3 Reasons A Front-End Focused Strategy Falls Short In Used Vehicles
I’ve been hearing more disenchantment and doubt from dealers about the value of a turn-and-earn strategy for retailing used vehicles, which I call the Velocity Method of Management.
The most vocal detractors are typically dealers who have long taken pride in the average front-end gross profit they achieve in used vehicles. The dealers like seeing their stores listed at the top of the 20 Group composites, with front-end gross averages that can run $1,000 or more than their peers.
It’s not too uncommon for turn and earn-focused Velocity dealers to come home from a 20 Group meeting feeling a bit deflated. Their front-end gross profit average is nowhere near the top dealer. They’ll then ask for guidance on how they can improve their performance and show up at the top of the page at the next 20 Group meeting.
More often than not, I tell these dealers to hold their horses. We’ll then take a closer look at the health of the high-gross dealer’s used vehicle inventory and their rate of used vehicle sales.
Time and again, the dealers with the highest front-end gross profit averages have more aged vehicles than they should, and their rate of used vehicle sales over the past five years tends to be flat or trending down. In other words, their front-end gross profits may be impressive, but the overall performance of the used vehicle departments isn’t where it could or should be.
The analysis gets even darker when you consider these dealers don’t regularly write down aged used vehicles to their actual wholesale cash value, and apply the loss to year-to-date, front-end gross profit. If the dealers undertook this level of honesty in their accounting, the average front-end gross profits they share would inspire much less envy.
Of course, such “dirty details” typically don’t generate much discussion at the 20 Group meetings—a symptom, I think, of the gentility dealers bring to the meetings and the traditional belief that average front-end gross profit is a reliable barometer of a dealership’s overall performance in used vehicles.
I advise dealers that they’d be better off worrying about the “total gross” they can generate from a turn and earn strategy in used vehicles rather than pumping up their average front-end gross profit. To make the case, I’ll share three reasons why I believe a single-minded focus on average front-end gross profit is the wrong strategy for today’s used vehicle market:
1. You can’t sell cars as quickly as the market requires. While my analysis of used vehicle inventories and sales rates at dealerships with high front-end gross profit averages isn’t scientific, the results are remarkably consistent. To me, the consistency indicates a market where consumers are too smart to pay too much for used vehicles, and dealers who only aim for high front-end gross profits on every car inevitably end up with aged inventory. This is not to suggest that dealers shouldn’t try to maximize front-end gross profits; rather, I’m saying that today’s market conditions require dealers to get in/out of their used vehicles faster than they had to in the past. In most cases, used vehicles lose their ability to make a meaningful margin contribution before 45 days in inventory. If you hold out for maximum front-end margin, you’ll pay the price with aged units and miss opportunities to redeploy the investment into more profit-productive vehicles.
2. You lose sight of other money-making opportunities. Think of your last trip to a gas station. Chances are pretty good you bought something other than gas (e.g., a snack, soda, etc.). The reason gas station owners offer so many non-fuel products flows from two factors—margins on gas sales are terrible, and each stop at the pump offers other higher-margin sales opportunities. To be sure, dealerships aren’t gas stations, but dealers share the pain of market-driven margin compression on the primary products they retail. To combat this market reality, I urge dealers to recognize that each used vehicle sale, whether it’s a short deal or even a loss, means money-making opportunities in F&I, service and parts—not to mention the cycle of future profits if they take in a trade.
As dealers adopt this “total gross” mindset, their inventories turn more quickly, they take fewer trips to the auction and every dealership department benefits. As a long-time Velocity dealer recently put it, “I don’t pay much attention to my front-end average anymore. I’m more focused on making my used vehicle department drive the profitability of my dealership.”
3. Your sales volume suffers. In market after market, dealers who adopt a turn-and-earn strategy that emphasizes “total gross” production are doing better than ever. They’re setting sales volume records, making more money and, in some cases, they’re buying up competitors who used to boast about their high front-end gross profit averages, even as their sales volumes limped along.
I would encourage tradition-minded dealers who believe that front-end gross matters most in used vehicles to consider the following quote from Mark Twain: “The less there is to justify a traditional custom, the harder it is to get rid of it.”