Reasons why retail recondition rates should be reconsidered

Dale,

I am a true believer. It took a while for it too all sink in.

Lately I have been having discussions with folks who are adamant about pricing recon work at full retail. As you know, their premise is based on the idea that sales people are mediocre and simply sell a fixed margin from cost. This concept of retail for recon internal began in the late 70’s and was a direct result of state and federal law requiring OEMs to compensate for warranty work based on the same door rate as they charged retail customer. Dealers jacked up their door rate to capitalize. The service department became an even more important profit center. In the meantime, someone got the idea that not only could we add gross profit to the service department by doing the retail recon thing, we wouldn’t suffer in sales gross profit loss because sales people would merely continue to add their 3 – 4 K to cost and sell from there. Theoretically, dealers would pay service commission at 15% rather than 25% for front end gross.

The Internet obviously does not allow for that old type of selling. Do you think it is time for dealers to review their recon policies? I have seen vehicles wholesaled because it wasn’t possible to recon them and have any “room” left. I have seen dealers try to stand down from trades because of recon costs. I am told by many that the fastest moving used vehicles have to be “made,” which is impossible to do if the vehicle needs considerable work. I’m not pushing recon at cost. That would be absurd. But should the policy be reconsidered? I am told that CarMax does recon at cost, but they aren’t running a service operation.

David R.

David,

You’ve nailed it. It is definitely time to reconsider retail rates for reconditioning. With the margin compression of the internet, the retail for reconditioning policies of the past causes irrational behavior on the part of appraisers and buyers. In addition, dealers and managers wonder what happened to their PVR. This is a very hard concept however, to convey to the industry and one that often invites criticism and ridicule. I’m sure that this posting will prove the point.

Dale