A Promising Sign For Used Vehicle Profitability?

January 14, 2020

As any regular reader here might know, I think a lot about the ways dealers can, and should, make money.

I pay close attention to the National Automobile Dealer Association’s monthly Dealership Financial Profiles. In used vehicles, I look first at what NADA tells us about the retail net profit per used vehicle retailed.

Years ago, I might have focused on more traditional used vehicle department take-aways: What’s the average front-end gross and how does it compare to the prior year? Is volume up or down, or holding steady? What’s the typical ratio of new-to-used vehicle sales?

These days, I’m all about net profit.

Why? Because it’s the single-best indicator of whether all the things you do in your used vehicle department make money for your business.

Yes, you can have a sizable average front-end gross. And, if you do, you might be making money.

But you don’t really know if you’re making money unless and until you examine the net profit your retail deals produce. As I write about in my latest book, Gross Deception, this is precisely where the rubber hits the road when it comes to retailing used vehicles.

Yesterday morning, I learned that NADA had just released its Dealership Financial Profile for last November.

I was delighted to see that, for the first time in 2019, the average retail net profit per used vehicle retailed beat the comparable YTD figure from 2018–$45 in November 2019 compared to $36 in 2018, a 25 percent improvement.

This improvement is important because it signals that, at least for the month of November, dealers were making more money in the used vehicle departments.

But I would also caution that this improvement isn’t necessarily cause for celebration.

The improvement would be more significant it came as dealers were retailing more used vehicles than they did the prior year. The November report says that YTD sales through November 2019 and November 2018 were the same.

Similarly, the profile data suggests some of the net profit improvement doesn’t entirely owe to dealers doing a better job of managing their used vehicle investments to maximize net profitability.

The profile’s retail net profit data includes F&I, and the report shows that dealers increased their F&I penetration by 3 percent, to 75 percent by the end of November 2019 compared to 72 percent a year earlier.

In addition, I know I’m not the only one who’s troubled by the fact that dealers are retailing used vehicles at ever-higher average transaction prices ($21,133 by the end of November 2019 compared to $20,507 the prior year) and making less than $50.

Still, better is better.

After all, we are in a market where any improvement in net profitability is a good thing.

I’m going to keep my eye on the NADA data. I’m hopeful the November results may signal the start of a more net-profitable era of used vehicle retailing.

Stay tuned.