Three important lessons for dealers

May 12, 2009

The turmoil in today’s market holds three important lessons for every dealer. First, any business that has a net profit percentage return of 5% or less, as is the case with retail automobile dealerships, is inherently vulnerable to volatility. Most other healthy ordinary businesses maintain net margins between 15% and 30%. When you’re keeping on average, only .01 to .05 cents on every sales dollar, you have an inherently risky business, and one that is highly intolerant to fluctuations and sales.

The second critical lesson is that new vehicle sales are inherently volatile as a sector. The volatility becomes even more pronounced when you break the sector down to a particular brand. When business people choose to invest their capital in the form of an automobile dealership of a particular brand which is part of a historically volatile sector and one where net margin returns an average 1-5% there is a toxic combination of risk.

The third lesson is that there is a way to minimize the risk to capital investment in automobile dealerships. That way is to focus on activities that yield the highest possible net return and posses the greatest amount of sales revenue consistency. This leads to the obvious conclusion that the used car business should be the primary emphasis of variable concentration. This is because used car sales generate equal or greater return with less investment capital and have historically performed consistently over past decades. Today, there are some dealerships that can and will survive the death of their new car franchise. These dealerships generate 80% or more of their variable revenue and net operating income from used car operations. If their new car franchise happens to be hot, all the better, but if it’s cold or worse yet, gone tomorrow, life goes on relatively unchanged. This should be the model for all dealers moving forward.

The challenge however is for our industry to undo a century of new vehicle centric thinking. There is a simple test to determine whether your used car operation has primacy in the dealership. Simply ask yourself if it’s true that approximately 70% of your used vehicles are of a brand consistent with your new vehicle franchise. If the answer is yes, then you can be sure that your used car department plays second fiddle to the new car business.

The more enlightened approach is to recognize that no new car franchise holds a monopoly on all the hot used cars in the market, and the internet makes it entirely efficient for any dealership to find a buyer for any hot used vehicle regardless of brand. Further, there is technology that can identify which vehicles down to a level of trim and equipment are hottest in the market right now. With these conditions and tools, there is almost no excuse for any dealership to unhitch itself from the inevitable high-risk rollercoaster ride of its new car franchise.

The only real practical challenge is the culture, practices and habits of the people inside the dealership. For example, dealership personnel are accustomed to sourcing used vehicles from trade-ins, and at auctions. The vehicles that are acquired through trade-ins are subject to happenstance and chance. Those vehicles sourced at the auction tend to be ones that are in a zone of brand comfort and familiarity to the buyer. Neither one of these existing methods are adequate to transform a dealership to the more enlightened used vehicle centric model.

John Malishenko, an extremely enlightened automobile executive in charge of the Germain Group in Columbus, OH recently wrote to his numerous general managers the following…

While vAuto has been a transformational experience for us, it’s also created some challenges. Frankly, we “know too much”. We now have access to information that has made it abundantly clear that the methods we’ve been using to source used cars are no longer adequate to meet our needs. We need different vehicles and we need more of them, which leaves us only one option. Change.As the subject line states, a static or unchanging strategy for sourcing used vehicles in a market that literally changes daily does not work. Some of you learned that first hand last month. In addition, if you’re waiting for the new car department to come to the rescue with significant increases in sales and the trades associated, let it go.

To be successful, we will have to be creative, adaptable and resilient.

John is determined to change the culture across his enterprise to position his dealerships to prosper in the future and no longer be exposed to variability of his new car franchises.

Keith Kocourek, another enlightened dealer in the heartland of Wisconsin wrote…

Last week we did 8 proxy bids and got 3.

This week we have 29 out. It’s lot like fishing.

Pick the pond, bait your hook, throw out your line, crack a cold one and watch your bobber. Then just reel in the catch. What a country.

100 percent of the shot’s you don’t take don’t go in.

When Keith talks about “pick your pond” and the “shots you don’t take don’t go in,” he’s referring to a willingness to experiment and expand the composition of his used car inventory.

Unfortunately, however, too many dealerships find it too much trouble or discomfort to do as Malishenko and Kocourek have done. One manager told me that it’s like being asked to wear their wristwatch on the opposite arm. While it may be uncomfortable and require extra work, these efforts should be viewed as investments in the future. Investments that engineer a particular improved outcome. Specifically, the outcome is to transform your retail automobile dealership to one that is more consistent, has higher return on investment and most importantly, exclusively under the control and destiny of its operators.