Creating a World-Class Used-Car Department, Part 1

The typical used-car department is incredibly busy and there are many pieces to the puzzle of what makes one more profitable than another. Here are a few best practices I have found the most successful dealers use to win at what can be a very profitable game of used-vehicle sales, especially in the current market.

Inventory Management (Acquisition, Managing ROI, Pricing, Disposal)

Let’s begin with inventory management, which includes acquisition, managing ROI, pricing and disposal.  For this article, I plan to cover the two key points of acquisition and managing your ROI. The remaining points will be covered in Part Two.

Acquisition: Don’t Just Buy Whatever Is Available

From an inventory management standpoint, a key element is finding the right vehicles to buy. A basic mistake I see too many dealers making is simply buying whatever is available at their local auction or only the vehicles that wander into their showroom via trade. From my vantage point, used-car departments tend to fluctuate between times of scarcity, when they focus on selling down inventory, and times when they are desperate for quality inventory. I feel the latter is more dangerous, as it creates a sort of pedal-to-the-floor, “I need cars now so hurry out to the auction” dynamic. It helps to have a meaningful strategy for acquiring the optimum inventory mix and maintaining appropriate stocking levels.

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One word of caution: It is not enough to simply think, “I am a Toyota store. I know I do well with Highlanders. I sell 10 a month quickly and for good profits, so I will go out and buy 100.” Market conditions do not necessarily mean you will sell 100. You still need to be mindful of your supply and demand.

I would advise you to research sales data in your market and try to understand the number of Highlanders that sold in your area last month. If all your local competitors combined sold 40 similar vehicles, then buying 100 Highlanders just means you have bought a two-and-a-half months’ market supply of cars. This puts you in a position where those vehicles are statistically likely to age, depreciate and erode your store’s profitability, even though they may be otherwise perfect inventory.

While you should buy from as many sources as possible, from a statistical standpoint franchise dealers perform best with a customer trade-in. The customer trade-in is your most profitable, and important, source of inventory. It makes sense to win as many of your customer trade-ins as you can. Think about it: You do not have to pay transportation and acquisition fees and it likely means you were able to sell that customer another vehicle. The customer is likely to service their vehicle with you and, eventually, come back to you for their next purchase.

Paying top dollar for a trade-in is a great retention strategy when done correctly. The problem is, when making an offer to a consumer, dealers often fall into the trap of only considering what they think they can retail the vehicle for in their market. Sometimes, a vehicle may sell for thousands more on a wholesale platform or at auction than what it can be retailed for in your area. This is because of large retail market disparities that exist throughout the U.S. A car that is worth $15,000 in Dallas may be worth $18,000 in Los Angeles, or vice versa. Your largest competitors understand this dynamic and use it to pay top dollar for a customer trade-in so they can snatch your customer away and win market share. They decide what to do with the vehicle after the fact. So, consider paying more, win more of those trade-in vehicles and keep more of your customers.

Managing Your Return on Investment (ROI)

When it comes to inventory selection, pay attention to your return on investment. Let’s say vehicle A costs you $10,000 and vehicle B, $40,000. Vehicle A sells in three days and makes $1,000. Vehicle B sells in thirty days and makes $2,000. Which vehicle was a better investment? Look at the cash required and the time you have to hold that inventory. Car A is a 10% ROI and made you $333 per day when you had it in inventory, whereas Car B is a 5% ROI and made you $67 per day that it occupied one of your parking spots. While you made more profit in pure dollars on vehicle B, it is not necessarily the best use of cash in the long run, especially considering you could have stocked four vehicles as with the same $40,000 investment.

The idea is to be strategic about how best to deploy your cash. Also, the impact of depreciation tends to be greater on a more expensive car. If there is a major market shift and values decline, 5% depreciation hurts a lot more on a $40,000 vehicle than on a $10,000 one.

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Several more points in addition to those I have covered, such as a pricing strategy, a defined disposal strategy and online and on-the-lot marketing, will be covered in Part Two of this article.

Nick Gerlach (pictured, above left) is executive vice president-Operations & Product Strategy at CarOffer.