Turn, Baby, Turn update from November 2011

At least 80% of pre-owned shoppers rely on the Internet as a major part of their shopping and decision making process.

Consumers value features that allow them to search for a particular vehicle online and sort results by various criteria. And they do so before phoning or visiting a dealership. It is clear consumers will increasingly travel to acquire a vehicle they want.

Today, dealers have access to a variety of programs that guide them on how to price their pre-owned inventory to achieve maximum Internet visibility, as well as what to stock for best inventory-turn rates.

The business has become more science that art. A consumer might never see a dealer's online offering if it isn't strategically priced to appear on the first few pages of a typical consumer's search and sort. Knowing what to stock for fastest turn and highest gross profit is critical.

One thing seems clear. Average gross profit per unit just isn't that important any more. A dealer has an amount invested in pre-owned inventory in a given month or a year. The critical metric these days is based on how much gross profit is produced with that average monthly or yearly investment.

A dealer averaging a high gross profit per pre-owned unit retailed may be coming up short compared with a dealer selling many more units at a lower average per unit gross profit.

The goal in this new environment is finding the right balance between average gross profit and inventory turn to achieve the highest gross profit to inventory investment.

As the Internet provides consumers with better price information, the chance of huge gross profit on individual units is increasingly remote.

Attempting to make large average gross profits through pricing greatly reduces the number of consumers who will ever see a dealer's offering if their search results are based on lowest prices.

By slowing down inventory turn rate, high grosses become almost self-defeating.

Dealerships used to manage their inventory acquisition and pricing based on “gut” feelings, but that was in an environment where consumers did not enjoy the information advantages they have today and before the advent of today's technology.

Dealers use software systems to help them determine supply and demand of vehicles in their market.

Among the top providers of such systems are vAuto, American Auto Exchange, FirstLook and LiquidMotors.

Each company has its strengths. Some do things the others don't, and vice versa. But all four are focused on providing information that enables dealership management to make the best decisions in their attempt to maximize total gross profit based on inventory investment.

An ongoing debate centers on issues such as core inventory and how best to price cars to balance average gross profit and inventory turn rate. The four companies might have some differences on how to accomplish this, but their objectives are the same.

It is also clear that dealers who stock pre-owned vehicles of a different brand than the new-car franchise they represent can increase their opportunities dramatically as consumers shop on the Internet rather than driving to a dealer representing the brand of vehicle they desire.

Dale Pollak, CEO of vAuto, has written two books on the subject of the Internet's impact on the pre-owned business. He equates the pre-owned business with the economic theory of “efficient markets” and does a great job of articulating both the challenge and solutions.

Dealers who overly rely on “art” while eschewing the “science” in their pre-owned operations are leaving money on the table, even if they still score substantial high grosses every now and then.

Pollak's point is that it takes too long to do that, because cars are losing value as they linger on the lot.

High turn-rate or “velocity” dealers, as Pollak calls them, report yearly pre-owned inventory turn rates of as high as 18 times per year, with a consistent average of 12 to 13 times annually.

The industry used to think in terms of a 60- or 90-days' supply of pre-owned inventory. A 60-days' supply would be a six-times-per-year turn rate, a 90- days' supply would be four turns a year.

Dealers successfully using the velocity approach are achieving average turn rates at least double what used to be considered ideal.

While the old-school dealer who relies more on art than science is waiting two or three months to get the $2,500 or so average-gross per unit he can brag about, a velocity dealer is selling three to five units at grosses of $1,200 to $1500.

The latter also will garner additional finance and insurance profits, get more trade-in opportunities and maintain a fresher and cleaner inventory.

To accomplish this does not require reducing one's prices across the board. It's about pricing each vehicle based on actual conditions in the marketplace, taking the substantial gross profit when the technology indicates it is available, and going with a quick-turn strategy on everything else.

Dealers who continue to operate their pre-owned business based on more art than science have competitors who want them to continue doing it that way.

David Ruggles is formerly a dealership manager and currently an automotive consultant. He can be contacted at [email protected].