Dissecting Two Different Types Of Used Vehicle Retailers

July 15, 2013

In my conversations and travels, I encounter two different types of dealers.

The first group often struggles with aged units in their used vehicle inventories, persistent wholesale losses and an as-yet unfulfilled desire to increase their sales volumes and overall profitability.

The second group has what I might describe as “higher-order” issues: To be sure, they encounter occasional aged units and wholesale losses, but these aren’t persistent problems. Their biggest challenges relate to fine-tuning and managing processes to help them increase efficiencies, lower costs and maintain improved sales volumes.

In the past several months, I’ve been trying to better understand this disparity: What, exactly, separates these two groups of dealers? Why does one group seem bogged down with aged cars and wholesale losses, while the other appears to have largely found a way to avoid these problems?

I think I’ve found the simplest answer to these questions. The difference between the two groups of dealers boils down to a willingness to own up to mistakes, address them and move on. Put another way, one group of dealers is more willing to take a loss on a used vehicle, while the other resists a potential loss at every turn.

This realization hit home the other day after two distinctly different dealer conversations.

In the first discussion, I was talking to a Midwest dealer with nearly a quarter of his 150-car inventory at or beyond 90 days of age. He’d stocked up this past spring and was trying to “retail out of the problem.” We looked closer and saw that he hadn’t made the pricing adjustments that appeared necessary to actually sell the cars. Why? Because he’d take a loss. Likewise, he didn’t want to wholesale them because “I’d lose my shirt at the auction.”

The second conversation with a Florida dealer revealed a different problem. He wanted my guidance on ways to find more cars more quickly to feed his inventory. He’s got an aggressive 25-day retail window, and turns his 120-car inventory more than 15 times a year. We discussed ways he could expand his reach at auctions and tighten up his trade-in appraisal efforts.

Then I asked how he felt about taking a loss on a vehicle. “I view every loss as two opportunities,” he said. “First, it’s a chance to re-invest my money in a car with a better profit upside. Second, it’s an opportunity for us to figure out what we missed.”

Wow, I thought. This dealer’s definitely a “new school” used vehicle retailer. Unlike his more tradition-minded peers, he’s evolved beyond holding onto cars and hoping for a profit-positive deal. He recognizes losses for what they are—a failure in his team’s efforts to acquire, recondition, price and merchandise a used vehicle, and an opportunity to make his next used vehicle investment decision even better.

Both conversations crystallized my conclusion about the difference between the two types of dealers.

I asked the Florida dealer for three tips to help other dealers adopt some of his “new school” used vehicle management thinking. Here they are:

  1. Recognize the time-sensitive nature of your investment. This dealer’s decision to retail every used vehicle in 25 days is no accident. Previously, his retailing timeline ran 90 days, then 60 days and then 45 days. The dealer’s settled on 25 days to essentially retail fresh cars all the time. My recommendation for most dealers is a 45-day horizon to retail used vehicles. The dealer’s more aggressive because he believes the shorter window minimizes his exposure to market risks—the mark of a retailer who understands the fast-changing nature of today’s market.
  2. Apply a disciplined, “retail-first” strategy. The dealer doesn’t wholesale too many vehicles, given the store’s “retail-first” strategy. This approach requires disciplined pricing decisions that balance each car’s potential for gross profit against its shelf life as a retail unit. The dealer’s team monitors each vehicle’s online performance against the market of competing cars to calibrate pricing.
  3. Adopt a “total gross” mindset. Part of the reason the Florida dealer is willing to take an occasional loss is that he understands he’s already made money on the unit through reconditioning, and he believes the next car will deliver a greater amount of both back-end and front-end gross profit. Like many velocity dealers, his focus on “total gross” followed years of using “average front-end gross” as his chief management benchmark. “Front-end gross doesn’t give you the whole picture of each car’s value as an investment,” the dealer says. “Total gross is better barometer.”

I shared the Florida dealer’s tips with the Midwest dealer. His comment: “I’m glad that guy’s not in my market. He’d be eating my lunch.”