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Unrealized Opportunities in the Used Vehicle Department

Written By: NCM Associates
Posted on July 16, 2015

Written by former NCM Institute instructor, Robin Cunningham:

Forgive me for saying this, but from where I now stand, it is quite apparent to me that there is way more opportunity for improving profitability than most dealership managers are aware of. I certainly know looking back on my career (and I thought I was very pro-active) that there was so much more opportunity to be realized than I was able to completely grasp at the time.

Most people agree that there is more upside potential left on the table, they are just not aware how much there is or how to attain it. Today I'd like to share some of the upside potential that we see in relation to the used vehicle department. One of the primary opportunity areas in the used car department is in increasing the average ratio of used to new vehicle sales.

We work with a Nissan dealer, in a single city market, that three years ago was selling close to a 1:1 used to new ratio. They realized there were only so many new Nissans they could sell no matter how aggressive they got with pricing and marketing. So, they got very clear on what does and does not work in today’s used vehicle market. They made steady progress in the quality of their processes and accountability management, and today are selling a 3:1 used to new ratio.

One of their managers was in class a month or so ago made a comment during a discussion. He said that as a variable department, they “freak out if and when any used vehicle hits 21 days in stock.”  They so highly value the processes in place from each vehicle’s first day in stock, that at 21 days, they know something is going terribly wrong. That comment raised a lot of eyes in class, especially from the managers of stores with huge aging issues. To get to that 3:1 ratio took a lot of trial and error, and a high degree of trust in their processes. It was all made easier by beginning to see it adding up in more total used vehicle gross profit.

To realize that opportunity, especially if one is still struggling in the used vehicle department, a pretty systematic overhaul of everything is often needed. That would include such processes as:

  • Acquisition
  • Appraising
  • Stocking
  • Reconditioning
  • Initial Pricing
  • Internet Marketing
  • Re-pricing
  • Desking policy
  • Pay plans
  • Aging

For sure, the change in focus from the amount of gross per vehicle retail to total department gross is required. To clarify, we are not against getting as much gross per vehicle as you can; but you just need to know which market segment each vehicle you are stocking is in, so your pricing policy is not getting you into aging problems.

I have been saying of late that our initial pricing policy is our turn policy. If you are pricing above market average right out of the box, we rarely see the pricing come back in line before the vehicle has aging issues, because the above market price has kept it largely invisible to the shopping public on the Internet ... where, of course, most shoppers are today.

I just referred to what "market segment" each vehicle is in. We break those segments into: A, B, C, and W categories. CPO, of course, is another category and I am going to come back to that separately.

A Vehicles

An “A” vehicle is a one of a kind, mostly irreplaceable vehicle. It is generally easier to replace the customer than it is the car. These almost always come from a trade, either rare in the first place, with very low miles, or both. At most, this makes up 10% of inventory. These vehicles should have a much higher than average gross profit, so the opportunity there is for a higher PVR.

B Vehicles

The “B” car is usually our own brand and is still under factory warranty. These are the most available cars to us, through trade, auction or our service drive. This is the case for all dealers, so the day’s supply is high, relatively speaking. These cars have the highest potential for wholesale loss, largely due to over-pricing on the Internet. Because these are very nice cars with lower miles on them, it can be tempting to try to get “above market” prices for them. Without a doubt, most vehicles with aging issues come from this segment, especially the ones bought at auction.

Because this segment makes up 60+% of inventory dollars, it can have devastating effects when these dollars become aged. The strategy for this segment is to aggressively price them to market immediately, get the F&I turn and the gross profit from reconditioning, and then go get more just like it. These will have slightly less than an average gross profit per vehicle. But again, since this is where the largest dollar amount of inventory is, a faster turn will equate to more total departmental gross. Again, the focus and opportunity for total departmental gross profit has to be primary here.

C Vehicles

The next segment is the “C” car. These are cars that are out of factory warranty, though a warranty could still be sold. They have higher miles and don’t have to be in perfect condition. These are the vehicles everyone seems to be wanting and almost always come from trades. The opportunity is a gross per vehicle that can be at or slightly higher than average. The return on investment is higher because they have a lower average cost of sale. Fortunately, most dealers are keeping more of these vehicles for retail these days, because in the past many got wholesaled and were the key source of inventory for the independent dealers. I know I wholesaled a lot of those in my past, and I now realize how we were missing out on possibly the richest segment of the business.

CPO Vehicles

The other retail segment that gets uneven attention is the certified pre-owned category, or CPO as we all call it. The luxury brands are all strong in this segment, and those manufacturers play a key role in helping make sure it is viable by actively supporting the strategy. For most of the other brands we see a very spotty consistency of dealers taking full advantage of this opportunity. It truly is like a separate franchise and has to be treated that way.

I have seen dealers of almost any brand take full advantage of it and other dealers from those same brands try to play both sides off the middle. Those dealers end up not having many CPO vehicles and that likely leads to less total volume, less gross per vehicle, less reconditioning gross, less future service and parts gross—and ultimately less customer retention. The other thing I see happen with CPO vehicles is when a dealer trades or acquires vehicles other than their own brands that have a strong CPO compliance; it makes it harder for competing dealers to retail those vehicles successfully. One thing we see that can offset this are some of the third-party, certified pre-owned programs that are available in the market place, like the Motor Trend Certified Program.

I would be remiss if I did not mention the very big opportunities that often get untapped in F&I. The public groups, who are under the most scrutiny of all, are at about $1,100 per vehicle retailed net after charge-backs. Many dealers are well above that, but most are way off that number and it really seems to be a focus issue. Selling more financial products and less focus on rate has been the trend, and it really seems to be working. Many of the financial service vendors provide the training as well.

W Vehicles

The last used vehicle segment is the “W” car or wholesale. There are two levels of wholesale: The ones we decide not to keep at the time of acquisition for various reasons (too many miles,  poor mechanical condition, or too expensive to keep). This level of W vehicles is actually a profit center.

Then, there are the vehicles we got for retail and for some reason have not sold. Maybe we have kept them for too long and now believe we have to get rid of them, often at a loss. Our friend Dale Pollak says there are only two reasons that could possibly happen: We somehow could not find the right price that others were selling the same vehicle during that time frame or we were unwilling to put the vehicle on that price. Knowing this is a possible unrealized opportunity can allow you take advantage of this.

This of course was just a very brief discussion of some of the most BASIC OPPORTUNITIES available in the used vehicle department that are very often not taken advantage of.

Learn more from the NCM Institute in their suite of Used Vehicle Management I, II, and III courses.

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