Dealerships with strong used-car operations share two things in common. They’ve reduced the cost of acquiring inventory cars and recondition them faster.
“Margin compression in used-car operations means dealers must disrupt old practices that result in high vehicle-acquisition costs and slow time-to-market speed,” says pre-owned vehicle expert Ed French of AutoProfit. “There’s no other way to really succeed in used cars these days.”
A way to cut acquisition costs, pare back on reconditioning and improve inventory quality is to rely on internal sources. That includes programs that encourage service-department customers to sell or trade in their vehicles.
“Those opportunities should account for 60% of inventory, with private party and auction units making up 40%,” says French, a former Buick dealer and a board member of TruWorth Auto, a used-car superstore in Indianapolis.
Here are four other ways to make the used-car department hum:
No.1: Shorten Trade Cycle
Brian Skutta, former CEO for data-mining company AutoAlert and now with TrueCar, says today’s 68-month average ownership cycle keeps buyers out of the market too long. His goal is to help dealers reduce the cycle down to 36 months.
An AutoAlert-commissioned survey of more than 400 vehicle owners indicates consumers would like to trade more often.
“The survey found that dealers aren’t sharing disruptive trade practices with customers, so they’re not being made aware of opportunities to trade sooner, yet keep payments about the same,” Skutta says.
Nearly half of survey respondents were not aware they could upgrade their current vehicle before their loan or lease is at the end of term. Nearly 65% say they would like to upgrade their vehicles every three years or less.
No.2: Reduce Reconditioning Bottlenecks
Dennis McGinn, founder and CEO of Rapid Recon, says disruptive recon practices get units retail-ready in four days or less.
“A typical 8-to-15 day recon cycle kills used-car gross,” he says. He is a proponent of an automated workflow approach – sort of like an assembly line. It allows used-car managers to get units ready for sale at less expense.
No.3: Reduce Holding Costs
A car sitting around during the reconditioning process costs the dealership money. Paul Faletti, Jr. president and CEO of NCM Associates, cites the average daily holding cost of $32 per vehicle, based on franchise and market area.
Once fully aware of how holding costs affect gross, used-car managers are more likely to act more promptly on reconditioning issues. That includes using software to expedite the process and being willing to pay for overnight shipping of auto parts if availability leads to faster frontline readiness.
“I simply won’t engage clients who are running their car departments without reconditioning software,” French says. “It’s that important to used-car profitability.”
Anthony Martinez is director-reconditioning for Greenway Ford and Greenway Dodge, Orlando. His team reconditions 600 vehicles a month for the two dealerships, using Rapid Recon software to reduce the cycle time.
“I can’t control what management paid for the trade or whether the used-car manager will authorize recommended services,” says the Iraq War army veteran. “But I can control the fundamentals of estimating, inspecting and doing the work.”
No.4: Market Smarter
Improving turn once units hit the lot is the idea behind vAuto, founded by Dale Pollak and now owned by Cox Automotive.
Pollak says used-car managers must strive for a 30-day-or-less retail sale for at least 50% of their inventory. This standard, he says, requires used car managers to buy the right vehicles at the right price, recondition them fast and price them competitively to sell quickly.
Lower per-unit gross margins are more than offset by higher sales volumes, leading to a dealership making more money.
The dealer cost of acquisition, ownership and reconditioning should be below 85% of the unit’s retail asking prices, Pollak says. “Given this ratio defines a unit’s baseline potential profit margin, decisions that can improve this ratio – like acquiring internally and improving reconditioning times to reduce holding costs – can mean substantial ‘real’ used-car grosses.”
Smaller dealers lacking digital-marketing expertise may benefit from inventory-management services provided by LotPop.
“Dealers who struggle with both gross and volume are pushing out and selling too many aged cars,” says LotPop founder Jasen Rice. “If a dealership is pushing out more than 20% of its sales as past-60-day units, they’re not hitting their true velocity potential. The key is to push for 50% of sales within the first 30 days.”
He says best-performing stores push out 60%-70% of their pre-owned vehicle sales in 30 days and less, with less than 10% going past 60 days. They adjust prices every two weeks until a vehicle is sold.
“Those stores achieve the Holy Grail of used-car sales in both gross and volume,” Rice says.
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