A Look Back and Ahead In Used Vehicles For Dealers

January 9, 2020

I trust that you were able to capitalize on last year’s rising tide of used vehicle sales.

By most accounts, total used vehicle sales increased by more than 200,000 vehicles last year compared to 2018.

Even better, as the overall market grew, dealers grabbed a bigger piece of the pie.

Cox Automotive data forecasts that retail used vehicle sales will increase by 500,000 vehicles last year compared to 2018.

That’s all good news.

But I’d ask a follow-up: Did you make more money as you retailed more used vehicles last year?

Unfortunately, the answer for many dealers isn’t an unequivocal “yes!”

Instead, it’s a mixed bag. Some dealers tell me their net profits stayed flat or improved a bit. Others are now working on ways to stop, if not reverse, another year of declining net profits despite a higher number of retail sales.

This situation underscores what I believe dealers should make as their primary objective in used vehicles for the coming year—making sure your retail sales bring more to your used vehicle department’s bottom line than they have in the past.

Looking ahead, it’s reasonable to expect that dealers will have more retail opportunities to drive a more profit-productive year in used vehicles.

Cox Automotive, for example, forecasts that dealers will see another year of rising retail opportunity in 2020—dealers will collectively add another 300,000 sales to their books, according to Cox projections—even as the overall used vehicle market flattens.

I’ve been offering three pointers for dealers who want to maximize their retail net profit and sales opportunities in the months ahead:

  1. Recognize the retail timeline for most vehicles isn’t what it used to be. I have addressed what I call the “New Math” in used vehicles here previously. I go even deeper on the topic in my new book, Gross Deception (which is available for pre-order on Amazon).

    Here’s the upshot: Thanks to a confluence of market forces, the Cost to Market percentage on used vehicles in inventory accelerates faster than it used to. The change, which remains a surprise for many dealers, means that most vehicles that are older than 30 days in your inventory will not produce a satisfying front-end gross profit, and may well represent a net profit loss after you account for commissions and departmental expenses.

    But recognizing that 30 is effectively the new 60 in used vehicles is only the starting point toward improved used vehicle profitability. The recognition must extend to your acquisition, pricing and desking decisions to make a significant difference.

  2. Align your inventory stocking levels to your rolling 30-day total of retail sales. This best practice is intended to help dealers address the New Math by not carrying more vehicles than they sell. If you’re stocking more used vehicles than you sell, you’re effectively allowing some of those investments to rot on the vine, which ultimately hurts your used vehicle department’s profit potential. Dealers who have adopted this best practice often see their aged inventory disappear and their profitability improve.
  1. Make peace with each vehicle’s profit potential. Like most people, dealers do not like to face financial losses. That’s why we continue to see dealers and managers treat bad used vehicle acquisition decisions, such as over-paying for a vehicle or bringing in the wrong car, as if the mistake didn’t happen. The end result is that dealers ask too much for a car that isn’t really worth it, the car doesn’t sell in a timely fashion, and the used vehicle department’s profitability pays the price.

    The good news is that new technology and tools, like Provision ProfitTime, help dealers accurately predict each used vehicle’s investment value and net profit potential from Day One. From there, it’s up to the dealer to make peace with the truth about a vehicle, or pretend it’s something different and roll the dice.

All in all, 2020 should be a good year for dealers, and an even better year for those who learn how to retail more used vehicles and make more money doing it.