Sacred Cows That Merit Scrutiny, And Maybe The Sword

August 3, 2016

I recently asked a group of about 20 dealers and used vehicle managers a series of questions:

How many of you mow your own lawns? No one raised a hand. After some discussion, it was clear that each individual felt their time was better spent doing something else.

How many of you get your groceries delivered? Several hands went up, with comments like “I don’t have time for that” and “The convenience outweighs the cost.” Among those who still shopped at grocery stores, most also ate delivered/take-out food at two or three times a week.

How many of you use a cleaning service for your home? Most raised a hand, with several noting they and their spouses simply couldn’t keep up with housework given career demands and children.

In sum, the dealers all agreed that each example represents the rise of household outsourcing—where a third-party provider offered a better, faster, cheaper or more convenient alternative for the dealers and their families than doing these tasks themselves.

Next, I turned the tables. I asked the dealers if they’d ever consider outsourcing some of the work they’ve long regarded as the sole priority and province of their dealerships—specifically the acquisition and reconditioning of used vehicles.

I wasn’t surprised by the responses. Only a couple of the dealers said they’d consider this type of outsourcing. As one put it, “We can buy and recondition the cars better ourselves. Plus, we’d give up the internal gross profit for recon to someone else. It doesn’t make sense.”

Years ago, I would have wholeheartedly agreed with the dealer’s assessment. One of the most beneficial aspects of today’s typical dealership business model is the ability to make money at each phase of a used vehicle’s lifecycle. Indeed, in some cases, the internal and back-end gross a dealer pockets from a retail used vehicle sale represents the only gross profit opportunity, given margin compression and market volatility.

But I’m starting to question whether this sacred cow—of doing the vehicle acquisition and reconditioning work yourself—is no longer the no-brainer decision it used to be. I’ve arrived at this way of thinking for three reasons:

1. Larger dealer groups are opting for outsourcing. Perhaps the best example of this trend is the partnership between Sonic Automotive and Manheim, wherein the auction company buys the cars and makes them retail-ready. Sonic views the arrangement as one that drives greater efficiency and profitability for their used vehicle operations. In a recent AutoRemarketing article, Sonic CEO Scott Smith noted some of the benefits the group expects from the Manheim partnership: “We don’t have to build the facility to recondition cars. We don’t have to have the buying team. We don’t have to have all the technicians, all the staff, everything you have to have, so the economics will be significantly better.”

2. Vehicle acquisition and reconditioning efficiency remain persistent challenges for dealers. All of the dealers in the group admitted they wished they could more quickly acquire and recondition vehicles. A few dealers noted they consistently recondition vehicles in two days or less, thanks in part to reconditioning teams and resources dedicated to the task. For most, however, the standard reconditioning time runs closer to five days or more. Every dealer acknowledged and understood that they’d make more money if they minimized the cost and time it currently takes to acquire and make their used cars retail-ready.

3. Pressure to outsource will only grow more pronounced. I was struck by one dealer’s story as he and his wife decided it’d be best to hire a lawn service. The dealer considered mowing the lawn an important responsibility, particularly for the example it set for his young son. But every weekend, he found himself fighting for lawn time, while his wife protested that the time should spend it with the kids. Over time, I’m convinced dealers will face a similar trade-off as market realities and diminished profitability push them to consider outsourcing options that, at the moment, rub them the wrong way.

Make no mistake, I am not advocating that dealers rush to outsource their used vehicle acquisition and reconditioning work. I am, however, suggesting that the time appears to have arrived where these sacred cows may no longer be as sacred and smart as dealers have long believed.