Do You Really Need to Sacrifice Volume for the Sake of Gross Profit?
An Automotive News story this past weekend gave me pause. The piece highlighted an apparent strategic decision by public dealer groups and large used vehicle-only retailers to go for gross profit at the expense of volume.
The article explains how the combination of high vehicle acquisition costs, particularly with auction vehicles, and affordability concerns among buyers, led company executives to the go-for-gross-over-volume decision. This quote in the piece sums it up: “It was a better trade-off to have lower volume and higher gross profits, which really generate a better [earnings per share result] for us overall.”
On one hand, I fully understand the decision to give up volume, especially if the only way you’ll be able to achieve it requires buying higher-cost auction vehicles to make your goals. It’s also true that there’s been a long-standing belief in the car business that you can’t achieve optimal gross and volume at the same time. If you go for one, the other’s got to give.
But I would submit that the art and science of used vehicle inventory management has advanced to a point where this classic trade-off isn’t always necessary. There are plenty of dealers who are growing volume and gross despite the headwinds in the current market.
The primary difference, it seems, is that these dealers are taking advantage of new data science and related decision-making insights to optimize turn and gross on every car. Plus, they’re being very proactive about acquiring inventory beyond auctions and trade-ins—a multi-channel sourcing strategy that helps offset the higher cost of auction cars the dealers feather into their inventories to achieve the volume they desire.
The dealers also exert discipline across their used vehicle business in a few critical ways:
Maintaining a balance between your used vehicle stocking and retail sales. If you read a bit between the lines in the Automotive News article, it seems like some of the larger used vehicle retailers over-stocked their inventories in anticipation of first quarter sales that didn’t fully materialize. At least a portion of the fall-off in their average front-end gross profit figures likely owes to selling vehicles at break-even or a loss, just to get rid of them. By contrast, dealers who were disciplined about maintaining a balance between their rolling 30-day total of retail sales and their stocking levels didn’t face this problem—especially when they priced the troubled cars right from Day 1.
Knowing the difference between your turners and earners. This is where data science proves extremely helpful. With ProfitTime GPS, dealers can appraise, purchase and price vehicles with the benefit of knowing two critical things—how the vehicle will fare as an investment if they acquire it, and how they can appraise and price it to achieve optimal outcomes. Such knowledge goes a long way toward ensuring dealers are patient with cars that will deliver the healthiest gross profit and more urgent with vehicles that they should retail out of quickly to minimize risk. These insights go a couple steps farther—they help you avoid acquiring the wrong vehicle, paying up for vehicles you don’t really need and identifying vehicles with retail potential you might otherwise have overlooked or passed by.
Putting a greater priority on customer experience. I had a conversation the other day with a dealer who isn’t afraid of high-cost auction vehicles, while proactively acquiring cars across every available channel. The dealer’s thinking: Why should I shy away from selling more volume when I know I can sell and satisfy a customer and set the stage for earning their business in the future? The dealer’s playing long ball, effectively stepping up to grab a bigger slice of the market share pie while competitors retreat to bolster their bottom lines.
I’m not suggesting that the large used vehicle retailers highlighted in the Automotive News story have it wrong. My point is that growing gross profit and volume doesn’t have to be an either/or proposition. You can achieve both goals if have the belief, insights and will to make them happen.