Letter from Larry
Below is an interesting letter that I received earlier this week and my response. I’d be interested in your thoughts. Thanks
Hey, Dale. Enjoyed your article in Sept. and Oct. ’09 issues of Auto Success about Volatility and Velocity. I agree. We don’t broaden our horizons enough, and with a shrinking market share (domestics), we will have to do so in order to appeal to a big enough share of the buying public. Also agree with your discussion of hiding true wholesale loss. However, when talking to my sons regarding the broader topic of all “packs”, and your feeling that charging retail in the fixed end to used car reconditioning is wrong. That battle was over long ago. NADA and twenty groups successfully justified the case for that on labor, and subsequently on parts, and won that batle and I disagree with you wholeheartedly on bringing up that old turd again.
You seem to be only for velocity at minimum gross. It is not sin to make money. If you prevail with your argument for removing all ways to make gross, we will all be fighting over deals at $300.00 gross per deal. Tell me how that makes sense.
Thank you so much for your feedback. I completely understand that challenging retail rates for reconditioning is like questioning the religious principles of the faithful. There are however, a few points in which I respectfully disagree with you. First, while it is true that NADA and 20 groups put the retail labor and parts issue to rest, I happen to know that this matter is now being reconsidered at NADA. Of course I do not speak for them, but I work with NADA closely enough to know that there is much discussion and concern as to whether it continues to be the right thing to do today. In other words, don’t be surprised if you see some modification by NADA on this issue in the near future.
Now, regarding the issues of packs (retail reconditioning included), it’s important to understand that the purpose of a financial statement is to clearly and properly reflect the operating results of a business enterprise. To the extent that dealers use packs, create reserve accounts, use reserves here and there to touch up their financial operating results as needed, all you’re doing is denying yourself the ability to see your business clearly. The most common example of this is dealers showing little or no wholesale loss because they have applied a credit from their reserve pack account. Do you really think that decisions about future acquisitions and sales benefits from this practice? I don’t think so- I believe that you are engaging in a practice that perpetuates the errors of your ways. Wouldn’t you rather see every single transaction for what it is? I would if I were you.
The retail reconditioning pack, however, is a peculiar animal because unlike most other packs, it’s not a matter of whether the work was done or not, but rather how much to charge for it. In the past, before the Internet, you had the ability to richly reward your service department and then pass that additional retail rate on to the consumer in the price of the vehicle. Today, however, consumers are too savvy to pay your retail reconditioning rates as a component of the price that they pay for your vehicles. In essence, you’re confronted with two poor alternatives when using retail rates for reconditioning. You can either price your vehicles at non-competitive price points or you can price cars competitively and accept the lower front end profit. Some dealers would rather do the latter because they believe they pay more commission on the variable gross profit than the fixed. The problem with this approach is that you then become very frustrated with your average profits and react with the traditional response of raising prices. In other words, it becomes a vicious cycle which ultimately causes your used car operation to spiral to ever lower return on investment. Sadly, you really can’t eat your cake and have it too.
This brings me to your statement that, “If you prevail with your argument for removing all ways to make gross, we will all be fighting over deals at $300.00 gross per deal.” Larry, I am not removing any way to make gross and profit but rather only pointing out that the way that dealers make profit today is different from the way that it’s been done in the past. On a recent one of my blog postings, I asked the industry to answer the following two questions:
- Can you really expect to get lucky on the used car lot as much as you used to now that the Internet has taken hold in the used car market?
- Can you expect to get lucky on the used car lot as much as you used to now that banks won’t advance nearly as much as they once did?
The answers are no, but that doesn’t mean that you can’t make good money. So I ask you, how will you make up for the loss of the big grosses that you once got on a regular basis? Most dealers respond with “volume” but that’s not exactly right. The correct answer is “velocity”.
The velocity principle of management says that you stock cars that have the greatest demand and least supply, price them all properly (not all high, not all low) and own them right. Your insistence on packing cars prevents you from pricing them right (I can prove it to you) and owning them right. Your packs cause you to violate two of the three most essential principles of making money in the used car operation – proper pricing and proper cost of ownership.
Larry, I don’t mean to be unduly harsh in my response. I completely understand where you come from. It’s no coincidence that you are the dad on one side of the argument, while your sons seem to be on the other. I see this movie all the time. The leading role is played by the dad that has made a lot of money in the past using practices and principles that proved successful. Today however, the dynamics of the market have changed. With all respect and care, I strongly urge you to rethink your position on this issue and talk to the velocity dealers that already have.