Is your reconditioning an investment or a liability?
Recently I’ve been thinking a lot about the issue of reconditioning. There is no doubt that we’re in a new market that is characterized by a high degree of price competition, and as a result, margin compression. This fact has caused me to reconsider how much reconditioning should be performed and how it should be charged.
I continue to believe that it’s important to have a used car standing tall. There is, however, a significant gray area about what defines “standing tall”. In my dealership days the used car manager made the big decisions with respect to what got done in our shop. After the vehicle made it to the lot, however, there was a whole array of regular vendors that performed additional services, such as dent removal, glass and upholstery work and other such cosmetic repairs. Because these vendors were regulars, and sometimes even friends, they basically had license to do what they deemed necessary. They would regularly present PO’s to me to sign after they did the work. This didn’t present a problem because I knew that they really did the work and it probably helped the car sell faster and for more money.
Today however, I’m certain that I wouldn’t sign any of those PO’s after the fact, but would rather insist on inspecting the vehicle prior to approval. I think that we can no longer be lax or overly generous in favor of these service providers. The cost of reconditioning is more critical than ever, and every single dollar matters.
Also, as I previously have written, the practice of charging the used car department retail is absolutely driving used car operations into the ground. Every single day I talk to used car managers that complain about their inability to buy vehicles for prices that allows them to make a fair profit. Implicit in their considerations is the $800 – $1,500 of retail reconditioning costs that will be charged to the vehicle’s ACV. As a result, these vehicles don’t get purchased and sales are inevitably lost. In other words, they’ve missed the opportunity to buy and sell a car that would have generated some internal profit for the service department (albeit less), a front- and back-end gross profit and likely a long term service relationship. All of this opportunity was missed because of a retail reconditioning policy that probably amounted to less than $500 of incremental revenue (the difference between cost + something and retail door rate) on a typical vehicle. So, in order to funnel an additional $500 to the service department, we probably passed up $2,000 or more in the transaction related to the vehicle that we should have bought but didn’t.
The smartest dealers are prepared to revisit their retail reconditioning policies. In fact, the smartest dealers are examining novel approaches, such as the following one from Andy Wright of Lehigh Valley Acura Honda. Do any of your clients pay their clean up people a flat rate per car that they clean and prep for the lot? Currently, I am paying guys hourly to do this job. I am looking to increase their production/performance and I have toyed with the idea of making them flat rate.
I would be very interested in hearing from anyone with respect to Andy’s question or my thoughts.