Avoid the Money Traps

New-vehicle sales are expected to drop this year, causing some dealers to come to the realization that they must “fix” their pre-owned vehicle department.

For many auto retailers, especially some import dealers, the lack of focus on pre-owned has resulted in lower grosses, lower sales, reduced traffic, aging inventory and big wholesale losses. The focus has been on hitting the new-vehicle objectives. Consequently, the pre-owned department has been an afterthought.

This started innocently enough with the new-vehicle manager just trying to hit volume numbers. New-vehicle managers needed to make a hard deal.

So they went to pre-owned vehicle managers and talked them into bumping appraisals. It was a decision made regardless of the true market on the trade value. They would go ahead and put the extra money in the unit and try to retail out of it (it was a pretty nice vehicle).

The pre-owned vehicle manager then priced it like most do by using the old cost plus $4,000 margin mentality, again ignoring what the actual retail market on the vehicle might be.

What happened next? As a result of that old lack of focus, there was no daily inventory management process in place, and along about 60 days later — voila! Another aged unit the dealership in stuck with. What now?

Well, someone suggests: “If we run the vehicle at the auction, we will lose 2 to 3 grand, so let's reduce the price and pay a big flat to the salesperson.”

It has worked before. Or has it? Do that a few times and at the end of the month the resulting pre-owned vehicle net to gross on the statement leaves us scratching our head wondering what the heck.

Now sales commissions are out of whack, gross per unit is down and wholesale losses are up. And so the story goes.

I'm not suggesting you have the pre-owned vehicle department try to steal all the trades. Doing that would just create more issues. But think it through a little.

First, the market is the market. No amount of wishful thinking will make you money over the long run.

How about another adage: “Your first loss is your best loss.” By placing a higher-than-market value on a trade-in, and trying to hide a new vehicle loser in the appraisal, you have accelerated the appreciating cost that is built into a pre-owned vehicle as it ages.

At the same time, a depreciating true retail market value is taking away the opportunity to make any margin when you sell it. Over the long run, this behavior will lose you even more money.

Overpricing inventory is the leading cause of lot rot, reduced traffic, low grosses and wholesale loss.

The longer a pre-owned vehicle sits on your lot, the true cost — including daily holding cost and reconditioning — keeps going up, while the retail market on the vehicle goes down.

If you are going to put too much money in a trade, at least price it on the market regardless of what you own it for and forgo the hope-to-get figure. You will have a better probability of moving the unit.

Congratulations if you have committed to re-focus your attention on the pre-owned department. But what will you do differently?

Armed with all the information available at their fingertips, your average customer is often more in tune with the pre-owned market than your salesperson. If you try to run the department based on what worked 20 years ago, no amount of focus or attention will have a lasting effect.

Do the research. Examine successful pre-owned operations, particularly their approach to daily inventory management and pricing policies. Adopt the modern thinking of return on investment and achievable margins.

It may be contrary to the way we have done things for many years. But if we are to compete and grow in today's market we need to make those adjustments.

What's worse? The pain of self discipline or the pain of regret?

Tony Albertson is executive conference moderator for NCM Associates. He is at [email protected].

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