It’s Time to Revolutionize Used-Car ROIsIt’s Time to Revolutionize Used-Car ROIs

Eroding returns on investment in auto retailing has turned used-car managers into what industry veteran Dale Pollak calls “money managers.”

A new investment-centric used-car strategy is needed these days, as dealers see their ROIs continuously declining.

“It’s a wakeup call for the industry,” Pollak says of the revised strategies he and co-author Lance Helgeson detail in their new book “Invested: The New Science, Strategy & System of Used Vehicle Investment Management.”

Pollak, a former auto dealer and vice president of Cox Automotive, which includes vAuto in its portfolio, has attended more than 50 National Automobile Dealers Assn. shows.

ROI Erosion Impact on Dealers

Much of the ROI erosion is because the Internet has allowed consumers to obtain detailed vehicle and pricing information that previously wasn’t readily available. Before the Internet, negotiating a sale was a lopsided two-party transaction, with the dealership having an advantage over the consumer.

With that process now turned on its head, the new book gives dealers tips on implementing a variable-management strategy to limit any resulting profit erosion.   

“ROI in the used-car business has basically been cut in half. Potentially, it could be cut in half again,” Pollak tells WardsAuto. “Ten years ago, the average dealer invested an average of $11,000 in a used vehicle. And the average front-end gross profit on resale was about $1,500.

“Fast-forward to today: The average investment amount is $23,000. More than double. But the average front-end gross profit is only a little higher than before, $1,800.”

The ABCs of ROI Shifts

Three factors affect a used-car department’s ROI, says Pollak, which should lead dealers to ask themselves the following: How much investment is critical? How long does the dealership hold that investment? What will it yield when it’s liquidated?

In the book, the authors encourage dealers and managers to reframe the way they view themselves – as “money managers” – going forward.

 “They are managing someone’s cash that happens to be in the form of an automobile,” he says of used-car staff.

The new approach, detailed in “Invested,” brings investment-management principles to used-vehicle operations, upending fundamental beliefs and practices that have shaped the industry for more than a century.

The book details how dealers can redefine their used-vehicle operations. Here are some ways Pollak suggests:

 “A management strategy that combines predictive data science, the ROI-minded variable-management strategy and vAuto’s ProfitTime GPS system (using software for data-driven pricing, appraising and merchandizing) can enable any dealer to extract the optimal amount of ROI from every vehicle, Pollak says

Buying the right vehicle is essential from a merchandising angle, but even more important is buying a vehicle that is the best investment.

“It could be both,” Pollak says. “But what if I buy the ‘right’ vehicle for $20,000 and make $500 off it? It may be the right vehicle, but it is the wrong investment.”

How Consumer Education Redefines Acquisitions

In the past, the buyer didn’t necessarily know how much a used car or trade-in was worth. In today’s online world, they do, Pollak’s co-author, Helgeson, tells WardsAuto. “There are fewer home-run deals” for the dealership.                      

Variable management is not a one-size-fits-all approach for auto retailing, however. That’s because business models vary from dealership to dealership.

Helgeson gives an example:

A used-car manager at a volume-oriented dealership might acquire an array of used cars (not just upmarket ones) to fulfill the store’s high sales-volume objectives.

“That used-car manager probably will have $10,000 or $15,000 cars that are a little rough and price them right,” says Helgeson. “Maybe not pass on some cars. That’s the way for that dealership to go to market.”

Pollak says the book he co-authored is more than just a manual for managing used-car operations.

“It is a testament to the enduring principles of investment and an exploration of how strategic thinking and innovative management can yield significant returns, he says.

Editors’ note:

Copies of the book – Invested: The New Science, Strategy & System of Used Vehicle Investment Management – went on sale on Jan. 23 at online retailers, including Amazon. Attendees at the Jan. 23-26 NADA Show in New Orleans can also find it at vAuto’s booth #2506 at this year’s NADA Show that runs Jan. 23-26 in New Orleans.