A Sobering Catalyst for a Strategic Shift in Used Vehicles

February 5, 2020

For the past several months, I’ve been discussing the trend of declining net profitability in used vehicle departments with dealers.

Sometimes the conversation ends like this: “I appreciate the heads-up, Dale, but thank God we aren’t seeing the net profit pain you describe.”

When I hear this, I may poke the dealer’s confidence bubble: “I’m glad to hear that. But, from what I can tell, the effects of margin compression and the New Math in used vehicles, will arrive at every dealer’s door.”

The decision to poke the bubble rests on whether the dealer might be considered a tip-top performer—someone who’s leadership, and team in the trenches, continually exhibit the ongoing operational discipline and desire to always improve that yields better year-over-year results.

If I choose not to poke the bubble, it’s because I have confidence that the dealer will keep an eye on the horizon, and the used vehicle department’s bottom line, to spot the effects of margin compression and the New Math early on, and adjust course to head off any significant net profit trouble.

Unfortunately, as I’ve learned in recent weeks, the real world isn’t so kind.

The decline of net profitability in used vehicles doesn’t resemble slow-rising floodwaters, it’s more like a flash flood. You turn around and, suddenly, you’re up to your knees in water.

Even worse, this sudden change is occurring at dealerships where, not so long ago, the dealers thought they were doing just fine.

Consider this e-mail from the COO of a 15-store dealer group in the Midwest I received a week ago:

“Only about half our used departments are profitable and we did trend downward last year as a group, despite a 7 percent increase in volume and a $3 Million increase in retained finance gross. Total used vehicle gross was down 5 percent and selling expenses up 15 percent.”

Or this note from a Chevrolet store in Michigan:

“For some reason, we never seem to turn a profit in our used department with any consistency. We actually showed a net loss of 2k last year. We are a Chevy dealer in Michigan and our Compass reports show that in Michigan zone we are right in line with profitability – which means we net nothing!  We sold an average of 74 used and 112 new a month in 2019.”

The notes are sampling of what I’m hearing from dealers across the country. Taken together, they offer a sobering start to the new year.

On the bright side, each of these dealers is using the disappointing net profit results as a catalyst for a new inventory management strategy—one that serves as an antidote to the New Math by focusing on the investment value each vehicle holds (or doesn’t) from the first day you own it.

I’m sharing this perspective for two reasons.

First, it’s critical that dealers understand the nature of today’s market, and how the New Math can turn what seemed like a great sales month or year into a disappointing net profit picture.

Second, these dealer examples suggest that if you believe your used vehicle department is doing just fine, you may likely find yourself facing a moment where it suddenly isn’t.