Velocity Management at its Best

What follows is an email that I received from a velocity dealer and my response. What makes his email noteworthy is the extent to which he understands and is able to control the delicate balance between the competing interests of his new and used car departments. Here’s a guy that is truly managing his business. I’d be interested in hearing your thoughts on this.

Dale- Our cost to market is typically in the high 70’s and price to market is 90-92%. Our front end margins have been $1800-$2200 which I believe to actually be too high—meaning we own our cars too well and are not stepping up enough with trades (our new vehicle sales, especially with Ford, have been off). Obviously if we drive that cost to market up to the mid 80’s (e.g. 85%) we’ll be compressing our used car front end margins since it isn’t as if we’d be raising our prices. We’d have to sell more new cars if we did this to make up for a compression of front end gross on used. That being said, if we sell more new cars then we’re taking in more trades and can sell more in the way of used to also help make up for lower used car front end grosses. Your help/thoughts would be greatly appreciated. Thanks and hope that you’re doing well!

C.

C: I think that your analysis is on point. You clearly understand the proper economic tradeoff between used and new car profitability. I can tell you that your present cost to market in the high 70’s is impressively low, so there is some room for you to be more aggressive on trades, conceivably sell some more new cars and take in more trades as you’ve outlined. You are clearly making this decision with data and knowledge of the trade-offs and realities.

Dale