Dealer Discovery: Why “Total Gross” Matters Most In Used Vehicles

August 1, 2014

I had an e-mail exchange with a Chicago-area Honda dealer the other day that I think is relevant for all dealers, especially those who have adopted the Velocity Method of Management.

futuristic-exotic-concept-cars-get-net-worthThe dealer asked two important questions—What’s the optimal percentage of used vehicle inventory that should be maintained under 30 days of age?, and, What’s an average front-end gross profit benchmark for today’s market?

The questions go to the heart of the challenge dealers face in today’s used vehicle market. In the past, the age of vehicles in a dealer’s inventory and the front-end gross profit averages they might produce weren’t closely correlated. This retailing blessing gave rise to the operational belief that the age of a vehicle didn’t matter as long as it delivered a $3,000 to $4,000 front-end gross profit.

Today, unfortunately, things are different. Dealers now face a higher degree of pricing transparency, competition and operational costs as used vehicle retailers. The result: Most used vehicles lose their ability to make a meaningful margin contribution sometime between 30 and 45 days. In effect, these market conditions have tightened the correlation between inventory age and front-end gross profit potential, forcing dealers to retail vehicles in less time to make the investment and opportunity cost of capital for each car worthwhile.

In light of these circumstances, I advised the dealer that it’s now an imperative for dealers to maintain at least 50 percent of their inventory under 30 days of age—an operational benchmark that requires constantly striking a balance between pricing vehicles for what you hope to achieve in front-end gross profit and what the market will truly bear in 45 days or less.

I also told the dealer that he’d be better off worrying less about his average front-end gross profit for used vehicles and focusing more on the “total gross” each vehicle generates for his dealership.

I explained that most Velocity dealers now understand that every used vehicle really represents four opportunities to generate gross profit—in the used vehicle department, in parts, in service, and in F&I. With this understanding, the average front-end gross profit is only one element of a holistic strategy that seeks to maximize the “total gross” on every car quickly, and repeat the process again and again.

After I shared my thoughts, the Honda dealer did some calculations. He determined that he would meet the inventory age benchmark, sell more cars faster and maximize his “total gross” if he trimmed his front-end gross profit expectations by $300 to $400 per car.

I congratulated the dealer on discovering the secret to success in today’s more-challenged used vehicle market. But his new-found understanding about the necessity and bottom line value of a “total gross” strategy still eludes an awful lot of dealers.

For these dealers, I must ask the question: Do you pay your bills off your average front-end gross profit or your total variable gross profit? And, if it’s the latter, why wouldn’t you sacrifice a little of your average front-end gross for the benefit of increasing your “total gross” on every car time and time again?