CPA Carl Woodward questions strategy of volume versus velocity

The following question was sent to me by automotive CPA, accountant and consultant Carl Woodward.  Woodward is a true automotive professional.  He’s practical, down to earth and knows his stuff inside out.

Dale:

I am not sure I understood your article on “smart dealers get off gross”. I have found dealers are only going to sell so many units retail within a range. Based on this, I believe a dealer needs to have overall above average gross to try and achieve maximum net profits. I find those dealers that believe being less gross oriented and trying to make it up on volume will make less money. I would appreciate your comments. – Carl

Carl,

You’re correct to the extent that volume is not the answer. We all know a lot of dealers that have gone out of business with large volume. The answer is velocity. What’s the difference between volume and velocity? Well please allow me to explain.

Velocity allows for profitable volume, providing three conditions are in place.

First, the inventory must have the favorable dynamic of high demand and low supply. When this condition exists dealers need to spend less money to attract buyers, and once the buyers arrive, such vehicles are less sensitive to price competition. This allows dealers to have a lower marketing expense and higher average gross profits.

The second condition that must exist for velocity is to have the vehicles priced right. This doesn’t mean all high or low, but rather to know which ones can be priced high among their competitors, and which ones can not. This requires having an appreciation for the vehicle’s physical attributes/replacability and importantly, the relationship between its supply and demand.

The third key velocity condition is to own the vehicles right. You and I know that you’ll never have profitable used car operation unless the inventory is owned right. Importantly, I’ve also come to understand that velocity dealers typically own the same vehicle as their traditional counterpart for on average of about 5% less. There are several factors attributing to their lower cost basis, but the most significant one is the greater degree of proficiency necessary to source the right vehicles in higher quantities. There is a big difference between a professional used car buyer and a good used car manager that buys cars. Also, the velocity dealer typically owns fresher inventory which means for less, in a depreciating asset environment.

Once and only once these key velocity conditions are in place can a dealer achieve greater volume with profitability albeit with a lower gross profit average. Also, I think it’s worth noting that most traditional dealerships retail per vehicle average is not what their income statement reflects. If they were ever to take the negative equity from their inventory and apply it against their retail transaction gross, they would realize that their velocity PVR isn’t really much, if any lower at all. I would appreciate your thoughts and response to this perspective.

Thank you
Dale