Used cars are all about the inventory, experts say. Making money in that business requires managing inventory intelligently.
While the average dealer has millions of dollars in used-vehicle inventory, the used-car manager often is managing it in “gut-feeling” ways that some consultants describe as “prehistoric.”
But new computer products are starting to bring used-car managers out of their caves and into the 21st century.
“Technology rapidly is changing the role of the used-car manager,” says Phil Smith, owner of the Phil Smith Auto Group in Fort Lauderdale, FL.
New-car departments use technology for sophisticated marketing and customer-relationship management initiatives. Even the parts department relies on advanced software to help manage inventory and reduce obsolete parts.
But much of that has been lost on many used-car departments.
“Up until now, the used-car department has not had technology supporting it,” says Steve Donaghy, vice president-sales and marketing, American Auto Exchange, Inc. a subsidiary of JM Family Enterprises Inc.
“The used-car department really is the last frontier for technology in the dealership,” says Bruce Glascok, owner of Spring Chrysler Jeep, outside Houston, TX.
Technology can help dealers manage their used-car operations more effectively, especially their inventories.
“The technology is here and it is available now,” says Dennis Gregg, a consultant with NCM and Associates, a dealership-training firm in Overland Park, KS.
But the movement still is in its infancy. Relatively few companies (such as AAX, Resource Automotive and Dealerwire) offer used-vehicle inventory management software systems.
Other companies are taking notice, however. For example, Finbarr O'Neill, the president and CEO of the Reynolds and Reynolds Co. believes it is an area of need for dealers.
Although AAX has an early lead with more than 800 dealers using its system, one of its vice presidents, Randy Barone, predicts there will be a number of companies coming to market with inventory-related computer products in the near future as demand grows.
“We're starting to see a number of dealers who are starting to look into it,” Gregg says.
Dealers know that turning inventory quickly is key and most strive to keep their days supply for used vehicles in the 35- to 45-day range. “We have a term for those vehicles that sit on the lot,” Smith says. “It's called ‘lot rot.’”
Used vehicles on average gross nearly $2,000 when sold in a 10- to -30-day range, according to National Automobile Dealers Assn. data. That profit drops to nearly $875 at 90 days.
While many dealers whose days supply gets above 60 days think they have what is typically called an “aging” problem, they really have a stocking problem, Gregg says.
Carrying excess inventory of those levels leads to wholesale losses later for the dealer. The key is getting the right inventory that can be retailed quickly.
That is where inventory-management systems come in. The systems pull the dealership's historical used-vehicle sales records from the dealer management system (DMS).
An ideal inventory list then is produced and updated based on which makes, models, years and trim lines of vehicles sell the fastest and make the most gross. Even vehicle colors are factored in.
“Dealers really do get it and understand the value of it,” says Donahgy.
Used-car managers go to auction and think they have a pretty good idea of the vehicles they need to buy. But thinking and actually knowing are two different things.
“You think you know, but you can't really be sure,” says Smith, a used-car manager before becoming a dealer. “There are things that will surprise you.”
Having that systematic information takes guesswork out of trying to decide which inventory to buy and stock, says Glascok. “The gut stuff is gone.”
Gregg recounts how one used-car manager was certain one type of vehicle was a big seller for the dealership.
“We pulled the data and found that he had sold only 11 the last few months and that they had sat on the lot for an average of 68 days generating only $460 a copy,” Gregg says.
Meanwhile, several Chevy Suburbans to which the manager had paid little attention, sold in less than 10 days and generated $2,600 in profit.
“Dealers have a gut feeling about what best-selling vehicles are, but they don't really know,” Gregg says.
They already have access to sales data in their DMS, he says. “They can run reports off their systems. It's complicated to set up, but once it is, the information is there.”
Some used-car managers aren't sold on the new technology.
Jeff Bell, used-car manager for Brunswick (OH) Auto Mart, Chrysler Jeep and Toyota Scion store near Cleveland, prefers the reports he runs from his ADP-provided DMS, but questions the overall value.
“We do things the old fashioned-way here,” he says. “If you're hands on, the reports confirm what you already know.”
But it comes down to hard work, he says. “The owner, Gary Panteck is the hardest-working dealer around,” Bell says. “He sets the example here. You could say I don't play much golf.”
Still, Bell says the dealership may move sometime in the future to an inventory-management product that Chrysler offers. He averages almost $1,500 in front-end gross per unit for used sales.
Dealers using inventory-management systems are able to take their operations to a new level, say advocates.
Dealers who are using AAX are turning 80% of their inventory in 22 days or less, Barone says.
Smith, who uses the modern technology, says it helps eliminate appraisal mistakes. “How often does a used-car manager miss on the appraisal?” he asks. “It's not rare to get the year or trim level wrong and that can affect the price.”
Once the vehicle identification number is entered into the system, the used-car manager gets an alert and can pull up all of the vehicle information, including Department of Motor Vehicle data, CarFax and AutoCheck vehicle histories and the values for whatever appraisal books the dealer uses.
“It streamlines the process,” Glascok says. “My used car managers can do 10 appraisals quickly and not be wrong.”
But some aspects of the old ways remain valuable, say some veterans who are old-school alumni.
Glascok got his start learning under legendary San Antonio, TX, dealer Red McCombs. “He taught me everything I know,” he says. “He always told me, ‘The first deal is the best deal.’ It took him a year of beating it into me before I got it.”
Bob McDorman, a Chevrolet dealer for 40 years in Winchester, OH, relies on experience and he has made a good living doing so. “We carry no 60-day-old vehicles,” he says. “That is the secret. My managers have 30 days to retail the vehicle and 30 days to wholesale them after that. And I check it once a week.”
McDorman says he handles the wholesale process himself. “My employees used to do it, but we were losing money, so I took it over. We're starting to make money now in wholesale.”
To be successful, the dealer has to be in all facets of the used-car business and know what's going on, he says.
What's Hot, What's Not On Used-Car Lots
Dealers may want to avoid fullsize SUVs when determining which vehicles to stock in their used-car lots.
While prices for wholesale used vehicles increased 1.6% in September (a 4.3% increase over the same period last year), full-size SUV prices declined 4%, due more to a weakness in demand than excess supply, according to the latest Manheim Used-Vehicle Value Index.
New-car inventories that have been depleted by auto makers' summer discount programs are offsetting the effects of higher fuel prices on used cars and keeping overall wholesale prices high.
The index measures used-vehicle prices at auctions. The recent used-car price increases are fueled by compact and midsize segments, especially for new models in good condition, says Tom Webb, senior economist for Manheim Auctions.
Fullsize pickups also show some sales weakness, although some markets for heavy-duty pickups with diesel engines are strong.
Bruce Glascok, owner of Spring Chrysler Jeep near Houston, TX, says pickups with diesels have been “hot” in his market, probably because of higher fuel prices. Diesel engines on average get better fuel mileage.
But Glascok says the used-vehicle market is tough to predict. He says a big Chevy Suburban SUV in his inventory sold quickly after getting 34 online hits in two days.
Andy Ganda, owner of Bedford (OH) Auto Wholesale, says the wholesale market “is becoming more of a challenge to find vehicles at the right price.”
While auctions are good sources of vehicles for used vehicles, dealers profit more from vehicles acquired in trades than at auctions, according to used-vehicle studies by NCM and Associates.
Dealers with strong used-car operations are able to use those trade-ins to spur new-car sales.
“For us, a lot of our new vehicle sales are based on the trade,” says Jeff Bell, used-car manager for Brunswick (OH) Auto Mart, a dealership near Cleveland. “Often, making that deal boils down to which dealership can offer the most money on trade. If you can offer $200 more, you're going to win.”
To do that, used-car managers must rely more on data and actual business intelligence rather than gut instinct when appraising trades, say experts.
“The importance of the trade to the new-car operation is one thing many dealers overlook,” says Art DeLaurier, chief operating officer for Veretech Inc., a company that provides used-vehicle appraisals on dealership web sites.
Franchised dealers are facing increased pressure from independent used-car dealers who are becoming more savvy in exploiting some of new-car dealers' practices in the used-car operations.
For example, dealers in regions where CarMax Inc. has used-car super stores are finding it difficult to compete with the chain.
“CarMax has been gathering data the last several years and now they're putting it use,” says Randy Barone, a sales vice president at American Auto Exchange Inc.
CarMax buys used cars even if owners do not buy a vehicle from it. That hurts new-car dealers' used-car inventory potential.
“It is becoming known as the place to take your vehicle,” Barone says.
— Cliff Banks
Turn, Turn, Turn Used-Car Inventory
Moving inventory fast makes used-car operations succeed.
“The faster the inventory moves, the higher the grosses,” says Jeff Bell, used-car manager for the Brunswick (OH) Auto Mart, a dealership with Chrysler Jeep and Toyota Scion franchises.
For a used-car operation to make good money, it should be turning its inventory no less than eight times a year. Ten times a year is preferable and will yield more profit, says Dennis Gregg, a consultant with NCM and Associates, a dealership-training firm in Overland Park, KS.
To turn inventory 10 times a year means a dealership should maintain an average 35 days' supply of used vehicles and no more.
But rather than looking at just unit days supply, Gregg suggests dealers also consider the dollar value of their inventory to help them consider which vehicles to stock.
He calls it the dollar days' inventory formula.
It calculates the dollar value of inventory a dealer needs to move each day along with the dollar value of daily inventory to maintain.
Plugging in annual used-car revenues and units sold from a dealer on the Ward's 500 ranking, and dividing each number by 12 to come up with monthly figures and using a $1,500 average front-end gross per vehicle, the formula works like this:
$1,215,823 (monthly retail sales) minus $153,000 (monthly gross, which is units sold multiplied by $1,500) = $1,062,823 (cost of sale) divided by 30 (days) = $35,427 (one day cost of inventory) multiplied by 35 (days of supply of inventory dealer wants on hand) = $1,239,945.
The calculation shows the dealer needs to sell $35,427 worth of inventory daily while maintaining $1,239,945 in daily inventory in order to turn inventory 10 times a year.
Knowing the dollar amount will provide the dealer with a better idea of what inventory to stock, says Gregg.
— By Cliff Banks