Over the last decade, the U.S. auto industry has witnessed an unprecedented collapse of pre-owned profitability.
According to the National Automobile Dealers Assn., the average franchise dealer actually lost money in 2018 for the first time in history.
There are a few contributing factors to this, but the biggest influencer is that pre-owned adopted the same pricing strategies as the new-car sector, pushing pre-owned off the same margin cliff, leaving dealers with a dramatically different landscape, and one that is significantly less profitable.
The good news is that with a few simple gear shifts, dealers can get headed in the right direction, toward profitability.
Before getting into best practices, let’s see how we got here in the first place. For starters, we are lacking diversity in strategies.
For example, approximately 80% of franchise dealers in the U.S. employ the same methodologies, which means they are targeting the same vehicles in the auction lanes as the Manheim Price Value Index continues to set record highs month after month.
Additionally, expenses associated with acquisition fees and transportation are also at all-time highs.
Once the vehicle is acquired and available on the lot and online, dealers systematically lower the price 9% to 10% over the next 30 days, striving to be 3% to 8% lower than the competition’s price for the same car.
If the vehicle isn’t sold within its first few days, the price reductions eradicate any hope of front-end margin. Making matters worse, if the vehicle hasn’t been sold in 30 to 45 days, the dealer sends the vehicle to auction, starting the process all over again with another purchase.
This cannibalistic system is a detriment to dealers as they are competing with their peers in the auction lanes, raising and lowering prices – all in a 30-45 day frantic cycle.
There’s a tendency to blame the Internet because of price transparency as the guilty party, but that leaves dealers feeling virtually powerless.
What’s more concerning than the net loss, is the unabated trendline of the last several years. If things don’t change, we’ll see unprecedented carnage in the coming decade.
The next economic downturn could break the backs of many dealerships if they don’t change course and quickly. The alternative could lead to Carmageddon.
So, how to change course? Dealers must challenge current conventional approaches. Start by identifying and attacking the things most damaging to margins: fees, expenses, and price-to-the bottom strategies.
Then focus on one of the most underleveraged assets in every dealership operation: trade-ins.
Consider this: the average dealer makes three times the profit on trade vs a purchase unit. Trades also turn in half the time. For the average dealer, 50% of their pre-owned inventory is over 45 days old. And, more than 90% of those aged vehicles were purchased, not traded for.
When dealers trade for a vehicle they don’t pay fees or transportation costs, and they’ve sold another unit in the process. The average dealer’s appraisal close ratio is 35% vs the best at 65%. The number is easily manipulated in inventory-management software tools, but close examination will verify dealers only trade for 3.5 out of every 10 opportunities.
Strategy No.1: Trade for twice as many cars and do everything in your power to do so. The impact of a 25% increase in close ratio will translate to over $1 million in bottom-line profit for the average dealer. This is low hanging fruit that can add immediate revenue opportunities to dealers’ stores.
Strategy No. 2: Look at pre-owned-vehicle customer retention. Most equity tools only focus on new car customers, leaving the typical pre-owned retention rate hovering around 17%-18%.
Rather than throw a car online and drop its price, a more effective approach is to concentrate on the hundreds of pre-owned customers in the database that can be upgraded at least two model years for about the same payment.
Pre-owned customers are payment buyers. Something newer and better at the same payment is compelling. Today, 83% of pre-owned customers are going elsewhere because they have fallen off the radar and don’t have any incentive to remain loyal to a store.
Once dealers free themselves from traditional methodologies around vehicle acquisition and current marketing strategies, they will see a clearer path toward pre-owned profitability. (Wards Industry Voices contributor Bruce Thompson, left)
There are answers and solutions. The industry isn’t subject to doom and gloom. Dealers are intrinsically entrepreneurs, and now is the time to harness that innovative spirit.
Bruce Thompson is CEO of CarOffer, a trade platform provider.