Dale Pollak

Invested Offers a New Way Forward in Used Vehicles

Dale Pollak — Wed, 08 Jan 2025 22:40:08 +0000

Today’s an exciting one—we’re officially announcing the release of my seventh book, Invested: The New Science, Strategy and System of Used Vehicle Investment Management, at the NADA Show this month in New Orleans.

My work on Invested, along with co-author Lance Helgeson, began about a year ago after we hosted vAuto’s Access: Innovation event in Chicago. While there, we talked about how the used vehicle market is returning to the levels of price and value efficiency that we saw in the years immediately preceding the pandemic. I’m sure many readers felt this reality in their financials for 2024—you probably sold more used vehicles than you did in 2023, but the net profit those vehicles delivered to the bottom line of your used vehicle department likely looks more like it did in 2019.

Invested examines some of the root causes of this dynamic, which we discovered by applying predictive data science to help us understand where common inventory management practices may fall short and how they might be improved. The data science revealed a few surprises, two of which I’ll share here:

Dealers often manage used vehicles as merchandise, not investments. We came to this conclusion after using data science to help us know a) the investment potential of every used vehicle is unique and b) dealers often treat every vehicle the same, despite the inherent differences in each vehicle’s ROI potential. This “sameness” manifests as dealers apply the same mark-ups as they price vehicles and they often give distressed inventory too much time to find a buyer, resulting in less-than-optimal ROI outcomes. At the same time, dealers tend to short-sell their best investments, which is something the best financial advisors and investment portfolio managers avoid.
Individual beliefs and biases play an outsize role in used vehicle decision-making. Invested reveals how the absence of a dealer-established investment strategy, across acquisition, appraising and pricing decisions, gives decision-makers a lot of latitude to do what they think is right for each vehicle. The book details how such latitude tends to serve the best interests of the individual, not the bottom line of the used vehicle department or the dealership.

I devote the bulk of Invested to helping dealers understand how they can turn the power of predictive data science to their advantage. In short, the book serves as the operations manual for dealers to establish and execute their preferred investment management strategy. The book also details how the vAuto team and I have built and enhanced our ProfitTime GPS solution to help dealers execute this strategy, and measure/monitor its effectiveness in real time, with every acquisition, appraising and pricing decision.

My work on the book, and the success I’ve seen with dealers who’ve fully adopted an investment management strategy to guide their used vehicle departments, leaves me convinced that this new approach will serve as a kind of Great Divide: If you’re on the investment management path in used vehicles, you trust the predictive data science that drives it and you follow the principles, you’ll sell more and make more than tradition-minded dealers, who’ll remain trapped in today’s ROI spiral.

Stop by vAuto’s booth at NADA (#2506) where you can pick up your copy of Invested and chart your own new way forward. See you in New Orleans!

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A Good News Story for Dealers Heading Into 2025

Dale Pollak — Fri, 20 Dec 2024 16:39:22 +0000

Every person who purchases a vehicle eventually arrives at a point of recognition: Now’s the time to pull the trigger and buy the car.

Perhaps the best news for dealers as we head into 2025 is that a confluence of conditions has flipped a switch: There are a lot of reasons why consumers, in this moment, appear to believe that it’s better to buy a vehicle now rather than delay their purchase.

On an industry call this week, which I’d encourage every dealer to check out, Cox Automotive chief economist Jonathan Smoke summed the situation this way: “Buy now or at least buy sooner rather than later seems to be the new marching cry.”

If we think about this past year, vehicle buyers had a lot of reasons to hold out. At various times, vehicle affordability, credit availability and the relatively steady decline in new/used vehicle prices were factors that suppressed retail sales. Right now, consumer concerns about rising inflation, the prospect of tariffs raising vehicle purchase costs and new federal fiscal and tax policy (including a possible sunset of tax credits that have spurred EV sales) serve as key catalysts for the current buy sooner rather than later mentality.

Smoke and others see sales momentum building in the market as we head into the new year. “The sun appears to be coming out, but there’s always a twist,” he shared on this week’s call. The optimism squares with what I’m hearing in my conversations with dealers. They’re feeling pretty good, even if profitability isn’t where they’d like it to be.

Generally speaking, the outlook for used vehicles is positive for 2025. Cox Automotive forecasts overall retail sales will grow 1.2 percent to 20.1 million next year. Analysts also noted a couple areas of potential pain or opportunity I thought I’d call out here:

CPO supply pressure. Cox Automotive forecasts that overall certified pre-owned retail sales volumes will be lower next year compared to this year—2.5 million total, down 1.6 percent. Constrained supply is the primary reason for the expected shortfall. The upshot for dealers: If you want to maintain or strengthen your CPO game, you’ll need to be ever-more proactive about sourcing the inventory outside of auctions, especially since they’re currently the go-to source for many dealers.

EVs. I was asked the other day how I’d describe dealers’ prevailing regard for used EVs. The answer: They’re wary, for a lot of good reasons, not the least of which is price volatility in the new EV market. Even so, you can’t deny that the market for used EVs is on the rise, especially as we face the prospect that EV tax credits might go away. I recognize that it can be hard for dealers who have avoided EVs, and don’t have a history of sales, to know how many to stock and how best to price them. If I fit this description, I’d be leaning into the live market data I get in my inventory management system for the answers. In many cases, dealers will find opportunities to step into, and build, their used EV sales share.

The Cox Automotive call also included another nugget about dealers being increasingly concerned about “competition.” To be sure, it’s a lower-level concern than the economy or interest rates. Still, I found myself scratching my head. Why would dealers be worried about the competition when sales volumes are good, the pool of potential buyers is growing and the number of dealers is basically the same?

I concluded the sentiment might be a form of projection—more revealing about the operational inefficiencies dealers know they should fix than anything else. If that’s the case, there’s no better time than right now to get on it.

Happy holidays and my best, warmest wishes to you/yours!

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When the Right Money Goes Wrong in Used Vehicles

Dale Pollak — Fri, 13 Dec 2024 17:54:41 +0000

Let’s imagine your appraiser valued a trade-in at $15,500—smack dab in the middle of a range your inventory management solution recommended as the “right money” for the vehicle.

Your inventory management solution arrived at the right money recommendation by assessing the vehicle’s investment return potential and the dealer’s strategic gross/volume objectives, the vehicle’s competitive appeal and price sensitivity in the retail market, the appraiser’s reconditioning estimates, the vehicle’s cost and any other costs (i.e., a pack) the dealer typically adds to vehicles they intend to retail.

At this point, there should be no debate or discussion that the appraiser did a good job. The $15,500 appraisal offer landed the vehicle. The dealer now owns it the “right money” as defined by their strategic objectives and the system’s recommendations. The customer’s happy with the trade-in value and transaction.

But as I noted in an earlier post, and write about in my new book, Invested: The New Science, Strategy and System of Used Vehicle Investment Management*, there are often times that the right money, in this case $15,500, can go wrong. Let’s examine a few:

A manager bumps the trade-in value to make the customer’s purchase of another vehicle work. Maybe the customer refused to buy the other vehicle unless the manager discounted the purchase price by an additional $500. The manager says “yes” and decides to bump the customer’s appraised trade-in value by the same amount. Suddenly, the right money of $15,500 becomes $16,000. It’s an example of the right money going wrong for what might be a good reason.

A manager decides to override the retail price range recommendation the inventory management system calculated to achieve the dealer’s desired volume or gross objective. In this hypothetical, the system advised a retail price recommendation around $18,000, which would translate to a $2,500 front-end gross profit potential based on the appraiser’s $15,500 valuation. But the manager has a different idea, maybe because of an appraisal bump or maybe because they are feeling pressure to make gross. Whatever the case, the manager decides to price the vehicle at $19,000, a decision that means the right money has gone wrong again.

A week after the vehicle’s been in inventory, the reconditioning RO clears. The appraiser’s original estimate wasn’t as accurate as everyone thought. The car had a mechanical issue that cost an additional $1,000 to fix. Now, instead of owning the vehicle for $15,500, the dealership owns the vehicle for $16,500, another instance where the right money goes wrong.

Collectively, these scenarios represent a breakdown of the retail exit strategy the dealership determined for the vehicle at the time of acquisition/appraisal. In my view, the retail exit strategy you determine at the time of appraisal must extend through its pricing and its eventual retail sale, even if its cost basis has changed for less-than-ideal reasons.

Unfortunately, dealers and used vehicle managers often aren’t aware that when you alter the retail exit strategy defined during the appraisal, you’re overlooking the fact that it’s the same car in the same market. The only thing that has changed is that the right money for a vehicle has gone wrong. If you pretend otherwise as you price and sell the vehicle, you’re inviting risk that the wrong money will go really wrong by the time you move the car,

* Invested will be available at NADA 2025 at vAuto’s booth (#2506). Stop by to get your copy.

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A Heartfelt Thank-You and a Clarifier

Dale Pollak — Fri, 22 Nov 2024 16:27:46 +0000

My heartfelt and sincere thanks for the outpouring of love and support following yesterday’s announcement that I’ll be leaving Cox Automotive at the end of 2025.

My wife, Nancy, captured the feeling I felt through the day: “It’s like you get to hear all the wonderful things people say and think about you, even though it’s not your funeral.”

With the hundreds of comments and likes across my social media pages, I’m not able to respond to everyone individually. But, make no mistake, you all mean the world to me. I’m truly blessed to have such deeply felt, industry-wide recognition and respect.

This moment seems right to call out two things:

First, I’m not retiring. I know. That’s the road many travel when they reach my age. But I’m as committed and excited as ever to join the Cox Automotive team at NADA 2025 in New Orleans and through the year ahead. As the announcement notes, I’ve spent the past two decades pouring myself into my mission of helping dealers and achieving success for vAuto and Cox Automotive. Along the way, I’ve parked some ideas and opportunities—things I’ll revisit and explore as 2026 unfolds.

Second, so many of yesterday’s comments and conversations brought me to a passage I wrote for the preface of my next book, Invested: The New Science, Strategy and System of Used Vehicle Investment Management, which will be available at NADA:

“When I first set foot in this industry, I was driven by a desire to innovate, to create solutions that would not only streamline operations but also transform how we perceive value and success for used vehicle departments.

The years that followed were marked by challenges, triumphs, and an unwavering commitment to excellence. Each innovation, each step forward was an investment in a vision I believed could redefine our industry.

Now, as I anticipate the future, I am filled with excitement and curiosity. As I think about what’s to come, it brings a profound contemplation of what it means to invest a lifetime into something greater than oneself. While I have witnessed the tangible returns of my efforts in the form of appreciation and the respect of the industry and the people I have had the privilege to serve, there is a lingering question: How will I continue to realize the investment return from my work as I have in the past?”

I’ll be working to answer this question in months and years ahead. In the meantime, my deep gratitude goes to all of you. My experience yesterday is proof positive that when you give yourself to serve others, you get way more in return than you can imagine.

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How to Define the “Right Money” for Any Used Vehicle

Dale Pollak — Wed, 20 Nov 2024 16:14:00 +0000

An age-old and elusive question in the used car business is, “what’s the right money for a car?”

I would submit that, in most dealerships and used vehicle departments, no one has a good answer. When I ask the question of a dealer or used vehicle manager, the answer I get most often is, “it depends.” It’s rare to find anyone who can clearly articulate what the right money for any vehicle should be.

Over the years, I’ve come to understand that our inability to answer the right money question leads to a lot of sub-optimal outcomes. If no one has a clear understanding of what the right money for a vehicle should be, chances are better than good that your appraisers and buyers are acquiring used vehicles for something other than the right money. In effect, they decide what the right money should be, based on whatever approach they use to define it for themselves. This is why dealers often worry that appraisers put too much into vehicles they acquire and too little into vehicles they miss.

This dynamic leads to the high degree of variability we see in the performance metrics dealers typically use to measure appraiser performance. Their Cost to Market and Look to Book averages are often all over the board. It’s only on occasion that reconditioning estimates captured in appraisals accurately reflect the work a vehicle needs. It’s why some dealers hold save-a-deal meetings, where they make a second or third attempt to get the money right for a vehicle.

I’ve given our industry’s collective difficulty in answering the right money question a lot of thought. I’ve made it a central topic of conversation with dozens of dealers, and I’ve come to a singular conclusion: We don’t know what the right money for any vehicle should be because of an inability on the part of dealers to define it, based on their strategic retailing objectives, and bring this insight to every appraiser in every appraisal situation.

But now, there’s a better way.

My next book, Invested: The New Science, Strategy and System of Used Vehicle Investment Management, which I’ll be releasing at the upcoming NADA convention in New Orleans, details how dealers can use a new appraisal system inside ProfitTime GPS to define the right money for any vehicle and make sure appraisers know the right money whenever they evaluate a vehicle.

A big part of this story is the system’s use of data science-driven insights that tell you the quality of a vehicle as an investment at the time of appraisal. The system also knows the dealer’s strategic objective, whether they are going for gross, volume or a combination of both in a given month, and whether you need the vehicle or you don’t. With all that, the appraisal system inside ProfitTime GPS offers up a recommended appraisal range to help appraisers bring in the vehicle for what the dealer has defined as the right money. The system also gives appraisers flexibility to make deals, while letting everyone know when a vehicle has been acquired for something other than the right money the dealer defined and desired.

As I write about in the book, the system’s a game-changer for dealers because their new-found ability to define the right money for any vehicle, based on their strategy, means appraisers bring more vehicles into their used vehicle inventories for the right money. In turn, there’s less variability as appraisers evaluate vehicles, and less likelihood that someone will price a vehicle incorrectly because the money you paid for it wasn’t right.

Therein lies a topic I also address in Invested and will share in an upcoming post—how to prevent the right money from going wrong once you own a vehicle.

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A Current Events-Minded View of Vehicle Affordability

Dale Pollak — Mon, 11 Nov 2024 16:49:52 +0000

It’s encouraging to see some OEMs reduce MSRPs on incoming 2025 models to help address one of our industry’s top challenges—with an average transaction price for a new vehicle north of $47,000, it’s difficult for a large swath of would-be buyers to afford a new vehicle.

But analysts and observers don’t think the MSRP reductions will have a significant impact on the affordability challenge, especially as they expect OEMs to diminish incentive spending in kind. This fall, incentive spending has averaged more than 7 percent of transaction prices (about $3,500) in recent weeks. At the same time in 2019, incentives were running nearly 10 percent of transaction prices.

“I’d expect to see incentives to remain high on 2024 models as OEMs help dealers clear the inventory,” a new vehicle analyst shared. “But we’ll probably start the new year with lower levels of incentive spending than we’ve seen lately.”

Such dynamics mean the average transaction price for buyers will effectively remain the same—and the pressure on dealers to move aging or excess new vehicle inventory will continue.

Meanwhile, the Federal Reserve’s decision last week to cut interest rates by another quarter percent is also expected to ease the affordability challenge. But the impact will take time. So far, we haven’t seen auto loan rates shift significantly from the Fed’s rate-cutting this fall. The big question is whether the Fed will continue down this rate-cutting path to provide more tangible relief.

Therein lies a big unknown. At the Fed’s meeting last week, chairman Jerome Powell noted that with a new president and Congress taking office in January, it’s difficult to chart a course forward.

“We don’t guess, we don’t speculate and we don’t assume,” Powell said. “We don’t know what the timing and substance of any policy changes will be. We therefore don’t know what the effects on the economy will be.”

Some of the uncertainty owes to a promise President-elect Donald Trump made on the campaign trail to increase tariffs on imports to spur domestic manufacturing, a policy that many believe would lead to higher vehicle costs. There’s also uncertainty around how President-elect Trump will treat current tax credits for EV purchases, which has helped spur demand and sales for dealers, particularly with used EVs.

In the end, time will tell whether we see vehicle affordability improve and become less of a headwind for vehicle sales than it is today. In the meantime, it’ll be important for dealers to do what you do best—stay attuned to your market, your inventory and your customers to capitalize on the opportunities that will inevitably arise on the road ahead.

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A Disturbing Trendline in Used Vehicle ROI

Dale Pollak — Tue, 05 Nov 2024 18:26:01 +0000

Across the country, most dealers have seen their used vehicle gross profits decline this year to essentially land where they were in 2019, before the pandemic.

Back then, the front-end gross profit average for public dealer groups was about $1,430. Today, the front-end gross profit average for public dealer groups through the third quarter runs about $1,600.

Some might see these numbers and think: Well, that’s not so bad. It’s five years later, and the data shows the groups are making more gross on a per-car basis.

But this quick assessment only scratches the surface. Yes, the gross profit in pure dollars might look better, but are dealers today realizing a richer Return on Investment for used vehicles than they did in 2019?

To answer this question, I asked CoPilot, Microsoft’s generative Artificial Intelligence tool, to help paint the comparative ROI picture in used vehicles in 2019 compared to today. I primed CoPilot with a couple data points that are necessary to calculate ROI—the average cost of investment, the average amount of time it takes to sell the investment and the gross profit the sale of the investment produced.

For the average cost of investment, I used Manheim’s average MMR for 2019 ($12,848) and its current year to date average ($18,928) as proxies. (Note: The average investment cost for many dealers currently runs closer to $25,000; the MMR average doesn’t capture any additional costs dealers typically ascribe to individual vehicles.) For the time it takes to sell an investment, I used 45 days. I drew the gross profit averages from public dealer group financials. Here’s what CoPilot produced:

2019: The annualized ROI for a $12,848 investment that sold in 45 days and generated $1,432 in front gross is 135.6 percent.

2024: The annualized ROI for for a $18,928 investment that sold in 45 days and generated $1,600 in gross profit is 82.9 percent.

This decline in used vehicle ROI signals a disturbing trend: Dealers must pay ever-higher amounts to acquire and retail used vehicles, while the front-end gross profit averages they achieve for selling these higher-cost investments isn’t significantly different. We can also reasonably presume that the average used vehicle investment cost in the future will be higher, and the ROI you achieve will be lower, assuming you do nothing different.

As I’ve shared this portrait of used vehicle ROI in decline with dealers, it often catches them by surprise. Many judge the strength and success of their used vehicle departments based on the average gross they produce and the number of vehicles they sell. They don’t consider ROI as they manage each retail used vehicle investment to its sale. They don’t judge an individual used vehicle deal based on the ROI it produced. They don’t evaluate ROI as they assess the financial performance of their used vehicle departments.

I consider the near-total absence of ROI awareness among dealers as a significant problem and opportunity. It’s a problem if you don’t do anything different in the way you acquire, manage and retail vehicles. Over time, as investment costs grow and market conditions put pressure on gross profits, some dealers will find themselves exactly where they were in 2019—moving a lot of used vehicles but not making any money.

The opportunity rests with tackling the ROI trend head-on. If you understand how to manage each used vehicle to achieve its optimal ROI outcome, you’re doing everything you can to proactively maximize the money you make for each investment and the used vehicle department. That’s exactly why the vAuto team and I developed ProfitTime GPS and the ROI-focused Variable Management strategy it supports.

My next book, Invested, goes into greater detail on how dealers can seize their own ROI opportunity. The book will be available at the upcoming NADA convention in New Orleans.

In the meantime, I’d encourage dealers to evaluate how your used vehicle ROI has changed over time. While your numbers might be different than those I’ve shared here, I think you’ll agree that the analysis and findings are cause for concern and perhaps a catalyst to find a new way forward.

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A Taste of Autonomous Driving Proves Profound

Dale Pollak — Sat, 26 Oct 2024 22:11:50 +0000

This past week, my wife Nancy and I were in San Francisco for a conference and had the opportunity to use Waymo’s autonomous ride service several times in the downtown area as we moved from place to place.

The ride struck me as both coincidental and profound. Just a week earlier, I’d marveled at the way an autonomous vehicle, without anyone inside, maneuvered through traffic in Austin. A few days later, I was in the back seat, marveling at how well the vehicle navigated its way through the winding hills and streets of San Francisco.

Overall, my sense is that while Level 5 autonomous driving is limited to specific areas, the technology has most certainly arrived. I was impressed when I heard a siren and the car moved to the right to let a fire truck pass. Same for when a vehicle was double-parked and blocked our path on a street. The car slowed down to let oncoming vehicles pass, and then went around the obstacle. When we were heading up a hill, the vehicle did the equivalent of hitting the gas to make the climb. At stop signs behind other vehicles, the car inched forward, just like most drivers do as they approach an intersection.

Beyond the human-like nature of the vehicle’s driving ability, Nancy and I appreciated the human touches the vehicle offered as we used the Waymo app to unlock the door and get in. A voice welcomed us by name. It played music, and gave us the option to speak to someone if we needed it.

To be sure, the experience was a bit creepy. But, in the end, it was more cool than creepy.

I also couldn’t help but think that at its most basic level, the vehicle’s human-like driving ability boiled down to a bunch of code. Pretty amazing.

I left town know I have no qualms about taking another ride in a fully autonomous vehicle, and that while the pandemic may have stalled efforts by Waymo and other providers to scale their services, it’s only a matter of time before they do.

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Reflecting on Cars and Mobility Moments

Dale Pollak — Fri, 18 Oct 2024 16:03:37 +0000

On our way home from dinner the other night in Austin, TX, my son, Samson, and I did a double take as we stopped at a red light along Cesar Chavez Street. A car pulled up alongside us that made us both wonder: Are flying cars next?

The odd vehicle sighting, which I’ll explain more in a minute, got me thinking about all the different vehicles that have been memorable throughout my life. They include:

A white Buick Estate Wagon: This car’s memorable because its inaugural journey took the entire Pollak family—my Mom, my Dad, my three brothers and me—and all our luggage to Monterrey, Mexico. We probably spent close to 25 hours driving to get there. At the time, I remember thinking, why are we here? We were staying at a Ramada Inn in what appeared to be an industrial town.

A Navy Blue Opel Kadett: As the son of a Buick dealer, I could have chosen just about any vehicle as the first one I owned outright. I liked the Kadett. It wasn’t anything special as a car, but it was special to me. My Kadett represented freedom.

A Chevrolet Volt: We were among the first in the Chicago area to own a Chevrolet Volt when it debuted in late 2010. At the time, gas prices ran close to $3 a gallon in our area—a catalyst for the Volt’s “Revolt” vanity plates. I remember being impressed by the Volt battery’s staying power. I certainly didn’t miss trips to gas stations.

A Tesla Model X. Almost a decade ago, Tesla located one of its service centers in the Chicago suburbs. A former colleague and friend who worked for Tesla arranged to have a Model X (and a driver) pick me up from my house. I was curious about the vehicle’s self-driving capability. On the highway, we let the car drive itself. It was a little unnerving for me to know that the car was driving itself, even though I knew the driver had his eyes on the road and hands close to the wheel. I was also impressed by the vehicle’s head-snapping power.

The autonomous vehicle ride brings me to the stoplight the other night in Austin. The car on our left at the light was empty. No one in the front or back seats. When the light turned green, the car hit the 35 mph speed limit fairly quickly, and we noticed all the sensors/other equipment on the roof. A few blocks later, the vehicle turned left and drove off.

My son and I figured the vehicle must be part of some company’s autonomous vehicle testing program. Whatever the case, we agreed it was a spooky mobility moment that seemed appropriate for this time of year. It also led to reminiscing about past vehicles and wondering how long it’ll be before flying cars dot the skies.

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Can We Stop the “Chase” in Our Used Vehicle Pricing?

Dale Pollak — Wed, 16 Oct 2024 16:04:50 +0000

As I talk to dealers week after week about their aged and distressed inventory, it doesn’t take long to uncover a distinct pattern: Someone is pretending the vehicle deserves a shot to make gross despite all signs suggesting otherwise.

I see the pattern in the inventories of ProfitTime GPS dealers, where the system recommends a move-it-quick pricing recommendation on Day 1 for a Bronze vehicle (i.e., a unit with the least ROI or profit potential). Even so, the vehicle’s been priced significantly higher than the recommendation, either becomes someone didn’t see or ignored it. We all know what happens next. The vehicle doesn’t sell. After 30 days or more, someone finally decides to price the vehicle to move. Unfortunately, by this time, the price required to move the vehicle results in a low-gross or net loss when it sells.

The other day, a friend observed that the behavior of pricing a vehicle that’s in distress as if it isn’t in distress is the equivalent or at least a close cousin of the “chase” in poker. That’s where a player has a weak hand and believes they can improve it through subsequent draws and bets. By the time the dealing’s done and the cards are on the table, the player would have been far better off if they had folded right away, and didn’t pretend their hand was something that it wasn’t.

The problem with used vehicle pricing and poker is that both have been built on the tempting prospects of hope and possibility. With a used vehicle, you might get lucky and find a buyer willing to pay more than the vehicle’s worth. In poker, you might get lucky and land the card that turns a weak hand into a winner.

As humans we’re wired to remember the situations where a positive outcome, either in used vehicle or poker, defied the odds—which is exactly why we seem so ready and willing to defy them again, even if the evidence in front of us indicates the outcome won’t be good.

My next book, Invested: The New Science, Strategy and System of Used Vehicle Investment Management, discusses how the long-standing beliefs and biases of used vehicle managers continue to contribute to sub-optimal profit or ROI outcomes for dealers. It highlights how it’s often difficult for dealers and their managers to accept that pricing a vehicle for a loss on Day 1, the equivalent to folding a weak hand in poker right away, is truly the best thing to do from an investment perspective.

The book also details what happens when you avoid the chase in used vehicle pricing. You sell your Bronze vehicles faster, typically for a higher gross or ROI than you’d achieve if you held them longer. Your overall volume improves because you’re not sitting on vehicles that are priced not to sell. In addition, your overall profitability improves because, as you move Bronze vehicles faster, there’s less need or temptation to short-sell your best cars (i.e., the ones ProfitTime classifies as Platinum and Gold) to achieve your volume targets.

The book will be available at the upcoming NADA convention in New Orleans. Until then, I’d suggest that dealers take a moment to see how often their used vehicle pricing amounts to a chase to achieve a result they’ll never realize. In the end, the faster you put an end to the chase, the better off your investment returns will be.

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Assessing Your Used Vehicle Acquisition Proficiency

Dale Pollak — Wed, 09 Oct 2024 15:53:56 +0000

This week, Cox Automotive reported that retail sales of used vehicles, while trending above last year’s sales volumes, have tapered off in recent weeks. The report also notes that the days supply of used vehicles on dealers’ lots is running close to 45 days, a few days less than the same time in the past two years.

Perhaps most important, the report notes that supplies of used vehicles are expected to remain tight through the end of the year.

Such circumstances will put dealers to the test, particularly for those where “go get some cars” is your typical MO when you need inventory. The fact is, given the variability and value volatility across vehicle model years, segments and powertrains, many dealers need to sharpen how they think about stocking inventory and how they can most efficiently acquire it.

Below, I’ve distilled some of the key principles I’ve gleaned from top-performing dealers as it relates to vehicle acquisition. These principles, and the extent to which they exist in your dealership, offer a way for you to check your acquisition proficiency. They also serve as the foundation of a fresh approach to acquiring inventory that I write about in my upcoming book, Invested: The New Science, Strategy and System for Used Vehicle Investment Management. The principles also shaped the tools we’ve built inside ProfitTime GPS to help dealers consistently maintain the right number and mix of vehicles in inventory.

Do you have a stocking strategy? For some dealers, the stocking strategy is pretty simple: We want to sell 80 units a month, so let’s stock between 80 and 100 or so to meet our sales goals. While this approach can work, it’s not likely to work as well as a strategy that accounts for the specific types of vehicles you should stock, and how many of them you should stock at any given time. The best stocking strategies break down a dealer’s inventory by vehicle segments (i.e., compact, mid-sized SUV, pick-up, etc.) and price points (i.e., <$10,000, $10,000-$15,000, $15,000-$20,000, etc.). From there, dealers determine how many vehicles to stock in each segment, based on an analysis of their segment-based sales in the past, and current sales by segment in the current market.

When’s the last time you updated your stocking strategy? It wasn’t all that long ago that dealers tended to follow a “set it and forget it” approach to their stocking strategies. It would be many months, or even a year or two, before someone took a moment to review the strategy and see how well it compared to current market sales trends. Today, I’d recommend that dealers conduct this review on at least a quarterly, if not monthly, basis, given how quickly market conditions can change.

Where do you plan to acquire the vehicles? In the past two to three years, as used vehicle supplies have been constrained and one-to-three-year-old vehicles have become harder to acquire, the best dealers have added another layer to their stocking strategy. That is, they’ll forecast the volume of vehicles they expect to acquire from individual sourcing channels, such as auctions, trade-ins, service lane, lease returns, off-street, etc. Such channel-specific objectives work best when they’re based on an honest assessment of what you can reasonably expect to acquire, not what you aspire to acquire from an individual channel.

What are your profit or ROI objectives for vehicles you acquire from each channel? Not long ago, we weren’t asking this increasingly important question. We typically acquired vehicles from auctions, trade-ins or lease returns, and we pretty much expected the same front-end gross or profit outcome with every vehicle we acquired—even if we knew we paid up to acquire an auction vehicle. Today, we know better. When dealers track the profit or ROI potential by sourcing channel, it becomes clear fairly quickly that your average Cost to Market or ProfitTime investment score varies by channel due to the unique nature of customer needs and available vehicles in each channel.

How are you addressing your performance improvement opportunities? The best dealers have long made it a daily practice to start each business day with a review of the prior day’s trade-ins to affirm or update an appraiser’s assessment of the vehicle and its optimal exit strategy. But I’d submit that such discussions rarely extend to vehicles you acquire in other channels and the performance of the individuals you’ve tasked with acquiring vehicles in a specific channel. For many dealers, such next-day discussions and ongoing channel-specific reviews offer a management opportunity.

I should note that while this acquisition proficiency check isn’t an end-all, be-all, the elements I’ve outlined here all point to an outcome we all know to be true—the dealer with the best cars in stock to sell is the one most likely to win a buyer’s business.

The post Assessing Your Used Vehicle Acquisition Proficiency appeared first on Dale Pollak.

Keeping An Eye Out for Opportunity and Showing Compassion

Dale Pollak — Fri, 04 Oct 2024 15:27:31 +0000

If you haven’t read former dealer Todd Caputo’s post on how the confluence of Hurricane Helene, the longshoreman strike (which, thankfully has been tentatively resolved), the escalating conflict in the Middle East and the upcoming presidential election may affect the car business, I’d encourage you to do so.

Caputo offers a thoughtful, prescriptive take on how the combination of these headline-making events may shape consumer interest in purchasing vehicles and how dealers might move forward. The piece underscores why I have long considered Caputo one of the most savvy and smart operators I’ve met in all my years in the car business.

Here, I thought I’d take a moment to drill a bit deeper into a couple points Caputo makes in his piece:

Exercise caution at auction. Caputo rightly says that the extensive loss of vehicles due to Hurricane Helene will further tighten the supply of vehicles in the wholesale market and spur inflated prices at auctions. As Caputo notes, the best way to avoid the risk is to do everything you can to acquire the inventory you need in non-auction channels. That means now’s the time to put an even greater emphasis on making sure you aren’t losing trade-in or other customer vehicle acquisition opportunities due to a sub-optimal experience for the customer or a less-than-fair offer.

Expect higher demand for lower-cost used vehicles. Cox Automotive data shows that the mix of inventory dealers carry has shifted a bit to older, higher-mileage vehicles. The average age of vehicles in dealer inventories is approaching six years, and the share of 10-year-old-and-older vehicles is up to 16 percent. The shift owes to dealers’ need to retail vehicles today’s budget-minded buyers can afford. In the weeks and months ahead, however, demand for these vehicles is likely to increase, putting pressure on your ability to buy them as cost effectively as you have in the past. The key here is knowing that when you must step up to acquire the unit for retail, you treat it with the understanding that you stepped up, which means you’ll likely see less ROI than you’d prefer when you retail it.

Mind the live market data. Caputo advises that dealers should be conservative with large expenditures as the remainder of the year unfolds. But, he also notes that, despite the uncertainty and volatility in the market, it might still present an opportunity. He’s right. I’d also add that such opportunities will arrive and pass unnoticed for dealers who aren’t paying attention to consumer interest in their vehicles and shifts in the Market Days Supply and Price to Market positions of individual vehicles and their inventories.

Caputo closes his piece with a profound bit of advice and wisdom that’s worth repeating here:

“Keep in mind that many customers affected by Hurricane Helene have lost everything. These are people who aren’t coming to your dealership because they want to, but because they have to. As dealers, it’s our responsibility to treat these individuals with care and compassion, helping them navigate one of the most challenging times of their lives. Let’s ensure we’re providing the best possible service, not just making a sale.”

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A Closer Look at Unit Cost Variability in Used Vehicles

Dale Pollak — Fri, 27 Sep 2024 19:18:26 +0000

Since the dawn of the used car business, it’s been true that dealers make their money when they buy a car.

This enduring truth was the first bit of advice my Dad passed onto me when I took over the used vehicle department at our Cadillac store outside Chicago. “It’s the money, honey,” he told me.

One would think that this understanding of the importance of each used vehicle’s unit cost’s influence on each vehicle’s profit potential would translate to a sort of cardinal rule. That is, it’s imperative that everyone gets each unit’s cost right, at the moment the vehicle is appraised and acquired. Maybe the rule would trigger some kind of consequence when someone gets it wrong.

But that’s not how it works in many dealerships today. Consider some of these findings from separate studies of vAuto dealers’ appraisal-related performance in the past year:

41 percent of dealers allow default reconditioning estimates on over 80 percent of the vehicles they appraise and take in. Nearly 70 percent of dealers allow default estimates on at least 50 percent of the vehicles they appraise and acquire.

80 percent of appraisals include reconditioning estimate misses that average $1,600. The misses can be due to over- or under-estimating the actual cost of getting a vehicle retail-ready.

70 percent of the vehicles dealers hold in their inventory see at least four adjustments to individual ACVs during a vehicle’s time in inventory. There are a multitude of reasons someone might adjust an ACV after they own the vehicle, but a prominent reason for the adjustments goes back to reconditioning—the accuracy of the initial estimate as well as the timing of when recon-related invoices (i.e., dent removal, glass/tire repair, etc.) and ROs hit the books.

Now, let’s go back to the age-old rule that you make your money when you buy a car. I’d submit that when a dealership appraises and brings in a vehicle, the initial unit cost likely shapes the collective sense of the vehicle’s profit and retail potential. The unit cost also likely plays a role in establishing the retail pricing strategy for the vehicle.

If that’s the case, what should one make of the data points above that suggest how you buy the car doesn’t really reflect the true cost of many vehicles you acquire?

To me, the findings suggest a glaring need for dealers to tackle an issue that many are likely aware of but haven’t addressed with the force and intention that they should—capturing a more accurate and thorough understanding of each vehicle’s condition, which can lead to a more accurate and true estimates of what it’ll take to make a vehicle retail-ready, should you choose to keep it.

I would also add that a greater level of unit cost accuracy is even more essential in today’s market than it has been in the past. Dealers everywhere are sensing, if not directly seeing, that used vehicle profitability is once again under pressure. I don’t think anyone would disagree that if you don’t have an accurate and clear understanding of a vehicle’s cost on Day 1, you’ll have a far more difficult time achieving the profit or return on investment potential a vehicle could command and you might reasonably expect it should command.

To borrow a line from singer Billy Joel, “get it right the first time, that’s the main thing.”

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Why Retail Used Vehicle Prices Won’t Rise Like Wholesale Values

Dale Pollak — Fri, 06 Sep 2024 20:45:10 +0000

Last week, I shared a post that outlined a somewhat odd moment in the used vehicle market, wherein wholesale values have risen steadily for the past two-plus months while retail prices have declined. It’s an odd moment in the market because you’d normally expect to see retail prices follow the trendline of wholesale values in roughly similar fashion.

Since last week, though, we saw retail asking prices for used vehicles rise ever so slightly, to the tune of one-tenth of a percent. This rise begs a question: Does it mark the start of retail price appreciation?

The answer is a firm “maybe, but wait.”

On the “maybe”: The slight rise in retail prices could signal that dealers are now accounting for the rising wholesale costs they’ve been paying for vehicles, particularly for one to three-year-old units, where recent wholesale value appreciation has been steepest due to reduced supply and resilient retail demand. Such a dealer response is exactly what you’d expect.

On the “but wait”: Analysts or observers, including me, don’t think retail price appreciation, if it continues, will be as significant as the wholesale value appreciation we’ve recently seen. Why? The main reason is that the current new vehicle market is effectively keeping a lid on how high retail prices for used vehicles might go.

If we flash back to 2021 and 2022, when retail prices appreciated 30 percent to 40 percent overall, there weren’t many new vehicles available in the market. The absence of those vehicles buoyed new vehicle prices and effectively offered clear sailing for dealers to price used vehicles as high as they wanted.

Today, it’s a far different story in the new vehicle market. Incentives have been growing with days supply, and transaction prices have been on the decline for much of the year. These trends put downward pressure on retail asking prices for used vehicles.

Here’s how a Southeast dealer summed the situation: “While we are certainly seeing the rise on the wholesale side, I don’t think we will see an equal increase on the retail side. With new car inventory where it’s at, and OEMs increasing incentives each month, the pre-owned market will need to keep separation from the new car transaction number. Meaning, used car prices cannot rise at the same level because if they do, they’ll get too close to new car numbers and then no one buys used cars. Dealers know this, so we aren’t seeing the adjustment on the retail side. We are just seeing margin compression.”

The dealer went a step further. He used ProfitTime GPS to analyze recent pricing trends of roughly 50 random one-to-three-year-old vehicles of various brands in two states. His take: “The result was inconclusive. It was pretty evenly split, where some went up in recommended price while others went down. I really couldn’t even find a pattern like some brands went up while others went down.”

To me, the dealer’s findings and perspective affirm two take-aways:

The first take-away is that margin compression in used vehicles is back. The typical relationship between wholesale values and retail prices appears to be challenged by current conditions. Looking ahead, it’s reasonable to expect wholesale values, particularly on near-new vehicles, will continue to appreciate. In turn, retail prices may rise, but the increase won’t be as significant as historical trends suggest it could or should be.

The second take-away is that, as margin compression continues, it’ll be incumbent on dealers to have a clear understanding of how to properly acquire and price every used vehicle. As the dealer’s findings affirm, the movement of retail prices in today’s used vehicle market isn’t monolithic. Rather, it happens on a car-by-car basis. Therefore, if you’re not acquiring and pricing your used vehicles with a clear understanding of each unit’s unique profile of investment opportunity and risk, you’re far more likely to under- or over-price a vehicle, which leads to a sub-optimal ROI outcome.

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An End of the Month Gross Profit Reckoning in Used Vehicles?

Dale Pollak — Fri, 30 Aug 2024 19:01:00 +0000

I have a suspicion that the month of August will look pretty good for dealers as far as used vehicle sales volume, but their month-end gross profit tally will likely be less-than-satisfying if not distressing.

My suspicion flows from dealer conversations in the past two weeks where the No. 1 topic of conversation was concern over declining front-end grosses. The concern struck me as similar to the moment when you’re not feeling quite right and you think a cold, or something worse, might be coming on.

This view squares with fresh Cox Automotive data on the current market:

Retail used vehicle sales have been strong over the past week or so. In fact, the weekly pace is the strongest it’s been since 2021, when everything was off the charts for dealers.

Wholesale values have appreciated over the course of the past eight weeks. The overall rise appears to owe to supply/demand dynamics in near-new vehicles. Cox Automotive data shows three-year-old vehicles have appreciated 2.4 percent; two- and four-year-old vehicles are up 1.6 percent. The explanation here is that buyers are likely looking to replace older-age vehicles with near-new used vehicles that are in short supply.

Wholesale conversion rates are running near 60 percent—about 10 percent higher than we historically see this time of year. The upshot: Dealers are buying auction vehicles to meet the brisk retail demand they’ve been seeing lately in their showrooms.

But here’s the part of the picture that doesn’t quite add up, and may well lead to a gross profit reckoning as dealers view their financial statements for August: Retail prices have been on the decline in recent months. With wholesale values on a sustained, two-month rise, we’d normally expect to see retail prices follow suit. Why? Well, as dealers pay more for vehicles, they tend to ask more. Right now, though, we haven’t seen retail price appreciation, which is a bit of a mystery.

The combination of all these factors suggests to me that August will look OK in terms of retail volume but not so good in terms of gross profit. In response, I suspect some dealers will likely take steps to offset the $500 and $600 declines in front-end gross averages they’ve been experiencing. In turn, we may well see a subsequent rise in retail pricing, or at least a plateau in the pace of retail price declines.

As I’ve shared this view of the current market with dealers, I’ve outlined two cautionary points that seem relevant to share here:

First, it’ll be incumbent on dealers and managers to closely track where the market’s moving. The current moment suggests a potential near-term opportunity to raise retail prices, especially on your best vehicles, which would be Platinum and Gold vehicles for ProfitTime GPS dealers.

Second, it’ll be critically important to lean on live market data to make pricing decisions. While the current market dynamics aren’t as dramatic as the sustained periods of wholesale value appreciation we saw in 2021 and 2022, they are similar. Back then, dealers who relied on and trusted the data science-driven pricing recommendations in ProfitTime GPS had a distinct advantage—the system automatically guided them to the proper pricing decisions for individual vehicles. Meanwhile, other dealers were still trying to figure out what to do.

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An Empathy-based Approach for Customers with Negative Equity

Dale Pollak — Thu, 22 Aug 2024 14:25:29 +0000

One of the most persistent topics of conversation with dealers of late has been the difficulty they experience working with customers who want to trade or sell a vehicle that’s saddled with an out-size level of negative equity.

I’ll get to some pointers for dealers to best help customers find a way out of their current vehicle and situation in a moment. First, though, let’s take a quick look at Cox Automotive data that underscores why negative equity has become such a pain point for current vehicle owners:

Customers who purchased a used vehicle in the first quarter of 2022 had a negative equity of $4,232 after 12 months. That figure compares to the pre-COVID average of roughly $2,900 in negative equity on used loans after the first year.
Customers who purchased a used vehicle between the fourth quarter of 2021 and third quarter of 2022 now have an average negative equity that runs two to three times higher than the long-term average for the industry of $1,550 for loans after two years.
Meanwhile, the share of new vehicle loans that include negative equity has risen to 39 percent from its long-term average of 33 percent. The current share of 39 percent has diminished by roughly 3 percent since the beginning of last year, likely due to lenders tightening their requirements. There’s a similar story for used vehicle loans—the current share of used loans with negative equity is 58 percent, which is below the long-term average of 63 percent. However, the share has grown by 2 percent since the beginning of last year.

The dollar averages here pale in comparison to some of the anecdotes that dealers share—the woman whose husband purchased a new $65,000 Mercedes for $80,000 two years ago, and had to pay off $17,000 in negative equity to sell the car when her husband passed away; the customer who paid $9,000 to resolve negative equity for a three-year-old Audi after the selling dealer refused to make an offer on the vehicle; the pick-up owner who couldn’t get out of their vehicle due to more than $20,000 in negative equity.

Best I can tell, the rise in negative equity owes to the combination of sky-high values for new and used vehicles between 2021 and 2023 that have since depreciated rapidly, the practice on the part of some dealers to sell new vehicles for significantly more than MSRP and lenders’ loan requirements, which allowed customers to purchase vehicles at elevated prices and roll over pre-existing negative equity into their new/used vehicle purchase.

But I would add that the negative equity for some dealers isn’t as dramatic, a difference that seemingly owes to their decision to not sell new vehicles over MSRP at a time when they could.

“We’re seeing negative equity, for sure,” says Adam Arens, dealer principal for a four-store group that includes Acura, Subaru and Nissan stores in Maine, Massachusetts and New Hampshire. “But as a brand and group, there’s probably less impact of the negative equity that we’re seeing across the industry.”

Arens is among dealers who decided not to sell new vehicles above MSRP or sell a new vehicle outside their primary market area unless it was for a previous customer. “I don’t know if it was the right thing to do, but it was the right thing for us,” Arens say. “The net result is we continue to do business with those customers. Our new car volume is somewhat dictated by availability and our used car volume continues to go up and set records. And our parts and service volume continue to set records.”

He adds: “We also had no employee turnover and continue to have no turnover. With downturn of gross, turnover’s pretty high in this business and we’ve been able to avoid that.”

During the NADA convention in 2022, I noted the decision Arens and other dealers made to not sell new vehicles above MSRP. At the time, they viewed the practice as a near-term opportunity that might seed longer-term harm for loyalty and satisfaction among their customers and employees.

Today, it seems like the concerns Arens and others shared in 2022 have arrived for the broader industry: Dealers are seeing customers who are often surprised, and less than happy, to learn how negative equity from a vehicle purchase decision a couple years ago means they can’t get out of their current car without paying a significant price.

I asked Arens and others for pointers on how to address the situation:

Show empathy. It’s important to take the time to hear a customer’s situation and story. After all, they came to you for help, often after they may have tried to sell the vehicle on their own. It doesn’t strike me as good business to refuse to at least make an offer on a customer’s vehicle, especially if you’re the one who sold the vehicle to them.

Educate but don’t point fingers. “We let them know we can maximize the value of the vehicle and take care of the other part of their problem,” Arens says. “However, there is a math equation that has to be done where they take responsibility. We outline their options. We also can track the trajectory of that car and let them know if it’s going in a positive or negative direction. The reality is almost everything is going negative, so waiting doesn’t solve the issue. In the end, you can’t point fingers. It doesn’t help.”

Arens uses vAuto data to show customers a 12-month valuation trendline for a vehicle in three-month segments. For almost every vehicle, the trendline shows vehicle values have and continue to head south. “Then, you can discuss how the ‘situation’ will not correct itself and offer to go over the options today,” he says. “Education has proven very good for relationship building.”

Give them your best offer on their current vehicle. vAuto Lead Performance Manager Dee Harris says it’s important for dealers working these deals to keep the focus on the customer’s current car and its value. Then, “only give them your highest number,” Harris advises. “Later, when their negative equity situation changes and they’re able to buy, what will they remember? Your trade allowance and how you treated them.”

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Pointers to Help You Play in Today’s Challenged CPO Market

Dale Pollak — Thu, 15 Aug 2024 14:04:37 +0000

A recent report from Cox Automotive highlights a pain point many dealers will know all too well—if you want to stock one- to three-year-old vehicles, it’s almost impossible to acquire them without stepping up to a price point you may find uncomfortable.

The high cost of near-new vehicles owes to the drop in new vehicle production and lease deals that largely occurred in 2020 and 2021. The report quotes Cox Automotive analyst Jeremy Robb outlining how these conditions are likely to persist:

“We are just beginning to see lower lease maturities for the key 3-year-old segment, and that impact will be felt over the rest of this year and into 2025 and 2026. As supply tightens for this key segment for the used vehicle market, we expect to see variances from historical average depreciation rates.”

Such market dynamics have contributed to an overall softening of certified pre-owned (CPO) sales by dealers for the past three months. The Cox Automotive report notes that while July’s CPO sales tally increased 1.4 percent compared to June, July’s total came in 6 percent less than total CPO sales in May, and 8.5 percent less than in July 2023.

In my conversations with dealers, some believe that the CPO programs they relied on in pre-pandemic years to attract near-new-minded buyers are a non-starter in the current environment. If you can’t acquire the vehicles for less than you expect to retail them, what’s the point?

It’s understandable that some dealers may prefer to sit on the sidelines, but the fact remains that while new vehicle affordability remains challenged for many buyers, the next-best alternative for many is a near-new vehicle that offers buyers the confidence and trust that many CPO programs offer. From my perspective, however, it seems that the reluctance on the part of some dealers to pursue CPO vehicles creates an opportunity for dealers who know how to source these vehicles and treat them once they arrive in inventory. Here are pointers to help on both fronts:

Mine your service drive for CPO-eligible units. Dealers who take service lane acquisition seriously report that a decent share of the vehicles they take in qualify for their factory CPO programs, even if they all don’t fall in the one-to-three-year-old sweet spot. Better still, service drive sourcing, if done right, can lead to CPO-eligible vehicles with a higher ROI potential than if you acquired them in the wholesale market. What’s the key to doing them right? It’s a blend of dedication and discipline, wherein your sales and service teams understand the important role that CPO vehicles play for the entire dealership. In addition, your service drive acquisition process and related payplans must minimize the friction points between the teams that have historically derailed many dealers’ efforts to acquire vehicles directly from their service customers.

Recognize the investment distress on Day 1. For many ProfitTime GPS dealers, the share of Bronze vehicles, or the units with the least ROI potential, runs close to 40 percent of their overall inventories. No surprise, a sizable share of the Bronze units are CPO vehicles, which dealers often paid up to acquire and recondition to make them CPO program-eligible. Top-performing dealers recognize the risk these vehicles hold and price them to move quickly on Day 1 to realize whatever gross or ROI potential they offer. A far larger share of dealers, however, subscribe to “hope,” wherein they price the vehicles to achieve the gross or ROI they expect, and end up retailing the vehicles for far less than they would have achieved if they’d been priced correctly on Day 1.

In the current CPO-challenged environment, it’s also important for dealers to remember why CPO sales played such an important role in your used vehicle departments in years past, when acquiring and selling CPO vehicles was much easier: Every CPO sale holds the potential to help you secure a satisfied customer, an F&I opportunity, additional gross in service for reconditioning and a trade-in, all of which seeds the ground for future business.

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How “Variable Management” is Moving to New Vehicles

Dale Pollak — Fri, 09 Aug 2024 15:11:10 +0000

Regular readers of my blog know I’ve embraced a “Variable Management” strategy for used vehicles and built a software system, ProfitTime GPS, to support the strategy.

The strategy itself flows from a data science discovery that undercuts one of the central principles of traditional used vehicle inventory management—that each vehicle is fresh and full of potential on Day 1.

However, we now know, thanks to data science and its ability to predict a used vehicle’s investment or ROI potential, that this principle isn’t true. In fact, each vehicle arrives in a dealer’s inventory with its own unique profile of risk and opportunity. Some are earners. Some are turners. Some fall in between.

I’ve been sharing this message with dealers across the country over the course of the past nearly two years. I’ll show them how ProfitTime GPS can help dealers know each used vehicle’s ROI potential on Day 1 and manage it accordingly. I’ll explain that the end game is to get dealers and used vehicle managers to operate more like prudent investment managers, wherein each asset, or used vehicle, gets treated with its own profile of risk and opportunity in mind.

To date, my message has focused on applying the Variable Management strategy and related principles to used vehicles. But now, with the advent of Vehicle Identification Number (VIN)-level incentives some OEMs are applying to new vehicles, it seems wise for dealers to at least consider how a Variable Management strategy should apply to their new vehicle inventory investments.

Historically, dealers have viewed new vehicles as commodities. Across different models, colors and trim lines, dealers have tended to treat new vehicles the same. Their mark-ups or discounts were often uniform across model lines and segments. The mark-ups or discounts would change as vehicles aged, or as OEMs offered broad-based national or regional incentives to help move model lines that were over-supplied on dealers’ lots.

Today, some OEMs are playing a slightly different game. Their VIN-specific incentives are targeted to move individual new vehicles that haven’t sold—a growing trend that fundamentally alters the risk and opportunity profile of one new vehicle compared to the next.

I recently spoke with a Midwest Ford dealer who’s extremely disciplined about moving new vehicles before their time in inventory creates floorplan expense. His concern: He’s effectively getting penalized when he sacrifices gross to move an aging unit while a competing dealer can sit on the exact same car and then receive the reward of a VIN-specific incentive to help move it out. “Some of those incentives definitely hurt us,” the dealer says.

To his credit, the Ford dealer understands that, despite the similarities of new vehicles in his inventory, each vehicle represents an investment of his money. Therefore, he accepts that it’s his responsibility to optimize the ROI on any particular unit before it ages away. He doesn’t plan to ease up on his discipline to turn each new vehicle in its own appropriate amount of time, which is a form of the Variable Management strategy I advocate that dealers adopt in used vehicles.

Looking ahead, I’m told that VIN-specific incentives are likely to increase in frequency and scope, especially as affordability concerns dampen retail sales of new vehicles and some OEMs keep sending more inventory to dealers than their market needs. That’s exactly why vAuto’s Conquest team has built new functionality to help dealers automatically apply VIN-specific incentives as they arrive.

But as the landscape of new vehicle incentives evolves, it’ll always be important for dealers to operate with the Variable Management-like mindset of the Midwest Ford dealer—ever-vigilant about each new vehicle’s individual profile of investment risk and opportunity and a desire to ensure each vehicle meets the your ROI objectives. That way, even if an incentive arrives too late because you already sold the vehicle, you’ll know made the most of your investment, and achieved your objective, while you owned it.

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ProfitTime GPS in Practice: ‘Start Small’ to Adopt ROI-Minded Used Vehicle Management

Dale Pollak — Thu, 01 Aug 2024 15:51:31 +0000

Tim Hlavenka, national sales director for the Rick Case Auto Group, says the adoption of ProfitTime GPS and the ROI-minded Variable Management strategy it supports didn’t come easy or happen overnight.

“There was push-back in that roll-out,” says Hlavenka, who oversees new and used vehicle sales for the group’s 12 stores in Florida and Georgia. “People don’t like change. They have to see it work. They have to see it’s useful.”

The group started its transition to ProfitTime GPS and the system’s investment-minded strategy in 2023. Hlavenka joined the group in June that year and, by January of 2024, all Rick Case stores had the system in place. By then, Hlavenka’s work to make the transition to help store-level managers manage used vehicles as investments had begun to take hold.

His approach to build buy-in: Don’t drop the hammer, start small to build acceptance and trust in a gradual fashion.

“I picked one store where I knew they had the potential to sell more used vehicles,” Hlavenka says. “We kept a few cars that we would have wholesaled for retail. I told the manager, give it a try on five cars. Just do it on a few of them and do an A/B test. Price five vehicles and price them using ProfitTime’s recommended ranges and take five cars and do it your way. Then, look at the cars that did better. You know what we found? The data always wins.

“From there, the store started selling more cars and making more gross. Then, we started seeing stores slowly raise their hands and say, ‘I’m ready for ProfitTime.’”

Mid-way through 2024, Hlavenka and his team are glad they made the transition. The store’s year-over-year volume has gained momentum as the year unfolded. In January and February 2024 showed a 10 percent increase. It increased 35 percent in March, 25 percent in April, 30 percent in May and more than 40 percent in June.

“March, April and May were three record months of used cars sold and profitability for our organization,” Hlavenka says. “We’re seeing some really nice increases. And you know what? It hasn’t hurt our new car volume. As the stores see the results, they buy in more and more. It’s been really good.”

On the gross profit side, Hlavenka notes that overall profitability has also improved. “Our gross has gone up with the sheer increase in volume,” he explains. “Our PVR (Gross Profit per Vehicle Retailed) hasn’t gone up but it hasn’t gone down. It’s stabilized. I’m good with that. None of us gets paid on PVR. We get paid on a pool of gross at the end of the month. We’re focused on that.”

I share Hlavenka’s story because it matches the experiences I see at other dealerships and dealer groups as they make the transition to become more prudent managers of their used vehicle investments with ProfitTime GPS and the Variable Management strategy it supports.

It’s smart to start small to help individual used vehicle managers see how data science can challenge and complement their thinking and help their used vehicle businesses grow. The start small approach is especially useful when your inventory and retail sales suffer under the weight of too many aged or distressed vehicles. ProfitTime GPS will help you move those vehicles quickly as you clean up your inventory.

But the best part comes soon after as your managers, like Hlavenka’s, understand how to treat every vehicle according to its investment value, and your gross and volume start heading in the right direction.

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A View of the Rising Cost of Trade-in Appraisal “Bumps”

Dale Pollak — Fri, 26 Jul 2024 17:54:31 +0000

As I work with dealers, I’m seeing the return of a practice that largely went away in the past few years as dealers were hungry for new vehicle inventory and consumers were willing to pay MSRP or more to purchase a new vehicle.

The practice is familiar to most, if not all, dealers: A customer wants to purchase a new vehicle that you really need to sell. Maybe you’re trying to meet a new vehicle sales volume objective or the vehicle’s been in your inventory far too long. The customer has a trade-in that, if you can make the deal, you know you could retail. The customer’s OK with the trade-in value you offered, but they want you to reduce the cost of the new vehicle by $750 to make the deal’s monthly payment work for them. In such scenarios, managers will often grant the $750 discount on the new vehicle and “bump” the trade-in appraisal by the same amount to satisfy the customer and move the new vehicle.

But here’s the rub: While the new vehicle department’s happy to make the deal and move the car, the used vehicle department is left holding the bag. The “bump” has now turned the vehicle into a less-profitable retail unit. If this situation occurs at a dealership using ProfitTime GPS, the bump may well degrade the vehicle’s investment value from Gold to Silver or Silver to Bronze.

One of the reasons bumps to trade-in appraisals occur owes to the fact that, in the minds of dealers and managers, the amount of the bump, which in this case is $750, may not seem like much. This belief may have been true in the past, but in today’s more margin-compressed market, any bump amount can rapidly degrade the profit or ROI potential a vehicle could achieve if the bump never happened.

I would add that the practice of bumping a trade-in appraisal amount isn’t just limited to new vehicle deals. It happens when a customer’s trading a vehicle to purchase a used vehicle, too. The difference, though, is that such used-for-used scenarios don’t pit new and used vehicle managers against each other.

Either way, the retail prospects of the used vehicle you just bumped and acquired only get worse from there. Why? Because the used vehicle manager doesn’t want to face the reality that the fresh trade they just acquired isn’t worth as much as it could have been. What do they do? Many managers will often price the used vehicle as if the bump never happened—that is, they’ll ignore the investment-degrading effects the bump created and price the vehicle as if they own it more right than they really do. Their decision reflects a belief that, if they give the now-distressed vehicle a chance to make gross, it just might happen.

But that’s not how the story typically goes. The reality is that when the manager prices the vehicle to get gross, they often price the vehicle too high. Then, the vehicle sits and doesn’t sell. In a few weeks’ time, the used vehicle department now has an even bigger problem on its hands—whatever gross profit or ROI potential the vehicle might have possessed has largely evaporated, and the department’s likely facing a low-gross or net loss on the unit when it sells.

I’m not suggesting that appraisal bumps are bad. However, I would suggest that dealers consider three things about this current practice:

First, I suspect customer requests for discounts on the new or used vehicles they purchase will grow in frequency and size as vehicle affordability continues to strain household budgets.

Second, I would encourage dealers to charge the cost of any bump against the gross of the new or used vehicle that gets the discount. This approach strikes me as a more honest accounting of the discounts.

Third, if the cost of the discount gets applied in the form of a bump on the trade-in, used vehicle managers should stop pretending that the bump didn’t happen as they price the vehicle. The fact is, the bump can turn your fresh trade into a more distressed and risk-prone investment. Therefore, it should be priced to move as quickly as possible to realize whatever gross or ROI potential it might hold.

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Three Reasons Automated Used Vehicle Pricing is a Bad Idea

Dale Pollak — Sat, 25 May 2024 14:40:21 +0000

I’ve run into a consistent theme in recent conversations with dealers: What do you make of systems that automatically price used vehicles?

The question has also led to requests that we change ProfitTime GPS from its current functionality of providing recommended price ranges for individual vehicles to automatically pricing each car. When I ask why someone would want to do that, the response boils down to this: “I want to take pricing out of the hands of our people.”

The frequency of the conversation topic, and the availability of automated pricing tools for dealers, spurred me to share three points to explain why I believe automated used vehicle pricing is, and probably will be for some time, an idea that sounds good in theory, but falls far too short in practice.

Point 1: If I were a dealer considering an automated used vehicle pricing system, I’d want to know exactly how it supports my primary objective of making more money, or net profit, in my used vehicle department. I’d also want to know how the system can adjust, in mid-month or even more frequently, as my goals to drive gross or volume change.

Through my experience with vAuto’s data science team to develop ProfitTime GPS, I’ve come to understand that the best place to drive net profit for the used vehicle department is to determine an ROI-based pricing strategy at the unit level. That’s because a) every vehicle’s investment value is unique; and b) pricing is the primary lever to pull or push to advance a dealer’s short-term objective to go for gross or volume.

To determine the most-optimal ROI-based pricing strategy for every vehicle, you must first know each vehicle’s risk/reward profile. Next, you need to calculate and calibrate a price for a vehicle that delivers the greatest probability of a sale that will achieve the highest ROI. From my familiarity with the data science and AI-based machine learning that powers ProfitTime GPS, I know it’s possible to crack the code of determining the specific factors, in proper weighting, that determine a used vehicle’s investment or ROI potential. But I’m not so sure any automated pricing system can adjust, on a car-by-car basis, when a dealer calls an audible and establishes an objective to drive gross or volume in a particular month, or even more frequently.

That’s why we built ProfitTime GPS to provide ROI-based recommended price ranges, rather than automated prices, for each vehicle. With ProfitTime GPS’ investment score and recommended pricing range, an individual can easily discern the earners and turners in an inventory and adjust prices on the vehicles that best support a dealer’s short-term gross or volume objective. In this way, ProfitTime GPS always serves a dealer’s primary objective to optimize the net profit or ROI for the department, by ensuring each vehicle bears a price that delivers the greatest probability of achieving the highest ROI.

Point 2: With an automated system, you’re pricing with your eyes closed. When dealers suggest they want to take pricing out of the hands of their people, I push back: “Our data’s not that good. Nobody’s data is that good.”

To explain, I highlight the myriad of circumstances that shape a vehicle’s value in the market and today’s technology and tools can’t readily see. You might have a vehicle with a clean CARFAX report and faded paint. You might have a vehicle with worn carpet or seats. You might have vehicle with dents and dings. You might have a vehicle with a tick in the engine, or a hitch in the transmission.

The take-away here is that today’s technology and tools can’t see everything that shapes a vehicle’s appeal, and value, to a potential buyer and the broader market. That’s why you should have a person in charge of pricing who’s got the requisite amount of experience and judgement to put proper eyes, ears and nose on every car. In the absence of human oversight, I question whether an automated system can properly price any vehicle. It seems like you’d be pricing vehicles with your eyes closed, blind to the subjective factors that influence a vehicle’s potential to sell in your market. To be sure, we may see a day when a computer-based system, armed with all the AI-powered technology available, can accurately and properly put “eyes” on a vehicle. But my sense is we’re not there yet.

Point 3: Automated pricing systems remove accountability. The whole point of having an individual in charge of used vehicles and their pricing is to ensure someone’s ultimately accountable and responsible for the outcomes of the used vehicle department. If you’ve got a system automatically pricing your vehicles, you run the risk of ending up in a situation like this:

Dealer: “Hey Joe, our used vehicle gross and volume are way off this month and even worse than last month. Plus, we’ve got a ton of aged cars. What are you doing?”

Used vehicle manager Joe: “Sorry, Boss. Don’t look at me. I didn’t make those decisions.”

As a general rule, dealers don’t like it when they feel the need to hold someone accountable and can’t rightly do it. If such situations occur, you can bet dealers will put the blame for the poor outcomes on the automated pricing system and the vendor who provides it.

I’d add a final observation that’s relevant to this discussion: AI-powered systems and tools are becoming more and more prevalent. Such is the nature of our technology-driven society. But if you look at aviation, finance, healthcare, shipping and other industries where AI tools now drive daily workflows, they all share a common characteristic—there’s usually a person keeping an eye on the AI.

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Are Your Used Vehicle Prices Right for the Current Market?

Dale Pollak — Fri, 03 May 2024 19:08:55 +0000

With April in the books, I thought I’d take a moment to highlight a feature of the current used vehicle market that, judging from recent conversations with dealers, appears to have been misread or overlooked entirely.

I’m talking about the steady decline in used vehicle retail prices since the beginning of the year. In this week’s Cox Automotive Auto Market Report, Chief Economist Jonathan Smoke spells out the situation: Since January, retail prices for used vehicles have declined 5.9 percent. By comparison, during the first four months of 2019, retail prices for used vehicles declined 0.1 percent. Smoke also notes that the pace of depreciation in the wholesale market is a click or two higher than normal.

Such a sustained stretch of retail price softening hasn’t happened in quite a while. We saw some retail price declines last year, but we also hit stretches where they were on the rise following an increase in demand, which was often segment specific.

Despite the retail price softening, I often see little or no sense of urgency on the part of dealers to make sure their retail asking prices are in line with the market. Across the country, many dealers are carrying vehicles that are priced not to sell. They’re making their monthly numbers by cheap-selling the fresh stuff that isn’t aged or investment-distressed—a sub-optimal sacrifice of gross for the sake of volume.

My guidance to dealers in this current moment has three parts:

Reckon with the painful cars. Dealers are currently carrying an average 45 days supply of used vehicles. By definition, such dealers are stocked to carry cars from one month to the next. When the cars celebrate their first or second monthly birthday, it’s a sure bet the vehicles represent retail pain when they sell. So what’s the point of holding on to them? They’ll only get worse over time, which means it’s time face the pain and stop kicking it down the road.

Be realistic about each vehicle’s potential on Day 1. This step is much easier for ProfitTime GPS dealers. Why? Because the system scores every vehicle’s investment potential on Day 1. The system also serves up retail pricing recommendations to connect the vehicle to a retail price point that’s market-honest and -realistic and attuned to the vehicle’s investment value. The challenge for every dealer, though, is what you do when know you’ve got a troubled car on Day 1. If you simply can’t resist the urge to “give the car a shot,” keep your “shot” as short as possible.

Exercise daily pricing discipline. Market conditions are always on the move. I suspect Smoke would agree that, comparatively speaking, market conditions also move faster, and in more surprising ways, now more than ever. The upshot: If you’re not assessing each vehicle’s pricing position at least once a day, you’re moving too slow, and your cars probably are, too.

As a closing note, I’d add that I didn’t hear anything in Smoke’s report that suggests the current market dynamics will shift course any time soon. That’s not surprising to me, since everything we’ve seen in 2024 so far suggests wholesale and retail market efficiency is back in full force and dealers’ used vehicle gross profits, if not sales volumes, show it.

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Rethinking the “Right”-ness of Your Used Vehicle Inventory

Dale Pollak — Tue, 09 Apr 2024 20:48:23 +0000

Over the past several weeks, it’s become clear to me that many dealers need to think more deeply about the composition of their used vehicle inventories. By composition, I mean the right number and mix of vehicles.

This realization follows multiple conversations with dealers in recent weeks—all of whom, at roughly the mid-point of last month—realized that their pace of used vehicle sales was lagging. It’s worth noting that all the dealers made their monthly volume targets for March, but the way they achieved this outcome leaves much to be desired.

Generally speaking, the dealers fell into three groups:

They were short on cars. I worked with a Toyota store where, after an analysis of their sales pace and stocking strategy, the inventory was off by 25 cars. The manager knew the score, but he lacked the time and ability to find vehicles and right-size his inventory. To make the volume target, the manager reduced asking prices on in-stock units. Sure enough, VDPs picked up. Traffic increased. Deals got done. But, in reaching the volume target, the manager unquestionably gave up gross.

They had too many cars. This scenario can seem like a head-scratcher—wait, the dealer had too many cars and couldn’t meet their volume objective? Well, the answer is often yes. If you unpack this situation, you’ll inevitably find that, due to carrying too many units, an ever-larger share of a dealer’s inventory will be aged or distressed; cars ProfitTime GPS dealers recognize as “Bronze” vehicles. Inevitably, nearly all of these vehicles aren’t priced to sell. Rather, they’re priced for a customer who might come along and over-pay, thereby helping the used vehicle department avoid a significant loss. In such cases, it’s almost a foregone conclusion that you’ll see managers marking down the best cars (usually the ones with the lowest Market Days Supply and least time in inventory) to reach the volume target. The net effect is the department’s unnecessarily giving up gross.

They have the wrong cars. Often, the cars that may be wrong today weren’t necessarily wrong in the recent past. The issue, as I found with a dealer last week, is often that no one’s proactively comparing the used vehicle department’s sales to the local market. After this analysis, the dealer’s used vehicle team understood that they were effectively over-stocked in larger, higher-priced SUVs and trucks than they should be, and they were cutting prices to move them. They also understood that, with a more consistently market-aligned inventory mix, they’d be more likely to meet their monthly sales target and keep the gross they’ve been giving up.

To reiterate, the common threads in these scenarios is that a dealer’s inventory isn’t as “right”-sized as it should be. That is, they don’t have the right number and mix of vehicles and, when this happens, bad things tend to follow, resulting in lost gross or volume.

I would add that the latest enhancement to ProfitTime GPS, Global Search, helps solve these recurring problems. It starts with establishing/retuning your stocking strategy to know how the number and mix of cars to stock at any given moment. It helps you craft a purchasing strategy to acquire vehicles more consistently with the investment potential you believe they should offer. And, it feeds you the vehicles, across all sourcing channels, that fit your established strategic parameters.

Yes, Global Search requires a bit of up-front time to set up your future success. But, judging from the gross profit that’s effectively leaking out of used vehicle departments every month because the inventory isn’t really “right,” the time seems well-worth its investment.

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A Quick Clarifier on How To Think About “Bronze” Vehicles

Dale Pollak — Fri, 15 Mar 2024 19:29:50 +0000

I appreciated a dealership GM’s comment the other day that he views Bronze vehicles as the equivalent of vanilla ice cream. That is, like vanilla ice cream, Bronze cars are common, available from any dealer, just as vanilla ice cream’s available at any reputable ice cream shop.

But as I noted to the GM, the comparison between vanilla ice cream and Bronze vehicles only tells part of the story. It’s not necessarily reflective of the reasons a vehicle receives a Bronze designation in ProfitTime GPS.

A quick refresher: Like all the precious metal categories in ProfitTime GPS, the Bronze designation reflects a vehicle’s investment potential. This potential is shaped in part by the overall supply of a vehicle in a local market. If a vehicle’s got a high Market Days Supply, which indicates there are plenty of them out there in the market, it could be a Bronze vehicle.

But the availability of a vehicle in a market, or its Market Days Supply, is only one factor that determines a vehicle’s investment potential. To calculate a vehicle’s investment potential, ProfitTime GPS system weighs a vehicle’s Market Days Supply, Cost to Market and retail sales volume, along with a host of other factors.

Therefore, you could have a high Market Days Supply vehicle that, because you own it really right and it’s a fast-mover in the market, earns a Platinum or Gold designation, indicating a higher investment return potential. On the flip side, you could also have a low Market Days Supply vehicle that’s a fast-mover that you own for too much money, making it Bronze, despite the fact that it’s a high-demand, low-supply unit.

To reiterate, a vehicle’s investment potential isn’t solely driven by the fact that it’s effectively available at any dealership in your market. This distinction isn’t lost on dealers and managers who regard their vehicles as investments rather than viewing them as merchandise.

To his credit, the GM fully understands that handling or treating Bronze vehicles, once you own them, is somewhat like eating ice cream—the faster you move them, the less likely you’ll experience the dissatisfaction of seeing your profit potential melt away.

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A Tale of Troubled Used Vehicle Department Performance and a Fix

Dale Pollak — Mon, 11 Mar 2024 18:07:05 +0000

I received the following note from a dealership manager that I thought I’d share:

I have a GM and a used car manager who are stuck in 1980 or Covid, take your pick. We are inverted in ProfitTime GPS. We continue to purchase and sometimes appraise at high Cost to Market, intentionally assuming that someone will show up and pay the price. When they don’t, we start cutting the price. We either get lucky and sell the vehicle prior to all the reconditioning being assigned to the vehicle or, in many cases, it ages. Once it ages sufficiently to be a distraction, maybe 200 days, they will get aggressive about getting closer to the market and take the loss. They aren’t overly concerned about losses long term because they are covered by the grosses produced by new car sales and F&I. Predictably the used department is losing about $350,000 annually.

The error, according to the GM, is that we are not selling the vehicles fast enough. I suggest it’s not likely that vehicles will sell faster since no one will see the vehicle. It’s essentially hidden in the market due to their high market days supply and prices. Any search for these low ROI units is going to put them on page twenty and they won’t be seen. Nothing will persuade them to consider the Market Days Supply when initially pricing the inventory, or when acquiring inventory. And yes, they are all coming from the auction.

I suspect this sounds familiar to many dealers because I see varying shades of this situation in dealer inventories every day. I have great empathy for dealers in this situation because it’s their money, their investment in used vehicles and yet, the sub-optimal performance continues day after day, week after week, and year after year.

In this example, the manager’s well aware that changing the mindset of the dealership’s used vehicle management team won’t be easy. Why? Because they are stuck in the past, believing that every fresh car, no matter how right or wrong you own it, deserves a shot. They believe the calendar, or days in inventory, is the primary metric on which they judge a vehicle’s retail potential. They also don’t appear to understand, as the dealer rightly points out, that the cycle of marking up and holding onto cars until they’re discounted to meet the market is a sign of a highly efficient and transparent retail market. They don’t seem to get that today’s customers know better. There aren’t that many buyers out there anymore who you can convince to pay more than they should, especially if it’s a vehicle with high Market Days Supply.

The way I see it, the dealership’s used vehicle management team probably views themselves as astute “car guys” who know their market and their customers very well. I suspect they also probably regard themselves as individual success stories.

But here’s a fundamental reality of today’s market they consistently miss: That is, the rise of the Internet, and the increased market efficiency and transparency it has created, require more than traditional “car guy” skills to drive success today. We are now fully back into an environment where used vehicles are depreciating assets and achieving a positive outcome with every vehicle requires operating with more than a mere belief that you know what you’re doing.

Ultimately, today’s retail and wholesale market efficiency require a different mindset and skill set from the individuals who manage used vehicles. Yes, they need all the “car guy” smarts they’ve developed and honed over the years. But even more important, they need to develop their skills as prudent managers of investments.

Once they do, they’ll recognize that a troubled vehicle on Day 1, a unit that has a high Cost to Market, high Market Days Supply and low retail sales volume, is nothing more than a troubled investment on Day 1. They need to ask themselves what a prudent investor would do with an investment that screams “RISK!” from the moment they own it. The proper response, as we all know, is to get out of the investment as quickly as possible and deploy the capital to a more productive asset.

Given the ubiquity of the situation the dealer shared with me, it seems wise for everyone who’s got a stake in the outcome of a used vehicle department to take a moment and reflect on the following questions: Am I here to move metal or am I here to make money? Am I managing cars or capital? Am I a “car guy” with zero investment aptitude or a “car guy” who behaves, believes and thinks like a prudent investor?

If you’re honest about answering the questions, you’ll have the seeds to set the stage for a transformation of your used vehicle department that helps eliminate the annual losses and less-than-optimal outcomes many currently accept.

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A Little “Say You, Say Me” in Used Vehicles

Dale Pollak — Fri, 01 Mar 2024 18:12:21 +0000

A couple days ago I was riding in a car on my way to a dealer meeting when Lionel Richie’s song, “Say You, Say Me,” came on the radio. The tune brought me back to the mid-‘80s when it was all over the airwaves. It also made me think of recent conversations I’ve been having with dealers and used vehicle managers and the common topics we cover:

Say You: We’ve got way too many Bronze cars in our inventory.

Say Me: Yes, the Bronze designations vAuto’s ProfitTime GPS assigns to these vehicles signal that they are distressed investments. But there’s nothing wrong with a Bronze vehicle. Some of them are really nice cars. Your problem appears to be how you’re treating them. They should be priced to move quickly, enabling you to turn the distressed investment into a retail sale that allows you to capture some front-end gross, F&I sales, a customer and possibly a trade-in with a more favorable investment profile. The share of Bronze vehicles in a dealer’s inventory can also signal an opportunity to improve how and where you’re acquiring inventory. If you’re leaning heavily on auctions, your share of Bronze vehicles will be higher than a dealer who’s less reliant on this sourcing channel. Likewise, it’s worth examining whether appraisers and buyers are putting too much into inventory acquisitions without a good reason (i.e., they needed to make a deal or you really needed the vehicle).

Say You: If we want to sell 100 units a month, we need 150 in inventory.

Say Me: We are fully back into a market where depreciation has returned in full force. If you’re consistently stocking more than your rolling 30-day total of retail sales, you’ll always be fighting an aging problem as the 50 vehicles you don’t sell in a given month roll into the next. This dynamic is especially true when the carry-over vehicles are lower tier investments (units ProfitTime GPS identifies as Bronze and Silver) and you’re pricing them too proudly—which means they won’t sell unless/until you price them more realistically for the market.

Say You: We knew we over-paid for this vehicle when we acquired it. But we wanted to give it a shot. Now it’s 55 days old. I now see we should have priced it to move sooner.

Say Me: Good on you for recognizing the problem with this car. The faster you fix it, the faster the headache and heartache goes away. I would point out, though, that the idea of giving a vehicle a “shot,” especially when you know you over-paid for it, effectively means you’re kicking the can down the road. We now know that more than 50 percent of vehicles in dealer inventories begin their first day of life as Silver/Bronze vehicles. Such vehicles don’t deserve the “shot” your instinct and training suggests they should get. In the current market where depreciation has returned, these vehicles absolutely will not get better over time.

Say You: We have a firm, 60-day age (or turn) policy.

Say Me: By definition, an age or turn policy recognizes the need for dealers to retail vehicles before depreciation saps away their ROI potential. But it’s even more important to understand that, as we now know through the data science behind ProfitTime GPS, vehicles do not depreciate at the same rate. That is, some are more sensitive, and some are less sensitive, to the passing of time. The problem is that a standard 45-, 60- or even 90-day age policy does not reflect the variable nature of vehicle investments. I’d encourage you to move toward a variable turn policy, where you’re managing each vehicle’s days to sell in accord with its unique investment value. In ProfitTime GPS, this tends to manifest in the following manner: Platinum vehicles turn in roughly 50 days; Gold vehicles in 40 days; Silver vehicles in 30 days and Bronze vehicles in 20 days. This variable approach helps you manage the varying levels of risk and opportunity that exist across individual vehicles and a dealer’s overall inventory.

These are just some of the recurring themes from recent conversations. In sum, they point to a need for dealers to consider how they’re managing their inventories in the current market to deliver the most optimal returns on individual used vehicle investments.

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An Emerging Opportunity for Used EVs?

Dale Pollak — Fri, 09 Feb 2024 22:01:12 +0000

This week, Cox Automotive analysts shared news that may surprise some dealers: Retail sales of used EVs rose sharply in January, an uptick that could owe to the ability of used EV buyers to apply a $4,000 federal tax credit at the point of sale.

The data:

Average weekly sales of used EVs in January grew 34 percent against the average weekly sales in December 2023.

January’s sales represented a 69 percent increase compared to used EV sales in January 2023.

Thanks to the January sales increase, the days supply of used EVs dipped below 47 days; it averaged nearly 64 days in the fourth quarter of 2023.

The current days supply of used EVs is now lower than the average days supply of internal combustion engine (ICE) vehicles.

The recent surge in used EV sales contrasts with the wariness I heard from dealers at NADA about stocking and selling used EVs. Like consumers, dealers are concerned about value volatility and battery health, among other issues.

Analysts offered a few reasons for the recent rise of used EV sales:

First, January marked the first time used EV buyers could apply a $4,000 federal tax credit at the point of purchase of a used EV. Previously, used EV buyers could claim the credit as they filed their taxes.

Second, the value of used EVs, which suffered last year as OEMs reduced MSRPs on new EVs, might be more within reach of interested buyers, particularly if the buyers and their vehicle of choice qualifies for the $4,000 tax credit.

Third, the average tax refund this year is expected to be $3,000, about $300 higher than last year. Some used EV buyers may be using, or at least considering, their refunds as they buy the vehicles.

Overall, the recent rise of used EV sales represents good news for dealers. As more sales of used EVs occur, dealers can wade deeper into this market with more confidence, since more retail sales brings deeper and more reliable market data to make better used EV decisions.

But I’d also offer a note of caution to dealers who might view January’s spike in used EV sales and the $4,000 tax credit as reasons to start stocking used EVs. Here’s why: The federal program limits the tax credit to EVs (and hybrids) priced at $25,000 and below. On top of that, the tax credit is tied to household income. For example, you wouldn’t be eligible to receive the credit if you’re married, file jointly and make more than $150,000 a year. Such requirements make it difficult if not impossible for dealers to acquire a used EV that qualifies for the program without knowing they’ve got an income-eligible customer ready to buy it.

Still, the January sales numbers suggest the used EV market is on the move and will merit closer attention in the coming months.

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ProfitTime GPS and Global Search: A ‘Guardian Angel’ as You Acquire Inventory

Dale Pollak — Wed, 07 Feb 2024 21:43:53 +0000

While many dealers have been working hard to diversify how they source used vehicle inventory and rely less on auctions, the role of auctions as an inventory-feeder remains necessary.

But one of the more challenging aspects of acquiring auction vehicles in the current environment, where overall supplies of inventory have improved, is finding the “right” cars that fit your acquisition strategy and offer your desired money- or ROI-making potential.

“ProfitTime GPS seems to know when the writing’s on the wall. What I mean is that it’ll stop you from making a bad purchase, way before it happens,” says the used vehicle manager for a three-store group in California.

I asked for a recent example, and the manager shared this: Recently, he was looking at an auction vehicle through ProfitTime GPS’ new Global Search tool. The system recommended a purchase price so far below the current Manheim Market Report value that “it was baffling.” The manager chose to trust the finding and passed on the car. A week later, “there was a thousand of those cars at the auction and MMR isn’t what it used to be. ProfitTime GPS is like a guardian angel.”

The manager’s story resonated because it underscores a fast-emerging reality for dealers and their used vehicle managers. That is, your competitive advantage today rests not only on your experience, instinct and judgement; it’s also tied to your ability and interest in using available data and tools to make better decisions faster.

For example, the manager shared how ProfitTime GPS’ Global Search tool, which serves up active vehicle listings from auctions, private party listings, your service drive and other sourcing channels, has helped him cut almost 70 percent of the time he spends looking for wholesale inventory:

“Before I was looking through a mountain of cars to find one that’s worth buying,” the manager says. “With Global Search, I now have a smaller list that’s typically worth looking at. Where I used to spend six hours grinding through 600 cars and maybe winning five of them, I’m spending only a couple hours and I’m buying a lot more.”

The manager shared that, with the help of Global Search, his auction-purchased vehicles average a score of six in ProfitTime GPS’ scoring system, ranking them as Silver vehicles. The achievement contrasts starkly with other dealers who typically bring in auction vehicles as Bronze, with investment scores ranging from one to three.

Perhaps the best part of the manager’s story is how he intends to invest the time he’s gained back by using Global Search to aid his acquisition efforts. “We’re going to diversify our inventory acquisition channels and try to make a win out of our service drive. This auction thing isn’t going to be my golden goose forever.”

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NADA Day 3: A Focus on Operational Consistency, Compliance and Customer Acquisition

Dale Pollak — Sun, 04 Feb 2024 21:37:13 +0000

You could see the evidence of last year’s busy pace of the dealership consolidation on the show floor at NADA. A fair share of my dealer conversations today focused on how dealers plan to optimize their investments in additional rooftops for their groups.

“We’re re-doing the service department at one of our stores and building another from the ground up,” the operations director for a nine-store group in the Southeast shared. “You name it, we need it. We’ll probably spend $850,000 today.”

Another dealer shared that he was looking to invest in a new CRM system to drive more operational consistency across his four-store group in the Northwest. “We want everyone working from the same playbook,” he explained. “We used to behave like a group of dealerships. Our goal is to behave as a dealer group.”

As a vendor partner for dealers, I also appreciated how a COO viewed the investments he intended to make for his group: “I need to see a 7-x ROI. It’s not enough for a vendor to tell me their solution will ‘pay for itself.’ That means they’re making the money, not me.”

Here are a few other take-aways from the floor:

Regulatory compliance: Several dealers mentioned concerns about how and where Federal Trade Commission regulations might land. The perspectives varied from “we’re taking a wait and see approach” to a belief that proposed customer record-keeping requirements represented a bit of “overreach” on the part of regulators.

Customer acquisition: I liked how a dealer described their approach to used vehicle inventory acquisition: “We’re focused on acquiring the customer, not just the car,” he said. The mindset means they’ll acquire every vehicle they can, even if they have no intention of retailing it. “A customer who only sells us their vehicle today might buy from us tomorrow if they like the experience.”

Margin compression: I heard more dealers talk about finding their optimal balance between turn and gross, which vAuto’s ProfitTime GPS and Variable Management strategy helps them achieve. “Profits aren’t collapsing, they’re normalizing,” a New York dealer said. “We have no interest in going back to 2019 when we were all cutting each other’s throats as we worked to move more cars.”

This year’s NADA marks the 55^th time I’ve been to the convention. A dealer asked if I still get excited about being here. The answer is an unequivocal “Yes!” The energy I get from reconnecting with dealers and being on the show floor knows no equal.

As I head home, I feel a deep sense of gratitude and kinship for everyone who visited the vAuto booth and entrusts us with your business. Thank you all, and safe travels home.

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NADA Day 2: AI Everywhere and Some Familiar Challenges

Dale Pollak — Sat, 03 Feb 2024 14:27:21 +0000

When I asked dealers what new solutions they might be looking for here at NADA, “AI” and “ChatGPT” were frequent responses. Like the rest of the world, AI is on the rise and on the minds of many.

Perhaps the most intriguing take came from a dealer who believes that AI, over time, will empower his people to make better decisions and likely lead to operating with fewer people in positions where AI can do the rote tasks individuals now perform. But the dealer shared that the AI-related he’s most interested in seeing did not appear available among the many vendors offering AI solutions here.

“I’d like to see AI tell me what vehicles will sell in two or three weeks to help my stocking strategy,” the dealer says.

The dealer’s thinking lands squarely in the four-tier framework that Cox Automotive’s chief data officer Ben Flusberg shared in our Thursday panel session at the National Auto Auction Association meeting. The breakdown:

Insights: This is where AI and machine learning can look at past data/events and provide insights on what occurred.

Predictions: This is where AI-driven tools use algorithms to predict specific outcomes, such as risk or opportunity related to the pricing or sale of a vehicle in the future.

Recommendations: Here, AI solutions recommend a particular course of action. This is the type of AI/machine learning the ProfitTime GPS performs as offers pricing and appraising recommendations on specific vehicles.

Automated decisioning: This is where an AI solution acts on the recommendation by itself, with some human oversight.

It seems to me that the automotive industry has and will continue to operate in the “predictions” and “recommendation” tiers for some time. This experience will then shape the types of automated AI-driven decisioning that take hold in dealerships and related businesses.

Here are a few other take-aways from the floor:

Profitability: Dealers are keenly aware that the new and used vehicle markets are normalizing. They see it in their financials, and the diminished front-end grosses they realize on retail sales. Not surprisingly, the dealers who complain about this inevitable shift—ours is a cyclical business, after all—in used vehicles tend to suffer from operational practices that worked pretty well in the past two or three years but work less well today. These include stocking more used vehicles than you sell in a given month, relying on the calendar to make pricing decisions and giving every vehicle the same “shot” or time in inventory to sell.

Packs: I did an informal poll of Performance Managers here at NADA. They generally agree that many dealers increased their packs on used vehicles in the past two to three years as gross profits soared. Today, the average pack seems to be around $1000, and “more dealers have been willing to go even higher.” I’ve long regarded packs as an effective tax that slows retail sales and can cause consternation among sales teams. My sense is that dealers who raised their packs would be wise to right-size them for the current market and the investment value of individual vehicles.

EVs: Almost every dealer I talked to remains wary of EVs. It’s not that they don’t recognize EVs represent the future. Rather, they understand consumer demand and related charging infrastructure isn’t as well developed as it needs to be for wide-scale adoption. It’s also clear to me that while there’s an awful lot of work underway to understand how to properly value a used EV, uncertainty abounds. It’s important that dealers and used vehicle managers recognize that the age and mileage of an EV don’t correlate to a valuation in the way they do with internal combustion vehicles. EV batteries degrade over time, even if you don’t drive the vehicle all that much. Hence, a five-year-old EV with 20,000 miles might not be worth as much as two-year-old EV with higher mileage. Still, I’d have to agree with the overall assessment that EV batteries, as a whole, are holding up better than almost everyone expected.

It’s been a long, productive day at NADA. I’m looking forward to what Day 3 will bring and I’ll share it here.

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NADA Day 1: A Well-Kept Secret and a Nice Surprise

Dale Pollak — Fri, 02 Feb 2024 15:10:12 +0000

It seemed odd that colleagues from the earliest days of vAuto were on hand for my participation in a National Auto Auction Association panel discussion on the impact of artificial intelligence in our business.

Mandi Fang. Tracy Fred. David Rice. Chris Stutsman.

Each person was part of the team that helped me build vAuto. Each has seen their individual career grow with Cox Automotive. They’re all in Las Vegas for the NADA convention. It wasn’t entirely clear why they came to the panel—I figured they might want to hear what Cox Automotive’s chief data officer, Ben Flusberg, and I had to say about how AI is reshaping the retail and wholesale markets.

It wasn’t until we’d finished the discussion, and the emcee asked Ben and me to stay on stage, that I understood why some of the vAuto OGs had shown up. They had a secret. They knew I would be receiving a Warren Jones Fellow Award to recognize my contributions to the industry.

The award was a sweet, pleasant surprise. I had no idea it was coming.

The award itself holds special meaning. Before he became a dealer, my Dad owned the Dyer (Ind.) Auto Auction. I have fond memories of hanging out there while my Dad was working, playing around the cars and sometimes getting into trouble. In some ways, the award marks a full circle for the Pollak family.

My sincere thanks to NAAA for the honor and recognition, and their desire to keep the award presentation a secret until it happened. I must also thank my vAuto and Cox Automotive colleagues for being part of the surprise and taking time to show their love. Nice work, y’all.

All in all, the NAAA event offered a memorable start to this year’s NADA. It’s the kind of experience that only NADA can provide. Tomorrow marks the official opening of the NADA exhibit hall and a full day spent with dealers. I can’t wait.

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How Will NADA 2024 Drive the Future of Your Business?

Dale Pollak — Fri, 26 Jan 2024 17:57:39 +0000

It’s fitting that the theme for next week’s NADA 2024 convention in Las Vegas is “Driving the Future.”

The theme is especially appropriate given recent news that Vroom will effectively exit the used vehicle business. The company’s announcement this week adds Vroom to what seems to be a growing list of technology-focused companies, including Shift and Carlotz, that positioned themselves as disruptors who represented the future of the car business.

And yet, there they are, and here we are. They won’t be going to NADA this year. For all intents and purposes, that means the future of the car business belongs to dealers who recognize something that apparently eluded the tech company executives and the investors. That is, you can’t and won’t find sustained success in the car business if you ignore the long-standing fundamentals that are necessary to achieve it.

For years, dealers and I have marveled at how the valuations for the disrupters continued to climb, even though it certainly seemed like they were stocking too much inventory and didn’t appear to be pricing every vehicle rationally every day. I remember how the rise of companies like Carvana, which has fared better than its peers but faces its own operational challenges, caused some to question whether CarMax was “with it” enough technology-wise to remain in business.

Well, guess what? CarMax never forgot the fundamentals and they took a measured, strategic approach toward incorporating the technologies that enabled ecommerce and online buying. Today, they’re still in business and doing pretty well. They’re making their fair share of deals online, just like other dealers. There’s good reason to believe CarMax will still be in business a year from now.

All this leads me to a question as our industry looks forward to next week’s NADA 2024 convention: How will you be driving the future of your business?

I believe the answer rests on an individual dealer’s desire and willingness to face a future where new technologies, aided by artificial intelligence and data science, help you make better decisions, keep ahead of market conditions and enable you to execute the fundamentals of dealership operations in a better way. I’ll be sharing some of this perspective next Friday and Saturday at the Cox Automotive stage. My presentation, A New Path to Optimal Used Vehicle Performance, focuses on how dealers can use new technologies to optimize their strategic objectives and ensure their related pricing, appraising and acquisition process execution tie back to the strategic objectives they’ve established.

As usual, I’m pumped for NADA. I’m excited for the annual opportunity to connect with dealers at the vAuto booth and share perspective on how they can run their businesses better and drive their own future success. I’m also excited to hear the reception the latest innovations vAuto’s bringing to NADA, including our Global Search tool, which helps dealers consistently connect their strategic objectives to every used vehicle acquisition.

Safe travels and see you in Las Vegas!

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3 Reasons Dealers Are Feeling Blue About Used Vehicles

Dale Pollak — Fri, 08 Dec 2023 21:34:59 +0000

I appreciated the Automotive News headline for a story about Cox Automotive’s latest Dealer Sentiment Index: “Comedown from favorable market making dealers pessimistic.”

The story highlights Index findings that suggest dealers are feeling pretty blue about their new/used vehicle businesses—and, in some cases, bluer than they’ve ever been.

In used vehicles, for example, Cox Automotive reported that dealers’ regard for the sales environment reached an all-time low. Here’s an excerpt from the report:

“The used-vehicle sales environment worsened in Q4 and continues to be viewed as poor by most automobile dealers in the U.S. In Q4, the overall used-vehicle sales environment index score dropped to 39, down from 44 in Q3 and below the 42 recorded a year ago. Excluding the Q2 2020 trough, the Q4 used-vehicle sales environment score hit an all-time low.”

Yikes. That all seems pretty grim unless you consider the following three factors that shape dealers’ current outlook:

Dealers track the health of their businesses on a month-to-month basis. In used vehicles, recent month-to-month comparisons haven’t been great. Used vehicle sales last month were off 7 percent compared to October, and down an overall 2 percent year-over-year. Things might seem bleak, but let’s remember: Dealers are still achieving solid used vehicle sales volumes overall, and used vehicle profitability remains far above pre-pandemic levels. The problem is that dealers enjoyed a pretty good party in used vehicles in 2021 and 2022, and now we’re feeling the downside, or the “comedown” as the headline put it.
There are a multitude of external conditions that contribute to a dimmer outlook right now for all of us. Vehicle affordability. Interest rates. Economic uncertainty. Political uncertainty. Violence across the globe and in our communities. The high cost of everything. The reasons one might feel glum are all around, and they seem to arrive with greater frequency.
Dealers haven’t had to contend with the more margin-competitive environment that’s emerged in recent months. This week, my conversations with dealers have focused on right-sizing inventory levels and retail pricing. Broadly speaking, there’s a reluctance among dealers and managers to face the music on their most-troubled vehicles, and a willingness to cheap-sell their best inventory to meet their volume targets. It’s all completely understandable. But, over time, it’ll become increasingly unacceptable. Let’s remember, it doesn’t take much for a margin-competitive environment to become margin-compressed.

I would also note that the current gloom doesn’t extend to every dealer. Some are very optimistic about where their used vehicle business is headed. Such optimism tends to come from the same place. It’s the confidence the dealers hold for the teams, technologies, tools and processes they’ve assembled to achieve the most investment-optimal outcome for every used vehicle they acquire and sell.

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A Beyond Velocity Event for Canadian Dealers

Dale Pollak — Fri, 17 Nov 2023 20:17:08 +0000

A quick heads-up for dealers in Canada: I’ll be sharing my perspective on why it’s time to move Beyond Velocity at a special event on November 28th in Toronto.

My presentation will outline how dealers can achieve more-optimal outcomes by using data-science-based insights about each used vehicle’s investment potential to guide your pricing, appraising and acquisition decisions.

Attendance is complimentary. It’s offered through our partnership with @autosync, a division of Trader Canada. It’s part of our shared desire to help dealers achieve greater success.

You can register to attend in-person or online here. I look forward to seeing you there!

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A Time To Get Your Inventory Balance Right—Or Else

Dale Pollak — Wed, 08 Nov 2023 20:17:38 +0000

I’ve been talking with dealers lately about right-sizing their inventories before the pain of too many vehicles in stock fully arrives.

The conversations owe to three factors in the current market:

Retail demand for used vehicles appears to be softening. Cox Automotive estimates that dealers sold fewer used vehicles last month compared to September—an assessment that squares with the “Seems like demand just dropped off” comments I’ve heard from dealers.

Used vehicle depreciation has increased. October brought above-average declines in used vehicle values at Manheim auctions, according to Cox. Demand for wholesale vehicles also diminished last month, a likely reflection of dealers’ sense that now’s not the time to be acquiring vehicles from auctions.

Consumer confidence declined in October for the third consecutive month. Cox reports that consumers’ plans to purchase a new or used vehicle declined to the lowest level since April. Analysts suggest inflation and interest rates offset consumers’ perception that vehicle buying conditions are currently more favorable than they have been in the recent past.

All this manifested last month as dealers had a roughly 50-days supply of vehicles on the ground and retail asking prices for used vehicles declined by .7 percent. The change in retail asking prices isn’t surprising given retail demand and wholesale values have softened.

This mix of current market conditions serves as the backdrop for conversations with dealers encouraging them to right-size their inventories before it’s too painful. I believe dealers operate most optimally when their used vehicle inventory’s balanced to their rolling 30-day total of retail sales. If you’ve got upwards of a 50-days supply on the ground, you’ve got some work to do.

The good news is that some dealers have the benefit of knowing exactly where this right-sizing work should start. It’s with the vehicles that pose the most risk to your profitability—the ones ProfitTime GPS classifies as “Bronze.”

But here’s the problem: I’ve seen several instances of dealers who have purposely held on to their Bronze vehicles of late, pricing them above the recommendations ProfitTime GPS gives them. Why? Because dealers don’t want to face the music of repricing the vehicles to sell and taking little or no gross (or a retail loss) on units they view as perfect fits for the right customers. Some dealers have also been holding late-model Bronze units at above-market prices because they believed the United Auto Workers’ strike would last longer, spurring demand for near-new vehicles and enabling dealers to get all the money.

Whatever the case, I don’t see any signs in the current market that holding on to Bronze vehicles and carrying more vehicles than you’ve retailed in the past 30 days, will produce the positive outcomes some dealers have been expecting. More to the point, the return on Investment potential for these vehicles is not getting better over time.

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A New Day Dawns for Dealers through Inventory, Process Optimization

Dale Pollak — Fri, 29 Sep 2023 16:58:13 +0000

In recent conversations and meetings with dealers, I’ve been describing how Variable Management and ProfitTime GPS represent a new day for dealers and their used vehicle departments.

The new day arrives from the way Variable Management and ProfitTime GPS help dealers evolve from simply managing their inventories to optimizing their used vehicle inventories and the critical processes of appraising, acquiring and pricing every vehicle. The combination of optimized inventory and process leads to a higher level of management that, to date, most, if not all, dealers have yet to achieve.

The absence of a suboptimal used vehicle inventory and related process shows up almost everywhere you look:

Appraising: Today, variances among appraisers typically abound if you compare average Look to Book and Cost to Market percentages across appraisers, or examine how frequently they use default rather than accurately estimated reconditioning costs, or include notes/photos to detail a vehicle’s condition. There’s also very little consistency across appraisers in how they arrive at an appraisal amount—is it a true “retail-back” or a cost-up calculation? If the offer’s based on retail prices, how “correct” is the competitive set and the appraiser’s retail asking price reference for the car?

Pricing: In almost every dealership inventory I examine, I’ll see used vehicles priced in a manner that defies logic and reason. With a few questions, I’ll usually get dealers and managers to agree that the pricing decisions reflect someone’s belief or bias about the vehicle than the cold, hard reality a clear-eyed examination of the market reveals. The belief and bias works both ways—either asking too much for a vehicle or not asking enough. I also see plenty of instances where inattention to daily price management contributes to asking prices that are, to put it charitably, misaligned to the current market.

Acquisition: One of the key Performance Management initiatives at vAuto in the past two years has focused on coaching dealers to go beyond simply stocking a specific number of vehicles to a more granular approach, wherein you determine your optimal days supply for vehicles within specific inventory segments—vehicle type (i.e., sedan, SUV, pick-up), model year, price segment, etc. The end game is to develop a stocking strategy that guides the number and type of vehicles you acquire. Despite the effort, we still see dealers choosing to stock too many vehicles for no reasons other than a) the vehicle was available and b) someone liked the car.

The totality of such deficiencies across three of the most-critical areas of used vehicle operations has led me to conclude that simply having inventory and management isn’t enough any longer for sustained success. The fix rests with individual dealers working to optimize their inventories and related process to achieve a higher order of management and performance.

At our recent Access: Innovation event in Chicago, I shared the outlines of what I believe optimized inventory and process require. Here they are:

Strategy. You can’t optimize anything without a specific destination, goal or target in mind. In used vehicles, the end goal is achieving your strategic objective. Your strategy might skew toward gross, volume or balance of both. In turn, this strategy should guide how your processes for appraising, acquiring and pricing vehicles occur. Your strategy represents the critical first step to optimize your inventory and related processes. A simple rule of thumb is that operating without a strategy tied to specific objectives, the opportunity for optimization never arrives.
Communication of your strategy. You can’t just communicate your strategy in a conference room or off-site meeting and call it good. Every team member who plays a part in executing your strategy across appraising, acquisition and pricing needs to understand your strategic objective and the specific process-related tasks they should perform to achieve it. If your strategy isn’t clearly set and communicated, you can’t expect anyone to do the right thing or make the right decision day in and day out.
Measurement of process execution to assess strategy alignment. The appraising, pricing and acquisition deficiencies I mentioned earlier aren’t necessarily indicative of managers who aren’t capable of more effective management. Rather, I believe the current state owes to the absence of a strategy or its clear communication across your team. Further, most managers currently lack the real-time means and visibility to effectively measure how well individual team members execute your strategy as they follow your process. Without this, managers can’t assess or ensure your team’s appraising, pricing and acquisition decisions fit your strategy or they don’t.

At Access: Innovation, I also shared how Variable Management and ProfitTime GPS help dealers achieve optimized used vehicle inventory and process. I’m excited for the dealers who have chosen to embrace the new day that’s dawned for their used vehicle departments. They are on the path toward a higher level of management and performance as they optimize their used vehicle inventories and process. I’ll be keeping in close touch with them and sharing their success stories here.

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How to Best Manage the Urge to “Buy Some Cars” Right Now

Dale Pollak — Fri, 22 Sep 2023 17:19:56 +0000

It’s clear the United Auto Workers strike against Detroit’s Big 3 manufacturers is both historic and highly uncertain. News headlines paint a picture of two sides having trouble coming to terms, creating a seeming standoff with disruptive ripple effects for many Big 3 suppliers.

For dealers, the possibility of a protracted labor strike is a hot topic of conversation and concern that increasingly extends to the used vehicle department. If you’re a Ford, General Motors or Stellantis dealer, you are probably thinking it’d be wise to stock up on late model used vehicles. If your new vehicle inventory and incoming supply dry up, isn’t it wise to have more late model vehicles in stock to satisfy buyers who want a new vehicle and can’t get one?

The conversation’s similar for import dealers: If we see an influx of new vehicle buyers, wouldn’t it be smart to hedge lower levels of new vehicle inventory with late model used units?

On the surface, you could make a pretty good case that stocking up on late model inventory right now makes sense. Retail demand for used vehicles is higher than it’s been all year. Current used vehicle inventories on dealer lots are leaner than this time last year. And, there’s the possibility that diminished new vehicle inventory will push retail demand for used vehicles even higher. From a dealer’s perspective, such conditions tend to spur the instinct to “get more cars.”

I’ve been asked if stocking up on late model inventory right now is the right thing to do. It might be, I’ll say. But it could also go the other way: Consumer sentiment has declined significantly in the past two weeks, and it’s been losing ground since July. The development owes to all the worries we see in the headlines—higher gas prices, inflation, student loan repayments, a possible government shutdown, the ripple effects of the autoworkers’ strike.

Is the recent drop in consumer sentiment cause for alarm? I don’t think so. But it certainly suggests that retail demand for used vehicles may weaken and create additional risk for dealers. You don’t want to stock up on late model inventory today and find yourself with too much inventory owned for too much money in late fall and early winter.

On the plus side, though, there’s never been a better time for dealers to make such speculative plays. That’s because today’s technology and tools can tell you when risk is outrunning your potential reward and give you the means to manage your way it.

If I were going to stock up on late model inventory at my dealership, I’d first recognize that I’ll likely need to purchase the vehicles from the auction for top dollar. With Variable Management and ProfitTime GPS, I’d know these vehicles were investment-distressed (i.e., Bronze) compared to other units. I’d then have the benefit of pricing recommendations to help me move each vehicle as quickly as it should to optimize my return.

Beyond that, I’d also have several metrics to inform how well I’m doing overall as I take in and manage the additional inventory:

The spread between my rolling 30-day total of retail sales and current inventory. When I bring in additional late-model vehicles, my inventory count will increase. That’s OK unless and until my rolling 30-day total of retail sales fails to keep pace with my inventory. When your inventory level and rolling 30-day total of retail sales fall out of balance, it’s typically your first sign of potential trouble.

Pricing alignment—Bronze vehicles. If I see a high percentage of price alignment on my Bronze vehicles, I would know that I’m consistently accepting ProfitTime GPS recommendations that help me optimize each vehicle’s return. If the alignment percentage is low, I’d want to examine the cars that are out of alignment to know if the market’s changed or it’s a case of intentional misalignment, wherein a manager had a strategically sound reason to override a pricing recommendation.

Days to Sell/Days in Inventory—Bronze vehicles. These metrics provide another way to tell if a risk-prone segment of inventory is or isn’t moving at the pace it should. Generally speaking, dealers who manage Bronze vehicles most proficiently and profitably maintain both metrics around 30 days.

Before I close, I should add another consideration to this stock-up-now conversation: Dealers who choose not to take on additional inventory right now can still play to a run of higher-than-expected demand for late-model vehicles as it takes shape. The key will be making sure your appraising and acquisition teams know that late-model vehicles are a higher strategic priority, and they work your direct-from-customer acquisition channels to acquire them whenever they can.

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Access: Innovation Day 2: A Few Challenges Growth-Minded Dealers Face

Dale Pollak — Sat, 16 Sep 2023 14:22:02 +0000

It was fitting that buy/sell expert Erin Kerrigan of Kerrigan Advisors closed Access: Innovation with a detailed, holistic rundown of current buy/sell activity.

I say that because it seemed like a majority of dealers at Access: Innovation are in active acquisition mode. You could tell their interest from the questions they served during Kerrigan’s Q&A:

What can you tell us about Blue Sky multiples for independent used vehicle dealerships? “They tend to trade in 3x multiples,” Kerrigan says. Often, the transactions are unique to individual buyers and sellers, and the former’s view of where they can take the business—factors that make specific benchmarks difficult to offer.

How should I work with a seller of a franchise store that under-performed and lost money prior to the pandemic, and then achieved $1 million in net profit in 2022, and now wants the latest earnings to serve as the basis for Blue Sky? “Buyers are not paying off prior earnings,” Kerrigan says. Instead, they’re applying formulas to determine the future earnings of a business. She added that if a deal’s going to go, sellers with unrealistic expectations need to get real, or potential buyers will look elsewhere.

How much is the impact of EVs on future service business factored into buyer projections? Kerrigan says the question hasn’t yet come up during buy/sell deals. She noted that the higher-than-ever average age of vehicles in operation signals future service work for franchise dealers. But Kerrigan balanced this reality with the fact that franchise dealers often don’t service 12- and 13-year-old vehicles.

More broadly, Kerrigan expects the buy/sell market to remain buoyant as dealership earnings continue to outperform other investment options. The current year is on track to be a record—both in terms of the overall number of deals and the relative size of deals. Smaller dealer groups are driving the activity as they recognize that future success will depend on scale, and they have the cash to finance the purchases and avoid the current high-interest loan environment.

I was not surprised to hear that some OEMs are weighing down buy/sell deal-making in two ways. First, they’re either being very selective and strict about who they’ll allow to take over their franchises. Second, their efforts to apply agency model principles, and enact facility/operational mandates, across their dealer networks give some buyers great pause, resulting in lower Blue Sky outcomes for sellers. The cumulative effect means buy/sell deals now take 60-90 days to close, Kerrigan says.

During Access: Innovation, I had multiple conversations with dealers who have been acquiring stores. The discussions often focused on the challenges they face as they bring new stores, with distinct performance and personalities, into their fold:

Standardizing process and strategy: I operated a Cadillac store and never faced the challenge of trying to get managers across multiple stores to standardize how they price, appraise and acquire vehicles. It’s a balancing act, and I was gratified to hear that dealers understand how Variable Management and ProfitTime GPS help dealers optimize their processes by aligning them to strategic goals, which can vary by rooftop.

Getting the team right in place. The operations director of a Southeast group shared that it’s taken six months longer than expected to staff three stores the group acquired in the past year. “We made mistakes on both fronts—hiring and firing the wrong people,” he says. The experience has become a lesson learned wherein the group’s spent time to fully define the personality characteristics and past experience that fits for key positions.

Paying the right price for property. The post-pandemic years have been marked by a significant drop in the value of commercial property since mid-2022. A dealer’s real estate is often one of their most valuable assets, Kerrian says. The decline in value is a factor driving some dealers to sell while Blue Sky multiples remain at robust levels.

All in all, this year’s Access: Innovation will go down for me as one to remember. Collectively, we raised more than $259,375 for the Juvenile Diabetes Research Foundation. We also achieved our goal of giving dealers best practices, ideas and insights to make their businesses better.

My thanks to Cox Automotive for underwriting Access: Innovation and my sincere gratitude and thanks to everyone who attended. Safe travels home!

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Access: Innovation Day 1: Take-Aways from Two General Sessions

Dale Pollak — Fri, 15 Sep 2023 13:02:24 +0000

During his general session at Access: Innovation, Cox Automotive chief economist Jonathan Smoke confirmed news that was on the minds of many dealers at the event—autoworkers would, in fact, go on strike at Ford, General Motors and Stellantis factories.

The possibility and potential impacts of a strike came up multiple times in my conversations with dealers at our opening reception and during breaks between sessions. Smoke’s afternoon session arrived when it seemed certain autoworkers would walk off the job at factories operated by not just one but all three Detroit-based automakers.

Several dealers with Chrysler dealerships viewed the news as a positive, at least in the short term. A 30-day strike, which Smoke outlined as the consensus view of analysts and economists, would at least halt the near pile-up of new vehicle inventory at the dealers’ stores and potentially reduce the six-figure monthly flooring expense they now carry.

The strike’s ripple effect on used vehicles, Smoke noted, would depend on each OEM’s current supply of new vehicles. If a strike extends four to six weeks, dealers will likely see yet another round of used vehicle value and price appreciation as new vehicle supply dwindles.

He also highlighted the current over-supply of electric vehicles (EVs) and vehicle affordability challenges as key “themes that are going to be important not just in the next few years but the next decade.” On affordability, Smoke notes that as lenders have become less aggressive with loan terms as a means to handle affordability challenges for buyers.

Dealers here also found keynote speaker Jason Dorsey’s presentation. He highlighted that no other industry, outside of healthcare, serves multiple generations of customers and employees like dealers. In particular, the rise of Gen Z as the fastest growing segment of consumers and employees will likely require dealers to change how dealers operate on several fronts:

Frequency and stability of compensation: Gen Z employees, Dorsey noted, prefer stability and they are “not good” with the variable comp plans in place at many dealerships. Their perspective’s been shaped by companies like Uber, which offer the opportunity to work today and get paid today. Some will take lower-paying jobs to access their money faster and keep up with their bills. If dealers want their job descriptions to resonate with Gen Z employees, they need to tout a specific salary range, scheduling flexibility and the availability of benefits, with free mental health care ranking as a top preference.

Dorsey also noted that Gen Z employees need specific examples of the performance you expect and more frequent communication than Gen X and Baby Boom leaders often offer. For Gen Z, “if your boss is not talking to you, you’re doing something wrong.”

All in all, it was a memorable first day at Access: Innovation. We’ll be wrapping up tomorrow, and I’ll Day 2 highlights here.

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A Focus on Your People at Access: Innovation in Chicago

Dale Pollak — Fri, 01 Sep 2023 17:26:28 +0000

A quick quiz: Which movies put the following quotes into daily circulation? “Follow the money” and “Show me the money.”

The respective answers are “All the President’s Men” and “Jerry McGuire.” Props to anyone who knew these without looking up the answers.

The quotes came to mind today while reviewing the 2022 Workforce Study from the National Automobile Dealers Association (NADA). Overall, dealers fared much better with retaining people than I’ve ever seen. Between 2021 and 2022, dealers saw turnover decline across all positions covered in the study. The average overall turnover rate declined 12 percentage points, year over year, to 34 percent.

That’s an impressive year-to-year improvement. Some of it, I’m sure, relates to realizations at many dealerships, especially in the height of the pandemic, that they won’t be in business without their people. If dealers downsized, many took the additional steps of assessing who they wanted to remain on their teams and why.

But another key factor that can’t be ignored is the money. Across the board, turnover improved as income increased. Further, turnover improved the least when the income increases at lower amounts.

You can see this dynamic with sales consultants and service advisors/writers. For the consultants, income increased 39 percent year over year, no doubt a reflection of the record-high profitability dealers achieved selling new and used vehicles, while turnover at the position declined 26 percent. For the advisors/writers, income increased 11 percent while turnover dipped 5 percent.

The year-over-year trend leads me to other questions: What will happen when the money diminishes? Will dealers continue to see reduced turnover or will it revert to its more troubling historical levels?

Unfortunately, we won’t know the answers until time passes. But here’s what we know right now: It’ll take more than money to see sustained improvement in turnover and retention for dealerships.

That’s why I’ve invited generational researcher Jason Dorsey to keynote the upcoming Access: Innovation event, September 13-15, 2023 in Chicago. He’s focused his career on what makes employees, across generations, truly tick in the workplace. With his keen knowledge on the motivational factors that go beyond money, and his keen understanding of the car business and the people who work for you, dealers at Access: Innovation will gain insights and understanding that help them sustain their employee turnover and retention improvements.

Jason’s keynote is another reason I’m excited to bring Access: Innovation to vAuto dealers next month. To be sure, many Access: Innovation sessions and workshops will focus on the money—specifically the money inherent in each used vehicle, and the processes that enable dealers to achieve optimal ROI for each used vehicle investment. Jason’s going to help us all think beyond the money as it relates to the people dealers trust to continue to make it.

If you’re interested in attending Access: Innovation, you can view the agenda here. Seats are available on a first-come, first-served basis. When you’re ready to register, call Anne Spencer at 888-841-3701.

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A Call for Caution Amid the Used Vehicle Market’s “Goldilocks Moment”

Dale Pollak — Tue, 29 Aug 2023 19:30:24 +0000

Economists sometimes use the term “Goldilocks moment” to describe an economy where everything’s just right—like the moment in the fairy tale when Goldilocks finds the perfect porridge.

The confluence of favorable circumstances that economists consider when defining a Goldilocks moment is not unlike the current moment in used vehicles. Consider:

We’re seeing the highest level of retail demand so far this year. And, it’s occurring in August. Usually, the spring selling season marks the high point of demand for a calendar year. It’s odd that we’re seeing sales rise now.

Cox Automotive analysts speculate that the surprising sales increase owes to factors like the higher-than-ever average age of vehicles on the road and related need on the part of owners to replace their current vehicles. They also note that, while interest rates for used vehicle loans remain high, they have stabilized, along with inflation. At the same time, retail prices have been declining—a reflection of the rapid wholesale depreciation we saw from late spring through July. In sum, consumers who need or want a used vehicle, and who may have recently considered a vehicle purchase out of reach, appear to be regarding the current moment as the time to make a move.

In the fairy tale, Goldilocks runs away when the bears return, ruining her moment of bliss. In used vehicles, there are several emerging factors that suggest the current mix of favorable conditions for dealers and consumers will also be short-lived.

The factors appear, as they often do, through wholesale market activity. Dealers have been buying vehicles as they sense the rising demand, look out at their average 44 days supply of inventory, and go to the auction. Conversion rates at Manheim auctions are currently higher than they’ve been in some time.

Given the still-limited supply of wholesale vehicles, the current buying activity is likely to spur an overall rise in wholesale values. In turn, we’re likely to see a subsequent rise in retail values, which might spoil consumers’ sense that it’s a good time to buy a used vehicle.

More broadly, we have the prospect of another federal interest rate increase, the resumption of student loan repayments that were paused for the pandemic, the possibility of a budget impasse in Congress and the seeming stall in labor negotiations with auto workers. All of these seem poised to darken the current consumer mood and their interest in purchasing a used vehicle.

With this outlook, I’ve been urging dealers to be cautious as they step up to meet current retail demand by acquiring more vehicles. If you stock inventory too far above your rolling 30-day total of retail sales, you’ll be at risk of holding the bag when the Goldilocks moment passes. Similarly, the current price volatility requires careful attention to how right you’re buying and pricing your vehicles for retail sale.

My goal here isn’t to throw shade on the current moment. Rather, my intent is to outline where things appear to be headed, and help dealers at least be aware of what may well lie around the corner.

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Putting Eyes on Your “Sight Unseen” Sourcing Opportunities

Dale Pollak — Thu, 03 Aug 2023 16:45:50 +0000

In my day as a dealer, we didn’t have customers calling or e-mailing the dealership to ask for a value on their vehicle to sell or trade it.

Such inquiries happened, of course, but it was far more common that a “sight unseen” appraisal came from another dealer who had a vehicle they didn’t want to retail and thought we might be interested in owning it.

Today, things are different. It’s far less common for dealers to ring a dealer down the street about a vehicle and far more common for consumers/past customers to ask you to put a value on their vehicle without seeing it. The dynamic has changed thanks to used vehicle retailers like CarMax, Carvana and Vroom who have made putting values on vehicles they haven’t seen a regular feature of how they do business.

The challenge for private dealers in this environment is how best to handle the incoming customer inquiries and, in turn, how to turn these opportunities into a more consistent and reliable source of inventory for your used vehicle department.

I’ve landed on “sight unseen” appraisals of late as I’ve been working with dealers on best practices to go beyond trade-ins and auctions for inventory. The work has led me to recognize that in this era of consumers seeking out two or three valuations before they choose to sell or trade their vehicle, dealers are often missing the boat. In many cases, because they can’t see the car in front of them and/or they don’t think a customer’s all that serious, they either provide a low-ball value or ignore the inquiry altogether. Next, if you look at the win rate on sight unseen appraisals at many stores, neither of these approaches seems to be working.

To help, I’ve distilled best practices from dealers and vAuto Performance Managers to help dealers do a better job managing the customer inquiries about their vehicle’s value:

Avoid giving customers a valuation number right away. “It’s the biggest mistake I see,” says vAuto Performance Manager Kevin Stearns. “Unless your number’s in the range the consumer expects, which it usually isn’t, the customer’s going to go somewhere else.” A better approach: Engage the customer right away, expressing your earnest interest in acquiring the vehicle and asking them to provide more detail about the vehicle’s condition through a third-party valuation tool like Kelley Blue Book Instant Cash Offer. It’s important to convey that you’ll often pay more than the valuation they get from the third-party source, provided the vehicle lives up to the condition assessment the customer completes.

Keep the conversation focused on the vehicle value/acquisition. It’s a best practice to separate the valuation and potential purchase or trade of a customer’s vehicle from your desire to sell them a new or used vehicle. Why? Because today’s customers are wary of dealer pitches to purchase a vehicle unless or until they convey that’s their goal. Even if you know they intend to purchase a vehicle and trade in their existing car, you’ll stand a better chance of capturing their business if you keep the transactions separate.
Appraise the vehicle in person with the customer. Once the customer completes and submits their condition assessment, you’ll want to appraise the vehicle with the customer, ideally at your dealership, or a location the customer prefers. It should be a collaborative, friendly effort where your intent is to affirm the accuracy of the vehicle’s condition the customer captured. In most cases I’m told, the customer will likely overstate the vehicle’s condition, giving you the opportunity to explain why the vehicle’s condition, and related reconditioning cost, results in a different valuation than the third-party figure the customer received. Dealers who use KBB ICO tell me that, in many instances, they are still able to bring in the vehicle for a higher value than the KBB figure (roughly $1,000). On the flip side, if the vehicle’s in far worse shape than the customer indicated, and you can only offer less than the third-party’s valuation, it’s important for the customer to understand the difference owes to the accuracy of their assessment and the third-party’s initial valuation.
Follow up with every customer after they say “no.” Some recent stats from Kelley Blue Book Instant Cash Offer suggest that dealers have more opportunity than they think to follow up with customers who get an initial offer and don’t respond or say “no.” They are: 89 percent of KBB ICO-related inquiries close after the initial seven-day offer expiration date, 58 percent of dealers believe it takes consumers three weeks to transact and 64 percent of consumers say the timeline’s a month or more.

To be sure, such best practices require more concerted effort from dealers than simply sharing a low-ball number and hoping for the best. But I’m told that, when dealers follow the best practices with intent and purpose, they’ll find that roughly six out of 10 consumers will participate in the in-person appraisal, and half of the people that go through the appraisal process eventually do business with the dealers who took care of them.

Finally, among ProfitTime GPS dealers, we tend to see the vehicles enter dealer inventories as Silver and Gold vehicles—cars with solid money-making potential. This outcome suggests there’s opportunity in your sight-unseen sourcing channel to pursue.

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3 Best Practices for Today’s Multi-Channel Inventory Sourcing Environment

Dale Pollak — Wed, 26 Jul 2023 16:16:18 +0000

It’s no secret that many dealers have been working hard to diversify how they source used vehicle inventory, relying less on trade-ins and auction purchases in favor of acquiring vehicles directly from consumers.

You can see the shift in the stats the National Automobile Dealers Association publishes in its year-end report on dealer financials. In 2022, dealers told NADA they acquired about 66 percent of their used vehicles from trade-ins with new or used vehicle purchases. That’s up slightly from the tally in 2019, which landed near 63 percent (see charts at right).

But check out “street purchases.” These are vehicles dealers acquire through “we’ll buy your car” and similar programs. The stats affirm how much dealers have pursued direct-from-consumer vehicles in the past two years. Last year, street purchases represented 13.5 percent of the inventory dealers acquired, nearly tripling the 4.8 percent in 2019. (The gains likely came at the expense of auction purchases, which dropped 10 percent during the same period.)

Meanwhile, public used vehicle retailer CarMax has also stepped up its efforts to acquire vehicles directly from customers. It’s always been a priority for CarMax, but it’s striking to note that in the first quarter of the company’s 2024 fiscal year, which ended June 30, direct-from-customer purchases accounted for 94 percent of the vehicles it acquired, almost double the percentage the company reported for its 2019 fiscal year.

I share all this to underscore how the used vehicle business now requires dealers to operate more effectively and proficiently across multiple sourcing channels. And, in my recent conversations with dealers, it’s clear that some dealers are doing a better job acquiring inventory profitably beyond trade-ins and auctions than others. I thought I’d highlight some of the best practices the top-performing operators employ to give them a sourcing advantage:

Measure individual channel performance. It’s critical for dealers and used vehicle managers to have more than inkling about the number, type and profitability of vehicles they acquire from individual channels. These basic benchmarks help you know, as you’re mapping out your stocking plan and strategy for the coming month or quarter, where you can expect to find the cars, and fill the gaps, to meet your volume and profit goals. This holistic view of where inventory comes from, which you can see in ProfitTime GPS’ Global Acquisition Dashboard, provides the foundation for an effective sourcing strategy.
Measure individual appraiser performance by channel. When dealers begin to assess how appraisers perform on a per-channel basis, you start to see some useful insights. First, most dealers immediately understand that, without oversight, individual appraisers and buyers often have their own means and methods for assessing a vehicle’s value. Such differences often lead to wide disparities in the Cost to Market and Look to Book percentages of how dealers bring in inventory. Against this backdrop, dealers are now making better-informed decisions about individual appraisers, coaching them on how they assess vehicles and determine the acquisition price and, in some cases, relieving them of their responsibility to appraise and purchase cars in a specific channel.
Establish a “universal appraisal process and objective.” Once dealers and used vehicle managers realize that widespread variances among appraisers yields sub-optimal results, they’ll often begin work to ensure that, in any particular channel, appraisers have a uniform and universal process for assessing a vehicle’s condition and establishing its value. (Note: There’s often a direct correlation between the degree of appraisal variance and the use of default or standard reconditioning estimates, which can relieve appraisers of taking the time to fully account for the condition of the vehicle in front of them.) Next, dealers will establish a strategic objective that every appraiser, in any channel, can use as a starting point to bring in vehicles on the money. In ProfitTime GPS, for example, dealers use vehicle investment scores to establish the strategic objective, and then measure appraiser performance, across many appraisals, to understand how well individual appraisers bring in vehicles on or off strategy.

When I’ve outlined these best practices with dealers, I also make a point that I suspect has been a pillar of CarMax’s culture and operational priorities for a long time—if you’re not consistently measuring how right your appraisers are bringing in cars according to your strategy, you really don’t have a means to manage your way to improved performance.

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ProfitTime GPS in Practice: Key Takeaways from a 90-Day Pricing Alignment Challenge

Dale Pollak — Thu, 06 Jul 2023 14:37:54 +0000

About two months ago, I wrote about general sales manager James Skop’s experience half-way through an operational challenge he accepted: To align his used vehicle pricing to ProfitTime GPS recommendations at least 85 percent of the time for 90 consecutive days.

I checked in with Skop recently to see how the full 90-day run, which ended June 1, turned out.

“It’s been very successful,” Skop says. “We’ve made very good money. Actually, in May, we had the most profitable month in variable operations in our company’s history and we’ve been around since 1939. The 85 percent target worked really well for us. I’m going to stick at that, but I have to look at it on a car-to-car basis.”

Skop accepted the 90-day alignment challenge in March to see if it would help him improve used vehicle profitability. Previously, he followed ProfiTime GPS pricing recommendations a little more than half the time—most notably on the vehicles the system identifies as Bronze, or the ones with the highest risk and least investment return potential.

“We had a hard time swallowing the fact that we owned a vehicle for too much money,” Skop says. As a result, he’d typically price Bronze vehicles above ProfitTime GPS’ recommendations to give the vehicles a chance to make gross. The approach wasn’t working. Bronze cars averaged about 60 days in inventory and typically lost money when they sold.

During the pricing alignment challenge, Skop focused intently on Bronze vehicles, evaluating each vehicle’s pricing alignment and position daily. The effort paid off and proved that Bronze vehicles, when treated correctly, offer money-making potential.

“We turned around from losing money to making about $1,900 per car on Bronze vehicles,” he says. “When we have Bronze cars now, we make sure we sell them in a timely manner so we can make money. It’s really just accepting the fact that it’s a Bronze vehicle and pricing it as price leader and not a gross profit holder.”

Here are other takeaways Skop shared from his pricing alignment experience:

“Eyes” still matter. Skop says that while his confidence and trust in ProfitTime GPS’ pricing recommendations have grown, it’s still critical to validate that the system’s recommended prices make sense for each vehicle. “We live in an area where there’s rust on vehicles and a vehicle can be Platinum based on how I own it, but it’s not Platinum when you look at it,” he explains. The observation’s consistent with the experience of other dealers. While the data science behind ProfitTime GPS recommendations is sound, there are some vehicles where your eyes (ears and nose, too) are necessary to affirm a vehicle’s retail potential.

Platinum cars perform. Skop has been struck by how fast he’s selling Platinum aligned to ProfitTime GPS pricing recommendations. “We’re asking 103, 104 and 105 percent of the market and they’re still selling fast,” he says. “We looked at how to slow this down. We’re asking top dollar and we’re getting it. But I’m out of alignment on time. That’s where my opportunity lies.”

Stocking-to-discipline is critical. Like a lot of dealers, Skop once believed that you needed more cars in your inventory to drive sales volume. “I said for a long time that there’s no way you can have 30 days’ worth of inventory and continue to do the volume. I was wrong. You can do that. Our inventory hovers around the 70-car mark, which is the number of cars we sell. Because we’re turning our inventory once a month, I don’t have stuff aging out, which typically puts vehicles in your Bronze and Silver buckets.”

Skop’s understanding of the relationship between inventory size and distressed investments holds critical relevance for every dealer in the current market. Right now, the average days supply of used vehicles in dealer inventories is about 45 days—well above the more ideal 30-day mark. When dealers stock more cars than you sell, you’re likely stuck in a rut. Your inventory’s share of Bronze and Silver vehicles grows, you’re effectively forced to fast-sell your best cars (the Platinum and Gold ones in ProfitTime GPS) for too-little gross and your overall profitability suffers.

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A Root Cause for Two Troubling Used Vehicle Trends

Dale Pollak — Wed, 07 Jun 2023 15:50:37 +0000

There are two troubling trends underway in used vehicle departments across the country that deserve dealers’ attention right now.

From here, it seems as if the trends and their singular root cause reflect a reality of life: Sometimes, when you make a bad decision, it begets more bad decisions.

Let’s dive into the particulars.

Across the country, I’m seeing the share of Bronze vehicles—the ones the ProfitTime GPS solution identifies as investments with the highest risk and lowest potential for return—are on a steady rise. This past week, the average share of Bronze vehicles hit 46 percent, the highest level I’ve seen in the past nearly two years.

The ever-larger share of Bronze vehicles, in and of itself, isn’t necessarily troubling. It’s rare to find a dealer who doesn’t have at least some Bronze vehicles in inventory. There’s nothing inherently wrong with Bronze vehicles, either. They just happen to possess a combination of characteristics—their Cost to Market and like-mine Market Days Supply are both high, and their retail sales volume is low—that make them vehicles with higher risk and lower ROI potential compared to others.

That’s why I say an increasing number of Bronze vehicles isn’t necessarily troubling. But the increase all too frequently gives rise to a second, far more troubling trend. That is, as the share of Bronze vehicles goes up, the level of alignment to ProfitTime GPS’ price recommendations for these vehicles goes down. This past week, the overall pricing alignment for Bronze vehicles fell to 26 percent—the lowest level I’ve seen in recent memory.

This percentage is disturbing because it signals that roughly 75 percent of the time, dealers and their managers are rejecting ProfitTime GPS’ data science-backed recommendations that would, by and large, help them retail these distressed investments faster. In effect, the dealers are saying, “I believe that if I price these vehicles higher, and hold onto them longer, I’ll make more gross profit than if I accepted the recommendations and the poorer grosses and occasional losses they’d bring.”

We see this mindset in the pricing alignment data from ProfitTime GPS. It shows that, on average, dealers are pricing their Bronze vehicles about $1,000 higher than the system recommends.

It’s entirely possible the dealers might know something I don’t. But we should all at least be aware that in the current market, where depreciation has accelerated and retail demand isn’t as strong as it used to be, a distressed used vehicle investment isn’t likely to get better over time. In fact, it’ll get worse, with steeper losses that dealers will eventually need to take, probably in the form of a year-end write-down.

After seeing the trends rise and sharpen in recent weeks, I began looking for a root cause. I wondered if compensation plans, which effectively penalize a used vehicle manager’s paycheck and standing if they price vehicles for poor grosses and losses, might cause some to ignore pricing recommendations for Bronze cars. But I realized that while comp plans play a role in pricing alignment, they don’t fully explain why the share of Bronze vehicles keeps rising.

That’s when I looked at inventory levels. I started comparing the dealers’ balance between their rolling 30-day total of retail sales and the number of vehicles in their inventories. Then, I found the root cause: In almost every case, at almost every dealership, the dealers with rising shares of Bronze vehicles have more vehicles in stock than they’re selling in a 30-day period. Their inventory levels are out of balance with their retail sales.

To validate the theory, I looked at inventories of dealers who consistently balance the cars they stock with the rolling 30-day total of cars they sell. Guess what? You don’t see Bronze vehicles on the rise at these dealerships, and the alignment of their Bronze vehicles to ProfitTime GPS pricing recommendations is much higher.

Furthermore, it’s clear that the willingness to follow the Bronze vehicle price recommendations, and accept the poor grosses and losses that may come, owes to the fact that these dealers also have higher percentages of Platinum and Gold vehicles in their inventories. That is, the dealers make peace with the ROI from their Bronze vehicles because they’ve got more Platinum and Gold vehicles to effectively cover or offset the grosses they’ll realize on the Bronze vehicles.

The dynamic reminds me of the “Spoonful of Sugar” song from Mary Poppins: “A spoonful of sugar helps the medicine go down!”

It’s an apt message for dealers caught in the current trends. For you, it’s time to balance your inventory to your rolling 30-day total of retail sales and take the medicine on the Bronze cars currently in stock and as they arrive. With these strategic imperatives in place, you’ll reverse the trend of rising numbers of Bronze vehicles and start seeing more sugar in your inventory.

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A Means to Manage Your Gross Profit or Volume Preference in Used Vehicles

Dale Pollak — Tue, 30 May 2023 14:36:44 +0000

My recent post about dealer groups opting to go for used vehicle gross profit over volume prompted a question from several dealers—what if we do want to make the trade-off and make gross or volume our top priority?

It’s a great question because there certainly are times when a dealer’s chief priority might be gross profit or volume, rather than a consistent balance between the two.

For example, a dealer who’s recently acquired a store they believe to be under-performing might be best served by gunning for volume over gross to establish (or re-establish) the rooftop as a local market leader in used vehicles. Or, there could be other circumstances, as noted in the recent Automotive News article that prompted my last post, where a dealer opts for gross profit due to difficulties acquiring sufficient inventory to advance their volume objectives and concerns about the strength of near-term retail demand.

Whatever the case, I have been cautioning dealers that if you do choose gross or volume as your primary used vehicle department objective, you’ll need a way to measure how well you/your team are working toward your objective in real-time and correct your present course if necessary. Without this real-time view, you’re always looking in the rearview mirror, evaluating your progress a month or more after the retail deals are already in the books and well past the time you can do anything about what’s already been done.

The limitations of a look-back approach to managing a dealership’s strategic objectives is a primary reason ProfitTime GPS offers a real-time view of a dealership’s current used vehicle pricing and how it aligns to the dealership’s strategy, whether it’s gross, volume or a balance of the two.

Here are a couple representative examples to illustrate my point. The examples might reflect how a dealer who sets gross profit as a chief priority, and another for a dealer who sets volume as their primary objective. (A quick refresher: ProfitTime GPS’s data science recommends retail price ranges for each vehicle, across Platinum, Gold, Silver and Bronze categories, to help dealers optimize their retail prices and capture the return on investment (ROI) or profit potential each vehicle offers.)

Gross-focused Dealer: This example shows a dealer who is gunning for gross profit, and likely doesn’t mind less volume to achieve it. You can see the dealer’s preference in the number of vehicles priced “above” ProfitTime GPS recommendations across every precious metal category.

If I was this dealer, I would want to take a closer look at the Silver and Bronze vehicles to see a) how far they are priced above ProfitTime GPS recommendations and b) how long the vehicles have been in the dealer’s inventory. It’s possible that the dealer’s over-arching emphasis on gross profit might actually be counter-productive with vehicles ProfitTime GPS designates as the dealer’s highest-risk investments.

Volume-focused Store: You can tell this dealer prefers volume over gross by the number of vehicles in inventory priced “below” ProfitTime GPS recommendations across every precious metal category. If I were the dealer, this view would tell me that my managers/team are going for volume.

But I might also want to take a closer look at two things. First, I’d examine how far we’ve priced vehicles below the recommendations, particularly with the Platinum and Gold vehicles, to see if there’s an opportunity to be less aggressive and still meet our goals for volume. Second, I’d want to look into the reasons someone priced a handful of vehicles in the Gold, Silver and Bronze categories above the recommendations—decisions that would naturally slow the turn on these vehicles.

The biggest benefit I’ve seen from dealers using this approach to manage their gross profit or volume objectives is the ability to see what’s happening in real-time and make adjustments as needed. When they do this, they’re able to consistently stay true to their preferred objective.

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Four Appraising Principles for the Current Market

Dale Pollak — Thu, 25 May 2023 15:18:36 +0000

There’s an interesting shift in my recent conversations with dealers about their used vehicle inventories that seems relevant to share here.

While many of my conversations address how dealers are pricing their used vehicles in the current market, there’s more interest on the part of dealers to tighten up how they appraise and bring in cars to achieve better outcomes.

The interest flows from a couple factors. First, used vehicle acquisition has become a more challenging task given the lower overall supply of used vehicles (particularly late model units). Second, wholesale prices have remained stubbornly high, most notably in auction settings where dealers (and rental car companies) are looking for inventory. Third, many dealers are at least attempting to source more inventory directly from customers through their service lanes, buy centers, lease returns, private party listings—basically anywhere they can find vehicles outside of trade-ins and auctions.

The dealers are asking how they can tighten up and potentially standardize the way they appraise vehicles against the backdrop of current market conditions and multi-channel sourcing environment. You might say they’re waking up to some of the appraisal inconsistencies I wrote about earlier this year.

The conversations have helped me distill what I’d consider four broad principles that can help dealers improve how their buyers, appraisers and managers bring in cars. Here’s a look:

Principle 1: The best way to get into a car is to know how you’ll get out of it. Almost everyone in the car business has at least heard this statement. The industry’s come a long way from the “old school” way of appraising cars, where you pay what you pay and apply your mark-up. The “retail-back” approach is more the norm now, but it has pitfalls. The most notable hitch relates to how appraisers effectively use a self-serving exit strategy, where they either adjust a vehicle’s competitive ranking or Price to Market percentage to allow paying more for a vehicle. Today, however, there’s a better way to ensure appraisers and buyers can see a vehicle’s proper retail exit as well as a target amount to bring in the car. ProfitTime GPS provides dealers a recommended retail exit price range, as well as a recommended appraisal range to minimize an individual’s ability to manipulate a vehicle’s true retail exit, which should provide the basis for evaluating and bringing in every vehicle.

Principle 2: Narrow the variances among appraisers. At many dealerships, it’s common to see differences of 10 percent or more across the acquisition Cost to Market percentages among appraisers. The variances owe to individual beliefs and biases, as well as confidence among appraisers that they know best how much a vehicle is worth. The aforementioned, strategy-tied appraisal and pricing recommendations from ProfitTime GPS offer a more uniform way for individual appraisers and buyers to at least start appraisals from the same place, and then pivot if they must.

Principle 3: Never second-guess an appraiser on a single car. This principle comes from personal experience. I can’t count the number of times I pointedly asked appraisers at my dealership, “What in the world were you thinking on this one?” I rarely got a satisfying answer—a fact that reflects the highly circumstantial nature of every appraisal. A better way, I now understand, comes from assessing appraiser performance across multiple appraisals, which helps you coach through the beliefs, biases and bad habits that result in letting the customer with the right car walk, or over-paying for the wrong car.

Principle 4: Measure appraiser performance against your strategy. One of the most encouraging things that’s emerged from the data science that drives ProfitTime GPS is the ability for dealers to establish a strategy for appraisals, give appraisers and buyers targets to start every appraisal, and then measure performance against the strategy. You can’t get this level of performance insight when you rely on Cost to Market or Look to Book benchmarks alone to measure and manage appraisers, especially in today’s multi-channel inventory sourcing environment. Today, it’s imperative that dealers set (and adjust) their appraisal strategy appropriately across individual sourcing channels and measure performance the same way. In the end, appraisers and buyers have clearer expectations of how they should handle cars in each channel and, better still, they know your oversight isn’t arbitrary.

I should add that deploying these principles and following them consistently across appraiser and buyer teams isn’t a cake walk. In some cases, you’re undoing a deeply entrenched way of appraising and pricing cars, and you’re shining a light on appraising practices that some may not want dealers to see. Even so, dealers who are disciplined about following these principles share an encouraging trajectory. Not long after the effort’s underway, they see less debate and friction over appraisals and retail pricing for properly appraised vehicles. Instead, there’s far more discussion around the benefits that occur when a larger share of vehicles arrive in inventory “on strategy” across every channel and then retail when they should.

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Do You Really Need to Sacrifice Volume for the Sake of Gross Profit?

Dale Pollak — Tue, 23 May 2023 16:30:08 +0000

An Automotive News story this past weekend gave me pause. The piece highlighted an apparent strategic decision by public dealer groups and large used vehicle-only retailers to go for gross profit at the expense of volume.

The article explains how the combination of high vehicle acquisition costs, particularly with auction vehicles, and affordability concerns among buyers, led company executives to the go-for-gross-over-volume decision. This quote in the piece sums it up: “It was a better trade-off to have lower volume and higher gross profits, which really generate a better [earnings per share result] for us overall.”

On one hand, I fully understand the decision to give up volume, especially if the only way you’ll be able to achieve it requires buying higher-cost auction vehicles to make your goals. It’s also true that there’s been a long-standing belief in the car business that you can’t achieve optimal gross and volume at the same time. If you go for one, the other’s got to give.

But I would submit that the art and science of used vehicle inventory management has advanced to a point where this classic trade-off isn’t always necessary. There are plenty of dealers who are growing volume and gross despite the headwinds in the current market.

The primary difference, it seems, is that these dealers are taking advantage of new data science and related decision-making insights to optimize turn and gross on every car. Plus, they’re being very proactive about acquiring inventory beyond auctions and trade-ins—a multi-channel sourcing strategy that helps offset the higher cost of auction cars the dealers feather into their inventories to achieve the volume they desire.

The dealers also exert discipline across their used vehicle business in a few critical ways:

Maintaining a balance between your used vehicle stocking and retail sales. If you read a bit between the lines in the Automotive News article, it seems like some of the larger used vehicle retailers over-stocked their inventories in anticipation of first quarter sales that didn’t fully materialize. At least a portion of the fall-off in their average front-end gross profit figures likely owes to selling vehicles at break-even or a loss, just to get rid of them. By contrast, dealers who were disciplined about maintaining a balance between their rolling 30-day total of retail sales and their stocking levels didn’t face this problem—especially when they priced the troubled cars right from Day 1.

Knowing the difference between your turners and earners. This is where data science proves extremely helpful. With ProfitTime GPS, dealers can appraise, purchase and price vehicles with the benefit of knowing two critical things—how the vehicle will fare as an investment if they acquire it, and how they can appraise and price it to achieve optimal outcomes. Such knowledge goes a long way toward ensuring dealers are patient with cars that will deliver the healthiest gross profit and more urgent with vehicles that they should retail out of quickly to minimize risk. These insights go a couple steps farther—they help you avoid acquiring the wrong vehicle, paying up for vehicles you don’t really need and identifying vehicles with retail potential you might otherwise have overlooked or passed by.

Putting a greater priority on customer experience. I had a conversation the other day with a dealer who isn’t afraid of high-cost auction vehicles, while proactively acquiring cars across every available channel. The dealer’s thinking: Why should I shy away from selling more volume when I know I can sell and satisfy a customer and set the stage for earning their business in the future? The dealer’s playing long ball, effectively stepping up to grab a bigger slice of the market share pie while competitors retreat to bolster their bottom lines.

I’m not suggesting that the large used vehicle retailers highlighted in the Automotive News story have it wrong. My point is that growing gross profit and volume doesn’t have to be an either/or proposition. You can achieve both goals if have the belief, insights and will to make them happen.

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ProfitTime GPS in Practice: Don’t Worry About the Precious Metal Composition of Your Inventory

Dale Pollak — Fri, 05 May 2023 15:27:41 +0000

I’ve been hearing a similar concern from ProfitTime GPS dealers in recent conversations: “I need more Platinum and Gold vehicles to get my average front-end gross profit back on track.”

The concern generally follows two realizations:

Bronze vehicles—the ones ProfitTime GPS identifies as the units with the highest risk and lowest profit or ROI potential—make up about 40 percent to 50 percent of the dealers’ inventories. When dealers view the average mark-up and days to sell for these vehicles, they can see the front-end gross profit they’re likely to make is significantly lower than other vehicles, and less than what they’d like.
Platinum and Gold vehicles—the ones ProfitTime GPS identifies as the units with the least risk and highest profit or ROI potential—tend to make up about 15 percent to 25 percent of dealers’ inventories. The dealers can see these vehicles have the richest mark-ups that should offer significantly higher front-end gross profits when they sell.

With this backdrop, it’s completely understandable that dealers would want to stock more Platinum and Gold vehicles. They might even direct their appraisers and buyers to do a better job of bringing in Platinum and Gold vehicles, while encouraging them to avoid Silver and Bronze.

When I hear the concern, it raises a red flag.

In my view, dealers should not be appraising and acquiring cars to engineer the previous metal composition of their inventories. To be sure, there’s nothing wrong with establishing precious metal targets to guide how appraisers and buyers value and bring in cars. But such targets should be the starting point, not necessarily the end point, for used vehicles, especially when they’re coming from trade-ins.

That’s because dealers should be focused on acquiring the cars they need, and appraising cars to make deals. We know the circumstances around individual customers and cars are always different. Hence, it can be counterproductive, and even dangerous, when dealers try to fit every car into a specific precious metal parameter.

Instead, I advise dealers that it’s far more important to treat every vehicle you bring in exactly how it should be treated. If it happens to be a Silver or Bronze car, ProfitTime GPS’ pricing recommendations will help you retail it quickly to realize its optimal profit or ROI potential. Better still, when Silver and Bronze vehicles are properly handled, they’re great cars. They typically represent volume cars that offer an F&I opportunity and keep your sales teams moving. Meanwhile, if you’ve got a Platinum or Gold car, ProfitTime GPS’ pricing recommendations will encourage patience to give the vehicle the time it needs to make its maximum return.

When dealers follow this operational discipline, the precious metal composition of their inventories takes care of itself and every used vehicle they own gets its best shot to make money.

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ProfitTime GPS in Practice: Halfway Through A Dealer’s 90-Day Pricing Alignment Challenge

Dale Pollak — Fri, 21 Apr 2023 15:21:51 +0000

In late February, sales manager James Skop of Fletch’s Buick GMC Audi in Petoskey, MI, made a bold decision.

The decision followed a conversation with his vAuto Performance Manager, Vinson Treharne, about the alignment of the store’s used vehicle pricing to ProfitTime GPS recommendations. For months, the pricing alignment had been running about 60 percent.

Skop explains: “Vinson showed us our data. We were at 60 percent because, a lot of the time, we weren’t willing to swallow the fact that we had a Bronze vehicle that wouldn’t make $2,000 or $3,000. Other times, we had a Platinum vehicle where ProfitTime GPS said we should be making $5,000 or $6,000 but we wanted to move it quick and make the money. We were selling ourselves short by thousands of dollars.”

To correct the problem, Skop agreed to a 90-Day Pricing Alignment Challenge. He pledged to keep his used vehicle pricing aligned to ProfitTime GPS recommendations at least 85 percent of the time, at all times.

Why not 100 percent alignment? “We can’t go 100 percent,” Skop explains. “We have rust in northern Michigan. So, with some of the cars, I have to price the car to what it is, not what the computer says. You have to know the vehicles better or more than the computer system sometimes.”

Skop makes a great point—if a dealer’s 100 percent aligned to ProfitTime GPS recommendations, I generally agree that they’re not wearing their “car person” hats enough.

Halfway through the 90-day challenge, Skop is pleased with the results he’s seen so far. The store closed the month of March selling two fewer cars than they did in February, while making $38,000 more in front-end gross profit. “That’s just front-end gross,” he says. “The results give me the faith and cold hard numbers to continue what we’re doing.”

I asked Skop to highlight how his 25 percent higher overall alignment with ProfitTime GPS recommendations helped him achieve the better results. No surprise…the improvement came from managing Bronze cars with more urgency and Platinum cars with more patience.

On the Bronze cars: Skop notes the average days to sell fell from 55 days to 50 days during March. Meanwhile, the faster pace of Bronze vehicle sales volume helped the store go from an average $1,000 front-end loss to an average $900 in positive front-end gross profit. “The difference is just swallowing the pill and pricing the Bronze cars right from the get-go,” he says. “We’re not trying to make $3,000 to $4,000, and just slapping the profit on the car. Then, the car depreciates and we’re further in the hole.”

On the Platinum cars: Skop says the average days to sell for Platinum vehicles increased from 18 to 21 days as they accepted a higher share of ProfitTime GPS recommendations. Also, thanks to the faster sales of Bronze cars, they faced less pressure to move Platinum cars quickly. “Your Platinum and Gold vehicles are the ones you’re going to hold out on a little bit longer and make more money,” he says.

In addition to maintaining the daily price alignment discipline Skop has achieved during the first half of the 90-day challenge, he and his team will be turning their attention to vehicle acquisition. The thinking: Now that they’ve figured out how to move Bronze vehicles more quickly, they need to make sure their appraisal and acquisition efforts bring in sufficient inventory to meet their monthly volume targets—even if it means acquiring more Bronze and Silver, rather than Gold and Platinum, cars.

“Typically, when you go to an auction, it can turn into a Bronze vehicle quite quickly,” Skop says. “But what we were seeing is that we were afraid to buy those vehicles because, first of all, the grosses are not as high, which kind of put us into a position of not having enough volume cars. We probably also missed some trades because we were trying to keep too many Golds and Platinums on the lot to make ourselves feel comfortable.”

I’m happy for Skop and his team, and grateful for his willingness to share the early results from his 90-Day Pricing Alignment Challenge. He and his team are out-performing other dealers in their area and they’re doing it at a time the market’s in decline. The early results reflect the combination of the team’s used vehicle pricing discipline and diligence, and the strength of the ProfitTime GPS solution.

Skop and I also agreed to reconnect when his 90-day challenge concludes next month. I’m excited to learn more about his experience and share it here.

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A Look at the “Profit Coma” Problem in Used Vehicles

Dale Pollak — Wed, 19 Apr 2023 15:05:46 +0000

If memory serves, I first heard the term “profit coma” from dealer Brian Benstock of Paragon Honda during a podcast more than a year ago. He used the term to describe how a run of unprecedented profitability could result in dealers being slow to move as used vehicle market conditions became less favorable.

Curiously, “profit coma” has come up in dealer conversations the past couple weeks—likely triggered by the current inflection point we’re seeing in the market and the tougher conditions dealers now face as they acquire and sell used vehicles.

The inflection point’s arriving almost exactly as analysts like Cox Automotive chief economist Jonathan Smoke predicted. Broadly speaking, retail demand seems to be slowing down after starting the year stronger than expected. Wholesale values continue to decline and retail prices have begun to soften, trailing the wholesale values as they have in the past. Smoke and others expected such conditions would emerge in mid- to late April, and that’s pretty much what we’re seeing.

The current conditions have caused some dealers to take a harder look at their used vehicle operations to find ways they might resuscitate their used vehicle sales volumes and profits. Such efforts, for which I’ve been providing counsel in recent days, caused more than one dealer to realize that they had been suffering from a profit coma without really knowing it.

The symptoms of the profit coma show up in two places:

1. Inventory Acquisition: I’ve talked to several dealers who lamented that their March sales volumes, and their current pace of sales in April, likely suffered from not having sufficient inventory. Note: These dealers’ inventories are not significantly out of balance with their rolling 30-day total of retail sales. Rather, the dealers have realized, upon closer examination, that their efforts to acquire inventory likely suffered as appraisers and buyers didn’t put enough money into cars they really needed.

As one dealer put it, “they were still looking to take in cars with potential for the $3,000 and $4,000 front-end grosses we’ve been getting.” Now, the cars and customers are gone, symptoms of the profit coma. The dealer, and his used vehicle manager, have now agreed to ensure appraisers and buyers know when a car they really need arrives and to step up to acquire it, even if the front-end grosses are leaner than they’d like.

2. Retail Prices: When you’ve come off two-plus years of seeing front-end gross profits rival the best that dealers in my time achieved 20 to 30 years go, it’s difficult to price cars for anything less—another sign of the profit coma. But the current market isn’t as forgiving as it used to be. Retail buyers are looking much closer at what they can afford to buy and what they’re willing to pay. When dealers ask too much, they aren’t selling cars unless and until they mark down their asking prices. I should add that the failure to move these vehicles often leads to a profit coma corollary—dealers cheap-selling their best cars to make their monthly volume target.

I’d be remiss if I didn’t add that the profit coma problem isn’t as profound with ProfitTime GPS dealers who are highly disciplined to the solution’s appraisal and pricing recommendations. When they consistently apply the recommendations, there’s no mystery about the vehicles they can, and should, step up to acquire. Similarly, there’s little, if any, doubt about the cars that need to be priced to move quickly, and those that deserve a mark-up, and time, necessary to deliver their optimal ROI.

Some of the ProfitTime GPS dealers will also admit that they, too, were in a profit coma not so long ago. But now they’re awake, alert and actively taking deals from dealerships where the profit coma persists.

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ProfitTime GPS in Practice: Knowing When It’s Right to “Roll the Car”

Dale Pollak — Fri, 07 Apr 2023 18:09:07 +0000

In my most recent post, I shared how dealers, and used vehicle managers in particular, get antsy about meeting their sales volume targets near the end of the month and discount the vehicles they understand to be the easiest to reduce. As I noted, in many cases, the vehicles are their best investments. The ones ProfitTime GPS designates as Platinum and Gold cars.

But I’ve also come to realize that the desire to meet monthly sales targets, and the practice of selling Platinum and Gold cars for less than they could or should command, isn’t limited to the end of the month. I came to the realization following several recent conversations with dealers, in one-on-one and 20 Group settings, when we examined the Days to Sell metrics for dealers’ Platinum and Gold vehicles, and where their retail sales landed within a particular month.

The analysis revealed that Platinum and Gold vehicles leave dealer inventories all the time for substantially less than the retail prices ProfitTime GPS recommends for the cars. I found that these vehicles were either priced less than their individual price recommendations or they were priced right and someone, often a manager, approved a substantial discount at the desk to sell the car.

When I ask dealers and managers about the dynamic, I hear common refrains: “We don’t pass on any deal,” or “We do any deal where there’s a profit,” or “We need to roll the car.”

I understand why such decisions happen, particularly in the current market, where used vehicle sales appear to be on the wane and selling a car today seems like the right thing to do.

But I question if decisions to retail Platinum and Gold vehicles for less money really represent the right financial decisions. For example, does it really make sense to roll a Platinum or Gold car for $1,800 in front-end gross when, if you waited because you knew you could, you’ll earn the $3,000 gross data science suggests you’re likely to get?

To be clear, rolling Platinum and Gold cars for less money isn’t always wrong. There are specific circumstances and customers where this decision is the right one. However, the frequency of these deals suggests they’re more about a desire to sell a car fast because it’s easy.

Herein lies a two-tiered opportunity I’ve been recommending for dealers:

First, you need to raise awareness with managers and sales associates about the financial potential Platinum and Gold vehicles truly represent for your used vehicle department. That’ll help them express the vehicle’s true market value with customers. Remember, there’s a reason ProfitTime GPS ranks some vehicles as Platinum and Gold, and it’s due to their higher market appeal and scarcity, and how right you own them.

Second, you need to exert more in-the-moment discipline when the urge to “roll a car” arrives. Your urgency should always be higher for Silver and Bronze vehicles, rather than Platinum and Gold units, irrespective of where you stand in relation to your monthly sales volume target.

When dealers and managers consistently follow these two principles, your used vehicle sales and profit goals tend to take care of themselves, month after month.

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A Familiar Monthly Ritual that Dealers Should Recognize and Repair

Dale Pollak — Fri, 31 Mar 2023 15:39:20 +0000

Let’s see if the following scenario sounds familiar:

In the final days of a month, a used vehicle manager gets worried about meeting their monthly sales goal. The current month’s sales might be three, five, seven or 10 units behind the goal. The manager’s worried that he/she will miss the target and miss out on the monthly volume bonus.

The manager’s next step is to identify vehicles that, if they cut the price, they know, or at least suspect, will move quickly. Typically, these vehicles are the ones the manager regards as the easiest to dicsount—ones they bought right and priced up to make a good gross profit. Then, the manager lowers the prices and, voila!, the vehicles sell. The used vehicle manager’s feeling good. The department makes the sales target, the manager makes his/her monthly bonus and they ripped a couple trades from customers who were happy to let go of their current vehicle because of the great deal they got on the car they purchased.

A few days later, as the next month gets underway, the manager’s faced with another problem. Leads and traffic are down. The showroom’s a ghost town. The sales team’s complaining that there’s no one to sell. Everyone wonders what happened.…

I’ve observed versions of this story countless times over the years. It’s a ritual that happens almost every month, except July, when many dealers roll out the bunting and balloons for Fourth of July sales, which front-loads the month’s sales volume.

The dynamic’s certainly been familiar to vAuto Performance Managers, too. They often hear the complaints that business is slow from used vehicle managers during start-of-the-month calls and in-person engagements.

Today, thanks to the data science behind ProfitTime GPS and the solution’s ability to identify the investment value of every used vehicle, we now know exactly what’s going on when this monthly ritual occurs. The upshot: Used vehicle managers are cheap-selling their Platinum and Gold vehicles—those ProfitTime GPS deems their best investments—to meet the monthly volume nut. In turn, as a new month starts, leads and traffic are down because the highly desirable cars that attracted buyers (the Platinum and Gold ones) are gone.

Digging deeper, we also now know that the used vehicle managers deployed month-end discounts on Platinum cars because they were unwilling to price their Bronze vehicles—the ones ProfitTime GPS identifies as those with the highest risk and lowest investment values—where they should be. Why? Because pricing the vehicles properly would mean less-than-favorable front-end gross profits when the vehicles sell, an outcome used vehicle managers prefer to avoid, especially at the end of the month.

Thankfully, with the help of ProfitTime GPS and its insights, we now know exactly how to make this monthly ritual go away for good. The fix, however, isn’t necessarily easy because it requires a greater degree of discipline and fortitude on the part of used vehicle managers to make sure their used vehicles are priced in proper alignment with each unit’s investment value from Day 1.

When dealers and used vehicle managers exercise this discipline, the ritual of cheap-selling their best cars at the end of the month and then seeing too-little traffic and sales goes away. Instead, dealers achieve a more consistent pace of sales, thanks to a larger share of Bronze vehicles selling faster and driving volume, with Platinum vehicles retailing when they should, for the retail prices they can command.

I’d encourage dealers to take a closer look at the cars that leave their inventories quickly at the end of a month, paying particular attention to the price discounts that preceded their retail sales. Then, they should ask the following question: Wouldn’t we be better off if we did something different? Perhaps, the answer is to provide a month-end sales objective tied to the reduction of the Silver and Bronze vehicles, to avoid cheap-selling your Platinum and Gold vehicles, which are always your best investments.

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An Earlier End to Our Unusual Spring Sales Bounce?

Dale Pollak — Mon, 27 Mar 2023 21:55:14 +0000

If there’s one thing that might define of how this year’s spring compares to prior years, it might be that everything’s arriving sooner than expected.

My friends in the Chicago area report that early spring flowers have already arrived, roughly two to three weeks before they typically appear. There’s worry there that fruit tree blossoms will suffer if the area gets another overnight freeze, which often happens in April.

In used vehicles, the seasonal spring selling bounce arrived early, too. Sales were higher than almost everyone expected in January and February. We began to see another period of appreciation in both wholesale and retail values as many dealers sold more cars than they expected, and they needed to replenish their inventories.

At the time, I was among those who advised that the current market conditions would create a money-making opportunity dealers. We also cautioned that the dealer-favorable conditions of rising wholesale values and retail prices would take a southerly turn by mid-April or early May.

Today, it looks like this market turn is arriving early, too. In the past couple weeks, Manheim has reported declines in its “lane efficiency,” a metric that assesses “no sales” in the lanes and is often regarded as a predictor of future vehicle values. Since lane efficiency’s fallen of late, we now expect wholesale and retail values will follow suit.

At the same time, we’re seeing the appreciation of wholesale and retail values slow down. Both value sets are still rising, but the rate of appreciation has diminished.

Like many, I’ve asked the analysts why the market appears to be turning quicker than expected. They point to potential contributors that extend beyond the car business—bad weather in several parts of the country, ongoing inflation, turmoil and uncertainty in the banking industry, the Fed’s decision last week to raise interest rates again and the onset of spring break vacations.

Whatever the root causes, it should be stressed that no one expects any deep or sudden drop in the used vehicle market. Rather, it appears that we’re in for another stretch where dealers will need to earn rather than expect their rightful shares of used vehicle sales and profits.

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A Closer Look at an Uncertain, Unpredictable Used Vehicle Market

Dale Pollak — Fri, 17 Mar 2023 19:14:45 +0000

My phone’s been buzzing off the hook in the past week as dealers are almost single-mindedly asking the same question: Where’s the used vehicle market headed?

The calls and questions moved from sporadic to a seemingly steady stream in the past week. Why? Well, the collapse of Silicon Valley Bank, and the shudders the bank’s failure has sent through global banking, financial and regulatory circles stands as a primary catalyst.

But the interest in where the market’s moving also owes to where we’ve been in used vehicles in recent weeks. Few expected the spring selling and tax refund season to arrive in January. Even fewer thought we’d see yet another period of wholesale value and retail price appreciation. The conditions caught some dealers, mainly those who were busy unloading or writing down inventory that hadn’t sold in the final quarter of 2022, by surprise. Suddenly, they found themselves in the hunt to get more cars.

To me, the events we’ve been experiencing all point to what might be considered the new nature of today’s used vehicle market: It’s more uncertain, more volatile and less predictable than it’s ever been. Further, there’s little evidence to suggest that what any of us might consider more “normal” or stable market conditions will arrive anytime soon.

In fact, there are several signs that suggest more turbulence ahead. Cox Automotive chief economist Jonathan Smoke believes May 1 will be a turning point. By then, the IRS will have largely finished issuing tax refund checks, which will temper the wind that’s behind recent retail demand. In addition, he believes uncertainty in the broader economy will cause some consumers to pause decisions to buy used vehicles.

The uncertainty extends to the Federal Reserve and their efforts to curb inflation. A week ago, many economists and financial analysts were all but certain we’d see another increase. The big question was whether we’d see a quarter- or half-point increase. Today, following the SVB-led disruption in the banking and finance sectors, it’s anyone’s guess what the Fed will decide to do.

My guidance to dealers in these more uncertain, more volatile and less predictable market conditions has two components.

The first is that they’ll need to keep their inventories clean and lean as we head deeper into the spring. No one really knows if May 1 will prove to be a critical turning point, but I’m not privy to any signals that would suggest retail demand will gain strength in the weeks ahead. It seems to me that what we’re witnessing amounts to a fair warning. If you’re not maintaining a balance between your 30-day rolling total of retail sales right now, you’d best be looking to strike that balance very soon.

The second is that dealers should strongly consider rethinking how they manage their used vehicles. In the current market, market supply and demand dynamics are increasingly segment-specific, it no longer makes sense to effectively treat every car the same. There’s too much volatility to give every fresh unit a sizable mark-up and then mark it down at regular seven-, 10- or 14-day intervals until it sells. If you follow this approach, and you’ve got too many cars in stock, you’re headed for trouble.

That’s why I’ve been advocating that dealers adopt a Variable Management strategy, where each car’s investment value dictates how you treat it. If you know a car’s risky, you price it to sell quickly on Day 1. If you know a car’s got significant gross opportunity, you price it to achieve its potential while paying close attention to how changing market conditions may affect its potential and signal the need for a price change.

So far, the Variable Management strategy, and ProfitTime GPS solution we built to support it, seems to be helping dealers navigate today’s more uncertain and volatile market. The data science that drives the solution’s investment value rankings for each vehicle, and the appraising and pricing recommendations it assigns to each vehicle, is proving to be a source of clarity and confidence for dealers who use it—a sharp contrast to the doubt I’m sensing among other dealers about what whatever’s coming next in used cars.

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ProfitTime GPS in Practice: A Longtime Appraisal Problem That’s More Problematic

Dale Pollak — Fri, 10 Mar 2023 14:38:46 +0000

Every dealer would agree that you make your money when you buy a used vehicle.

That’s why appraisals are so critically important. The appraisal establishes the return on investment (ROI) and profit potential on every vehicle you acquire, based on an appraiser’s assessment of the vehicle’s condition and determination of how much to pay for a vehicle.

Unfortunately, as I noted in a recent post, the appraisal process in many dealerships suffers from inconsistencies between appraisers, both in how they assess a vehicle’s condition and in how they determine the optimal purchase price. In the post, I noted that I would address an aspect of the appraisal process that appears to be increasingly problematic for dealers—the inaccuracy of reconditioning costs appraisers apply to a vehicle they acquire for a retail sale.

To be sure, the accuracy of reconditioning estimates in appraisals has always been a topic of conversation, if not concern, among dealers. If your estimates don’t reflect the actual costs required to recondition a vehicle for retail sale, the car’s ROI and profit potential typically suffer.

But the problem’s never gone away and today, as dealers use solutions like ProfitTime GPS to establish investment value targets to guide how appraisers bring in cars, the inaccuracy of reconditioning estimates stands out as clear as a bell.

Here’s an example: During last year’s run of inventory scarcity, a Toyota store in a California dealer group determined that they would do everything they could to ensure they had sufficient used vehicle inventory to sell. They set aggressive investment value appraisal targets in ProfitTime GPS to ensure they did not lose any potential acquisitions due to not stepping up enough to acquire the vehicle.

Early on, it was a counter-productive result from what they were trying to accomplish. What they found if you don’t have a really thorough evaluation and condition process in your appraisal. The tool works great if you’re putting the right recon and expense into that car. But if you’re not, it can be counter-productive when you’re aggressive in acquiring the store down and then you’re scaling the score down as a result, then you’re shooting yourself in the foot.

“It wound up being counter-productive,” the group’s director of operations shared. “What they found is that they didn’t really have a thorough evaluation of vehicle condition and they didn’t have the right reconditioning expense. If you’re off on recon by $1,500, and you’re getting aggressive buying cars, you end up in trouble as you scale it.”

The director adds that “cosmetics affected our misses more than mechanical. If you’ve got to shoot a couple panels and put a windshield on a car, it adds up quick. That’s a $1,000 bill in today’s market.”

After some “significant” issues with wholesale losses and gross profit, the store’s on better footing, the director says. It’s established less aggressive acquisition targets and focused more intently on ensuring appraisal estimates reflect the actual costs the vehicle will incur as it gets reconditioned in the service department. “It’s not 100 percent perfect but we’re missing fewer of the major issues that really burn you.”

Mike Boyd, who directs business development for vAuto’s iRecon solution, says the situation at the Toyota store isn’t uncommon. Across the industry, Boyd says that when reconditioning estimates are off, they’re off by an average of $300 to $500—a sizable chunk of retail gross that effectively disappears when the vehicle gets the reconditioning it needs.

Part of the problem, Boyd says, comes from appraisers using standard reconditioning estimates when they appraise every car. The estimates may have been established years ago and they no longer reflect the reality of today’s reconditioning costs, much less the work that really needs to be done on a specific car.

Therein lies an opportunity. As dealers move away from a one-size-fits-all strategy for pricing vehicles in today’s more variable market, they’ll need to depart from one-size-fits-all reconditioning estimates in appraisals. Now more than ever, success in used vehicles depends on having the right data to make the right decisions with every car.

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ProfitTime GPS in Practice: How and Why “Cost” Doesn’t Drive Pricing Recommendations

Dale Pollak — Fri, 03 Mar 2023 16:04:14 +0000

I’ve had a version of the following conversation with dealers in recent weeks. The conversation typically arrives after I’ve shared why dealers should be treating their distressed (or “Bronze”) vehicles differently and getting out of them faster. It goes like this:

Dealer: “Wait a minute. You’re telling me that I need to lower the price on my Bronze vehicles because I own them for too much money?”

Me: “That’s exactly right. You’ve had the cars for too long. You’re in them for too much. They’re depreciating. You need to move them.”

Dealer: “But you’ve been telling me to ignore my cost and Cost to Market when I price used cars for years!”

Me: “That’s true. But what makes you think that your Cost to Market on these Bronze vehicles means you need to price them cheap?”

Dealer: “That’s what you just told me. The cars are Bronze because of my Cost to Market, right? And isn’t that what you do with Bronze vehicles…you price them cheap?”

Me: “Ahhhh. I see. I’m sorry. Let’s step back so I can help you understand how ProfitTime GPS uses Cost to Market and why it doesn’t drive the system’s price recommendations.”

The frequency of this conversation suggests a need to address a growing false assumption, misconception or over-simplification about the way data science works in ProfitTime GPS, and how a vehicle’s Cost to Market influences its investment value but matters far less, if at all, when it comes to the system’s individualized, car-by-car pricing recommendations.

How Cost to Market Influences Investment Value

In ProfitTime GPS, a vehicle’s Cost to Market serves as one of three primary data points that the system distills, weigh and uses to determine a vehicle’s Platinum, Gold, Silver or Bronze investment value. The other data points are the vehicle’s like-mine Market Days Supply and its retail sales volume. The individual weight the system gives to each of these variables, as well as other market factors, differs by car. The end result is an individualized, unique investment value for every vehicle, attuned to the circumstances of each car.

As such, each vehicle’s Platinum, Gold, Silver or Bronze investment value serves as a signal of the opportunity and/or risk each vehicle offers as a retail unit. The investment value indicates how you should treat the vehicle to minimize its risk or optimize its opportunity. The investment value gives you a way to see, across your inventory, from the moment you acquire a vehicle, whether a vehicle should move fast, move slow, or land somewhere in between. In other words, the investment value signals the “turn policy” you should establish for each car, and it helps you establish broader turn policy targets for each investment class (Example: Platinum (50 days), Gold (40 days), Silver (30 days) and Bronze (20 days.)

But it should be understood that the Platinum, Gold, Silver and Bronze designations, in and of themselves, have little direct bearing on the actual retail prices ProfitTime GPS recommends for individual vehicles. The investment value designations, and associated metrics like Cost to Market, are connected to price recommendations but they do not directly influence them in the way dealers think they do.

Instead, the recommendations come from a different set of data, and data science, that’s built into ProfitTime GPS’ pricing recommendation algorithm. Let’s have a look.

Factors Behind ProfitTime GPS Price Recommendations

Prior to the launch of ProfitTime GPS, data scientists at Cox Automotive and vAuto spent significant time trying to understand all of the factors that indicate a vehicle’s probability of selling within seven days, at any price. This work led to an algorithm that blends and measures all of the factors for each individual vehicle.

Broadly speaking, the factors that drive the ProfitTime GPS price recommendations are drawn from three buckets—everything the system knows about the car, everything it knows about the market for the car and everything it knows about a dealer’s past experience selling the car. With this information, the algorithm distills and weighs the factors most relevant for an individual car and produces a price recommendation.

As a result, the system doesn’t recommend that dealers price every Bronze car to be the cheapest, or lowest in the competitive set, to sell fast. Rather, each Bronze car’s price recommendations reflect the optimal market position for the vehicle and its unique circumstances. Hence, some price recommendations for Bronze cars are higher than others; the degree of difference depends on the car, the market and how the dealer’s likely to sell it, based on past experience.

The same is true for Platinum cars—the ProfitTime GPS price recommendations don’t put every Platinum car at the top of a competitive set. Some Platinum cars need to be priced more competitively because of their unique circumstances.

Is it fair to say Cost to Market has absolutely no bearing on ProfitTime GPS price recommendations? No. That’s because a vehicle’s Cost to Market percentage influences its investment potential, and the price recommendations in ProfitTime GPS have been built to help dealers execute a Variable Management strategy that moves vehicles in accord with their individual investment values, accounting for the opportunity and risk each vehicle represents.

In the end, it is fair to say this: While there’s a relationship between a vehicle’s Cost to Market percentage and the price recommendations ProfitTime GPS provides, it isn’t a direct connection.

The post ProfitTime GPS in Practice: How and Why “Cost” Doesn’t Drive Pricing Recommendations appeared first on Dale Pollak.

A Head-Scratcher Market and an Imminent Moment of Truth

Dale Pollak — Mon, 27 Feb 2023 16:35:36 +0000

I’ve been in multiple conversations with economists and data scientists at Cox Automotive, as well as members of the Chicago Federal Reserve Bank, that have focused on the apparent and surprising strength of used vehicle sales so far in 2023.

Most analysts expected used vehicle sales in early 2023 would be softer than they’ve been. Cox Automotive reported that used vehicle sales were up 5 percent in January 2023 compared to January 2022. It appears February sales may not reach last year’s levels, but they remain robust.

The data’s a bit of a head-scratcher because analysts and others thought affordability would be a bigger roadblock for used vehicle buyers. Several interest rate increases in 2022, along with another one earlier this month, have resulted in higher average monthly payments for three-year-old vehicles (up $123/month from a year ago) along with higher down payments (up $500 from a year ago).

A prominent theory or explanation for the recent strength in used vehicle sales is that we’re seeing an early start to the spring tax season bounce. Indeed, the Internal Revenue Service has processed significantly more refunds so far this year compared to the same timeframe last year. Even though the average refund is smaller than in 2022, there’s consensus that consumers are spending tax refund-related money on used vehicles.

The strength of the market has contributed to another unexpected development: Many analysts thought used vehicle depreciation would continue in the early months of 2023. Instead, we’ve seen values appreciate by 2.5 percent since the beginning of the year. And while the rate of value appreciation appears to be tapering off, the recent rise is likely to spur some moderate, near-term appreciation in retail prices, which have declined about 3 percent since the beginning of the year.

What does all this mean for dealers? It seems to me that dealers with currently clean and lean inventories have an opportunity to acquire vehicles now and take advantage of what will likely be a short-lived run of retail price appreciation. I should stress, however, that if your inventory’s stocked today with more vehicles than your rolling 30-day total of retail sales, you probably should be focused on right-sizing your inventory rather than adding more cars.

But I’ll make a rare prediction: By the time mid-April or early May arrives, the current retail market party’s likely to cool off. I say this due to the three “Rs” that will manifest by then:

Rates: Observers expect that the Federal Reserve will raise interest rates at least once before mid-April, with additional increases in subsequent months. Some expect the next interest rate increase could be as high as .5 percent. Whatever the amount, we know interest rate increases tend to dampen retail demand as the already sizable costs required to finance a used vehicle purchase grow.

Refunds: If we’re seeing an earlier spring tax season sales bounce due to the IRS processing tax returns more quickly, we can be assured that by mid-April or early May, the bulk of refunds will have been issued and remaining refunds will decline. Put another way, the spike won’t be in front of us, it’ll be behind us.

Rebates: We’re already seeing a rise in new car incentives as inventory continues to build across the country. Most everyone expects factories to further expand rebate spending. As they do, the values of one-, two- and three-year-old vehicles will likely drop, creating additional margin pressure for dealers retailing late-model units.

The current market conditions are by no means cause for concern. They’re simply yet another sign that today’s used vehicle business remains marked by variability that comes and goes more frequently than it used to—a dynamic that creates opportunity for dealers who are properly positioned to grab it.

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A Strategy-Based Approach to Tame Appraisal Variability

Dale Pollak — Fri, 17 Feb 2023 21:02:27 +0000

As I’ve been helping dealers reckon with the vehicles they purchased at the top of the market and failed to retail in recent weeks, I’ve been reminded of what might be considered the “wild, wild West” in many dealerships.

I’m talking about the appraisal process, and the degree of variability that too often exists between appraisers, as well as a common disconnect between appraisers and the individuals who price used vehicles for retail sale. Let’s take a closer look at both.

Appraisal Variability

There’s an old axiom in the car business that if you asked five different people to appraise the same vehicle, you’d end up with five different answers. The variability owes to each appraiser’s individual capabilities and skills—some are better able to put good eyes/ears on a car than others. The variability also owes to how well appraisers are trained, and whether they’re all truly operating from the same playbook and process. The variability also owes to the time an individual appraiser might have to evaluate a vehicle; if you’re pressed for time, it’s easy to overlook small stuff that can diminish a vehicle’s value. Finally, there’s absolutely no question that appraisal variability also stems from the circumstances surrounding each car and the customer who’s looking to sell or trade it, and potentially buy another vehicle.

In my work with dealers, I’ve also come to understand that appraiser variability also results from a lack of clear guidelines for appraisers, and sufficient oversight on the part of dealers and managers. I see evidence of this in recent efforts dealers have launched to tame and tighten up their appraisal process. They are committing themselves to do a better job of tracking individual appraiser performance, and coaching them to achieve better outcomes.

But the tracking itself is also a bit problematic. While dealers may set standard Cost to Market or Look to Book targets for appraisers, and use these metrics to gauge individual performance, the metrics themselves only go so far, particularly in today’s environment where dealers are appraising and sourcing vehicles from a wider variety of channels. If you’ve established a goal that appraisers should average a 50-55 percent Look to Book and 85 percent Cost to Market is that truly applicable and relevant to every car in every channel and every circumstance? Does this method help you account for, and potentially correct, variability or does it invite more of the same?

The Appraising and Pricing Disconnect

Another appraisal-related area that some dealers are looking to address occurs between appraisers who establish what the dealership should pay for a vehicle and the individuals who price vehicles once they’re acquired.

This disconnect isn’t new, but it’s becoming more problematic as market conditions put pressure on dealers to acquire cars with a clear and shared understanding of the vehicle’s retail potential, from the moment of establishing the vehicle’s appraised value to the initial retail asking price for the vehicle and beyond.

In an ideal world, appraisers would use a retail-back approach after they’ve assessed a vehicle’s condition to determine how much they should pay for the car. Unfortunately, the current state of this process leaves room for subjectivity on the part of the appraiser, which drives the disconnect between appraisers and those who price cars.

For example, it’s common for appraisers to use a Price to Market percentage or a vRank in vAuto to determine the vehicle’s retail price. The problem arrives when an appraiser adjusts the Price to Market percentage or vRank to fit the circumstances of the car, the customer or, in some cases, their paycheck. An appraiser might have a need to put more into a vehicle than the initial Price to Market percentage or vRank appears to allow. To meet this need, it’s not uncommon for appraisers to adjust the Price to Market or vRank higher, to give the appearance that their appraised value offers sufficient gross profit margin.

Unfortunately, the appraiser’s justification and reasoning often doesn’t extend to the individual pricing the vehicle. If the appraiser used a Price to Market percentage of 101 percent, or a vRank of 20, to bring in a car, the person pricing the car might determine its retail price should match a Price to Market percentage of 97 percent, or a vRank of 7.

When this scenario happens, a dealer suddenly has a vehicle that, for all intents and purposes, they paid too much to acquire and they’re now destined to realize a less-than-optimal gross profit or retail outcome on the car.

A New Approach to Tame and Tighten Your Appraisal Process

The good news for dealers who are looking to achieve more consistency and fewer disconnects between appraising and pricing is that there is a better way of doing it.

The better way starts by anchoring everyone around a “North Star” or a strategic target by which appraisers can examine every vehicle, know the right retail price range for each car to determine a retail-back appraisal value and capture the rationale and reasons the appraiser used to bring in a car above or below the strategic target.

This approach is embedded in the Global Acquisition system inside ProfitTime GPS. The system gives dealers the ability to set an investment value target for acquisitions, as well as the ability to measure, over time and many appraisals, how often and how close appraisers bring in cars to the dealer’s established acquisition/appraisal target.

Investment Value Targets—A North Star for Every Car

ProfitTime GPS’ Global Acquisition system enables dealers to establish a strategic, investment value-based target, or North Star, to guide appraisers as they evaluate vehicles. The targets are drawn from the 1 to 12 investment scores ProfitTime GPS assigns to vehicles based on data science that distills a host of factors, including the vehicle’s like-mine Market Days Supply, its Cost to Market and retail sales volume. Vehicles with lower investment scores represent units with higher risk and less profit opportunity, while higher investment scores denote vehicles with less risk and more profit opportunity.

Dealers can choose a target from the 1-12 scale that best fits the profit and volume objectives for their dealerships.

For example, a dealer who’s hungry for used vehicle inventory, or needs to capture more trade-ins to help move new vehicle inventory, might pick a more aggressive investment value target, between 3 and 5, that enables them to put more into each vehicle for the sake of driving the larger objectives. Conversely, a dealer who’s most concerned about gross profit, might pick an investment value target of 8-10 to bring in vehicles with the gross profit potential the dealer prefers.

When dealers establish a target and appraisers begin an appraisal in ProfitTime GPS, they immediately see the recommended retail price range that’s optimized for the dealer’s target. The range gives them an objective, strategy-aligned starting point to perform a retail-back appraisal. With the range in hand, appraisers can subtract expected costs (reconditioning costs appraisers calculate based on their condition assessment, transportation if the car’s purchased from an auction or other off-site location, and any other expenses dealers charge to the car).

The range doesn’t restrict appraisers from doing what needs to be done to make a deal or doing what’s right for the car. For example, if a customer’s asking for an additional $500 for a vehicle, the appraiser would know the additional money means they’d need to bring in the vehicle at an investment score that’s below the dealer’s target. If it makes sense for the appraiser to step up, they can, and the Global Acquisition system would mark the appraisal as “below” the strategic target, while offering appraisers the ability to note the reasons they determined it was best to bring in the car at a lower investment score.

Similarly, if the appraiser’s assessment of the vehicle uncovers reconditioning costs that are exceptionally high, the appraiser might decide it’s best to pay less for the vehicle, which would result in the vehicle’s appraised value arriving “above” the dealer’s objective.

A Better Way to Manage Appraisers and Variability

The beauty of establishing and following such strategic investment targets or North Stars for every car is that, for the first time, every appraiser has an objective starting point to assess and value each vehicle and determine an acquisition price or value that’s anchored to the dealership’s objective. This approach reduces, if not eliminates, the risk that appraisers’ retail price guesstimates and justifications for their appraised values do not make sound financial sense for the dealership.

Better still, the North Star provides an objective baseline for dealers to measure individual appraiser performance that’s far more relevant for the dealership’s overall strategy and the circumstances of the vehicle itself. Over the course of time and many appraisals, you can see how often individual appraisers bring in cars at, above or below the dealership’s strategy, and you can know the reasons why behind their decisions.

Further, this ongoing analysis tends to produce key learnings. For example, if you find that few, if any, appraisals come in “on” strategy, you know you either have a coaching opportunity or a sign that your North Star objective isn’t quite right for current market conditions, or perhaps both. This strategy-based performance review yields even richer management insights when dealers layer in Look to Book, Cost to Market, volume and other metrics related to individual sourcing channels.

I’m encouraged by the early evidence from dealers that this investment value-based, strategy-minded North Star appraisal process is helping them assess, value, acquire and price vehicles with a greater level of objective-tied consistency, and a greater understanding of the reasons why appraisers are making their decisions.

I’ve also been struck by operational inefficiencies the North Star appraisal process is bringing to light—first and foremost being the inaccuracy of reconditioning costs appraisers assign to vehicles based on their condition assessments. No one benefits when a vehicle that appears to have been appraised and acquired “on” strategy takes a sudden, southerly turn because the appraiser missed blemishes you now need to fix. I’ll take up this topic in a future post.

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ProfitTime GPS in Practice: Who’s Your Used Car Captain?

Dale Pollak — Wed, 08 Feb 2023 17:18:29 +0000

It’s fair to say that there’s often a gap between the way a used vehicle manager manages a used vehicle department and the way a dealer believes the department is being managed.

The gap often owes to the reality that dealers, despite their best efforts, often can’t pay extremely close attention to the manager’s day-to-day decision-making. Dealers also haven’t had the right tools to properly measure how right or well a used vehicle manager is steering the used vehicle department. As a result, dealers often can’t tell if a manager’s steering the department on or off their preferred strategic course.

This gap provided the inspiration for the Pricing Alignment tool inside the ProfitTime GPS solution. We envisioned it to be the equivalent of the navigational tools that airplane pilots or ship captains use to know if they’re staying on their charted course or veering away from it.

With the Pricing Alignment Tool, dealers can see their inventories segmented by the solution’s Platinum, Gold, Silver and Bronze investment categories. The tool also shows the vehicles in each category and whether a manager prices them above or below the strategic price range recommendations ProfitTime GPS provides. Note: The system’s pricing recommendations are calibrated to ensure that each vehicle, in each investment class, is priced appropriately to optimize the vehicle’s unique ROI and profit potential.

I’ve been using the Pricing Alignment Tool in my conversations with dealers on an almost-daily basis since it debuted a year ago. I’ve seen first-hand how an individual manager’s beliefs and biases can influence their day-to-day decision-making and, in many cases, cause them to steer the used vehicle department away from the dealer’s preferred strategic course.

I’m now asking dealers: “Who’s your used vehicle captain and how well are they steering your ship?” Of course, I turn to the Pricing Alignment Tool for answers. Here’s a quick look at the four categories of used car captains I typically find:

Captain 1: A Gross-Getter

The graphic on the right offers a representative view of the first type of used vehicle captain—an individual for whom maximum gross profit matters most, often above all else. You can easily see the evidence of the manager’s emphasis on gross profit. Across every ProfitTime GPS investment category, the manager’s priced vehicles above the solution’s pricing recommendations. The manager’s overall 51 percent pricing alignment suggests he/she/they agree with the recommendations at least some of the time. In the end, though, the desire to maximize gross profit serves as the manager’s effective default pricing decision.

The upshot: The manager’s dealer may be perfectly satisfied with the gross-minded decision-making. I would submit, however, that the manager’s emphasis on gross profit likely costs the dealer some sales volume and, potentially, less gross overall as the vehicles wait to find buyers willing to pay the gross the manager believes they should.

Captain 2: A Volume Gunner

You can see this manager’s gunning for sales volume by the sheer number of vehicles priced below ProfitTime GPS recommendations. It’s also true that this manager apparently has less interest or trust in the recommendations themselves, as evidenced by an overall alignment of 43 percent.

The manager’s volume-oriented pricing priority may be perfectly acceptable to the dealer, especially if it’s someone who believes you make more when you sell more.

But I would submit that a volume-focused pricing strategy ultimately means that the dealership is losing out on gross profit opportunities, especially with the Platinum and Gold vehicles that, thanks to the data science behind ProfitTime GPS’ pricing recommendations, we now know have the appeal and capability of delivering the highest ROI and gross profit potential.

Captain 3: A Great Pretender

This type of used vehicle manager is, by far, the most common that I see when I work with dealers to drive better outcomes for their used vehicle departments. In the graphic at right, you can see the manager is pricing their best used vehicle investments, the Platinum and Gold cars, below ProfitTime GPS pricing recommendations. Meanwhile, the manager is pricing the store’s worst used vehicle investments, the Silver and Bronze vehicles, above the pricing recommendations.

To me, this pricing profile is potentially the most troubling. It suggests that the manager doesn’t want to face the music on the worst cars, and is cheap-selling the dealer’s best used vehicle investments to drive volume. Ultimately, this manager’s a Great Pretender—pretending that the gross on Platinum and Gold vehicles isn’t available, and pretending that they’ll get all the gross on Silver and Bronze cars, which likely wasn’t available on Day 1.

Captain 4: An On-Course Operator

I love it when I see a used vehicle manager with the type of pricing profile you see on the right. Note the overall 85 percent alignment. The manager has a fair amount of faith and trust in the ProfitTime GPS pricing recommendations but isn’t accepting them all the time. Why? Because the manager understands that, no matter how good the data science, there are times when a manager’s discretion or specific knowledge about a vehicle can suggest a better opportunity. Across the investment categories, you can see a mix of vehicles priced above and below recommendations.

When I see this profile, I give dealers, and the manager, solid props. I view the data in the Pricing Alignment Tool as strong evidence that, on a car-by-car basis, the manager is trying to do the right thing, and achieve the optimal outcome for the dealer’s investment. In other words, the managers are steering the ship on course, as they should. I would also note that managers with this type of pricing profile also tend to have higher gross profit and sales volume averages than managers with less-balanced approaches to the way they manage used vehicle investments.

In today’s market environment, where there are plenty of cross-currents including fluctuating retail demand, wholesale values and affordability, I think it’s useful for every dealer to ask the question: Who’s my used vehicle captain and how are they steering my used vehicle department?

If my experience is any indication, dealers will be surprised when they see the answer for the first time.

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A Universal Used Vehicle Problem—Inverted, Irrational Pricing

Dale Pollak — Fri, 03 Feb 2023 21:34:25 +0000

Heading into NADA, I wondered how dealers would respond when they saw their used vehicle pricing presented to them through the investment-based lens that ProfitTime GPS provides.

My curiosity came from the fact that I knew every dealer who saw their pricing in ProfitTime GPS’ pricing profile would see exactly the same thing—an irrational inversion of used vehicle pricing that is causing them to sell fewer used vehicles, and make less money, than they should be achieving.

The response was as I expected. When faced with a true picture of their used vehicle pricing, and how it relates to each vehicle’s investment value, dealers had a wake-up moment. Most, if not all, were unaware the inversion existed. Many believed they were pricing their used vehicles in a more rational, investment-minded way.

Unfortunately, the used vehicle pricing irrationality is nothing new. Neither is its universal nature. I’ve been telling dealers across the country about the irrational pricing problem for more than two years, a time when my message got lost as dealer-positive market conditions masked the damage it causes.

But that’s not the case today, and the experience at NADA affirms my belief that every dealer in the country who hasn’t invested the effort and time to eliminate the irrationality in their used vehicle pricing suffers from it today, whether they know it or not. That includes most, if not all, of you reading this post.

A Closer Look at the Irrationality

The irrationality surfaces when dealers view your inventory through ProfitTime GPS’ used vehicle pricing profile. The profile shows a dealer’s used vehicles categorized by the investment values (Platinum, Gold, Silver and Bronze) the system identifies for each vehicle. The profile also shows the average Cost to Market and Price to Market percentages, along with the average age of vehicles and share of inventory, for each investment value bucket.

The chart at right reveals a representative example of what every dealer sees when their inventory appears for the first time in ProfitTime GPS. The chart shows two disturbing take-aways:

Take-Away 1: As dealers, you are most proud of their worst used vehicle investments. You can see this reality by looking at the Bronze vehicles on the chart. Note: ProfitTime GPS classifies vehicles as “Bronze” because they typically have the highest Cost to Market and like-mine Market Days Supply and the least retail sales volume. The ProfitTime GPS system measures and weighs these variables for each vehicle, deriving an investment value designation.

On the chart, you can see that Bronze vehicles make up the largest share of inventory, and the vehicles have the highest average Cost to Market (100.4 percent), Price to Market (101 percent) and days in inventory (81 days) compared to vehicles in other investment segments. The upshot: You are pricing your Bronze vehicles above the current market, and they aren’t selling as quickly as they should, given their high risk/low return investment profile.

Take-Away 2: As dealers, you are cheap-selling your best used vehicle investments. Look at the Platinum vehicles, or the units ProfitTime GPS identifies as the ones with the highest ROI and profit potential. You can see the Platinum vehicles have the lowest Cost to Market (81.4 percent), Price to Market (96.4 percent) and days in inventory (35) than all the other vehicles. The upshot: You are leaving money on the table by selling your best investments for too little money too quickly.

Reasons for the Irrationality

You may be thinking: That’s not how my inventory looks. We heard the same sentiment at NADA. And, to be sure, some dealers didn’t like hearing this news. In fact, they questioned the profile’s accuracy, and ProfitTime GPS’ ability to know each vehicle’s inherent investment value.

Such concerns typically fade when you take a closer look at specific vehicles in the Bronze and Platinum buckets.

With the Bronze units, you’ll likely remember the reasons the vehicles were investment-distressed. You either paid too much money to acquire them, or the market changed, and cars you might have purchased right, and then priced too high, became problematic. With the Platinum units, you’ll have cars that you don’t feel comfortable pricing higher because they won’t get VDPs, or you’re worried that if they don’t sell fast, you’ll miss your volume goals for the used vehicle department.

But it’s not hard to understand the whys behind the used vehicle pricing inversion and irrationality. With the Bronze cars, you don’t want to take the hit on a vehicle that you probably knew, at least on some level, wouldn’t produce the gross profit you expected or wanted to see when you acquired it. Hence, the vehicle’s priced high to give it a shot to make gross. With the Platinum vehicles, your pricing reflects two things—the need to drive overall volume due to Bronze vehicles that aren’t selling, and the desire among your sales team to sell and turn vehicles that offer them the best money-making opportunities.

My question to every dealer who hasn’t yet addressed their own used vehicle pricing irrationality is this: Are you OK with what you see here?

I haven’t yet met a dealer who’s OK with the used vehicle pricing irrationality once they become aware of it. I also haven’t met a dealer who, after they’ve univerted their pricing and begun pricing each vehicle in accord to its investment value, doesn’t appreciate the superior outcomes of higher volume and average gross profit this more rational approach produces.

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NADA Day 3: Factory Moves, A Stocking Problem and a Fond Farewell

Dale Pollak — Tue, 31 Jan 2023 14:15:58 +0000

Several themes emerged in conversations with dealers at NADA that suggest future strain on their factory partner relationships.

Beyond the OEM efforts to push dealers to invest in electric vehicle (EV) charging infrastructure, dealers have their eyes on how factories might compensate them for subscription-related sales of in-vehicle features and systems. An Automotive News piece published during NADA notes how General Motors intends to share future subscription revenue with dealers.

There’s also ongoing debate, and related legislative efforts, around the potential cost of subscription services for vehicle buyers, and the role factories and dealers can/should play in the subscription service model itself. Some view the concept as another step toward direct, factory-to-consumer vehicle sales and another risk for existing franchise laws that, at least for now, give dealers seats at the table. “That’s the thin line that keeps us in the picture,” a Southwest GM dealer shared.

It’s all worth watching close, and it signals another evolution in the multiple ways dealers may make money on the vehicles they sell long after delivery.

Speaking of factories, I was among those who wondered whether any OEMs would follow Tesla’s lead and reduce the MSRP on any of their vehicles—a recent decision that hurt dealers with used Teslas in their inventories. Two analysts shared that they expect at least some MSRP adjustments from OEMs, and perhaps more as vehicle affordability issues continue to crimp retail demand.

Other take-aways from the floor:

Stocking Right. There’s an age-old axiom in used vehicles that you can’t sell cars you don’t have in stock. I spoke with several dealers who use this rule of thumb to justify stocking more vehicles than their rolling 30-day total of retail sales. The dealers add that, in the current supply-constrained environment, they’re better off acquiring vehicles they can now, even if it means they’re over-stocked, because it won’t get any easier to acquire them down the line, when buyers are ready to purchase. I understand the perspective, but it strikes me as risky speculation, especially when all signs suggest higher-than-normal depreciation of used vehicles in the weeks ahead.

Pricing Frequency: I noticed a striking difference in the amount of time and attention dealers apply to pricing the used vehicles they currently have in stock. For example, several dealers who now use the pricing recommendations in ProfitTime GPS, shared that used vehicle pricing is now a daily discipline. They’re using the solution’s Pricing Alignment tool to address vehicle prices that, due to changing market conditions, have fallen out of alignment. Meanwhile, other dealers noted that they also look at used vehicle pricing on a daily basis, but only for units that show up in a “No Price Change in 7 Days” alert. It seems to me that, in today’s more variable market conditions, dealers should at least be examining the price of every vehicle on a daily basis to ensure its competitive position matches where you think it should be.

It’s been an incredible three days with dealers at NADA. Thank you to everyone who stopped by to say “hello,” attended my workshops, joined me for dinner and took time to check out the new innovations from vAuto and Cox Automotive. It warms my heart to feel all the love and mutual respect.

A fond farewell to Dallas, and safe travels home to all!

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NADA Day 2: EVs, F&I Pressure, Stability and an Opportunity

Dale Pollak — Mon, 30 Jan 2023 16:29:58 +0000

Not so long ago, some observers questioned whether dealers would want to sell and support the rise of electric vehicles (EVs) given their long-standing history and investment in selling and servicing vehicles with internal combustion engines (ICEs).

I’m not sure why anyone thought this could be the case. From conversations with several dealers at NADA today, it’s apparent to me that dealers want to play an active role in putting, and keeping, EVs on the road. The big question, of course, is the nature of the role dealers will play in EV sales, and the requirements OEMs are putting on dealers’ shoulders to support EV sales and service.

A CFO from a large Southeast dealer group told me that he came to NADA with a two-pronged mission—try to figure out the smartest next step to support the group’s OEM partners as they supply a larger share of EVs, and the investments the group should make to meet the needs of vehicle buyers who want to complete at least a portion of their new/used vehicle purchases online. “Those are the two big things that are going to reshape our business,” he says.

The CFO shared another item of interest—how to spiff up service waiting areas when a growing number of customers “aren’t interested in watching TV or reading magazines.”

Here are a few other nuggets from the exhibit floor:

F&I Income: Dealers have been seeing a rise in all-cash deals over the course of the past year or more. It’s a trend analysts expect to continue due to high interest rates. Some dealers estimated all-cash deals accounted for 15 percent to 20 percent of their retail vehicle sales. The trend effectively eliminates the opportunity to book finance interest/reserve income and sell gap insurance and other products. It also makes every F&I office visit, and presentation, more important.

Vendor Stability: NADA marks the time when many dealers revisit their dealer management system (DMS) providers. I spoke with several dealers who aren’t happy with their current DMS partners. “We didn’t get what we signed up for,” the operations VP for a Florida-based group shared. The problem: The group’s current provider merged with another company, causing disruption. I asked a Southwest dealer in a similar situation if he’d consider one of the newer players in the DMS space. “No,” he told me. “We don’t want to be the pioneer who takes all the arrows. We need stability.”

Vehicle Quality Advantage: I spoke with a dealer who attended an NADA workshop that featured an analysis of online reviews for CarMax, Carvana and Vroom. The dealer said the analysis affirmed something we all know—that consumers really like a digitally enabled purchase process when it’s easy and smooth. But the analysis also apparently revealed that dealers do a better job of managing/responding to online reviews than the other companies, and dealers tend to see comparatively fewer complaints about vehicle quality, thanks to their focus on used vehicle reconditioning. “That’s an opportunity,” the dealer shared. “We don’t really tell our customers about how we recondition our cars and why.”

That’s a wrap from Day 2 at NADA here in Dallas. It’s time to get some rest and get ready for Day 3.

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NADA Day 1: A Busy, Optimistic, Discipline-Minded Day with Dealers

Dale Pollak — Sat, 28 Jan 2023 14:35:43 +0000

I’ll be taking home a new term that I learned in the first of my two workshops here at NADA—“learning journey.”

It came from a dealer during the workshop Q&A as the dealer asked for guidance on how he might lead his team on their learning journey to adopt our new strategy for managing used vehicle inventories, Variable Management. I like the term for two reasons.

First, it acknowledges that, just like the early days of Velocity, there’s a learning curve with Variable Management. Its strategic principles call into question what have long been regarded as best practices for used vehicle management, such as giving every fresh car “a chance to make gross” or applying the same age policy to every car. Second, the term touches the reality of today’s more variable market, where change is constant and finding success is, in fact, a journey. It’s a journey that will offer plenty of valuable lessons for those willing to learn them, which is what life, and good business, is all about.

On the show floor, it was an exceptionally busy first day. I sensed that dealers were perhaps a bit more eager and hungry to gain new perspective, and investigate new solutions, than they were at last year’s NADA convention in Las Vegas. I suspect the keen interest reflects concerns about where the market’s headed in 2023, and the way the final quarter of 2022 played out, particularly for dealers who had too much inventory as used vehicle depreciation gained steam.

“We got kicked in the teeth,” the operations director for a seven-store group in the Southeast told me.

I heard a fair amount of optimism from dealers, too, including the General Manager of a Honda dealership in California: “New car inventory is coming back. Our profitability is still strong. Our used inventory’s clean and lean. I’m optimistic. Besides, if you’re all gloom and doom, isn’t that what you get?”

Here are a few other nuggets from the NADA exhibit floor that seemed worthy to share:

Discipline: Several dealers shared that they’re dusting off their inventory age policies, re-instituting the 45- or 60-day age limits they followed before the pandemic-influenced market conditions rendered inventory age largely irrelevant as used vehicle values appreciated. I shared that I respect each dealer’s rediscovered discipline, and noted that while I still believe there’s an age limit for used vehicles I no longer believe it’s the same for every car. I encouraged dealers to take a page from Variable Management, and advance a variable turn policy, wherein they should manage the days to sell for each vehicle based on its unique investment value.

Limits of software solutions: I asked a dealer who’d just purchased several new solutions for stores his group had recently acquired how the solutions might help his business. I liked his response, which showed a key understanding that software, in and of itself, can’t fix a problem. The dealer’s take: “The tools don’t fix the problem but they gives us the ability to fix a problem and manage smarter so the same problems don’t keep happening.”

Team development: I was especially encouraged by the number of dealers who told me they plan to send key members of their management teams, not just their family members, to NADA Academy to gain a deeper, more holistic understanding of the car business and dealership operations. As one dealer shared, “If I’d done this 20 years ago, I’d have the organizational bench strength I need today to continue to grow.”

That’s a wrap from Day 1 at NADA. My dogs are tired, and I’m excited to see what Day 2 will bring.

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Super-Excited to See Dealers in Dallas for NADA 2023

Dale Pollak — Wed, 25 Jan 2023 22:17:28 +0000

Like a saddle bronc in the chute, I’m chomping at the bit for this year’s NADA convention in Dallas.

As many of you know, I get excited as NADA approaches. It means I spend my days talking to dealers in person from different parts of the country, catching up, swapping stories and talking about where the car business is headed.

This year’s NADA convention is no different. In particular, I’m excited to go deep with dealers on Variable Management, and why I think the time has come for them to adopt this new way of managing used vehicles—from finding inventory to appraisals to retail sales—based on each unit’s investment value. Variable Management is the focus of my NADA workshops and Cox Automotive Powerup stage presentations. I suspect it’ll also be a key thread in my discussions with dealers at the vAuto booth (#3433) on the exhibit floor.

I’m also certain that dealer conversations will address the future, and how the market will move in the months ahead. Best I can tell, 2023 will be more challenging for dealers who haven’t, or won’t, adjust their operational priorities to match expectations for higher-than-normal rates of used vehicle depreciation and the risk that retail demand for new and used vehicle sales will languish.

I’ll be especially curious to hear how dealers are planning to meet these market conditions, and how Cox Automotive and vAuto can help them achieve their goals. Like every year, I’ll have my ears on, listening for nuggets of gold and pearls of wisdom that I can share with other dealers who may not have planned as proactively or thoughtfully for the road ahead. I’ll do my best to chronicle the top take-aways in daily NADA dispatches here.

Safe travels to Dallas for everyone heading there for the convention. I look forward to seeing you and doing everything I can to help you make this year’s NADA a productive, future-minded pivot point for you/your teams to achieve greater success.

See you in the Big D!

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Inventory Write-Downs: A New Year Rite That Isn’t Right

Dale Pollak — Wed, 18 Jan 2023 21:04:24 +0000

Every January, some dealers exercise their right to an annual rite—the financial write-down of used vehicle inventory they have in stock as the calendar moves from one year to the next.

This annual practice, which appears to be occurring in earnest this year, isn’t universal. For every dealer who writes down inventory, there are plenty who do not, because they don’t need to.

This distinction arrives as I’m seeing dealers write down six- and seven-figure sums as they aim to erase the “water” that’s built up in their inventories during the past year. The write-down practice leads to what’s known as the “13^th monthly financial statement” for some dealers.

I’ve always understood the practice of writing down inventory, but I’ve never agreed with it. My thinking flows from four realities that write-downs represent:

First, the write-downs are very similar to the crash diets, new gym memberships and other resolutions we all make as the new year arrives. Trouble is, history and past practice demonstrate that if you go on a crash diet, or suddenly resolve to go to the gym, there’s a good chance it’ll be a short-lived effort. Why? Because such resolutions often lack the mental/personal discipline that’s necessary to turn watching what you eat or exercising more into your way of life, day in and day out.

Second, write-downs are wholly unnecessary. Dealers who have or will take write-downs this month typically followed a similar course—they stocked too many cars in a declining market, and they were left holding the bag at the end of the year. By contrast, other dealers applied more daily inventory management discipline. They consistently made sure their current inventory levels reflected their rolling 30-day total of retail sales. They exerted more investment-minded discipline in pricing. If they had a vehicle that showed signs of investment distress or trouble on Day 1, they priced the vehicle to move quickly. They weren’t holding out, hoping the vehicle would find a buyer willing to pay what they’re asking. Meanwhile, if they had a vehicle with high investment potential and value, they’d price the car to give it time to earn the gross profit it deserved.

Third, write-downs typically excuse the lack of inventory management discipline that spurred their need in the first place. Consider the “13^th monthly financial statement” dealers create when they write down inventory to start a year. By design, the statement restates the prior year’s performance, often for the worse. The effect: Monthly results in the past year are now overstated, meaning dealers paid commissions and gave other rewards based on performance that wasn’t as good as they thought.

Finally, write-downs take some of the bloom off a new year. They amount to adjusting to, and apologizing for, past sins. By contrast, dealers who do not need to write down their inventories can focus their new year energy, and related resolutions, on more positive, forward-looking initiatives to help them find greater success in the months ahead.

Looking back, it’s somewhat understandable why this year’s season of-write downs seems more sizable. 2022 marked a year of significant transition in the used vehicle market—ever-more variable conditions that are likely to remain (and evolve more) in the year ahead. Some dealers simply missed the boat, and the size of their write-downs reflects the degree of individual misses.

It’s my sincere hope that, by this time next year, fewer dealers will find themselves in a position where they need write-downs to make their inventories right, once again.

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An Ongoing Gross Deception That’s Growing—Moving Cars Between Stores

Dale Pollak — Fri, 13 Jan 2023 16:22:17 +0000

I’m seeing a correlation between the current and pre-pandemic market in the way dealers with multiple rooftops are managing their used vehicle inventories.

Back in 2019 and earlier, dealers with multiple stores would, to varying degrees of frequency, move retail units that weren’t selling at one store to a different store in their group. When I talked to dealers about this practice, I questioned what they were doing. I’d ask whether such moves made sense financially. After all, the vehicles they transferred often were distressed and aged units that hadn’t moved.

I’d explain that the vehicles didn’t sell at the first store because a manager either didn’t know where to price the vehicle to sell or refused to price it where it would sell. I’d also note that when vehicle moved to a different store, the manager was effectively off the hook for failing to turn the dealer’s investment.

Some dealers would take issue with my position. They’d note that, before a vehicle would get transferred, the manager would need to “write down” the vehicle, enabling the receiving store to acquire the vehicle for the right money. Hence, the manager wasn’t off the hook; the manager’s department took a hit.

But we all know how write-downs work. It’s an accounting move that effectively washes out the management failure that resulted in the vehicle not selling in the first place. On top of that, the manager could, if inclined, use other cars to make the effects of the write down effectively disappear.

It’s curious to me that I’m seeing this practice return in recent weeks. I can’t recall conversations about store-to-store transfers over the course of the past two years. Why? Because dealer-favorable conditions meant that if you had a vehicle to sell, it sold. We all understand how those conditions have shifted and the retail market’s more challenging, especially for dealers with too many vehicles in stock in relation to their rolling 30-day total of retail sales.

That’s what makes me concerned as I hear dealers today talk about moving more cars between stores. It doesn’t matter to me that dealers are still making relatively strong profits in their used vehicle departments. The financial fundamentals of moving vehicles you’ve reconditioned and tried to retail at one store to another store still don’t add up. If a vehicle gets 45 or 60 days to retail at one store, and then another 30 to 45 days at a second store, the dealer’s investment is tied up for upwards of 80 to 90 days without turning. How can this be acceptable?

The answer is, “it isn’t.” In fact, I’d put this practice among other gross deceptions I wrote about in my 2020 book, “Gross Deception: A Tale of Shifting Markets, Shrinking Margins and the New Truth of Used Vehicle Profitability.”

If it were my dealer group, I wouldn’t allow store-to-store transfers of vehicles if a manager at the store that landed the vehicle made the decision to recondition and retail it. Why? Because I believe the primary job of every used vehicle manager is to make money on every used vehicle investment, not just the ones that come easy. For sure, the manager might fall short on occasion. But I see no reason to give managers the equivalent of a hall pass if/when they fall short.

To be clear, I’m not opposed to dealers moving a vehicle from one store to another, provided such transfers occur at the time of acquisition, when market- and store-level performance data clearly indicate a better retail outcome at another store. When this occurs, the manager is doing right by the dealer’s money. He/she is figuring out the best location to achieve the most-optimal outcome for the dealer’s investment.

If the transfer decision comes later, after a manager has invested additional reconditioning dollars and tries to retail a vehicle, he/she should own the responsibility for the car and the less-optimal return of the dealer’s investment that occurred on their watch. If dealers don’t hold managers accountable to this standard, the gross deception will only continue.

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A New Reality in 2023: More Variability in the Used Vehicle Market

Dale Pollak — Fri, 16 Dec 2022 17:02:17 +0000

It’s fair to say that many dealers experienced and saw things in used vehicles during the past year that ran counter to traditional wisdom.

In the early part of 2022, we saw a continuation of the used vehicle value appreciation that turned 2021 into one of the most profitable years for dealers that many of us have ever seen. As summer turned to spring, used vehicle depreciation returned and the rate of depreciation picked up.

But the depreciation was different than it had been in the past. Dealers may well remember how the values of some cars seemed to almost fall off a cliff, while others appeared to hold their values.

Meanwhile, I was like many dealers—keeping a careful eye on how used vehicle depreciation would affect dealers’ retail asking prices. For much of the history of the car business, retail prices followed the wholesale market. When wholesale values go up, retail prices rise; when wholesale values diminish, retail prices soften.

But it took several months before we saw retail prices reflect their traditional symbiotic relationship with the wholesale market. It was striking how, through the summer and early fall, retail prices remained resilient. The dynamic shifted, though, as fall turned to winter. Today, dealers are now experiencing a more rapid rate of retail price softening, and some analysts suggest retail prices will decline even more rapidly in 2023.

What does this all mean? My take is that, thanks to all the disruption we’ve seen in the past two years due to COVID-19, a fall-off in new vehicle production, limited supply of used vehicles and the more-recent rise of inflationary forces, is that the used vehicle market itself has changed. In the past, one could talk about the used vehicle market as if it were unified. We used to see wholesale depreciation occur at almost consistent rates across all cars. Similarly, retail price dynamics tended to move in more or less the same fashion.

In my conversation with dealers, I’ve noted that we no longer have a singular, unified used vehicle “market,” per se. Instead, we’ve got a far more fragmented used vehicle market that’s effectively made up of multiple markets, wherein specific types of vehicles and segments, in specific parts of the country, move and stand on their own. In sum, today’s used vehicle “market” has a lot more variability than it ever did in the past.

I share this backdrop because it serves as a precursor to an even greater level of variability that I believe dealers will see in 2023.

Here’s my thinking: All the variability in the used vehicle market that’s occurred in the past two years has largely happened in the absence of new vehicles and factory incentives. Indeed, limited supplies of new vehicles helped spur the used vehicle variability. Retail demand for used vehicles has remained surprisingly strong due to the absence or inability of some consumers to purchase a new vehicle.

But as we close out 2022, we’re seeing higher supplies of new vehicles on dealer lots. A recent Cox Automotive report notes that the average days supply of new vehicles hit 53 days in November—71 percent higher than November 2021. To be sure, the current supply of new vehicles is nowhere near the pre-pandemic level of an 83-days supply at this time of year. Further, the days supply of new vehicles is entirely dependent on the brand. The Cox Automotive report notes that import brands like Toyota and Kia are running with less than 30 days supply. Meanwhile, domestic brands are in better shape overall. The report notes that Buick has more than a 120-day supply of new vehicles.

The ever-growing build-up of new vehicle inventory is occurring as retail demand for new vehicles faces affordability pressures. Analysts point to average listing prices of more than $46,800 and rising interest rates as two reasons would-be new vehicle buyers can’t purchase the cars they might want.

At the same time, we’re hearing some calls from dealers for their factory partners to bring back incentive spending that, in the years prior to the pandemic, helped propel the industry to record-setting levels of new vehicle sales volumes. So far, manufacturers haven’t really opened the purse strings on incentives, at least compared to historical incentive spending levels.

But I’m among those who believe it’s reasonable to expect OEMs, especially those currently blessed with higher days supplies of new vehicles, to resume incentive spending in 2023. They may not put as much money on vehicles as they did in the past, but multiple signs suggest that, as 2023 unfolds, automotive manufacturers will need to juice the retail market.

If/when incentive spending picks up, we can expect a ripple effect in the used vehicle market. As OEMs put incentives on 2023 models, the values of one-, two- and three-year-old vehicles will inevitably decline.

Such are the reasons I believe dealers should prepare for more variability in the used vehicle market in the year ahead. Not every OEM will need to put incentives on their vehicles, and you can bet any new incentives won’t arrive at the same time, or in the same amounts, across new vehicle brands.

Given this disparate, fragmented environment, it’ll be ever-more important for dealers to adopt the principles of Variable Management for used vehicles. You simply won’t see optimal results if you’re applying a singular strategy to managing your used vehicle inventories. In this more variable environment, it’ll be imperative that dealers understand each vehicle’s ROI and profit potential, and price their vehicles accordingly.

If you don’t, chances are good you’ll be leaving money on the table or taking deeper losses on vehicles you retail more often than you should.

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A Return of Margin Compression? Yes, But Not Necessarily

Dale Pollak — Fri, 09 Dec 2022 21:01:11 +0000

I’ve been struck by how often the term “margin compression” has come up in recent conversations with dealers.

Interestingly, dealers aren’t necessarily complaining about margin compression. It’s more accurate to say they’re starting to notice it in their used vehicle operations. Just this week, for example, two different dealers shared a surprisingly similar story: A few short months ago, their front-end gross profit average was about $3,200. Today, it’s about $2,800, and both expect it to continue to contract.

I suspect dealers aren’t complaining about margin compression because the market dynamics we’re seeing right now don’t necessarily correlate to the margin compression many dealers faced prior to the COVID-19 pandemic. Back then, dealers were selling record volumes of used vehicles, and making $14 in net profit per used vehicle retailed, according to NADA. Most dealers were happy if their front-end gross profit average landed between $1,300 and $1,500/vehicle.

The current moment might best be described as an essentially definitive end to the margin-rich environment dealers enjoyed the past two years. Retail prices are starting to come down from their historic highs, almost in line with current rates of used vehicle depreciation. Further, analysts expect the trends to continue, with some suggesting retail price and wholesale value declines might fall steeply compared to historic norms.

But I must also add that the effect of margin compression, and its material impact on used vehicle performance and profitability, isn’t like the margin compression dealers dealt with in previous years. I’d submit the current flavor has two important distinctions.

The first distinction is that market forces that drive margin compression no longer affect all used vehicles equally. Think back to this past summer, when depreciation resumed in earnest. While the overall rate of depreciation was high, some cars were hit harder than others. The differences owed to the supply/demand characteristics of different vehicle segments, model years and other factors. We still have supply/demand imbalances in the used vehicle market and where those imbalances occur, the effects of margin compression will vary.

The second distinction is that margin compression isn’t affecting every dealer equally. Based on my conversations with dealers and reviews of their used vehicle performance, dealers with a lot of older, now-distressed vehicles face a steeper degree of margin compression than dealers who have diligently right-sized their inventories to retail demand and remain focused on turning each vehicle in a time appropriate to its investment value. Some of the more market-efficient dealers report they haven’t seen much softening of their front-end gross profit averages at all—an advantage that speaks to the benefit of operating with the current market always in mind.

As I talk with dealers about margin compression, I’ll make another important point: If you attack the operational reasons your margins may be on the decline today, you’ll have less to complain or worry about if/when the pace of margin compression picks up.

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ProfitTime GPS in Practice: A Big Difference Between Two Dealer Groups

Dale Pollak — Wed, 07 Dec 2022 15:57:58 +0000

I’ve been talking to a lot of dealers lately about how they’re doing in used vehicles. Often, I’m in these conversations because a dealer’s become convinced that vAuto’s new inventory management solution, ProfitTime GPS, is causing a performance problem.

Naturally, the starting point of every conversation is ProfitTime GPS. I’ll call up a dealer’s inventory, and study what the metrics tell me about how a dealer and their team is managing used vehicles to achieve optimal ROI outcomes. Sometimes, I’ll show a dealer how their performance compares to peers who have similar franchises, market areas and rooftops.

The other day, this exercise led me to a telling tale of two very similar dealer groups:

Both groups have about 30 stores, with similar franchise mixes across a similar mix of metro and suburban markets.

They sell essentially the same number of used vehicles in a rolling 30-day period, across a similar mix of metro and suburban markets in different parts of the country.

The overall pricing of their used vehicles looks about the same—one group’s inventory has a Price to Market percentage of 97 percent, the other, 95 percent.

The overall Cost to Market percentages for each group’s inventory runs about the same, 87 percent and 84 percent.

From this high-level view, you could reasonably presume that both groups should be achieving roughly the same outcomes. After all, there’s an apparent parity across the inventory-level metrics, and they’re selling the same volumes of used vehicles.

But this view doesn’t inform how well either group is managing their used vehicle investments to achieve optimal ROI outcomes. And, with the help of ProfitTime GPS, we can see that there’s actually very little parity between the two groups in terms of their ability to maximize the money they could make in used vehicles:

Overall inventory investment. One group has roughly $80 million in used vehicle inventory, while the other has $46 million. The latter group’s overall stocking levels effectively match their rolling 30-day total of retail sales; the former group has almost 1,000 vehicles more than their rolling 30-day total of retail sales.

Total mark-up or profit potential (e.g., a measurement of the spread, in dollars, between the Cost to Market and Price to Market percentages of vehicles). The group with $80 million in inventory has an overall mark-up of $1.9 million, while the group with $46 million has $4.4 million in mark-up.

At this stage of the analysis, I had to ask myself: How is it possible that both groups are selling the same volume of vehicles with such dramatic differences in the number of cars they stock, and the profit potential their vehicles possess? I found the answer by examining the mix of pricing decisions each group makes on a day to day basis with their vehicles:

Pricing alignment. The group with $80 million in inventory aligns its prices to ProfitTime GPS recommendations about 56 percent of the time. The group tends to price Platinum cars (the vehicles ProfitTime GPS designates as the best investments) too low, and Bronze vehicles (the vehicles with the least investment value) too high. Meanwhile, the group with $46 million in inventory aligns its prices to recommendations about 75 percent of the time. Pricing exceptions go above and below recommendations, across ProfitTime GPS’ Platinum, Gold, Silver and Bronze investment categories.

Share of distressed inventory. About 45 percent of the inventory at the group with $80 million in inventory represents Bronze vehicles. The share of Bronze vehicles is 29 percent at the group with $46 million in inventory. It’s difficult to say if the former group’s share of Bronze vehicles represents a sourcing problem. But I can say this: Some of the vehicles likely turned Bronze over time and should have been priced differently from Day 1.

For me, the analysis offers three key lessons that are relevant for every dealer, particularly those who, like the group with $80 million in inventory, have too many cars in stock for current market conditions.

First, and perhaps most important, is the lesson that, if you’re like the group with $46 million in inventory, and you strive to properly price each vehicle to optimize its turn and ROI, you don’t need to stock more vehicles than your rolling 30-day total of retail sales. It’s quite striking to see two different groups selling the same number of cars, knowing one group does the job with half the inventory investment and twice as much profit potential. For me, the $80 million group’s additional investment not only represents a poor use of capital. It’s also an open invitation for inventory age and water.

Second, the group with $80 million in inventory would be better off if they took a page from their peer and priced more vehicles in alignment with ProfitTime GPS recommendations. The group’s out-size share of Bronze vehicles likely owes to consistently pricing the vehicles above the market, and the group’s volume likely comes from cheap-selling Platinum vehicles. This duality is common in the current market, and it’s leading to less-than-ideal and unnecessary outcomes.

The third lesson is that dealers who aren’t disciplined about maintaining a balance between their retail sales and stocking levels, and fail to mind each vehicle’s inherent investment value when pricing, will end up like the group with $80 million in inventory—selling a lot of vehicles but failing to make all the money they can and should.

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Emerging Pressure Points on Used Vehicle Profitability

Dale Pollak — Wed, 30 Nov 2022 18:37:54 +0000

As dealers are getting ready to close out 2022, some are seeing two trendlines in their used vehicle performance that give them pause.

The first trendline relates to front-end gross profit. Anecdotally, I’m hearing that average front-end grosses have largely been on the decline since the early part of the summer. That’s when depreciation returned to used vehicles and retail demand started to show signs of softening.

Overall, front-end grosses appear to be running north of $2,000 at many dealerships—a figure that’s several hundred dollars below the averages dealers achieved earlier in the year and through much of 2021. In its 2022 third-quarter earnings release, public dealer group Autonation reported its front-end gross profit in used vehicles at $1,870/car, down 11 percent from the same time in 2021. Compared to the average front-end gross profit dealers achieved in pre-pandemic years, the current front-end gross averages look pretty good, if not great.

The second trendline relates to the net profit dealers achieve in used vehicles. Just like the front-end gross average, the retail net profit per used vehicle retailed also appears to be on the wane. Here again, the average net profit isn’t terribly bad in comparison to earlier years. I remember when NADA reported the average retail net profit per used vehicle retailed was -$2/car at the end of 2017. At the end of 2021, this figure ran nearly $1,200. Today, I understand the average retail net profit per used vehicle retailed is less than $1,000, and trending lower.

When I ask dealers about the trends, the net profit piece tends to drive the discussions. After all, it’s the net profit that ultimately determines how much money you make when you’ve sold a used car.

Part of the pressure on used vehicle net profit comes directly from the economic environment in which dealers are operating. Inflation is pushing up the cost of pretty much everything—from the people on your teams to the various advertising, rent and other expenses dealers typically charge to their used vehicle departments.

With this backdrop, you could make the case that a decline in used vehicle net profit should be expected and, perhaps, may be unavoidable. I can agree with this assessment, but only up to a point.

Here’s why: For the past several months, I’ve been seeing, and writing about, the rising numbers of distressed cars in dealers’ used vehicle inventories. These are vehicles dealers paid top-dollar to acquire, priced to maximize gross profit and have yet to sell. In many cases, dealers have not been willing to face, or take, the losses associated with these vehicles when they retail. As dealers reckon with these cars, the used vehicle department’s front-end gross and net profit averages tend to suffer.

The problem is even more profound for dealers who floorplan their used vehicle inventories. Floorplan interest expense has nearly doubled in the past year—a rising cost that creates a double-whammy for dealers who aren’t retailing distressed vehicles as fast as they should.

In light of these circumstances, I’ve been emphasizing two operational disciplines in my discussions with dealers to help them set a solid course for the coming year.

The first is to right-size your inventory to your rolling 30-day total of retail sales. This discipline minimizes the drain on front-end gross and net profit that inevitably follows stocking too many vehicles for current market conditions. Across the country, the average days supply of used vehicles has been hovering close to 50 days for much of the year—a level that’s too high given retail demand trends in many markets.

The second discipline is to do the right thing with every car the minute you own it. Much of the rise of distressed inventory owes to dealers trying to make gross on cars that don’t deserve it. In turn, we find the same dealers cheap-selling their best cars to make up for volume lost to distressed units that aren’t selling.

The good news: Today’s technology and tools, like ProfitTime GPS, help dealers identify the turners and earners in their inventories, and everything in between. When you have this knowledge, and recommendations on how to optimally price every car, the negative net profit impacts of more difficult market conditions and rising expenses become less extreme.

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A Persistent, Two-Pronged Used Vehicle Pricing Problem

Dale Pollak — Fri, 04 Nov 2022 20:39:41 +0000

I’m seeing it day after day. At almost every dealership. It’s what can only be described as a problematic, two-pronged pricing problem.

I’ll dig into the problem in a moment.

But first, I must share that the seemingly almost-universal nature of the pricing problem affirms an understanding about car dealers I’ve carried for years. The understanding’s based on observations of my own behavior as a dealer, and what I see with other dealers.

Here it is: As a group, we do not respond well to times of market transition. We often don’t see the early signs of market transition and, when they become even more apparent, we don’t make any proactive moves. Rather, we tend to wait until the market transition’s fully underway, and then pay a price as we try to catch up.

That’s effectively the backdrop for the two-pronged pricing problem in the present market transition.

On the right, I have shared an example of the Pricing Alignment box from ProfitTime GPS. The box shows how much a dealer’s current retail prices align with the price range recommendations ProfitTime GPS offers. (Note: ProfitTime GPS recommendations use data science to help dealers optimize each vehicle’s ROI according to each unit’s unique investment value. Practically speaking, the system recommends urgency for a dealer’s most-troubled vehicles (the Bronze cars), and patience with the highest-value vehicles (the Platinum cars).

The Pricing Alignment box here mirrors the data I see almost every day at almost every dealership. Note the dealer’s overall alignment (highlighted)—46 percent. I read this percentage as a sign that there isn’t much collective faith in ProfitTime GPS’ recommendations. More than half the time, someone in the dealership believes they know best how to price their vehicles.

Now, let’s examine the most prominent prongs of the pricing problem.

Bronze Vehicles: You can see the dealer’s Bronze vehicles (red oval) represent almost half of the dealer’s total used vehicle inventory. Generally speaking, the share of Bronze vehicles has been on the rise for dealers because asking prices are too high, the vehicles aren’t selling and depreciation is eating away at whatever profit potential they may still hold—a topic I addressed in a previous post.

In this case, the vast majority of the dealer’s Bronze vehicles (32 vehicles) are priced above ProfitTime GPS recommendations. (The same is also true for the dealer’s Silver cars, which hold a slightly higher ROI potential than Bronze units.)

When I ask dealers about the pricing of their Bronze vehicles, and the apparent practice of pricing their worst investments most proudly, many don’t have an answer. Some may say they’re simply trying to get gross on cars that cost a lot to acquire. My take: Irrespective of how or why the vehicles became Bronze cars, we can all agree the current pricing alignment represents a problem—one that’s not likely to get better over time.

Platinum Vehicles: Like many if not most dealers, Platinum cars (blue oval) at this dealership represent a smaller share of the overall used inventory, about 14 percent. You can see the dealer’s priced all but one of their Platinum vehicles below the ProfitTime GPS recommendations.

Generally speaking, when I ask dealers why they price Platinum vehicles below system recommendations, the responses reflect a belief that, if they ask all the money for these vehicles as ProfitTime GPS recommends, they won’t get any Vehicle Details Page (VDP) views, or third-party sites might deem/designate the asking price as “too high” for shoppers.

Here’s the explanation the GM at a Detroit-area dealership recently offered: “People believe CarGurus. If they says it’s good deal, it’s a good deal. If they say it’s great deal, it’s a great deal. If it’s a fair deal, it’s a fair deal. But if they say my car’s over-priced, no one is going to click.”

The GM’s concern is understandable, but it also doesn’t hold water.

Across the country, I’m seeing dealers price Platinum vehicles up to the price points ProfitTime GPS recommends. Guess what? The cars don’t get as many VDPs as other units, and they still sell fast. How can this be? Well, the Platinum vehicles are blessed with low Market Days Supply, high retail volume and dealers own them really right. Sales associates are incentivized to sell them, because they recognize a good gross profit opportunities. Overall, Platinum cars require fewer online looks, because they’re in-demand cars that buyers will search to find and purchase when they do.

Now, let’s all step back from the dealer’s Pricing Alignment particulars, and ask ourselves, “What’s really going on here?”

It seems to me the answer rests with beliefs and behaviors dealers and used vehicle managers bring to their jobs every day. They know they have a large share of now-aged and -distressed inventory (the Bronze units) that isn’t selling. They also don’t want to face the music on these vehicles, which is why they’re consistently priced too high.

Meanwhile, because the dealer’s like everyone else and wants to sell as many vehicles as possible in any given month, they are cheap-selling their best inventory (the Platinum units) to turn these cars faster and make up volume lost due to the slow-selling Bronze vehicles.

My guidance to dealers is you don’t have to operate this way when you have the right technology and tools to distinguish the earners, turners and everything else in your inventory. You can now more consistently and easily make the most investment-optimal decisions with every car. Best of all, you’ll be more sure-footed with the cars you have in stock, and their prices, the next time the market turns.

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A Parallel Between Baseball and ProfitTime GPS

Dale Pollak — Wed, 02 Nov 2022 19:51:02 +0000

‘Tis the season to be thinking about baseball. Here in Texas, a lot of people are hoping the Houston Astros live up to their potential as 2022 World Series favorites.

During a recent postseason game, the announcers talkedabout how data science has changed the game. They mentioned a decision by Major League Baseball to ban teams from shifting players to defensive positions where, according to data science, an opposing hitter is most likely to put the ball.

At the time, the book inspired the data-gathering and metrics we built into vAuto’s Provision system. Today, I think it’s fair to say the development helped dealers change the way they manage used vehicles for the better. I still hear from dealers whose used vehicle performance and profits took off more than a decade ago, ushering in a new level of operational success they’ve now come to expect.

Of course, Lewis’ book also inspired baseball teams at all levels to bring more data into their decision-making. These days, batters study data on pitchers to understand what their next pitch might be and where it’ll be located. Same for the defensive shifts noted above.

Broadly speaking, the data science that drives baseball decision-making has come a long way in the past nearly two decades—a fact that almost directly parallels the advance of data science in used vehicle decision-making.

One of Lewis’ central premises is that, without the benefit of performance data, the beliefs and biases individual managers might bring with them to the dugout can produce inconsistent results. Because of how they think, and they’ve been trained to think, they also might miss opportunities that would be evident if they had the ability to see them.

The same is true in used vehicles. Now that we have deep data science built into ProfitTime GPS, and dealers can understand each vehicle’s probability of sale at any price and ROI potential on Day 1, they are finding new opportunities to improve used vehicle sales and gross that they didn’t see before.

A Southwest Honda store recently summed the dynamic this way: “ProfitTime GPS helped me find gross I didn’t know was there.” Meanwhile, a Midwest dealer recently shared, “We’ve always had turners and earners in our inventory, now I know which ones are which.”

To be sure, some purists decry the advent of data science in baseball. They still believe that a smart manager, playing hunches and instinct, can succeed. Here again, the same is true in used vehicles. I hear the same criticisms about data science from dealers—that it can’t be trusted and it’ll never replace the heart and soul of a smart used vehicle manager.

When this occurs, I reiterate a point I’ve been making for the entirety of my career with vAuto and Cox Automotive: The data and tools we’ve developed, and the performance that results from their application, are only as good as the individuals who ultimately make the decisions.

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ProfitTime GPS in Practice: A Closer Look at a Bronze Car Problem

Dale Pollak — Wed, 26 Oct 2022 13:49:38 +0000

Across the country, the share of distressed vehicles in dealer inventories is rising.

On the surface, a rise in the number of distressed vehicles in a single dealer’s inventory isn’t necessarily alarming. But since they dynamic seems to be happening for almost every dealer, it’s worth taking a closer look here to understand why dealers have more distressed cars today than they did just a few short months ago and what they should do about them.

A quick context-setter: vAuto’s ProfitTime GPS system readily identifies distressed inventory as Bronze vehicles, the ones that have the highest Market Days Supply, the highest Cost to Market and the least retail sales volume compared to other vehicles. ProfitTime GPS ranks all inventory based on its investment potential, using Platinum, Gold, Silver and Bronze designations. On this scale, Bronze vehicles offer the least ROI/profit potential.

It’s also important for everyone to understand that the share of Bronze vehicles in a dealer’s inventory depends on the dealer. If a dealer’s most focused on volume, then they may have a higher share of Bronze vehicles than dealers who put a high priority on gross profit. Why? Because the volume dealer’s might pay more to acquire a sufficient volume of vehicles to meet their sales targets, whereas the gross-minded dealer might be more selective about cars to acquire, and pickier about how much to pay, for the sake of maximizing gross profit. In this simplified scenario, the volume-minded dealer’s inventory may have a higher overall Cost to Market average and, as a result, a higher share of Bronze vehicles.

But this generalization doesn’t necessarily fit the circumstances I’m seeing on the ground right now in dealer inventories across the country. It almost doesn’t matter if a dealer’s focused on volume, gross or a balance between both. Bronze cars appear to be more plentiful for almost every dealer than they have been in the past.

To understand this condition, I’ve been noting the characteristics of Bronze vehicles in my daily conversations with ProfitTime GPS dealers. Here are some common threads:

Many of the Bronze vehicles are priced too high. Given their opportunity/risk profile, dealers should be pricing Bronze vehicles to move quickly. Yet, time and time again, the average Price to Market percentage of Bronze vehicles is at/near 100 percent. Often, the dealers own these vehicles at Cost to Market percentages of 98 percent or higher.
Many of the Bronze vehicles are older than 30 days. Generally speaking, I advocate that dealers strive to retail Bronze vehicles in 20 days or less to minimize the risks these lower-tier investments possess, and optimize whatever ROI each unit can deliver. Last week, I spoke with a Midwest BMW dealer where more than 50 percent of the dealer’s Bronze vehicles were older than 45 days—a fairly common condition.
A fair number of the Bronze vehicles didn’t start out as Bronze. On several occasions, I’ve shown dealers how their Bronze vehicles started as Silver or Gold investments, often purchased through trade-ins and off-street channels. (You can spot this dynamic through the Global Acquisition dashboard in ProfitTime GPS.) But over time in inventory, the initial investment values of the vehicles weakened, and now they appear as Bronze units.

When I review the characteristics of Bronze vehicles with dealers, it’s often a wake-up call to current market conditions. The rise of Bronze vehicles owes directly to the higher-than-usual rates of value depreciation we’ve seen in recent weeks. Dealers are often surprised to see that off-street purchases and trade-ins they believed they bought right a few weeks ago no longer offer the profit/ROI potential they once did. The rise of Bronze vehicles also owes, at least in part, to slightly softer retail demand dealers report across the country.

But you can’t pin the rise of Bronze vehicles solely on less-favorable market conditions. Their increased prevalence in recent weeks also ties directly to dealer performance. We see the evidence in ProfitTime GPS. The system recommends retail pricing for every vehicle. The alignment of current dealer asking prices to ProfitTime GPS recommendations often runs less than 40 percent for Bronze vehicles. This finding suggests dealers are choosing to override or reject recommendations that are purpose-built to move the cars more quickly because of their high risk/low return profile.

At this point in my dealer conversations, dealers begin to recognize they need to address the prevalence of Bronze vehicles. Here are three things I recommend to help them mitigate the pain the Bronze vehicles will inevitably bring to their used vehicle department profitability and sales volume:

Adjust retail asking prices to reflect where Bronze vehicles will transact. There are a host of reasons many dealers price Bronze vehicles at/near 100 percent of the market. If you own a vehicle for a Cost to Market percentage of 97 or 98 percent, you deserve a chance to make at least some money, right? Well, the reality is that if you play this card, you’ll likely end up holding the cars and discounting prices until your price reflects the place would-be buyers take notice. Generally speaking, in dealerships where Bronze vehicles are selling in less than 20 days, the average Price to Market percentage is at/near 95 percent. When dealers have Bronze vehicles priced at or above 100 percent of the market, there’s no real mystery why the vehicles aren’t selling.
Attack the most-distressed, oldest vehicles first. While I firmly believe dealers should aim to retail every Bronze vehicle as quickly as possible, I recognize that reducing prices on an ever-larger share of a dealer’s inventory right away might create more pain than a used vehicle manager’s paycheck (and heart health) can handle right now. The next-best approach is to attack the cars that have been in your inventory the longest. The end goal: Work your way to more transaction-realistic pricing for all of your Bronze inventory. It’s important for dealers to remember that these cars won’t get better over time, especially in a depreciating market like we’re seeing now.
Be more diligent about pricing Bronze vehicles right on Day 1. While its understandable dealers and used vehicle managers don’t want to face the music when they take in a Bronze vehicle, it’s not rational. We all know these vehicles represent high risk/low reward investments. We also know that the vehicles won’t get better over time, especially in a depreciating market. When dealers handle Bronze vehicles correctly, they rightfully understand that while the cars may not offer the front-end gross profit they’d like to see, the cars represent volume units that drive F&I gross and customer/trade-in acquisition opportunities.

Overall, it’s important for dealers to remember there is no shame in having Bronze vehicles in your inventory. They are a fact of life in today’s used vehicle market and every dealer’s inventory. They’ll also be a fact of life in tomorrow’s market, too.

But there is shame in not treating these vehicles for what they are the minute you own them, and pretending they’ll command a gross profit that, for all intents and purposes, will never arrive.

Editor’s note: In an upcoming post, I’ll share a different problem I’ve been encountering with vehicles ProfitTime GPS regards as a dealer’s best investments, the Platinum cars.

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ProfitTime GPS in Practice: “Fishing Where the Fish Are”

Dale Pollak — Thu, 13 Oct 2022 14:46:34 +0000

A little more than 60 days ago, when Gettel Automotive in Bradenton, FL, began using ProfitTime GPS in earnest, Kurt Fisher, director of pre-owned operations for the 18-store group, knew he’d have work to do.

“It’s the same every time you first turn it on at a store,” Fisher says. “There’s an inversion. Your Platinum cars were priced too low, and all the Bronze cars are priced too high. Our goal now is to balance it as much as possible.”

He’s referring to the investment value lens ProfitTime GPS provides for every vehicle. The system distills a swath of data—including a vehicle’s Cost to Market, Market Days Supply, retail sales volume, past history, and more—to identify and score where the vehicle’s investment value ranks on a Platinum, Gold, Silver and Bronze scale, and recommend the appropriate price for a vehicle based on the ranking.

Fisher’s balancing effort also began as a slowdown in the retail and wholesale markets for used vehicles seemed to be getting worse. Indeed, Cox Automotive data shows that wholesale values overall declined almost 2 percent in September, and analysts estimate retail sales declined 8 percent from August performance, and are down 10 percent year-over-year.

For Fisher and Gettel, these conditions spurred what might be considered an attack mode. They used ProfitTime GPS to right-size the retail pricing for their inventory to retail out of the investment-distressed vehicles rather than sending them to auction and “losing money,” Fisher explains.

But the effort to align and balance prices to ProfitTime GPS recommendations produced some unexpected, if not surprising outcomes.

In the case of Platinum vehicles, the system would recommend higher prices. Fisher’s team members questioned the system’s sanity: “They’d call me and say, ‘The system told me to mark this car up $5,000 and I’ve had it for 60 days and this is crazy. Why are we doing this?’ The next day, they’ll call me and say, ‘Guess what? Somebody bought the car last night and it sold.’”

Meanwhile, with Bronze vehicles, ProfitTime GPS generally recommended that Fisher and his team face the music on cars that were priced too high and held too long to produce the gross profit outcomes they initially expected. But there were also plenty of instances where “we had the cars priced too low and we’re being too aggressive,” Fisher says. After they raised the prices to align with recommendations, the vehicles sold.

The experience led Fisher to an analogy that isn’t surprising given he lives and works in Florida: “I tell my guys, ‘we’re going fishing. If you hire a captain to take you to the fish, let’s put our line where the fish are, or where the vehicles are transacting. If you try to fish too deep or close to the boat, that’s not where the captain took you.’”

As someone who’s had decent luck fishing the open waters around Florida, I appreciate Fisher’s analogy. I also believe it’s relevant for every dealer in the current market. Yes, the market appears to be slowing down overall, but there are still some vehicle segments, and specific vehicles, that offer opportunity.

Therefore, as dealers price and re-price vehicles they should keep three things in mind: Which vehicles need a price adjustment? Should the adjustment move the price up or down? And, how much should the adjustment be given the specific circumstances of the car?

When dealers ask and answer these questions on a car-by-car basis, they’ll be more likely to be fishing where the fish are and enjoying better results.

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A Pivotal Time for Dealers and Used Vehicles

Dale Pollak — Fri, 30 Sep 2022 18:18:34 +0000

It’s a pivotal time for dealers retailing used cars as they head into the final quarter of 2022.

Why pivotal? Well, there’s been a marked shift in consumer and dealer sentiment about where the used vehicle market is headed as we close out the year. The shift owes in large part to the Federal Reserve’s decision a week ago to raise interest rates again. Since the early part of the year, the Fed’s rate increases have totaled almost 3 percent—the highest increases in a single year since the early 1980s.

Cox Automotive chief economist Jonathan Smoke says the Fed’s aggressive, inflation-fighting stance is hastening an “affordability crisis” in used vehicles. Cox Automotive analysts note the average used vehicle monthly payment is 47 percent higher today (at roughly $551 a month) compared to 2019, and they expect the amount to climb to nearly $570 by the end of the year, as the market adjusts to the Fed’s recent moves.

In a presentation this week, Smoke’s team has also reduced its projection of retail used vehicle sales in 2022 to 19.1 million, down almost 2 million units from last year, and believes affordability and supply issues will dampen demand and sales even further in 2023.

The pivot point for dealers rests with how they plan to move forward in the final months of 2022 and beyond. Will you look at the current conditions as an opportunity to do even better, or default to a belief where you simply can’t do better, because of the less-than-favorable market conditions?

Put me in the camp that believes that any moment of crisis or uncertainty in the car business represents an opportunity for dealers who have the discipline and will to pursue it.

Right now, it appears that dealers will need to muster both discipline and will if they want to seize the opportunities that have already begun to emerge.

For example, while we’re seeing wholesale values of vehicles depreciate faster than normal for this time of year, retail asking prices have yet to reflect the wholesale value decline. This current dynamic creates an arbitrage moment for disciplined dealers to make money and sell more cars. In recent days, I’ve talked to several dealers who have positioned themselves for the opportunity, and I thought it would be useful to offer a high-level view of how they’ve arrived there.

First, the dealers have been running lean levels of retail inventory. Across the country, the days supply of used vehicles is roughly 10 percent higher than it was a year ago, around 50 days. That’s not the case for opportunity-minded dealers who, through the summer and early fall, reduced their inventory levels to match a rolling 30-day total of retail sales. Today, these dealers are busy buying cars with an opportunity to move, and make gross, them while other dealers are waiting for their vehicles to sell.

The opportunity-minded dealers have also been sharp about the composition of their inventories. Cox Automotive data shows that the largest segment of inventory in dealer lots across the country consists of vehicles valued at $35,000 and higher—a price segment that’s the least affordable for buyers worried about higher mortgage payments and inflation.

There are a lot of reasons for the skew toward higher-value vehicles, and some of them are reasonable and right, especially for dealers who make certified pre-owned sales a priority. But opportunity-minded dealers have recognized the risks higher-value vehicles represent, particularly as new vehicle inventories continue to grow. These dealers tend to have higher shares of $15,000 to $30,000 vehicles in their inventories than their peers to address the broader affordability concerns.

The opportunity-minded dealers have also been disciplined about getting out of higher-risk vehicles faster, even if it means taking a retail loss. In ProfitTime GPS, we can see that the overall share of high-risk, Bronze vehicles is growing, and the average age of these vehicles is climbing, too. Why? Because the dealers are, on average, pricing them $1,000-plus above the system’s recommendations, which strikes me as “wishful thinking” in the current market.

By contrast, the opportunity-minded dealers have brought a higher level of pricing discipline into their used vehicle departments in recent months. They’re watching the market every day and adjusting their asking prices to reflect current conditions. Their high-risk, low ROI cars are selling in 20 days or less, and their low-risk, high-ROI cars are selling in 40 to 50 days, as they should.

Perhaps the most-difficult aspect of re-exerting the stocking and pricing discipline it takes to seize the current opportunity rests with the success nearly every dealer has found without it. A recent report from the National Automobile Dealers Association suggests that dealers will end the year in a very profitable position, even if they’re making a little less, and retailing fewer used vehicles, than they did last year.

But now’s not the time to rest on past success. Instead, it’s time to plot a new course to find tomorrow’s opportunity, which will always be there, if you get after it. That’s what makes the current moment so pivotal.

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Why It’s Time To Tighten Up and Be Ready in Used Vehicles

Dale Pollak — Fri, 02 Sep 2022 14:52:27 +0000

Two things occurred in the past week that prompt this call for dealers to be ready for a rougher run in used vehicles for the remainder of the year than many, including me, have expected.

The first thing arrived last Friday. That’s when Federal Reserve Chairman Jerome Powell gave a speech at an economic forum in Jackson Hole, WY. Powell made it clear that the Federal Reserve plans to “forcefully” do what it believes it must to curb rising inflation. Analysts took Powell’s comment as a signal that we should expect additional interest rate increases in September and October.

Investors in the stock market apparently didn’t like Powell’s message. The rally that arrived during the summer appears to have effectively ended with Powell’s speech. Some investors thought the Federal Reserve wouldn’t be as aggressive as Powell suggested about imminent interest rate increase.

But here’s what gives me pause about the prospect of additional interest rate increases in the coming months. In his speech, Powell acknowledged the pain such moves might bring to the broader economy and the ability/desire of consumers to buy used vehicles:

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

The second thing that raises concern about the near-term future of the used vehicle market comes from the market itself. For the past several weeks, we’ve seen higher-than-normal rates of depreciation in used vehicle values. In fact, the depreciation rates we’re seeing now are more in line with those that arrive in October to December. The dynamic begs a question: If it’s like October right now, where will depreciation be when October arrives?

Unfortunately, none of us has a crystal ball. We also know that retail demand, while softer than a year ago, has proven resilient over the course of the current year. Total used vehicle sales could end the year higher than last year.

But the current market dynamics suggest that even if consumers continue to buy used vehicles, dealers will likely see additional pressure on their ability to make the kind of gross profits they’ve enjoyed. In fact, we’re already seeing distress signs in dealer inventories. Aged units, and the percentages of vehicles the ProfitTime GPS solution classifies as most-risky (e.g., the Bronze cars), are both on the rise.

In my view, Powell’s speech and the current state of used vehicle depreciation serve as signals. That is, they suggest that now’s the time for dealers to prepare for what may be a tougher stretch in used vehicles and get back to the basics of managing inventory investments with discipline, process and accountability.

In this light, I’ve been advising dealers on two fronts.

Stocking: Dealers currently have about 10 percent more inventory than they did a year ago, when sales were roughly 10 percent higher. If current rates of depreciation persist, and retail sales don’t pick up or decline further, dealers will likely see a return to the retail net profit losses that were prevalent in the months and years prior to the COVID-19 pandemic. My recommendation is that dealers right-size their inventories right now. Get clean and lean before conditions get worse. From a stocking perspective, dealers should strive to balance the number of vehicles they have in stock to their rolling 30-day total of retail sales. This more disciplined inventory position ensures that, if the market picks up, you’re in a position to step up. And, if the market diminishes, you’re not burdened by an out-size number of vehicles that aren’t selling.

Pricing: If there’s one area of used vehicle operations where discipline, process and accountability has gone out the window during the past two-plus years, it would be used vehicle pricing. To be sure, if wholesale and retail prices are both on the rise, pricing discipline can seem unnecessary, even quaint. But this favorable combination is no longer in play. Wholesale depreciation is here, and we’re starting to see some acceleration in falling retail prices. Overall, the retail changes are nascent and scant. Retail prices hadn’t declined much at all until the past two weeks, when they dipped .01 percent and .03 percent. The big take-away here is that retail prices have begun to move, and they appear to be heading in the same direction as the wholesale market. The implication? If you’re not paying close attention to each vehicle’s pricing position, there could be some sizable discounting (and diminished gross) as the fall unfolds.

The current conditions call to mind a line Brian Benstock, vice president of Paragon Honda and Paragon Acura of Woodside, NY, has shared over the years: “The time to fix your roof isn’t when it’s raining.”

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“CPR” to Offset Declining CPO Profits, Sales for Dealers

Dale Pollak — Fri, 26 Aug 2022 15:50:43 +0000

I’m seeing more fault lines around certified pre-owned (CPO) sales that, over the years, have become the backbone of used vehicle departments for many franchise dealers.

The fault lines aren’t necessarily universal. They seem most apparent, and troubling, at franchise stores where new vehicle inventories don’t seem to be recovering compared to other brands. In the past week, I’ve heard from Honda and Toyota dealers who share that they’re not selling as many CPO vehicles as they expected or have in the past. In turn, they’re not booking the more-sizable sums of front-end, service and F&I gross profit the deals can produce.

The problem, I’m told, relates to the pipeline of incoming inventory that has traditionally fed the “CPO machine,” as some dealers call it, in the used vehicle department. With fewer new vehicles available, there are fewer new vehicle deals and fewer trade-ins.

And, with the rise of pre-selling new vehicles, some customers are shopping the trade-in appraisals they receive as part of the new vehicle deal. An apparently frequent result: “When the customer shows up for the new car, they don’t have the trade anymore,” the used vehicle manager at a Southeast Toyota dealership says. “We put a big number on the car because want it and the customer says, ‘Gosh, I didn’t know it was worth so much.’ Poof. It’s gone.”

A similar situation surfaces with lease returns. A larger share of consumers has been buying out their leases rather than taking them back to dealers, where the cars have served as prime candidates for CPO programs.

In this environment, some OEMs have expanded the pool of CPO-eligible vehicles, allowing their respective CPO badges to be placed on in-/off-brand vehicles as old as seven to 10 years. But such efforts are OEM-specific, and the vehicles aren’t necessarily as appealing to shoppers who really want a near-new vehicle because they can’t afford or want to purchase a new vehicle.

Through my conversations, I’ve gleaned a few approaches that might help dealers and used vehicle perform Certified Pre-Owned Resuscitation (CPR) to keep their CPO profits and sales on pace with where they’ve been in the past:

1. Source more cars directly from customers. Across the country, many if not most dealers have put more attention and energy to efforts to purchase cars from customers through their service drives and other customer-direct channels. In my view, the service drive represents the largest untapped opportunity for dealers who haven’t pursued it. Why? Because these customers often drive/own a vehicle you sold to them, they choose your service department and, if you serve them well, many represent a future vehicle sale. Through ProfitTime GPS’ Global Acquisition System, we see that dealers who proactively source vehicles from service customers bring in a larger share of vehicles with optimal investment values than other channels (excluding trade-ins and lease returns). The volume of vehicles sourced from service every month is dealer-dependent: For some, the service drive produces a handful of vehicles, for others it represents 20 to 30 units or even more.

2. Reserve a share of new vehicle allocations for service drive acquisitions. The fundamental premise of a service drive acquisition program is to take in the customer’s vehicle while offering an attractive replacement vehicle. In today’s market, with diminished supplies of near-new vehicles, the most-appealing replacement vehicle for a service drive customer would be a new vehicle, especially if they’re in a strong equity position with their current car. This dynamic creates a pressure point for dealers who pre-sell 80 percent to 90 percent of their new vehicles. “We don’t have any new cars to offer these customers,” says a used vehicle manager who has struggled to implement a service drive acquisition program. “If they’ve got an ’18 Tacoma that I want, it doesn’t make sense to offer them a certified ’17 Tacoma with more miles that costs too much money.” It can be a tough sell with new car managers to effectively set aside a share of your new vehicle allocations for these customers. The chief worry: They won’t turn new vehicles as fast, which will hurt future allocations. I’m not sold on this push-back, given the imbalance between supply/demand in new vehicles.

3. Find a way to “de-horse” the customer. Some dealers use loaner or rental units to provide a vehicle for service drive customers who agree to sell their car and purchase a new one. The approach assures you’ve got the used vehicle in hand and the customer won’t sell it somewhere else. But the approach also carries some risk: If the customer pre-orders a vehicle, and it takes 30 to 45 days for the vehicle to arrive, the costs of the loaner/rental unit will crimp the ROI potential of the used vehicle you purchased from the customer. But in my view, the risk is worth the reward, especially given the life-time value the customer likely represents.

Looking ahead, it’s apparent that the current CPO predicament won’t get much better, especially amid recent reports that some OEMs have recently (and once again) scaled back production. I’m beginning to wonder if the time hasn’t arrived for factories to include a dealer’s past CPO sales success as a factor in their new vehicle allocation formulas. From what I understand, OEMs typically base allocations on new vehicle performance metrics. If OEMs added CPO sales performance into the allocation mix, they’d be helping dealers who’ve done the most to help them advance the long-term brand loyalty and value every OEM considers essential for future success.

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ProfitTime GPS in Practice: From Skeptical to Sold

Dale Pollak — Wed, 17 Aug 2022 21:13:51 +0000

When Mike Cirona, general manager of Scott Robinson Honda in Torrance, CA, initially heard about ProfitTime GPS, he didn’t think his store’s used vehicle department would benefit from it.

“I wasn’t crazy about it when it first came out,” Cirona says. “I didn’t think it was ready for prime time. Maybe it was me and my mindset, but I passed on it.”

But earlier this year, Cirona’s vAuto Performance Manager, Kevin Stearns, brought ProfitTime GPS back into the conversation. Stearns thought the solution’s recent improvements warranted a second look.

“I’ve known Kevin for a while. I call him one of our team members. I trust him,” Cirona says. “Kevin told me the system is a lot better and it would help. So when he said ‘Trust me, this will work,’ I did. I signed up. I didn’t even look at the changes that had been made to the system. It was a leap of faith.”

Today, Cirona’s glad he made the leap. Since launching ProfitTime GPS in May of 2022, his average front-end gross profit has increased $587, and it’s up more than $1,000 year-over-year. His sales volume remains consistent, averaging between 80 and 90 units a month. Meanwhile, his net profit has also “improved greatly.”

“July 2022 was our highest gross profit month for pre-owned cars since I joined the company in August of 2014,” Cirona says. “The numbers tell the story.”

Like other dealers who have increased their success by switching to ProfitTime GPS, Cirona would be the first one to tell you the transition wasn’t as easy as flipping the switch. The system pushes dealers away from the belief that every vehicle must be priced to sold quickly, a tenet of the Velocity Method of Management. Instead, ProfitTime GPS identifies the investment value of a vehicle at the time of appraisal, recommends an appraisal amount and a recommended retail price range to optimize the vehicle’s return on investment (ROI) for the used vehicle department and dealership.

“ProfitTime has become our culture,” Cirona says. “It’s not an easy task to get a team of sales managers to forget how they used to appraise units and to retrain me on how to price units.”

I asked Cirona to share how he managed his team through the transition, aiming for pointers that might help other dealers see the value in a different way of managing their used vehicle investments. He kindly obliged.

A View of Investment Value-Based Appraisals

Like other dealers, Cirona’s used vehicle department has had to diversify how it sources inventory. Prior to the pandemic, his Honda store saw the bulk of its inventory come from new vehicle trade-ins and lease returns—channels that slowed to a trickle over the past two years. Meanwhile, Cirona, like other dealers, also now regards auction-purchased vehicles as a last resort.

“It’s not the old days of 20 to 30 people standing in the lane and fighting for it. Now there’s 200-plus buyers online, so are you really the smartest guy if you’re the last one with your hand in the air?” Cirona asks. “Probably not. By the time you get it home, through the shop and get it on the lot quickly and price it right, you might break even or only lose $500 on the front. There’s nothing left but F&I income. I’m trying to avoid that at all costs.”

Cirona’s solution has been to purchase a greater share of vehicles directly from customers, through a Kelley Blue Book Buy Center and his service lane. Those two channels now produce about 80 units a month. The change also means his sales managers, who appraise vehicles, are evaluating vehicles and circumstances that are less familiar. Cirona says the Global Acquisition System in ProfitTime GPS helps his appraisers get a clearer, quicker view of each vehicle’s retail potential in his market.

“The system feeds you what the car’s worth in your market. How much can you sell that car for? Forget about the book, how much can you sell the car for? That’s what ProfitTime GPS tells us,” Cirona says. “It’s made us better at appraising cars. Our appraisals are more relevant to what the market is as opposed to what the book is. The numbers are smarter.”

But what about getting appraisers to believe in system’s recommendations? As Cirona affirms, that’s where he’s spent time to get the buy-in that drives improvement.

“The hardest thing with my sales managers was teaching them to trust the data,” Cirona says. “They’re convinced that no computer is smarter them. I told them, ‘You have to trust the data. Close your eyes. Follow the numbers. Follow the data. If you do that, I won’t get upset with you.”

These days, Cirona uses ProfitTime GPS to inquire about vehicles his sales managers decided not to purchase or purchased for an amount different than the system recommended.

“I’ll typically look at a missed car,” Cirona says. “I’ll say, ‘The data was here and says this, and your number was different. Tell me a bedtime story.’ I’ll want to know why the manager didn’t trust the data. Sometimes I’ll get a valid story to go with it. There were valid things wrong with the car that the data doesn’t see. OK. I’m good with that. The other one’s fall where a guy says, ‘I just didn’t like the car.’ I couldn’t get any specific reasons. That’s when I go back to say, ‘trust the data.’”

Cirona adds that his efforts to build confidence and trust in the data has been helped by a tailwind—more cars acquired right leads to better gross profits and paychecks for his team. “That’s always the way to a salesperson’s heart,” he says.

A View of Investment Value-Based Pricing

Cirona’s transition to ProfitTime GPS also spurred a personal teaching moment. He needed to re-think how and why he priced his used vehicle inventory—a task made a bit more difficult given his long-standing commitment to pricing every vehicle to sell quickly.

“As I got into ProfitTime, it taught me that, ‘Hey, you’re going to make money on this car and don’t worry if the bucket changes in 10 days. It’s going to take this many days to sell it and this is what you can expect your gross to be. It’s pretty spot-on,” Cirona says.

He attributes the additional lift in front-end gross and net profit to the results he’s seeing from vehicles the ProfitTime GPS system classifies as Platinum and Gold investments, which represent vehicles the dealership bought right, and possess low Market Days Supply and solid retail sales volumes.

“I was discounting cars in the past that didn’t need to be discounted,” Cirona says. “I was discounting cars further, hoping to get more visibility. I didn’t need to. I hurt myself by doing that. ProfitTime GPS has taught me, hang on, there’s another way.”

Meanwhile, The system’s recommendations for Bronze and Silver vehicles, the higher risk investments, fit with Cirona’s instinct to get out of distressed, risky vehicles as quickly as possible.

On a day- to-day basis, Cirona uses the ProfitTime GPS pricing alignment tool to monitor how closely his prices tie to the system’s recommendations. “The alignment can change a lot as the market changes,” he says. His goal: 85 percent alignment, a benchmark that ensures he’s accounting for vehicles with extra equipment or special circumstances that require “the car guy to come out.”

I asked Cirona what he might say to other dealers who, like him, were skeptical about ProfitTime GPS, or maybe hadn’t seen the system. I thought his response served as a nice close:

“I would question them as to why do you think doing things the same you’ve done them for five, seven or 10 years, or whatever the number is, is going to improve your gross?,” Cirona says. “You have to be willing to change. The data we have today is different than the data we had two years ago, five years ago or 10 years ago. Some guys still fight the technology instead of letting technology be an asset and partner to the business. That’s been my approach and it’s helped me.”

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A Time to Rethink How You Manage Inventory Age

Dale Pollak — Fri, 12 Aug 2022 16:07:25 +0000

Three market conditions have converged to cause dealers and used vehicle managers to return to inventory age management policies that call for immediate wholesaling of vehicles that reach 45 or 60 days in inventory.

First, there’s depreciation. Cox Automotive data shows that through the first week of August, values have declined between roughly 5 percent and 9 percent, depending on the model year, since the beginning of the year. Values have declined the most among two- to four-year-old vehicles.

Second, retail sales of used vehicle sales are solid, but softer. Cox Automotive’s retail sales data shows that dealers closed July selling about 11 percent fewer used vehicles compared to the same time in 2021, and 9 percent fewer compared to the same time in 2019.

Third, dealers are carrying a bit more inventory than what I’d consider ideal for this time of year. Last year at this time, the days supply of used vehicles in dealer inventories ran about 42 days. It’s currently running about 48 days. (Note: As regular readers know, I’ve been recommending that dealers run even leaner inventories, matching their stocking levels to their rolling 30-day total of retail sales.)

Such conditions have dealers and used vehicle managers taking a hard look at vehicles they acquired two to three months ago and liquidating those that have reached the 45- or 60-day mark, per their age management policies.

But I think the current moment gives dealers an opportunity to rethink their inventory age management policies. I say this for two reasons.

The first reason is that I’ve long regarded a vehicle that hasn’t retailed in 45 or 60 days as a failure of management to move the car. If you’ve chosen to retail a vehicle, you should retail it. I understand why dealers haven’t worried too much age-creep in their inventories. After all, retail prices remain high and, with the exception of the past two months, wholesale values were strong. It was a reasonable decision to hold out for a retail buyer and, if one didn’t arrive, to wholesale the car and get at least a little more than you initially paid for the vehicle.

The second reason is that I believe the prevailing age management policies are out of step with the investment value reality of used vehicles today. For example, we now know that the investment values of vehicles vary from car to car. In ProfitTime GPS, we can see vehicles that offer the highest risk and lowest investment return (e.g., Bronze vehicles), those that offer the least risk and highest return (e.g., Platinum vehicles), and the vehicles that fall in between (e.g., Silver and Gold).

Given such investment value variability, age management policies that apply a 45- or 60-day limit to every vehicle amount to a blunt management instrument. Inevitably, these age management policies won’t drive decisions necessary to move the highest-risk cars as fast as they should. They also create risk that you’ll dramatically discount or dump a vehicle that doesn’t really need to go.

The good news is that when dealers know the investment values of their used vehicles, the knowledge gives them a ready means to adopt a different way of thinking about age management, one that links more closely to the unique investment value of every vehicle. Call it a sharper stick approach that leaves the blunt instrument behind.

In ProfitTime GPS, the sharper sticks flow from Days to Sell targets dealers achieve and manage for each investment value category. The sticks, and the solution’s pricing recommendations, prod decisions to retail vehicles in timelines appropriate to each unit’s investment value. A frequent end result is that aged inventory ceases to be a problem.

“I know that I need to retail my Bronze vehicles in 20 days or less, and I’m good with my Platinum cars selling around 45 or 50 days,” says a Southeast dealer who uses ProfitTime GPS. “Everything else falls in between. I can’t remember the last time a car aged out on us.”

The dealer’s not alone. That’s why I’ve been telling dealers that while I’ve always believed in the value of age management policies, and I still believe in them, I no longer believe that the same age policy should apply to every car. I now believe that every used vehicle must turn in its own optimal time, based on the opportunity and risk inherent in its investment value.

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Beware the Pitfalls of a “New Car Masquerade” in Used Vehicles

Dale Pollak — Wed, 27 Jul 2022 20:02:13 +0000

In the past few weeks, I’ve come to understand what I’d call a “new car masquerade” in used vehicle departments across the country.

Perhaps the circumstances are familiar at your store: The new car department remains under-stocked on inventory, and you’ve got some would-be new car customers who can’t get the new car they want because you don’t have it in stock. As a result, your used vehicle department is actively stocking one- or two-year-old vehicles that can help you make deals with customers who came in wanting a new car.

This new car masquerade in the used vehicle department isn’t necessarily bad. In fact, it’s a smart move to ensure you’re doing everything you can to satisfy every customer who comes to your dealership.

But here’s what’s problematic: Dealers and used vehicle managers often aren’t aware of how the new car masquerade can hurt their used vehicle department, especially when you over-rely on auctions to acquire the near-new inventory.

A key signal that the new car masquerade may be hurting your used vehicle department typically appears in the department’s inventory-level Cost to Market percentage. At many stores, the inventory-level Cost to Market percentage has been trending upward.

That’s been the case at a Midwest dealer group I visited last week. Within the group, one store’s overall Cost to Market percentage was 92 percent. At a similar store, the overall Cost to Market percentage was 83 percent. It wasn’t a surprise to anyone that front-end gross profits were far richer at the store with the lower Cost to Market percentage than the other.

We all agreed the Cost to Market difference between the two stores was substantial. The observation led to a discussion about how/why each store was acquiring its inventory. We used the Global Acquisition system in ProfitTime GPS to understand the roots of the disparity. The analysis yielded three key insights:

Insight 1: The dealership with the higher Cost to Market percentage acquired a far-larger share of inventory from auctions compared to the other store. When we compared at the number of auction-purchased vehicles at the two stores, we found the store with the higher Cost to Market percentage purchase nearly 13 times the number of auction vehicles, with 2021 as the median model year. We also noted that the auction-purchased inventory took longer to sell compared to the sister store—a difference that reflected higher retail price mark-ups to compensate for the higher costs required to own the auction-purchased vehicles.

Insight 2: While the dealership with the higher Cost to Market percentage had a higher share of 2020 and 2021 vehicles in its inventory than the sister store, it had fewer three-to-five-year old vehicles. The reason: The dealership’s reliance on auction vehicles to source near-new inventory appeared to come at the expense of sourcing older-model units the sister store was more proactively, and successfully, acquiring from the service drive, sight-unseen and other sourcing channels. (Note: Both stores appeared to do a comparably decent job of acquiring the same volume of trade-ins, where the median model year was 2016 at both rooftops.)

Insight 3: Both stores have a performance improvement opportunity. The store with the higher appetite for near-new inventory, and the higher overall Cost to Market percentage, would be wise to offset its reliance on auctions by tapping other sourcing channels to acquire inventory at more favorable investment values. The shift would address the relative dearth of three-to-five-year-old units that likely represent a sales volume opportunity, and help reduce the store’s higher overall Cost to Market percentage.

Meanwhile, the store with lower overall Cost to Market percentage could use the strength of its current multi-channel acquisition efforts, which enables them to acquire slightly older-age vehicles at more favorable investment values, to step up their efforts to purchase a larger share of near-new inventory, even from auctions. The shift might raise the store’s overall Cost to Market average, but it would be a strategically measured trade-off to help them serve customers who can’t (or won’t) currently purchase their new vehicle of choice.

I’m sharing this rundown because I believe it has relevance and utility for dealers in a market where new vehicle supplies will remain short for some time, and near-new used vehicles will be the easiest and most-expensive to acquire at auctions. The big take-away: It’s OK for your used vehicle department to masquerade as a new vehicle department, provided you dance with as many sourcing channels/partners as possible to ensure your overall inventory selection, profitability and sales volume doesn’t suffer.

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A Primer on Used Vehicle Price Sensitivity

Dale Pollak — Wed, 20 Jul 2022 16:14:38 +0000

As the used vehicle market returns to more normal conditions, I feel compelled to reiterate a perspective on retail price sensitivity that seems to have been lost over the course of the past two years.

My perspective is shaped from conversations with dealers who worry that the high gross profits they achieved last year are not occurring with the same degree or frequency today. Make no mistake, gross profits and sales remain strong, but dealers correctly sense a changing market tide.

My response to the concerns is that dealers can remain on pace with past performance provided that a) you understand how price sensitivity varies from one vehicle to the next and b) you apply the understanding of price sensitivity as you set the retail asking prices for your vehicles.

It’s the second point that dealers worried about gross profits appear to be missing. For example, I continue to see used vehicle inventories with an out-size share of vehicles priced almost uniformly at or above Price to Market percentages of 100 percent.

When I ask dealers about the reasons behind their retail asking prices, they generally tie back to two factors—how much they paid to acquire the unit and how much gross profit they believe they should make, given what it took to get into the vehicle in the first place. The problem with this perspective, of course, is that it doesn’t account for the price sensitivity of individual vehicles in the current market and/or each individual vehicle’s competitive set.

Hence, as we’re currently seeing with some ProfitTime GPS dealers, their worst investments, the Bronze vehicles, are priced as if they can and should command all the money. A sizable share of these vehicles have reached 45 or 60 days in inventory, and they aren’t selling. And, if/when the vehicles do sell, they are not delivering anything close to the gross profit the dealer or used vehicle manager believed they could make on the car. In some cases, the vehicles are producing a net profit loss for the used vehicle department.

The price sensitivity issue plays out in the opposite manner with these dealers’ best investments, or the cars ProfitTime GPS deems as Platinum units. By definition, these vehicles are blessed with a low Market Days Supply, a favorable Cost to Market position and high retail demand. The Platinum vehicles are those customers want and will come looking to find. Yet, dealers are pricing these vehicles as if they aren’t worth top dollar. And guess what? The cars are flying off the shelf, often at a faster rate of turn than Bronze vehicles.

I’ve been struck by an irony that’s apparent in such conversations with dealers.

With the Bronze vehicles, I generally suggest that dealers should price them lower, to speed up their sales rate, minimize risk and optimize whatever return on investment (ROI) potential a vehicle possesses. I’ll point out that the vehicles are highly price-sensitive, and therefore need to move quickly.

In most cases, the dealers and used vehicle managers push back, arguing that if they lower the price they’ll lose out on the potential for a higher gross profit and risk a retail loss. In turn, I’ll point to the fact that the Bronze vehicles aren’t selling and that, inevitably, dealers will have to lower their prices to sell the vehicles. I’ll also note that it’s far better to lower the price now rather than later, particularly given the current levels of used vehicle depreciation.

Meanwhile, with the Platinum vehicles, I’ll often suggest that dealers raise their prices to give the vehicles more time to maximize their return on investment (ROI) potential. I’ll note that Platinum vehicles are less price sensitive and therefore deserve a healthier mark-up. In most cases, dealers and used vehicle managers push back, arguing that the current minimal mark-ups are warranted because the vehicles still deliver decent gross profits, they sell quickly and they help drive overall inventory turns and sales volumes.

Further, the dealers and managers argue that if they mark up these vehicles, they’ll lose VDPs. In response, I’ll say that Platinum vehicles don’t need VDPs to sell. By their nature, Platinum vehicles are blessed with low Market Days Supply, low Cost to Market percentages and high retail demand. Customers hunt for these cars and, chances are, your sales team members have customers who asked to be contacted when these vehicles arrive.

The irony is that I’m getting push-back on both sides of the price sensitivity equation. I’m sometimes arguing with dealers and managers who have their cake and want to eat it, too. Still, I find solace in the fact that other dealers, who are more attuned to the price sensitivity of individual vehicles, aren’t complaining about declining grosses and sales. Instead, they’re focused on how and where they can acquire more vehicles with less price sensitivity, and how to get out of the highly price-sensitive units they already own as quickly as possible.

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More Eyes on Dealers’ New Vehicle Mark-Ups

Dale Pollak — Mon, 18 Jul 2022 12:37:28 +0000

A couple months ago, an associate asked if I’d heard or seen any chatter among dealers about an apparently crowd-sourced site (www.markups.org) that listed new vehicle markups and the dealers who made them.

I didn’t think much of the site at the time. A few days after my associate mentioned the site, I saw some chatter about it on a Facebook group for dealers. The related commentary questioned the accuracy and methodology of the site’s listing and its purpose. I shared the “wait and see” attitude of many Facebook commentators—the site launched early in 2022, and it didn’t seem to be getting much notice.

Enter the text message I received the other day from my older brother, a retired orthopedic surgeon in Florida: “I just saw a Facebook post on markups.org…have you heard of it?”

I called my brother and explained the background I’d shared here. Next, I wondered: Is the site gaining momentum?

The answer appears to be “yes.” A quick Google search yielded recent stories from multiple outlets, including newspapers like the Indianapolis Star, noting how the site can help new vehicle buyers at least know how much they might expect to pay for a new vehicle, if not steer clear of dealers asking more than others for the new vehicles they were selling.

I also ran across several articles that noted how despite factory directives encouraging dealers to avoid selling more than MSRP, the practice has become so common, many buyers expect to pay more than MSRP. Consumers understand, observers say, that microchip and other supply chain issues have made more-than-MSRP transactions common in today’s new vehicle market—a point Cox Automotive affirmed last month when in reported the average price paid for a new vehicle has been “over sticker” the entire year.

I’m not necessarily troubled by the current mark-up practices among dealers. Like other long-timers in the car business and as a former dealer, I understand how, for many years, new vehicles effectively served as a loss-leader for dealerships from a financial perspective. Today, dealers are seeing record-setting profits on new vehicles. The profits are coming from the margins and mark-ups on the vehicles themselves, as well as the F&I income that flows from higher overall transaction prices.

I understand why dealers believe they are well within their rights to set the prices their customers appear willing to pay. I also respect the perspective of dealers who heed the factory directives and refrain from retailing new vehicles for more than the MSRP.

But I think it’s wise to recognize that as public attention and interest in new vehicle mark-ups grows, so too will the risks of blow-back, either from customers or factory partners, for dealers who have made above-MSRP mark-ups on new vehicles their standard practice.

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It’s a “Whole Truth” Tuesday!

Dale Pollak — Tue, 12 Jul 2022 20:35:21 +0000

I thought I’d put out a quick post to highlight that, after production and supply chain delays, my latest book, Whole Truth: A Fresh Money-Making Method to Wholesale, the Most Misunderstood Side of Your Business, is now officially available on Amazon and other retail outlets.

The book aims to help every dealer recognize how their used vehicle departments hold the potential to be double-barrel businesses, where you can (and today, you should) make money when you sell a vehicle in the retail or wholesale market.

“Whole Truth” touches on the history of the wholesale market and unpacks what I call the half-truths about wholesale that have long led dealers, including me, to believe that selling wholesale vehicles should be anything but a money-making opportunity. The book also serves as the catalyst for the new Upside solution, and the Upside direct marketplace, that Cox Automotive launched in late spring.

I’m glad “Whole Truth” is now available. I hope the book helps dealers see how a strong wholesale business can ultimately feed the success of your retail business in used vehicles.

The post It’s a “Whole Truth” Tuesday! appeared first on Dale Pollak.

A Rosier View of A Recession, Plus a Moment of Used Vehicle Opportunity

Dale Pollak — Thu, 07 Jul 2022 18:25:47 +0000

If you follow the news and related commentary on social media, you may well be thinking that the United States is heading toward a recession, if we’re not already in the initial stages of one.

I’ve heard similar sentiments in my conversations with dealers and, over the Fourth of July weekend, with an extended group of family and friends. It seems the level of concern and worry about a recession depends on the individual, and how they view the world.

But there’s one person for whom I hold a great deal of respect who doesn’t believe current indicators suggest that the overall economy, and specifically the used car business, is clearly destined for a recession. The person is Cox Automotive chief economist Jonathan Smoke. This week, he shared a perspective on consumer spending, the economy and used vehicles that gave me, and others around the conference table, some comfort.

First, Smoke points to employment or, more specifically, the historically low rate of unemployment. Previous recessions were typically marked by significant increases in unemployment, a trend we’re not seeing on a widespread basis. Job openings are at record highs, and layoffs at record lows—exactly the opposite of the employment conditions you’d expect in the face of a recession.

Second, consumer spending remains remarkably strong. True, some retail sectors appear to be suffering from diminished consumer spending. But overall spending remains robust across all sectors—another indicator that Smoke says doesn’t fit classic recession-like conditions.

Third, used vehicles remains a place where consumers are spending their money. To be sure, used vehicle sales and profits are not as strong as they were this time last year. But, historically speaking, dealers are effectively selling similar volumes of used vehicles as they have in years prior to the onset of the 2020 COVID-19 pandemic.

Perhaps the wild card in Smoke’s rosier view of the current economy is consumer sentiment—and how much it may decline as worries about an actual economic recession, and related headlines, trigger recession-like behavior, wherein consumer spending fades or falls more than expected.

Meanwhile, Smoke’s view of the economy also allows for some of the volatility we’ve seen of late in the wholesale used vehicle market. Astute dealers and used vehicle managers have likely noticed that the wholesale values of two- and three-year-old vehicles sharply declined in the past two weeks—to the tune of roughly 1 percent each week at Manheim—compared to other age-based segments.

Is the volatility a sign of an imminent recession? Smoke and others, like me, don’t think so. Rather, the volatility owes to rental car companies. Late last summer and fall, when rental car companies entered the wholesale market as buyers, they helped drive up prices for two and three-year-old vehicles. Today, as the rental companies discontinue and ease their wholesale purchases, the values of the two- and three-year-old vehicles are falling off more quickly than other vehicles.

Broadly speaking, such conditions amount to a segment-specific “correction” and it’s one that either spells trouble, or opportunity, depending on the individual dealer.

The current situation’s trouble for dealers with older-age inventory that hasn’t moved. I’m seeing more dealers correctly realize that used vehicle values have begun to depreciate. They now recognize that vehicles they’ve had in inventory 30, 45 or 60 days have largely lost retail margin. Some dealers are cutting retail prices to move this inventory; others are sending it to auction. Gross profits for these dealers probably won’t look as good in July as it has in previous months.

At the same time, dealers like the used vehicle manager at a Midwest Buick-GMC store are enjoying an opportunity the current moment offers. The dealers have what I’d consider “clean” inventories that aren’t bogged by an out-size share of older-age units. Such dealers are looking for, and finding, “arbitrage” moments at auctions.

“I bought two really right today, probably from guys who have been sitting on them and needed to get out,” the manager says. “I think we’ll see more of the same the next couple weeks. There are going to be guys who are concerned about their inventory, and I’m going to be there with an open checkbook.”

vAuto Performance Consultant Scott Sadler, who works with Stockwave dealers, confirms the opportunistic moment. Each week, he tracks wholesale supplies and sales efficiency at auctions across the country. He’s now seeing something that hasn’t manifested in the wholesale market in months—vehicles with significant spreads between their Manheim purchase prices and rBook values in vAuto.

“What I am seeing is less competition at the sale, and a lot of hesitation in the bidding on the block,” Sadler says. “There’s opportunity happening in the wholesale market right now if you’re looking for it. The key is you’ve got to be looking for it and, when you see it, to respond right away before the opportunity passes through the retail market.”

The statement speaks to the more-normal used vehicle market conditions we’ll likely see in the months ahead—where opportunity and risk go hand in hand, and neither should be taken for granted.

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A Mid-Year Gut-Check on Used Vehicle Market Conditions

Dale Pollak — Fri, 24 Jun 2022 18:06:05 +0000

As we close in on the halfway point of 2022, I think most dealers would agree with the following statement: While used vehicle sales and profits remain solid, they are nothing like they were at this time last year.

The sentiment flows from two realities that are taking shape broadly across the industry and in the financial statements of dealers I’ve consulted in recent days.

On the broad industry front: Early this year, Cox Automotive chief economist Jonathan Smoke and other analysts predicted that 2022 might shake out in two sections. They believed the first six months of the year would be better for dealers in used vehicle than the final six months. They reasoned that spring would do its thing, and dealers would enjoy a seasonal bump in sales. Unfortunately, the bump wasn’t quite as big or bold as many expected.

The economists’ less-rosy view of the back half of the year resulted from their concern that retail demand would suffer as inflation, rising interest rates and other economic factors would pull would-be buyers out of the market. To some extent, we’re already seeing this. While some dealers have managed to meet or beat their 2021 sales volumes during the first six months of the year, others are less fortunate. They worry they have more cars in stock than current, interested buyers.

On dealership financials: As used vehicle sales seem to be softening slightly, so too have used vehicle department profits. I’ve had more than one dealer confide that despite maintaining sales volumes and profits through the early part of the year, used vehicle gross profits aren’t as rich as they have been. The used vehicle profit declines are more pronounced at stores where volume has dropped off significantly from a year ago and even last month. Some dealers also share that their overall net profit has dipped, while F&I and service businesses remain strong.

Of course, everything I’m sharing represents a broad-stroke, high-level view. Individual dealers may be enjoying the best year ever in terms of used vehicle sales and profits. Beyond that, we should all remember that, at this time last year, nearly every used vehicle you had in stock would sell quickly and generate a sizable front-end gross profit. Net profits were off the charts at most dealerships.

Even so, I think it’s wise for dealers to acknowledge that the market has begun to turn into less dealer-favorable territory, and everyone will need to re-exert the inventory investment management disciplines they had in place before the pandemic. On this front, I’ve gleaned what may be two top priorities for dealers to be ready and right-sized for a market where used vehicle sales and profits won’t come as easy as they have in recent months:

Right-sizing your inventory. Across the country, the days supply of inventory on dealer lots runs close to 50 days. At this time last year, and for much of 2021, dealers operated with a roughly 40-days supply of inventory—an unprecedented level of inventory efficiency that contributed to increased profits. But given the current market outlook, I’ve been counseling dealers to reduce their days supply and do their best to align their inventories to their rolling 30-day total of retail sales. It’s an adjustment that should always start by looking to dispatch the cars you’ve held that haven’t sold, and by being judicious about the vehicles you take in. You don’t want to be sitting in the middle of July with vehicles you acquired in April and May. In addition, while your acquisition teams should be doing everything they can to appraise and acquire vehicles from customers, you don’t want to be buying cars, and especially auction cars, for the sake of owning them. You want to take in cars you know will sell and buying them as right as you can.

Right-sizing your pricing. It’s important that dealers appreciate the current market moment when it comes to retail asking prices for used vehicles. We’re still in an era of limited supply, and while demand appears to be waning, no one expects it to fall off a cliff. Hence, the market doesn’t appear to be ushering in a moment where right-sizing your retail asking prices requires deep and dramatic discounts across the board.

That said, however, I see sizable segments and shares of dealer inventories that appear to be priced based on what a dealer or manager believes the vehicles will fetch versus a retail price that will most likely deliver buyers and satisfying returns on investment. Put another way, the vehicles are priced following the “explore and exploit” strategy that has dominated the market for months.

Here’s some evidence from ProfitTime GPS dealers: During the height of the appreciating market in 2021, many dealers effectively ignored ProfitTime GPS price recommendations for their Bronze vehicles, which are the vehicles with the least investment value and highest risk. We saw well over 50 percent of Bronze cars priced $1,000 or more above the ProfitTime GPS recommendations through much of the year. In January through March of this year, 51 percent of Bronze vehicles fit this high-price profile, a figure that has declined to roughly 41 percent today.

The decline likely owes to another reality for high-priced Bronze vehicles that some dealers now realize: The vehicles are taking longer to sell, and they’re returning less profit when they retail. For example, in January, the median days in inventory for high-priced Bronze vehicles was 42 days, compared to 25 days for all other Bronze vehicles. Today, the median days in inventory for high-priced Bronze vehicles is 53 days, and 30 days for all other Bronze vehicles. Meanwhile, with depreciation returning to the market, the median profit potential for vehicles that reach 60 days in inventory, as measured by the mark-up against a dealer’s cost to own the vehicle, runs about -$800.

My guidance to dealers with an out-size share of Bronze vehicles priced above ProfitTime GPS recommendations is that they should take their lumps sooner rather than later. The investment value, and net profit contribution, these vehicles posses won’t get better over time.

It’s understandable why dealers are holding on to these vehicles and asking all the money for them. In many cases, the Bronze vehicles are late-model units the dealers paid up to acquire, often at auctions. Dealers and managers are loathe to take less than their current gross profit average, or even a retail loss, when there’s a memory, and a possibility, that the vehicles will sell for their current asking prices no matter how long they sit.

But I would submit that such market grace will fade in tandem with retail demand. In my view, the best way for dealers to right-size their used vehicle inventories and pricing and get ahead of a changing market is to address the cars that contribute the most to your risk of profit and volume loss—the units you priced too high for too long that haven’t sold.

The post A Mid-Year Gut-Check on Used Vehicle Market Conditions appeared first on Dale Pollak.

A Memorable Honor from NIADA

Dale Pollak — Wed, 22 Jun 2022 16:30:47 +0000

I received a humbling and significant honor from NIADA (the National Independent Automobile Dealers Association) yesterday at the group’s convention in Las Vegas. They presented me with a Ring of Honor, an award they give to select leaders who advance the growth and professionalism of the automotive industry.

It was touching to receive the award. It reminded me of my father, who spent years as an independent dealer, and all the other independent dealers who have become friends over the years through my work as a dealer and with vAuto and Cox Automotive. I also had the chance to catch up with some at the convention.

The award will have a prominent place in my home office. Thank you again, NIADA, for the once-in-a-lifetime honor and recognition.

For those interested, here are the remarks I shared after receiving the award:

Thank you, everyone. It’s quite an honor for me to receive NIADA’s Ring of Honor award, and I’ll share why in just a moment.

First, though, I’d like to acknowledge and thank NIADA board president, Lou Tedeschi, NIADA CEO Bob Voltmann and NIADA vice president of member services, Jim Gibson, for the work you and your teams do to advance the fortunes and interests of independent dealers across the country. The long-standing success of independent dealers, and the important role they play in our industry, owes to the things you and your teams do every day to help them be successful.

A few minutes ago, you heard a prime example of this work and commitment. The annual scholarship sponsored by NIADA, Northwood University and Cox Automotive stands as testimony to NIADA’s interest and investment in providing opportunities for the next generation of leaders who will shape the future of the car business.

This conference also reflects NIADA’s commitment to independent dealers. Events like these aren’t easy to put together or pull off. But in my experience, annual conferences like this often serve as the single best opportunity for dealers to connect with longtime friends and gain new ideas and perspective, which they can bring home and sharpen how they do business.

Now, let’s get to the Ring of Honor award and its meaning. A few weeks ago, when I learned that I would be here today to accept the award, my mind was flooded with memories. I thought of my Dad, who was like many of you in this room. He was a true blue car guy. He started in the business as a wholesaler, and eventually owned an independent auction. From there, he became an independent dealer in Northwest Indiana. His career included stops in management and sales at franchise stores. The car business was my dad’s true calling, and he eventually found a way to owning his own franchise, Len Pollak Buick AMC, Jeep and Renault in Gary, Indiana.

Like many of you, I grew up in the car business, washing cars, moving cars, making parts runs, cleaning the bathrooms and doing all the odd jobs that must be done at a busy dealership. I loved the vibe of the dealership, and how we made a difference in the lives of the customers we served. I sold my first car during the first summer I was home from college. Quite simply, I was hooked.

When I graduated from college, my Dad and I opened a Cadillac store in Elmhurst, Illinois. It was there that I saw, first-hand, how independent dealers played an important role in the success of our business. If we had vehicles we couldn’t or wouldn’t retail, we’d call our local independent dealer friends. We’d sell and trade used cars back and forth. My Dad and I considered these symbiotic relationships—business dealings that benefitted both of us.

It was this experience that shaped my belief that, without successful independent dealers in communities across America, there wouldn’t be successful new car franchises. In my view, independent dealers serve as the foundation of the car business. The work all of you do every day is a critical part of the entire automotive retail ecosystem.

I brought this perspective to vAuto when I founded the company more than 15 years ago. I had an idea that dealers, franchise and independent alike, might benefit from having more market data in their hands to make better decisions about how they manage and sell used vehicles. When I hit the road to sell my software to dealers, I didn’t care if the dealer had a franchise brand on the sign out front. My goal was to help every dealer, regardless of how they came up in the business, achieve greater success.

That’s why the Ring of Honor award means so much to me. The award serves as affirmation that as dealers, we are all in this game together. The interests of independent and franchise dealers have always been intertwined and I believe they always will be.

On a more personal level, the Ring of Honor award helps ease one of my long-standing insecurities. You see, I was never a car guy like my Dad or many of you in this room. I was the son of a successful dealer who cast a long shadow. Sure, I had a knack and love for the business. But I wasn’t a car guy in the classic sense.

But here I am today, receiving the Ring of Honor award from NIADA. It’s really the highest level of recognition I could hope for. The award signifies that I’ve been accepted as a car guy by the true car guys of the car business—all of you, the independent dealers who help make our shared business so exciting and special.

Thank you for this honor and this very special moment. I’ll cherish it forever. Thank you.

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A Call for “Bucket”-Minded Inventory Acquisition

Dale Pollak — Mon, 13 Jun 2022 17:16:13 +0000

If you scrolled the clock back 15 or 20 years, you’d find very few dealers who managed their used vehicle inventory in what we now call “buckets.” Rather, dealers managed used vehicles in blocks—cars that were less than 60 or 90 days old and those that weren’t.

Over time, the bucket-based approach to inventory management has proven to be a superior method. Dealers set up buckets based on a vehicle’s age or time in inventory, as well as other criteria. Each bucket generally has parameters for pricing and promotion to manage sales throughput in each bucket. The parameters usually tie to market metrics (like Cost to Market, Price to Market and others).

In the past two-plus years, with the help of vAuto’s ProfitTime GPS, some dealers have gone beyond buckets, using each vehicle’s investment value and automated price recommendations to manage each vehicle to its appropriate investment return.

I share this bit of inventory management history because it’s helpful to understand where we are in the current moment with used vehicle inventory acquisition. In a nutshell, I believe we’ve arrived at a time where dealers should follow a bucket- or channel-based approach to acquiring used vehicles, lest they miss out on opportunities in today’s supply-constrained market.

My thinking follows the evolution of how some dealers quickly shifted the way they acquire inventory as the COVID-19 pandemic disrupted the wholesale and retail markets for used vehicles. Dealers who relied on auctions or trade-ins for inventory found themselves in a pinch. Many turned to their own customers, looking for vehicle acquisition opportunities in their lease portfolios, service lanes, off the street and we’ll-buy-your-car programs.

Unfortunately, this shift occurred at a time when dealers didn’t necessarily need to worry about how they were acquiring these cars. What’s the point of sweating how right you acquire vehicles if you know values are rising, customers want almost any car and, if you have the cars, they’ll likely sell quickly?

Well, such favorable conditions are fading right now. Meanwhile, dealers who want to maintain their retail sales volumes and profitability have no choice but to continue acquiring inventory from as many channels as possible to meet their goals, and to know, in no uncertain terms, what buying a car “right” means for any specific sourcing channel.

That’s why I believe it’s time for dealers to apply a bucket- or channel-minded approach to managing their inventory acquisition efforts, just like they’ve done with managing and pricing vehicles in their inventories. The shift needs to start with metrics that help dealers and managers know if/when appraisers and buyers are doing the best job as they aim to acquire cars and/or customers. The metrics should inform acquisition teams of the type of vehicles typically available in each channel, the channels where they can acquire the best cars, and when they should step up, or step back, on purchase or trade-in offers due to the individual circumstances of each deal and each sourcing channel.

I’ve been working with dealers and vAuto ProfitTime GPS developers to define the metrics that matter most to optimize inventory acquisition in the current multi-channel sourcing environment.

Volume: This metric tracks the number of cars that flow from each sourcing channel, helping dealers and managers identify (and prioritize) the channels where cars can and should come from.

Model Year/Odometer: In today’s supply-constrained environment, it’s important to know the channels where you can source late-model vehicles that might fit certified pre-owned program criteria and higher-mileage, older vehicles that fit the needs of budget-minded buyers. This metric gives dealers the insight to pursue channels with specific vehicles and characteristics in mind.

Investment Value: I’ve always believed that the job of used vehicle managers isn’t to sell cars, it’s to make money for their dealers. Hence, it’s critical to source and stock vehicles with the highest money-making potential. In ProfitTime GPS, the investment value metric shows dealers the sourcing channels that produce the vehicles with the best money-making potential. With this knowledge, dealers and managers can prioritize the channels that help them achieve their business objectives, whether it’s volume, gross or a balance of both.

% On/Off Strategy: As dealers source inventory from a wider variety of channels, it becomes more important to establish an overall strategy that guides how appraisers and buyers approach cars and customers in each channel. The strategy sets the parameters for buying a vehicle “right” in a specific channel, while giving appraisers and buyers latitude to make deals, provided they have good reasons. Over time, dealers find the strategic baseline enables closer collaboration and oversight to achieve optimal outcomes in each channel.

Days to Sell: This metric helps dealers connect the dots between the investment value of the vehicles they acquire in a specific channel and the time horizon by which they expect a retail sale/investment return. It’s a thumbnail-quick way to know the retail performance of vehicles sourced from individual channels, and explore why vehicles from specific channels do not perform as well as expected.

When dealers use these and other metrics to manage the performance of appraisers and buyers across all the sourcing channels they activate, good things tend to follow. They arrive in the form of realizations where “pockets” of the just-right inventory can be acquired, where investment acquisition strategy targets or thresholds might be adjusted in a particular sourcing channel and greater appraisal and valuation consistency across every channel.

The outcomes mirror what we saw when dealers began bucket-based inventory management. They priced vehicles more consistently, developed rationales, reasons and rules to ensure their teams made the right decisions and, ultimately, sold more cars. I’m not surprised at all by the parallels between used vehicle acquisition and pricing when the right metrics are applied to each. After all, you can’t manage what you can’t measure and, if you can’t manage, you can’t improve.

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Where Dealers Get Their Most Profitable Inventory

Dale Pollak — Fri, 03 Jun 2022 18:29:16 +0000

Most dealers would agree that acquiring inventory over the course of the past two years has grown more complex and difficult. We now understand that, if you want to maintain, if not grow, your share of money-making used vehicle sales, you can’t rely on trade-ins as much as you did in the past.

Similarly, while dealers still lean on auctions for inventory, they aren’t likely to find vehicles with substantial money-making opportunities, unless you’re buying vehicles that are four years old and older.

These market circumstances have led to a key question among dealers as we arrive at the mid-point of the current year—what are the best channels to source the most profitable inventory?

We can at least partially answer this question through inventory data that shows the sourcing channels where ProfitTime GPS dealers are vehicles with the highest investment values. (A quick refresher: ProfitTime GPS includes the Global Acquisition system, which measures and tracks where dealers acquire inventory, and shows how vehicles in each channel stack up based on their Bronze, Silver, Gold and Platinum investment value designations.)

The chart at right shows what every dealer could likely guess correctly—lease returns and trade-ins provide inventory that possesses the highest investment values. Nearly two-thirds of the inventory acquired in these channels carry Gold and Platinum designations, the highest investment classes on ProfitTime GPS’ scale. But it’s also important to note that between the two channels, trade-ins account for a far higher share of inventory volume than lease returns (roughly 54 percent and 1 percent, respectively).

The inventory data also shows that vehicles acquired in the service drive and through Kelley Blue Book Instant Cash Offer also deliver a sizable share of higher investment value vehicles. Sixty-two percent of the vehicles acquired in the service drive are Gold and Platinum cars, while 58 percent of the KBB ICO-acquired vehicles are Gold and Platinum. Both of these channels suggest opportunity for dealers to source more high investment value vehicles: service drives account for 1.7 percent of overall inventory volume; for KBB ICO, it’s 3.4 percent.

The inventory data also suggests opportunity for dealers to acquire high investment value vehicles through the sight unseen and off-street purchase channels. Fifty-nine percent of the sight unseen-acquired inventory, and 53 percent of the off-street inventory, arrives as Gold and Platinum investments. There are more Gold than Platinum cars in these channels, and the channels tend to produce more inventory volume than the channels noted above (4.1 percent for sight unseen, and 2.7 percent for off-street).

I don’t think anyone will be surprised by the higher percentages of lower investment value vehicles at the bottom right of the chart. The data affirms what I hear in dealer conversations—there certainly aren’t as many great deals, or steals, across the inventory dealers acquire from auctions, other dealers and wholesalers.

As I’ve shared the ProfitTime GPS inventory data with dealers, I’ve been suggesting two steps to help them point their inventory acquisition efforts to the channels where better-value investments are more likely to occur:

Step 1: Avoid acquiring one-to-three-year-old vehicles at auctions if you can. Currently, wholesale prices for these vehicles are higher than retail prices. If you need these vehicles, you’ll be far better off, investment-wise, to step up your efforts to acquire late model units directly from customers through the trade-in, service drive, KBB ICO and sight unseen channels.

Step 2: Turn your lower-tier, Bronze-level investments as fast as possible. These vehicles are arriving in dealer inventories as distressed investments, and the market is returning to more normal trends of depreciation. The faster you get out of these vehicles, the faster you’ll reduce your risk and be able to redeploy the capital to another investment with higher yield potential.

My hope is that this inventory data will give dealers benchmarks they can use to know where they are more likely to find the best investment value vehicles and how to pursue these opportunities. After all, it’s the higher investment value vehicles that will help you hold your own if/when market conditions become less favorable in the months ahead.

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Rediscovering the Past and the Profound While Packing

Dale Pollak — Tue, 31 May 2022 13:31:22 +0000

I’ve been busy the past week, helping my wife, Nancy, pack our belongings into boxes as we officially relocate to Austin, Texas.

I did an informal poll of family and friends and arrived at a near-universal conclusion—no one really likes moving. True, there’s the anticipation and excitement of setting down roots in a new place. But it’s the old place, and the process of going through everything you’ve accumulated over the years and deciding what to keep, that I and others find to be the least-pleasant and most-tedious part of the whole experience.

Like many empty-nester parents, Nancy and I have marveled at how much stuff we’re moving. We’re both a bit sentimental, so there’s quite a bit we’ve gathered, and forgotten about, over the course of the past 20 to 30 years. We’ve found ourselves laughing, and sometimes crying, as we go through our things and remember the day they arrived.

The other day, we ran across a third-grade writing assignment from our son, Samson. It’s a hand-written paragraph describing what he wants to be when he grows up. Back then, he wrote about his desire to be an inventor, who would build something others would need and find useful.

We found this memento about the same time Samson called to share some exciting news from his job at Oracle Netsuite in Austin. He told us that he’d just met with top executives at the company to share a formula, and software tool, that he developed for identifying and selling business prospects for the company. They liked his invention and may develop it for broader use.

Of course, Nancy and I were extremely proud to hear the news. And, we were struck by the happy coincidence of finding his assignment and hearing that our invention-minded third-grader is living the life he imagined more than 15 years ago.

The packing also produced a baseball I had completely forgotten about and that I didn’t relish remembering. The ball came from my Little League team in the summer of 1967, when I was nine years old. The ball bears the name of our team sponsor, General Glass, a local auto glass shop, and our team’s record, 5-8. The ball also shows my batting record and the early stages of a degenerative eye disease I still carry: 12 at-bats, 11 strikeouts and one hit.

I distinctly remember the hit. Somehow, I managed to connect with the ball and send it into the outfield. It was a triple that should have been a home run—except I had trouble finding and rounding the bases. I remember the screams and yells from coaches and parents in the stands. I also remember the laughs from those who apparently found my struggle in the basepaths a bit comical.

The baseball and Samson’s writing assignment won’t join what seems like a vast quantity of stuff we’re donating or throwing out as we pack up the house. No, we’re keeping them as reminders of how early experiences in life profoundly shape the lives we eventually lead.

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How Dealers Acquire Inventory from Service Customers

Dale Pollak — Fri, 20 May 2022 20:10:06 +0000

In a recent post, I highlighted how vehicles dealers acquire directly from service customers hold almost as much investment value potential as those they acquire off-lease and from trade-in.

The insight comes from ProfitTime GPS analytics that help dealers understand the sourcing channels that perform best for them, and where they may find additional acquisition opportunities. In the post, I promised to share best practices from dealers who have turned service lane acquisitions into a reliable, steady source of inventory for their used vehicle departments and certified pre-owned (CPO) sales programs.

One of my first calls went to Brian Benstock, vice president of Paragon Honda and Paragon Acura in Woodside, New York. He is regarded as one of the nation’s best CPO retailers. Among Honda and Acura dealers, Benstock leads everyone by a sizable margin in terms of CPO volume. He and his team repeated this achievement in 2021, marking more than a decade in the top CPO spots for both brands.

If you asked Benstock why his CPO sales have remained so strong, he’d point to his service lane, and the process he implemented coming out of the Great Recession in 2008 and 2009. The process aims to acquire current vehicles from service customers and sell them another one.

“It’s why our CPO sales have remained so strong,” Benstock says. “We go fishing in our database. It’s a strategy that insulates you from the competition and it’s an excellent strategy for vehicle acquisition.”

For other dealers, the service lane remains a largely untapped opportunity for inventory acquisition. To help, I’ve distilled some of the best practices I gleaned from Benstock and other dealers:

Understand the opportunity. Benstock considers the acquisition/sale of a vehicle with service customers as the single-most valuable transaction that occurs in his stores. “It feeds every profit center in the dealership, new, used, parts, service and F&I, and it feeds a couple profit centers multiple times,” he says. Benstock encourages dealers to determine the average value of the transaction for themselves to better understand the scope of their own service lane opportunity. Today, Benstock says the 10-person team that’s dedicated to meeting with service customers to acquire/replace their vehicles creates a $120 million annual opportunity, factoring in the gross profit achieved across the departments as a result of the initial transactions.

Set the stage for the conversation. Benstock uses technology and tools to identify the customers who meet the store’s definition of an “equity” position in their current vehicle. “Equity doesn’t necessarily mean they owe less than the value of their vehicle,” Benstock says. “For us, equity means you can take a customer out their current car and put them into a new car for a similar monthly payment. It’s equity in terms of doing a payment walk.” As customers who fit the definition schedule service, they are made aware of an “equity alert” opportunity that sets the stage for a discussion with the customer about their current vehicle and a replacement.

Steer clear of hard sells. Recent Cox Automotive surveys show that 15 percent of consumers say they’ve been presented a trade-in value during a dealership service visit, while 12 percent say they’ve traded/replaced their vehicle following the initial presentation. The stats match up to results I’ve heard anecdotally from dealers who pursue service lane acquisitions in earnest. They share that close rates on appraisal/trade-in conversations run between 10 percent and 20 percent. At Paragon, the team aims for acquiring/replacing vehicles from 10 percent of the roughly 10,000 customers they identify as equity-eligible every month. The survey data and close rate benchmarks underscore that while customers are often interested in hearing about their vehicle’s value and a possible replacement, a smaller share will complete the deal. Hence, dealers say it’s best to avoid a hard sell with your service customers. As Benstock says, “we have an obligation to let customers know about the opportunity. They don’t have an obligation to do it, but if it makes sense for them, we want them to strongly consider it and know we’ll make it easy.”

Avoid sales/service conflicts. The most successful service lane acquisition programs share a common theme—they’re set up to avoid conflicts between sales and service. An example: A service advisor has an RO underway, and sales works to acquire the vehicle while it’s on the lift. When this occurs, dealers like Benstock advise that the service advisor needs to get credit for the RO—whether it’s booked as customer pay or as part of an internal RO for reconditioning the vehicle post-acquisition. As Benstock explains, “this way, the house captures the work either way and the service advisor is not in competition with the sales-in-service team. The car needs the work, regardless of the status.”

Dedicate resources to the effort. Some dealers set up and staff a “vehicle exchange” desk at/near the customer lounge; others rotate sales-in-service specialists to engage customers after advisors ask them if they’re interested in knowing the value of their vehicle. The broader take-away: “If you aren’t going to dedicate a team, you’ve got to dedicate hours,” Benstock advises. “If you aren’t all-in and committed, it won’t work.”

Through my conversations with dealers about service lane acquisitions, it’s becoming increasingly clear that this sourcing channel holds opportunity for them to favorably acquire vehicles that they need for their used vehicle inventories and their CPO sales goals—especially given the constraints on new vehicle inventories, lease deals and trade-in volume nearly everyone expects to continue for some time.

Benstock believes his service lane acquisition strategy will serve as a profit replacement plan as market conditions normalize and potentially become more difficult with higher inflation and interest rates: “By being hyper-focused on the customers we have today, we’ll be on our way to lessening the downside when it comes.”

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A Top of the Market Moment in Used Vehicles

Dale Pollak — Tue, 17 May 2022 00:26:31 +0000

If you’re a stock investor, the top of the market arrives when the value of an asset or security stops rising and begins to trend downward. The same is true in used vehicles: The top of the market occurs when wholesale vehicle values reach a peak and begin to soften.

That’s effectively where the current used vehicle market stands. Cox Automotive analysts believe we’ve reached the top of the wholesale market and the spring selling season. Wholesale values aren’t rising like they have in recent weeks, and retail demand doesn’t appear to be getting any stronger. Some suggest we’ve passed the strongest part of what might be considered a sluggish spring selling season, particularly compared to prior years.

The analysts and economists go a step further. They tell me there’s no reason to believe that retail demand will get any better than it is right now, and they don’t think wholesale values or retail prices will rise any higher than they have already, barring the wild card of rental car or other companies pushing up values as they acquire inventory.

The situation arrives as dealers have an average of a 48-days supply of used vehicle inventory on their lots—about five days higher than normal for this time of year. The extra inventory likely owes to dealers stocking up on vehicles in anticipation of a spring selling season that wasn’t as strong as many of us had hoped for.

The result: Dealers are sitting on a lot of inventory investments that, given the way the market appears to be moving, will likely see a greater degree of depreciation than we’ve seen in recent months.

What to do? I’ve been telling dealers that now is not the time to be heavy in inventory, it’s the time to be “right” with your inventory.

There are two initial steps dealers should take to make sure their inventories are “right” as the market turns.

First, dealers should re-balance their inventory to their rolling 30-day total of retail sales. The COO for a six-store dealer group in the Southeast is following this prescription. “About 90 days ago, we made some errors when we were buying cars just to buy the cars,” the COO says. “About a month ago, we had 80 in stock at one of our stores, and we were selling 40. We’re down to about 55 now. We’re only filling holes with cars we really need.”

Second, dealers should take a close look at how they’re pricing vehicles that have reached 30, 45 or 60 days in inventory. A sizable number of ProfitTime dealers have priced their most investment-distressed vehicles (e.g., their Bronze cars) at or well above 100 percent of the market. I’m not suggesting now’s the time for fire sale prices, but it’s becoming apparent that the buyers some dealers believe will pay above-market retail prices for these vehicles don’t seem as plentiful as they have been.

Dealers who work to get things right with the inventories now will be doing themselves a big favor. They will minimize and mitigate the effects of what appears to be a softening used vehicle market and, more importantly, they will be restoring the disciplines of inventory investment management the market hasn’t required for some time.

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A Closer Look at Where Dealers Can Acquire Late Model Vehicles More Profitably

Dale Pollak — Fri, 06 May 2022 18:10:21 +0000

If you’re a franchised dealer looking to stock more one- to three-year-old vehicles in your used vehicle inventory, you’re probably having a hard time lately.

The difficulty owes to a few related factors. First, there are fewer one-to-three-year-old vehicles available. In two of the three most recent years, 2020 and 2021, new vehicle production fell markedly below normal levels. That’s not saying late model vehicles aren’t available. The pool is simply smaller.

Second, demand among dealers for one-to-three-year-old vehicles is as robust as ever. For much of the past decade, one-to-three-year-old vehicles have effectively served as the sweet spot in used vehicles for dealers. The cars are prime candidates for factory certified pre-owned programs, and they also appeal to buyers who, due to availability, budget or some other factor, want an almost-new used vehicle.

Third, wholesale values for one-to-three-year-old vehicles are sky high. In the past week or so, these vehicles are selling at auction for more than their current retail prices. Earlier this week, Cox Automotive analysts noted that 2019 vehicles, as a whole, sold at auction more than $50 above current retail prices.

Given this backdrop, I’ve asking a question: Where’s the opportunity?

I found at least a partial answer through inventory acquisition data from ProfitTime GPS dealers. The data comes from the solution’s Global Acquisition System, which helps dealers know the number/type of vehicles they source from specific channels (e.g., auctions, trade-ins, lease returns, service drives, etc.), the average investment value of vehicles in each channel, retail performance of cars in each channel, appraiser performance in each channel and other operational insights.

Generally speaking, the ProfitTime GPS dealers are like everyone else. They’re getting most of their one-to-three-year-old vehicles from the sourcing channels they’ve relied on for years. The data shows that 46 percent of vehicles less than five years old in dealer inventories come from trade-ins, and 19 percent come from auctions.

As you might expect, the profit potential these vehicles are able to produce is dramatically different. With trade-ins that are less than five years old, 36 percent arrive in dealer inventories as “Gold” vehicles and 18 percent are “Platinum.” (ProfitTime GPS ranks the investment value of each vehicle on a scale of 1-12, classifying them progressively as Bronze, Silver, Gold or Platinum vehicles.) Meanwhile, auction vehicles that are less than five years old consistently enter dealer inventories as Bronze (63 percent) and Silver (20 percent) vehicles, which represent the lowest investment values on ProfitTime GPS’ scale.

This data leads to another question—what other sourcing channels might offer dealers the opportunity to bring in more late model vehicles with better overall investment value potential?

To answer the question, I looked at inventory data to determine other sourcing channels where current volume and investment values suggest an opportunity. Some might readily point to lease returns as a solid option for dealers to get near-new inventory. The supposition is true—dealers take in almost 70 percent of lease returns as Gold and Platinum vehicles. However, lease return volume amounts to less than 1 percent of dealers’ total inventories, and current conditions see many lease owners choosing to keep their vehicles.

Meanwhile, there’s another sourcing channel that stands out as offering what might be regarded as untapped potential for late model inventory—the service drive. ProfitTime GPS dealers currently source about 2 percent of their used vehicle inventory from the service drive. When they bring in these vehicles, the profit potential on late model units runs strikingly close to trade-ins—35 percent are Gold and 20 percent are Platinum. This data affirms a comment I’ve heard from more than one ProfitTime GPS dealer: “There’s gold in your service drive if you go after it.”

As I’ve talked to dealers, most acknowledge that there’s ample room for improvement in the way they source from their service drives. Many have made this sourcing channel a higher priority this year. I’ve been collecting best practices for service drive sourcing, which I’ll share in a future post.

In the meantime, my quick study of dealer inventory data offers a key take-away for every dealer: Once you know the investment value and type of vehicles you might expect from individual sourcing channels, the better able you’ll be to profitably acquire the cars you really need to sell and satisfy today’s near-new-minded buyers.

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An Encouraging Start for Cox Automotive’s Upside/Upside Direct Wholesale Experience

Dale Pollak — Thu, 28 Apr 2022 17:26:43 +0000

This past Monday marked the end of the first Upside Direct auction in Atlanta.

The digital sale, which started Friday and ended Monday, was notable on several fronts:

Keen buyer interest. “We saw 270 bids in the first five minutes,” says Derek Hansen, vice president of wholesale for Cox Automotive. “Historically we haven’t seen dealer bids that strong so early in a sale.” The inaugural sale featured almost 90 vehicles, which saw an average of 23 bids/vehicle—more than three times the number of bids the average vehicle earns in more established auction settings.

Through the course of the sale, more than 8,000 dealers logged into Upside Direct to view cars. A sizable number submitted a single bid—ostensibly to see if the sale itself was for real. My take: Such interest flows from two factors—Upside Direct is new and buyers appreciate that Upside Direct starts vehicles for sale at 50 percent of their Manheim Market Report (MMR) values.

Solid profits for sellers. When dealers use Upside to put cars for sale in Upside Direct, they are guaranteed a minimum profit, plus the lion’s share of the upside a vehicle earns above the guarantee when a vehicle sells. The end result for sellers: Upside’s minimum guarantee and the lion’s share of the upside from sales meant that dealer sellers averaged about $1,500 in wholesale returns in the first Upside Direct sale. The figure compares favorably to wholesale profits public retailers like CarMax and Carvana reported in their latest earnings reports.

Independent dealer Jeremiah Mowry of Atlanta Auto Brokers sold four cars in the sale. He also plans to put more in future Upside Direct sales. “We sold our cars and made really good money,” he says. “I’m super-satisfied with the results.”

Proof of the Rule of 200: In my latest book, “Whole Truth: A Fresh Money-Making Method to Wholesale, the Most Misunderstood Side of Your Business,” I share the Rule of 200, a strategy smart dealers use to measure how well their wholesale vehicles perform at auction. The Rule of 200 dictates that a dealer’s wholesale vehicles should achieve 100 percent of MMR in total, and 100 percent first run sales efficiency (meaning the cars sold the first time they ran). Dealers who use the strategy add the two strategic goals together to see if the sum of their performance equals 200.

The Upside Direct sale met those critical performance benchmarks: Overall, the vehicles achieved nearly 100 percent of MMR when they sold. Some cars sold for more than MMR (a pick-up went for 122 percent of MMR), and some sold for less. But the cumulative total of the vehicle sales met the first leg of the Rule of 200.

Only six of the nearly 90 vehicles available for sale did not receive bids – in these cases, the dealer will be paid the full Upside Guarantee and Upside bears responsibility for reselling the cars. In this regard, the Upside Direct sale came close to achieving the second leg of the Rule of 200. I view the performance as a solid start that will only get better as Upside Direct brings in more buyers and vehicles

A good mix of vehicles. The first sale featured a varied mix of vehicles. The average age of the vehicles was nine years, with some older than 21 years. The average mileage was 117,000; some cars had less than 10,000 miles and some had more than 200,000 miles. Across the vehicles, MMR values ranged from less than $5,000 to more than $50,000. The take-away: Upside Direct’s first sale offered vehicles that would appeal across the full spectrum of potential buyers.

As one might expect, the initial sale also offered some lessons learned the Upside teams will apply going forward. All in all, however, the debut of Upside and Upside Direct, Cox Automotive’s new wholesale experience for buyers and sellers, stands out as a winner for both.

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Signs of a Softening Retail Market in Used Vehicles

Dale Pollak — Fri, 22 Apr 2022 17:17:28 +0000

Earlier this month, I noted how retail used vehicle sales in April might be a stage-setter for the remainder of the year. Like many dealers, I was hopeful that sales would take a positive turn—that a shower of sales in mid-to late April might bring flowers in May and beyond.

Well, it’s starting to look like we won’t see the “bounce” in retail sales everyone hoped would materialize. The hope was based in part on the fact that, as of a few weeks ago, a smaller share of consumers had received their federal tax refunds than usual. The arrival of those delayed checks, the thinking went, would hopefully cause retail sales of used vehicles to pick up.

Unfortunately, as many dealers know, retail sales of used vehicles haven’t increased substantially as April has unfolded—despite the arrival of more (and larger) Internal Revenue Service refunds than the same time last year. The upshot: Tax refund dollars are out there but they don’t seem pointed toward used vehicles.

The end result is that while retail demand remains relatively strong, dealers are experiencing a far more muted spring selling season than many expected this year. At Cox Automotive, analysts had projected April to be one of the best months of 2022 for retail sales of used vehicles. Today, analysts are revising their retail sales forecasts for the calendar year. Cox Automotive chief economist Jonathan Smoke believes we’ll see 500,000 fewer retail sales of used vehicles this year compared to last year.

As I’ve talked to dealers in recent days, I’ve shared how the current rates of retail sales, combined with broader economic factors such as rising inflation and higher living costs overall, suggest the time has arrived for more stocking and pricing discipline. At some stores, inventory investment fundamentals have gone soft as dealers have enjoyed two consecutive years of record-setting used vehicle sales and profits.

Across the country, dealers have a roughly 45-days supply of used vehicle inventory on their lots. Given the current conditions, I’ve been reprising my guidance that dealers should balance their inventories to their rolling 30-day total of retail sales. If you’re long on inventory right now compared to your rolling 30-day retail total, the time has arrived when tempering acquisition efforts, particularly in the higher-cost sourcing channels like auctions, makes good sense. It’s also a time that when you need to make doubly sure that your appraisers and buyers understand exactly how much your inventory needs the vehicle they’re considering.

The current conditions also suggest that dealers will need to mind their retail used vehicle pricing more earnestly than they’ve needed to in the recent past. A few months ago, some anticipated that a spring sales bounce would cause price appreciation in the wholesale and retail markets—the best of both worlds for dealers.

While we’ve seen some appreciation in the wholesale market in recent weeks (about 2 percent, roughly half of typical spring value appreciation), retail prices aren’t moving up in any significant way. Some anticipate retail prices will trend down as dealers realize spring buyers aren’t coming as quickly, or in the numbers, that they expected.

Perhaps the best news of the current used vehicle market environment is that we’ve all been here before. We know how to optimize used vehicle profitability when market conditions aren’t fully in our favor and margin compression risks are on the rise. It’s time to restore your focus on inventory investment management fundamentals to stay ahead of what appears to be a softer used vehicle market.

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Will April Bring a Bounce or Bump for Used Vehicle Sales?

Dale Pollak — Mon, 11 Apr 2022 16:27:29 +0000

All eyes, it seems, are on the used vehicle sales rate for April. Why? Because the month appears to be shaping up as a touchstone of where the market’s headed.

First, a quick bit of background: Overall, dealers closed the month of March selling 15 percent fewer vehicles than they did in March 2019. Compared to March of 2021, used vehicle sales were off even more.

To be sure, some dealers didn’t have this experience. They sold record numbers of vehicles in March. If you were among this group, you were fortunate. You benefitted from what analysts might consider the start of the “spring bounce” in used vehicle sales.

Other dealers, meanwhile, have started to question if we’ll have a spring bounce at all. Their March sales didn’t meet expectations, and they’re now seeing (and selling) fewer customers looking at their cars online and on the lot.

March’s slower-than-anticipated sales appears to owe largely to delays in federal income tax refunds to consumers. As of March 22, the IRS had issued about 45 percent of tax refunds. At the same time last year, the IRS had issued 71 percent of tax refunds. The difference means we had fewer people with fresh tax refund money looking for used vehicles last month.

Now comes April. Cox Automotive chief economist Jonathan Smoke shared this outlook last week:

“We anticipate the second quarter – and particularly April – will be the strongest part of the year for used vehicle sales and values. Once we get through the spring, we expect demand to wane somewhat and should see closer to normal price depreciation patterns for the rest of the year.”

The key element of Smoke’s analysis is whether April will bring the bounce to used vehicle sales the industry wants to see or a bump that signals a rockier road in the months ahead.

Smoke and other analysts note several economic factors that might slow sales in April. Gas prices are high. Groceries are more expensive. Rents are up. Interest rates for mortgages and used vehicle loans are also on the rise. In other words, household budgets face some strain, which could suppress retail demand for used vehicles.

Like everyone else, I’m hoping that Smoke’s forecast for a strong April proves true. If we see a bounce, it’ll validate the fact that retail demand remains relatively strong. Plus, a bounce would give dealers the opportunity to sell through the average 45 days’ supply of used vehicle inventory that’s built up as spring sales so far haven’t met expectations.

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ProfitTime GPS in Practice: Elevating Appraiser Accuracy, Consistency and Performance

Dale Pollak — Thu, 24 Mar 2022 20:32:21 +0000

It’s been an eye-opening experience as I’ve taken part in early training sessions for dealers who are adopting the new ProfitTime GPS (Global Profitability Solution).

The training sessions typically address two main elements—how dealers can use ProfitTime’s 1-12 scoring system to establish the strategic start/end points for every appraisal (your “target” and “threshold”), and how the system helps dealers and managers know how often, and how well, individual appraisers bring in cars that fit the strategic objectives dealers establish.

Broadly speaking, the feedback from dealers, managers and appraisers in these sessions has been extremely positive. I was worried that some might view ProfitTime GPS’ strategic appraisal baselines, and its recommended appraisal and pricing amounts, as too restrictive. Similarly, I was concerned that the system’s reporting tools, which provide a greater level of detail (and accountability) on appraiser performance, would make individual appraisers uncomfortable.

Instead, it’s been gratifying to hear exactly the opposite. Everyone seems to understand that ProfitTime GPS’ strategic objectives serve as efficiency-minded guideposts, not hard-and-fast rules. Appraisers appreciate seeing the potential open and end points for a vehicle when they start a new appraisal. They also appreciate the system’s built-in logic, which automatically adjusts appraisal amounts and retail price recommendations to help bring in vehicles to meet their dealer’s objectives and give them flexibility to step up or back on a vehicle when they need to. I suspect the overall understanding that ProfitTime GPS is intended to help everyone do a better job contributes to the positive feedback we’re hearing about the appraiser performance page. What’s to fear if you’re set up for success, right?

But the sessions have also revealed what might be described as two fault lines in the current processes many dealers use to appraise vehicles. The fault lines aren’t new or unknown. They are, in fact, appraisal fundamentals that, due to the hectic nature of appraising cars and making deals, often get forgotten or overlooked:

Pencil-sharp reconditioning estimates. Over the years, vAuto Performance Managers have been helping dealers and their teams do a better job of assessing each car’s condition and getting as close as they can to actual costs when they estimate the reconditioning work needed to get a vehicle ready for retail. Even so, it’s an area of appraisals that could be better. On the training calls, I’m hearing dealers emphasize to their teams the importance of getting the estimates right. Why? Because any variance—which anecdotally I’ve heard can range from $300 to $600, depending on the dealership—means you’ve got less money to apply toward acquiring the vehicle and customer in front of you and, if you buy the car, you don’t have a clear view of a vehicle’s investment return or profit potential if the recon estimates are wrong.
How much you need the car, and the market likes it. On the training calls, appraisers shared how they liked the way ProfitTime GPS’ Global Acquisition system “pivots” to recommended appraisal and pricing amounts based on how much a dealer’s inventory needs a car and how much the market likes it. As one appraiser put, “it’s sometimes hard to know how much we need the car.” The comment’s honest, but it also reveals a big risk. If your buyers and appraisers don’t know how much you need a car, or whether the market likes the car, they really don’t know how much they can or should pay for it. This age-old truth has become even more critical as dealers are putting more people, in more places, to acquire inventory from anywhere and everywhere.

A final point: Perhaps the most telling aspect of the training calls came via the realization among dealers that as ProfitTime GPS gives them a way to strategically guide and measure appraiser performance, their used vehicle departments will ultimately see better, more consistent outcomes. As one dealer noted, “there’s always been thousands of dollars of difference between appraisers and more consistency will only help us.”

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NADA Follow-Up: Two Things That Occurred While We Were Away

Dale Pollak — Tue, 15 Mar 2022 19:40:15 +0000

One of the nice things about an in-person NADA convention is its all-consuming nature. The convention is the center of the universe for a few days. When you’re there, in the moment almost every moment, it’s not as easy to keep up with what’s going on everywhere else.

But while we were away, two fairly significant things did occur in the used vehicle market.

The first came in the form of a slight, overall increase in wholesale values—what analysts like Kevin Chartier of Manheim take as the first sign of the spring selling season. The increase marked the first rise in wholesale values in 2022, and it arrived a few weeks later than usual. Analysts believe the lag owes to delays in processing of federal tax returns.

The second notable development came in the form of a new record for the national average price for gasoline. The per-gallon gas price topped $4, following a rocket-like rise over the course of a few days. With gas above the $4/gallon threshold, analysts expect it’ll spur demand and interest for more fuel-efficient vehicles. Indeed, if you look at wholesale vehicle values, compact and mid-size cars and entry-level SUVs gained in value, while full-size and luxury SUVs, and trucks, suffered the most in the past week.

Some dealers were aware of the market dynamics at NADA. “We’re already getting more aggressive with truck prices,” a used vehicle manager for a Chevy store told me. “I’ve been nervous that my average investment has been north of $30,000 for a while now.”

The manager’s point has relevance for all dealers who have aligned their inventories to meet rising retail demand for SUVs and trucks in the past year or two. Those are the segments that’ll likely face the most value volatility if gas prices continue to climb.

There’s also another looming issue that could weaken retail demand for used vehicles across all segments—interest rate increases, which the Federal Reserve has essentially promised but hasn’t enacted yet.

As analyst Chartier noted in an e-mail this week: “Are we having fun yet in 2022? We’re 11 weeks into the year and we’ve already seen things that would have been unimaginable a couple of years ago… a giant spike in Omicron Covid cases to start the year, a Canadian trucker protest shut down Detroit auto production for two weeks, highest inflation rate in more than 40 years, geo political events that are further stressing supply chains and financial markets, empty shelves at grocery stores, gas prices up $0.79 in one week and the Fed hasn’t even started raising interest rates yet. Buckle up, 2022 is shaping up to be just as turbulent as 2020 and 2021, unfortunately.”

It’s good to be back from NADA so we can all get back to business.

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NADA Dispatch 2: Trust, Transparency, Inventory Efficiency and EVs

Dale Pollak — Sun, 13 Mar 2022 18:11:24 +0000

Beyond the record-setting profitability dealers achieved in the past two years, there’s another blessing that hasn’t received anywhere near the same level of attention. The blessing came in the form of record-setting customer satisfaction.

Earlier this year, Cox Automotive’s Car Buyer Journey study showed that after reaching a high of 72 percent in 2020, buyer satisfaction related to their shopping experience dipped to 66 percent due to inventory shortages and high purchase prices. Meanwhile, 75 percent of survey respondents said they were highly satisfied with their dealership experience.

These numbers likely result from the pandemic-related push among dealers to more fully embrace digital retailing tools and transparency as they worked hard to capture and engage customers, and make deals. The high satisfaction ratings also illustrate the growing understanding among dealers that doing business their way, instead of the customer’s preferred way, isn’t necessarily the best recipe for long-term success in today’s retail market.

I was reminded of the Buyer Journey findings following several conversations with dealers at the NADA convention today about what might be considered a bit of backsliding among dealers in the current market. The backsliding relates to digital retailing and new vehicle prices.

On digital retailing: Some dealers shared that while they may want to satisfy and serve customers who engage their digital retailing tools looking to purchase vehicles, they also have customers effectively “bidding on cars in the showroom” or “waiting to buy cars when the transport arrives” with more inventory. In some cases, the customer on the lot gets more attention than the customer online, and the latter doesn’t get the opportunity to buy the car they want.

On new vehicle pricing: There’s a debate among dealers as to how much they can rightfully mark up new vehicle prices beyond the MSRP in the current environment of relatively strong retail demand and constrained inventory supply. Is a 5 percent mark-up OK? 10 percent? 15 percent? Dealers selling vehicles above MSRP share that the practice is OK because customers are aware supplies are limited and they’ll get top dollar for their current vehicles if they sell or trade them in. Meanwhile, other dealers want no part of the debate, and refuse to ask for more than MSRP. The dealers include Adam Arens at Patriot Subaru in Saco, ME, John Bergstrom of Bergstrom Automotive, Neenah, WI, and Rick Niello of The Niello Company, Sacramento. Each told me at NADA that they disagree with the position of their markup-minded peers.

The conversations about digital retailing and MSRP markups give me pause. Together, they strike me as threats to the buyer satisfaction gains dealers achieved over the course of the past two years—gains that ultimately arrived because dealers gave customers reasons to trust them. Maybe the opportunism of the current moment will pass quickly. Maybe buyer satisfaction won’t suffer. I hope that’s the case. I also know that, if satisfaction sags, dealers who kept the press on digital retailing, and avoided the MSRP mark-up temptation, will be in the best place.

Two other quick take-aways from the convention floor:

Inventory inefficiency. A dealer visited the vAuto booth looking for help to right the ship in his used vehicle department. The department holds a five-month supply of used vehicles and the inventory water level is on a steady rise. Our Performance Managers at NADA helped the dealer understand what he already knew—you’ve got to get out of those cars quickly and take the pain. The dealer’s situation wasn’t necessarily unique, but his level of inventory inefficiency was higher than I’ve seen in some time.

EVs. NADA offered multiple workshops and sessions to help dealers prepare for what one industry analyst dubbed a “tsunami of supply” of EVs that will eventually arrive at dealerships. EVs are certainly on the minds of many dealers, particularly as their factory partners pledge to commit varying levels of EV production capacity. Nonetheless, I’d submit that for many dealers, EVs aren’t necessarily top of mind. “We’ll worry about them when we start seeing the cars,” a fixed operations director for a three-store group in the Southeast told me. “Right now, I’m more worried about keeping my customers happy today so we can expect them tomorrow.”

All in all, it was another great day at NADA. Like most everyone here at the convention, my feet and I are looking forward to the finish line.

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NADA Dispatch 1: A Buoyant, Busy Day on the Exhibit Hall Floor

Dale Pollak — Sat, 12 Mar 2022 16:52:27 +0000

It’s good to be back at an in-person NADA convention. No. Check that. It’s great to be back, and it’s a sentiment I heard over and over throughout the opening day of the exhibit hall at the convention.

I could sense anticipation and positive energy as I arrived before the exhibit hall opened. Dealers were lined up, waiting for the doors to open—a sign, I thought, of their desire to find better ways to move their businesses forward and connect with partners they haven’t seen in person for two years.

Handshakes gave way to hugs as I met with dealers to talk about their businesses and where they plan to take them in the months ahead. There is absolutely no question that dealers are in a very good place. They know that while the market, and especially the used vehicle market, won’t be like last year’s rocket ride, there is still plenty of opportunity to sell more cars and make more money.

No surprise, used vehicle inventory acquisition was top of mind for many dealers. Most of the dealers I met were keen on plans to do an even better job sourcing inventory directly from customers. A handful shared that they plan to return to buying auction vehicles after sidelining themselves from the lanes because they thought prices were too high.

I especially liked the term a manager who oversees preowned operations for a 25-store group in the Northeast used to describe his acquisition and pricing strategy—“calculated courage.” The manager explained the calculation starts with a clear-eyed view of a vehicle’s competitive set, overlayed with an understanding of “what we can do with a car that’s different from other dealers.”

Here are a few other take-aways from the exhibit hall floor:

A return to discipline. More than a few dealers shared that in recent weeks they realized they are “out of round” with sizable shares of their inventories as wholesale values have softened in recent weeks. “We had about 20 cars that were priced at 100 percent of the market, and the market changed. We’re working our way out of the cars and my guys are back to pricing cars more than once a week,” a Southeast dealer shared.

A focus on decision-making efficiency. The new Cox Automotive solution, Upside, garnered positive interest from dealers for its promise of informing dealers, at the moment they acquire a vehicle, of the money they could make if they choose to wholesale a vehicle. “I don’t want my managers to spend time trying to decide if what to do with a car,” an Atlanta-area dealer shared. “We need to be in the business of acquiring every customer vehicle that comes our way and making the right decision faster.”

In a similar vein, several ProfitTime dealers were excited about the new Global Acquisition system’s ability to help them analyze and optimize how well and right they acquire inventory across multiple sourcing channels and manage their outcome as retail units.

An eye on growth. I can’t recall a convention where so many dealers noted that they either recently acquired another dealership, or they were actively pursuing stores to purchase. The stories affirmed all the recent headlines about more stores changing hands as growth-minded dealers look to capitalize on the economies of scale and profitability they’ve enjoyed in the past two years.

A concern about comp plans. Expense reduction remains on the minds of dealers—particularly as it relates to compensation plans in sales, where record-high gross profits are yielding substantial paychecks for top sellers and making some dealers worry that they’re paying their people too much. The view isn’t universal, though, as several dealers noted that they increased take-home pay for their teams last year and have seen less turnover.

That’s all for now. I’m off to the NADA exhibit hall. I’ll share more here tomorrow.

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A Bit of the Whole Truth on Wholesale Profits in 2022

Dale Pollak — Wed, 02 Mar 2022 17:00:59 +0000

Dealers across the country enjoyed a big blessing last year that previously only big retailers like CarMax, Carvana and some public dealer groups had the opportunity to enjoy.

The blessing came in the form of record-setting wholesale profits. For some dealers, the wholesale line on their financial statements showed more profit in a single year than the previous five to 10 years combined.

It should be noted that this development didn’t come about because dealers suddenly figured out how to make money in the wholesale market. It also didn’t arrive because dealers regarded or treated their wholesale vehicles any differently than they had in the past.

No, the record-setting profits arrived because of wholesale market conditions that ushered in an era of easy money for wholesale sellers. If the wholesale value of a used vehicle today will be greater tomorrow, and even greater next week or next month, it’s not difficult for someone selling a wholesale vehicle to make money, even if they over-paid on the day they acquired the unit.

But while the wholesale line on most dealer financial statements looked great last year, I don’t think the line will look the same this year, or at least represent the real profits dealers recorded in 2021. I say this for two reasons:

The wholesale market is ever-so slowly returning to its typical trend of week-over-week depreciation. While wholesale values remain historically high, analysts expect we’ll see an accelerated rate of seasonal depreciation later this year. Such market dynamics suggest to me that the era of easy money in the wholesale market, which produced an unprecedented amount of wholesale profit for dealers, is largely over.
As the wholesale market becomes less forgiving and more risky, I suspect we’ll see a robust return to the creative methods that are used to determine the vehicles that get wholesaled and when, and account for the outcome of the wholesale sales on dealer financial statements. I fear that while wholesale profits were very real in 2021, they may be, shall we say, less “real” this year and beyond.

The good news is that I’ve been part of two bulwarks that can help dealers steer clear of the more traditional ways of wholesaling vehicles and help them achieve consistent and real profits as they sell vehicles in the wholesale market—just like CarMax, Carvana and some public dealer groups.

The first bulwark is my latest book, Whole Truth: A Fresh Money-Making Method to Wholesale: The Most Misunderstood Side of Your Business. The book attempts to help dealers get beyond the view that they should expect to break even or make a small profit as they wholesale vehicles. The book also sheds light on the darker side of wholesaling cars, and how it contributes to less-than-optimal returns as dealers sell vehicles in the wholesale market and account for them on financial statements.

The second bulwark is the new Cox Automotive solution, Upside. It’s inspired by my latest book and promises dealers a whole new way to wholesale, one that guarantees real profit and eliminates risk, while creating a more positive, transparent wholesale experience for sellers and buyers, alike.

We’ll be debuting the Upside solution, and offering copies of Whole Truth, at next week’s NADA 2022 convention in Las Vegas. Together, I think they’ll help you understand why I believe the old ways of wholesaling vehicles and the sub-optimal outcomes dealers have typically achieved, will soon be gone for good.

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Understanding the Need for a ‘North Star’ to Guide Inventory Acquisition

Dale Pollak — Wed, 23 Feb 2022 17:26:16 +0000

We are in a unique moment in the history of the car business when it comes to how dealers acquire inventory for their used vehicle departments.

It’s a moment where dealers have learned a lot about how to source vehicles in a supply-constrained market. It’s also a moment where what dealers don’t know will come back to bite them.

Let’s look at what dealers have learned in the past two years, as the COVID-19 pandemic, chip shortages and strong demand in used vehicles has reshaped inventory sourcing:

First, we know that trade-ins, what might be considered the “old reliable” source of used vehicle inventory, don’t occur with the frequency they did in the past. The relative absence of trade-in vehicles forced dealers to seek inventory from other sourcing channels.

Second, we know that auctions have become a last resort for many dealers to find inventory. The last resort status owes to the unprecedented and ongoing appreciation of wholesale values we’ve seen in the past two years. In the past, auction vehicles were dealers’ second most-important sourcing channel.

Third, we know that as dealers look to acquire vehicles directly from customers (through their service lanes or off the street), they face stiffer competition. Today’s customers with vehicles to sell or trade are more likely than ever to have a purchase offer in hand when they present a vehicle to a dealership.

Now, let’s look at what we don’t know about this new era of multi-channel used vehicle inventory sourcing:

First, while dealers often know what constitutes doing a good job acquiring trade-ins, they often don’t know what a “good job” looks like when they’re sourcing vehicles from their service lanes or off the street. They don’t have a history of measuring the Look to Book (or win rate) and acquisition Cost to Market percentages (or for ProfitTime dealers the investment score) of cars in the more nascent sourcing channels. (Two quick definitions: The acquisition Cost to Market metric measures how right you own a car compared to prevailing retail prices for the vehicle. In ProfitTime, the investment score measures a vehicle’s investment return potential based on its Cost to Market, Market Days Supply and retail sales volume.)

Second, if you ask 10 dealers what a good Look to Book (or win rate) and Cost to Market or investment score should be for auctions, you’d get 10 different answers. To my knowledge, it’s the rare dealer or manager who tracks how often buyers win or lose at auction. In addition, the threshold for what constitutes an acceptable acquisition Cost to Market or investment score depends on how a dealer does business.

Third, the absence of the metrics that matter as dealers source inventory across more channels makes it difficult, if not impossible, to effectively manage the larger number of individuals who appraise and acquire inventory. As the old saying goes, “without metrics you can’t manage and, if you can’t manage, you can’t improve.”

My take on this situation is that dealers are effectively operating in the current multi-channel sourcing environment without a “North Star” to guide all the individuals and managers responsible for acquiring the right number of cars, for the right money, in each sourcing channel, where risks and opportunities are different. In any dealership, you could have two individuals working the same sourcing channel. One passes on a vehicle because of the acquisition cost, another buys it for more money. Who’s to say who’s right or wrong?

As the year unfolds, and brings more volatility to used vehicle wholesale values, retail prices and retail demand, it’ll be ever-more important for dealers to answer this question if they hope to improve the number of vehicles they acquire for the right money, and the right reasons, across multiple sourcing channels.

The question also serves as the cornerstone for the new ProfitTime Global Acquisition system. We built Global Acquisition to help dealers have ready access to the metrics they need to manage their teams in accordance with the North Star they establish for their inventory sourcing strategy. I’m excited for dealers to see the new Global Acquisition system, which is part of the all-new ProfitTime Global Profitability Solution, at the NADA convention in Las Vegas.

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Will We See A Sudden Change to Used Vehicle Values?

Dale Pollak — Wed, 16 Feb 2022 14:58:41 +0000

I’ve had several conversations in the past week or so with dealers wondering if we’ll soon see a “burst” in what some have dubbed a used vehicle pricing bubble.

Dealers point to a recent and slight downward trend in wholesale values as proof that we’re past the high point of the used vehicle market, and we’ll soon see a dramatic tumble in vehicle values.

I can appreciate the viewpoint. It reflects a keen understanding throughout the retail automotive industry that ours is a uniquely cyclical business, where what goes up must eventually come down.

Even so, the industry economists and analysts I speak to every week don’t think we’re in the early stage of a sudden market correction, and that the sky will soon be falling. Rather, we’re seeing exactly what Cox Automotive analysts have expected us to see—an easing of the historically high wholesale value appreciation that occurred in 2021. The analysts also expect that wholesale value appreciation will return in more robust fashion as retail demand picks up when spring, and tax refund checks, arrive.

The outlook’s a little less rosy for the back-half of 2022. By then, we are likely to see a fall-off in retail demand due to expected increases in interest rates. News outlets this week report that the Federal Reserve is likely to raise interest rates next month, followed by similar-size increases in late spring, summer and the fall.

But even with incremental interest rate increases, analysts don’t anticipate a sudden drop, or a burst in the current used vehicle pricing bubble. Instead, they suggest we’ll see what amounts to a “an accelerated seasonal decline” in used vehicle values in the summer and fall. If the outlook proves true, it’ll be costly for dealers who load up on inventory at the peak of the market this spring and find fewer shoppers looking to purchase used vehicles.

I’m also certain we’ll see more headlines that predict the used vehicle bubble will “burst.” When the stories arrive, I’d encourage dealers to remember the economic fundamentals of supply and demand and how they shape used vehicle values.

To wit, the sustained appreciation of used vehicle values arrived because of an imbalance of supply and demand. The used vehicle market supply is diminished. Think of all the leases that were not initiated in the past two years, and the fleet vehicles that weren’t built and put into service. Add in the growing number of consumers who are buying back their current leased vehicles to either continue using them or sell them to someone else to make a return.

No one expects the current constraints on used vehicle supplies to change dramatically any time soon. Hence, you’d have to look at the demand side of the equation to determine if there’s any risk of a sudden drop-off in used vehicle values, or the so-called “burst” of the bubble.

From what I can tell, retail demand for used vehicles is expected to remain relatively strong through the spring. Retail used vehicle sales will be buoyed by higher-than-average tax refund checks, a desire among consumers to replace and/or update a current vehicle and still-limited supplies of available new vehicles. As the effects of higher interest rates sink in with consumers, we can expect retail demand will slow, and vehicle values will diminish. Such market dynamics do not, however, represent a dramatic or sudden change.

To be sure, we might experience some unexpected or unforeseen circumstance that disrupts retail demand, causes consumers to suddenly pause their used vehicle shopping and triggers a sudden drop in used vehicle values.

But that’s not the outlook I anticipate. Instead, I see a horizon that bodes well for dealers who align their used vehicle inventories and prices to the current market and use it to know when a change is around the corner.

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Why Margin Compression May Return in Used Vehicles

Dale Pollak — Fri, 04 Feb 2022 14:23:48 +0000

While I try to avoid making predictions about the future, recent conversations with industry analysts suggest that market conditions that drove record-setting profitability for dealers in used vehicles may take a darker turn later this year.

The darker turn owes to the relationship between wholesale and retail prices for used vehicles and where they may be headed in the coming months.

At the current moment, in early February, wholesale values have softened. The softening owes in part to the arrival of inventory from rental car companies, who are now clearing their fleets of higher-mileage, late model vehicles. Not long ago, rental companies were big buyers of used vehicles in the wholesale market, because they needed to put more vehicles in service to meet holiday travel demands. Now, the cars are coming back, with 60,000 to 70,000 miles on the odometers. These vehicles aren’t as desirable, and they are depressing values in late model segments.

Wholesale values also softened due to slightly diminished retail demand. Dealers have an average of nearly 50 days worth of inventory currently in stock. Retail sales have been OK, generally speaking, but they are not as strong as they were in January last year. As a result, dealers are not buying as aggressively, at least at auctions, as they have in recent months.

Analysts believe we’ll see another rise in wholesale values in the next few weeks as consumers receive their tax refund checks and look to spend the money on used vehicles. Cox Automotive chief economist Jonathan Smoke shared this week that his sources at tax preparation firms suggest the average tax refund will be almost 50 percent higher than it was a year ago, up to $7,200 from $5,000. He and other analysts do not expect any significant increase in available new vehicle supplies in the near future—which suggests consumers who need vehicles will look to used vehicles.

When dealers begin to sense the rising retail demand, they will return to inventory acquisition, which will cause wholesale values, in specific segments if not across the board, to increase. Analysts also believe that, as the spring selling season gets underway, rental car companies will need inventory, and they’ll also return to the wholesale market to purchase used vehicles.

But while we expect wholesale values to increase in the weeks and months ahead, analysts do not believe retail prices for used vehicles will rise in tandem. Why? It’s because there’s not much room, particularly in late model segments, for retail prices to go. Depending on the specific model/segment, two to three-year-old vehicles remain priced close to comparable new vehicles.

The outlook has me concerned that as dealers ramp up to meet retail demand, they will face high wholesale prices with little or no margin in relation to retail prices. Last year, when wholesale values took off, retail prices could rise, too, because they hadn’t hit what might be considered a natural ceiling (e.g., the price of the same/similar new vehicles).

The return of margin compression will likely be most profound for dealers in the second half of the current year, when we expect to see more new vehicles available at dealerships and higher interest rates. These factors will likely cause retail demand for used vehicles to soften, leaving dealers with what might be called “tough” inventory—cars purchased at high wholesale values, little retail margin and fewer potential buyers.

Given this outlook, my guidance to dealers is to remember the fundamentals of operating in a less-forgiving market—maintain a balance of your current stock to your rolling 30-day total of retail sales, keep a close eye on retail pricing recommendations and trends, and avoid the age-old temptation of believing that the car you love and paid up to acquire, and priced to make the money you believe you deserve, will deliver the results you expect.

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A Closer Look at General Motors’ CarBravo Program

Dale Pollak — Fri, 21 Jan 2022 16:32:02 +0000

Whenever a factory launches a program to sell used vehicles directly to consumers, it gets my attention.

This past week has been no different, following the announcement from General Motors that it will launch CarBravo, a site it intends to use to sell GM-, GM Financial- and dealer-owned used vehicles directly to customers.

For its part, GM is saying all the right things publicly. The factory wants to help its dealers compete in an era when upstart digital retailers like Carvana and Vroom have been selling used vehicles, and taking market share, from their dealers. GM intends for CarBravo to deliver the same kind of shopping and purchasing experience as the digital competitors—a process where consumers can get a car whether it’s “online, at the dealership or both.”

But the more I read about CarBravo, the more questions it raised. How will GM price used vehicles, and how will dealers make money? How will CarBravo’s plans to ask dealers to appraise, inspect and certify vehicles complement or conflict with the way GM dealers currently handle these mission-critical used vehicle tasks? I took my questions to GM dealers. Their initial reads suggest significant concerns about the success CarBravo might achieve.

“CarBravo feels to me like an extension of GM’s Factory Pre-Owned Collection, which didn’t work,” says the used vehicle director of a dealer group with several GM stores. “We’re not going to sign up.”

“We signed up,” adds the used vehicle manager for a Chevrolet store in the upper Midwest. “But we pretty much sign up for everything in case it’s good. We’re not sold on CarBravo yet.”

“I’ve asked other GM dealers I know and so far, CarBravo is a thumbs-down,” shares a Southeast dealer with two GM stores.

The chief concerns from dealers fall into three categories:

Dealer investments in GM’s certified pre-owned program. From what I’ve gathered, dealers who have been selling GM CPO units will need to make a choice between continuing in the program or following CarBravo’s certified pre-owned program. Some GM dealers pride themselves on their CPO performance, which accounted for a significant and steady share of their used vehicle sales up until the COVID-19 pandemic. Like dealers who participate in other factory CPO programs, GM dealers have sometimes accepted losses on CPO sales because they needed to meet or beat factory-set sales objectives. GM has built a degree of dealer loyalty toward its current CPO program that’s now under question.

Program costs. In addition to a $1,000 enrollment fee, CarBravo’s ongoing quarterly fees run $1,500 or $3,000, depending on the percentage of dealer-owned vehicles a dealer commits to the CarBravo platform. When vehicles sell, dealers would also pay $199 or $299, depending whether the sold vehicle falls in CarBravo’s standard line (vehicles 10 years older or less, with fewer than 100,000 miles) or budget line (more than 10 years old, with 100,000-plus miles). The CarBravo program also includes requirements for dealers to pay program-approved vendors to help merchandise vehicles and make guaranteed offers for customer trade-ins and vehicle sales. Every GM dealer or manager I talked to believes CarBravo will cost more than GM’s current CPO program.

Pricing/profit. CarBravo intends to price GM- and GM Financial-owned vehicles using J.D. Power Clean Retail values, according to its dealer guide. Dealers can price the inventory the own and post on CarBravo they way they prefer, although one used vehicle manager shared that it seemed like CarBravo would prefer everyone to price vehicles the same way. The pricing strategy raised immediate concerns for dealers on two fronts. First, several called current J.D. Power Clean Retail values as “high, high, high” for the current market. Second, some dealers have no interest in straying from the used vehicle pricing strategies they currently follow, such as ProfitTime’s investment value-based pricing method. “If I plug into their numbers, my ProfitTime dashboard would explode,” a used vehicle manager says.

On the profit front: While dealers say they’ll have an opportunity to sell F&I products to CarBravo customers, no one seemed to know what back-end opportunity would remain for dealers when customers purchase a vehicle from the national pool of GM-/GM Financial-owned units, complete their deal on CarBravo’s digital retail platform, and take delivery at a dealership. Similarly, dealers aren’t sure how much retail margin might remain when they purchase GM-/GM Financial-owned vehicles for CarBravo’s “buy now” price.

“GM Financial is asking a fortune for their cars right now,” the dealer group used vehicle director says. “If the ‘buy now” pricing is anything like what we’ve been seeing, we won’t be able to buy them and make any money.”

From where I sit, the CarBravo program seems like an ambitious, arguably bold move by a manufacturer that’s not always been associated with terms like disruption or innovation. Broadly speaking, the rise of digital retailers like Carvana has arrived because dealers have largely been slow to adapt to changing consumer expectations about car buying, and CarBravo may well move the industry along.

I also am not convinced that, as some dealers worry, CarBravo represents a way for GM to advance a direct-to-consumer sales model. I say this because CarBravo simply won’t work without sufficient widespread GM dealer participation, so CarBravo can offer the broad, multi-brand inventory it’ll need to attract mass consumer interest.

Therein lies the challenge for GM and CarBravo. It certainly seems like they’ve got more work to do to convince GM dealers that CarBravo is beneficial for their used vehicle businesses.

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ProfitTime in Practice: A Deeper Dive Into Bronze Vehicle Pricing

Dale Pollak — Wed, 05 Jan 2022 16:52:04 +0000

When dealers are making record profits and selling all the used vehicles they can acquire fairly quickly, it can be difficult to convince them that their current decision-making could be better or improved.

Such is the case with used vehicles the ProfitTime system identifies as Bronze vehicles. The vehicles earn the Bronze designation because they share three characteristics—high Cost to Market, high Market Days Supply and low retail sales volume. Such characteristics indicate Bronze vehicles will produce the least return on investment or net profit potential for dealers when they retail compared to other inventory, which ProfitTime designates as Silver, Gold or Platinum.

Bronze vehicles aren’t bad cars. Rather, they represent a fact of life for dealers that’s typical for almost any retail business. Most retailers sell a mix of merchandise that represent a range of profit potential and investment returns, just like their competitors. It’s the rare retailer who is fortunate to only sell products that customers want to buy, that are hard to find and that are almost always guaranteed to deliver a healthy profit or investment return.

In theory, most dealers at least intuitively understand that when they acquire a Bronze vehicle the best course of action would be to price the vehicle to move quickly. If a Bronze vehicle represents a retail loss or a less-than-desired profit, they realize that more time in inventory typically won’t improve the vehicle’s financial outcome. That’s why I’ve long advocated that dealers retail out of their Bronze vehicles in 30 days or less, to get what they can for the car and minimize the risk that their troubled investment will get worse.

But in practice, and thanks to market conditions where used vehicle values have been appreciating over time, dealers have been doing exactly the opposite with Bronze vehicles. When a Bronze vehicle enters inventory, and the ProfitTime system recommends a retail price range to move the vehicle quickly, most dealers (80 percent) price the vehicles at least $1,000 or higher than the recommendation.

When I ask dealers why they are effectively putting lipstick on their Bronze vehicles, the response is almost universal: “If we price the vehicle to sell right away, we won’t make the money we want, and we might even take a loss. We’d rather take a chance on the vehicle and see what happens.”

This mindset is completely understandable. Most used vehicle managers are paid from the gross profit the used vehicle department generates. It’s not in their best interest to price cars at less-than-desired profit outcomes, even if that’s what a Bronze vehicle’s investment value suggests they should do.

Some dealers also point to Bronze vehicles that actually sold at the higher price point, and left their inventories in less than 30 days. “See?,” they’ll say. “We took a shot on the car and it worked!”

When dealers shared such success stories, I haven’t had much to offer as a come-back. Intuitively, I believed the instances of dealers selling Bronze vehicles for all the money they asked was the equivalent of a blind squirrel finding a nut—it happens, but not often enough.

Over the holidays, I asked vAuto data scientists to take a closer look at whether dealers who went their own way with Bronze vehicles, and priced them with what I have come to call an “explore and exploit” strategy, are really finding the degree of success they believe and share with me. Here’s what the data scientists found:

Twenty-five percent of Bronze vehicles priced at least $1,000 higher than ProfitTime’s recommended range sold in less than 30 days. My hunch is that these vehicles were late-model, likely certified pre-owned vehicles, dealers paid up to acquire. The fact that they found buyers willing to purchase at the dealer’s asking price owes to the desirability of the vehicles in a market where everyone’s paying up.
Of the remaining vehicles, 50 percent sold at the higher price after more than 50 days in inventory, on average. One could reason dealers saw some front-end gross when these vehicles retailed, though I suspect many of the vehicles, given their Bronze status and time in inventory, resulted in retail net losses, even in an appreciating market.
The balance of the vehicles—25 percent of the Bronze vehicles in total—required price discounts to sell. Some retailed with discounts in less than 30 days, the rest took longer, closer to 40 days, according to the data.

My take-away is that while many dealers are pricing Bronze vehicles as if they were higher-value investments, they could achieve better overall returns if they priced a larger share of their Bronze vehicles to sell more quickly. From my analysis, the decision to give Bronze vehicles “a shot” at higher asking prices only seems to work about half the time, at best.

I recognize that the current market doesn’t penalize dealers for taking shots with Bronze vehicles, even if they take longer than they should to retail. But I would also submit that if a dealer or used vehicle manager hasn’t been happy with the sales volume or F&I profits they achieved in the past year, they can likely find the fix in the way they’ve been pricing their Bronze vehicles.

In addition, it should be noted the appreciating market that currently forgives dealers for over-pricing Bronze vehicles won’t last. And, when the market changes, dealers who continue the practice of taking shots with Bronze vehicles run the risk of being caught long and wrong.

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5 Best Practices that Shaped Used Vehicle Success in 2021

Dale Pollak — Wed, 15 Dec 2021 17:11:38 +0000

It has been a remarkable year in used vehicles in 2021. Based on what I see and hear, many dealers will enjoy the dual blessing of record-setting used vehicle sales and profits as they close out their books for the year. An even larger number of dealers will celebrate the unprecedented profitability they achieved in used vehicles in 2021, even if they aren’t satisfied with their sales volumes.

You could summarize the year in used vehicles as one where the high tides of the wholesale and retail used vehicle markets lifted all used vehicle departments, at least in terms of profitability, while some did even better.

I took some time to assess the reasons some dealers rose higher than others in 2021. I was struck by how many, if not most, dealers pursued the same priorities in the past year. The key difference, though, boiled down to the execution of the following five best practices, which I believe will shape dealers’ success in used vehicles in the year ahead:

Best Practice 1: Sell more cars with less inventory. Broadly speaking, dealers operated through much of 2021 with a 35- to 40-days supply of inventory—roughly 15 percent to 20 percent fewer vehicles than they’d normally carry through a calendar year. Despite lower inventory levels, some dealers still sold record levels of used vehicles. I can’t recall a time, since I first took vAuto to dealerships more than 15 years ago, when almost every dealer sold more than 50 percent or more of their inventory in less than 30 days. The best dealers achieved this performance by becoming hyper-efficient as they acquired, reconditioned, merchandised and priced their used vehicles. Reconditioning proved to be a critical focal point for some dealers once they saw a near-empty lot out front and a backlog of cars out back.

Best Practice 2: Diversify inventory sourcing channels: Among the most remarkable things that occurred in the past year to 18 months is the number of dealers who flipped the script on their inventory sourcing. With limited wholesale supplies and higher costs, and fewer trade-ins from new vehicle sales, larger numbers of dealers began pursuing inventory from wider variety of sourcing channels—their CRMs, service lanes, their communities, their lending partners, other dealers or anywhere else they could find cars.

In my view, the push to acquire vehicles directly from customers with the help of solutions like Kelley Blue Book Instant Cash Offer and in-house buying centers could not have arrived at a better time—especially given the number of vehicles digital retailers like Carvana and Vroom have been siphoning out of the market. Best of all, dealers who find success acquiring customer inventory find the practice sets the stage for future advantage, when the customer they serve well today needs to purchase or sell another vehicle tomorrow.

Best Practice 3: Put the customer at the center of your appraisal process. This best practice flows directly from the playbooks retailers like Carvana and Vroom have established in recent years. In their world, vehicle appraisals start with the customer, via an online form. Customers plug in the information about the vehicle, they receive a “sight unseen” appraisal offer and, if they accept, a transport comes to pick up their car. Customers seem to appreciate the process and consider it far more convenient and transparent process than the vehicle purchase and trade-in experiences they had with dealers in the past.

It’s no surprise, then, that the dealers who found the greatest success acquiring vehicles from customers—both in terms of the number of cars and their profit potential—did so by putting customers in the driver’s seats of their appraisal processes. They adopted the tools that let customers begin the appraisal on their own terms and complemented it with an in-store or in-driveway experience that provided the ease and transparency customers want.

In the year ahead, this best practice will gain even more credence as used vehicle supplies will remain limited and dealers will take their customer vehicle acquisition efforts to the next level. A key area of focus will be the adoption of investment value-based metrics and strategies to manage appraisers and the outcomes of vehicles purchased from specific customer-based acquisition channels, where opportunities and risks are different.

Best Practice 4: Price based on investment value. For much of 2021, dealers pursued an “explore and exploit” strategy in used vehicles, where they could put almost any price on a vehicle and sell the car quickly. If some vehicles didn’t sell quickly, it didn’t really matter. Dealers were able to make up any losses or low grosses they achieved on slow-selling cars by cheap-selling cars they acquired “really right.” I heard countless stories of dealers accepting a $2,500 gross to sell a car quickly for the sake of their monthly gross and volume targets, even if they could have made a $3,500 gross if they held out for it.

Meanwhile, some dealers stayed disciplined and true to an investment value-based pricing strategy. If they had a vehicle with a low investment value (a Bronze car in ProfitTime, characterized by a high Cost to Market, high Market Days Supply and low retail sales volume), such as a car they purchased from auction for all the money because they needed it, they priced the vehicle to move right away. Conversely, if they had a vehicle with a high investment value (a Platinum car in ProfitTime, characterized by a low Cost to Market, low Market Days Supply and high retail sales volume), they priced it to achieve the gross profit the vehicle’s investment value deserved. This investment value-based pricing strategy helped dealers strike a balance between turn and gross that led to better overall outcomes. vAuto data suggests that dealers who followed an investment value-minded pricing strategy achieved 10 percent more in gross profit and sold 13 percent more volume than dealers who priced vehicles based on the less investment-efficient “explore and exploit” strategy.

Best Practice 5: Evaluate your wholesale opportunity with every car. While the unprecedented, ongoing appreciation of wholesale values meant that you’d pay all the money to acquire an auction vehicle, it also created a first-ever opportunity for dealers to make money almost every time they chose to wholesale vehicles. I believe this favorable selling environment for wholesale vehicles gave dealers the confidence they needed to pursue and purchase vehicles from customers. If they took in a car they didn’t need or didn’t want to retail, chances were better than good they could wholesale the vehicle and make money.

Moving forward, it’ll be important for dealers to evaluate each vehicle’s wholesale potential to ensure that when they choose to retail a vehicle, the decision reflects the most-optimal financial return for the investment. If nothing else, 2021 taught us that while we may aspire to be “retail-first” dealers, there are some vehicles and circumstances where the best exit strategy for the vehicle awaits in the wholesale market.

As a final point, I’ll add that I’m optimistic about the used vehicle market in 2022. Indeed, we’ll likely see market conditions normalize as new vehicle inventories gain strength and the robust demand we’ve enjoyed for used vehicles wanes. Such dynamics, though, will prove less problematic for dealers who follow these best practices and pay close attention to their markets for signs of emerging risks and opportunities.

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A Key Question: Is the Wholesale Market Turning?

Dale Pollak — Fri, 03 Dec 2021 20:10:47 +0000

Several dealers astutely noticed a slight drop in wholesale values in the past week and asked the same question: Is the wholesale market finally cooling off?

Unfortunately, the answer to the question probably won’t be very satisfying to dealers and used vehicle managers.

In the past week, wholesale values did, in fact, drop. But the decline was minimal—three-tenths of 1 percent. The dip marked a notable departure from the prior 15 weeks, when wholesale values increased week over week as the combination of limited supplies and high demand, particularly from rental car companies and volume-minded dealers hungry for inventory, pushed up prices.

I give credit for dealers who noted the wholesale value decline. It suggests they are rightly paying super-close attention to where the wholesale market is heading.

But I would submit that the decline doesn’t signal any significant movement in the wholesale market. It’s simply a reflection of the time of year, when wholesale values typically depreciate at a faster rate than they do at other times of the year. In fact, Cox Automotive analysts expected that wholesale values would diminish, if only slightly, in the final weeks of 2021. Furthermore, the analysts expect that the current tempering of wholesale values will give way to another stretch of wholesale value appreciation in early 2022, particularly as dealers and the industry gears up for the typical spring selling season.

The current moment is also marked by another first—even as wholesale values took a slight dip, we saw wholesale prices exceed retail prices across all inventory segments, not just those that have been in high demand. This development arrived, at least in part, due to the anemic rate of retail price appreciation we’ve seen in recent weeks, coupled with the realization among dealers and used vehicle managers that retail demand has been softening and they need to lower asking prices to move metal.

Neither of these conditions should signal any cause for alarm on the part of dealers at least for the moment. There’s likely still margin available in vehicles purchased in recent weeks that haven’t yet sold to retail customers. In addition, dealers have been proactively acquiring inventory from non-auction channels, which still offer more favorable purchase-to-retail price relationships.

Perhaps the biggest take-away from the current moment, and the one that bears continued close examination in the months ahead, is the overall profitability used vehicle inventories generate for their dealerships. If you’ve been relying on auction vehicles, there’s no question your gross profits have been to look far less rich and robust compared to the spring and summer this year. Similarly, I’m told that as competition heats up to acquire vehicles directly from customers, the Cost to Market percentages on those vehicles aren’t as favorable for dealers as they used to be.

The big take-away for me is that, as dealers enter 2022, we may well find ourselves back at a point where market forces are no longer giving dealers the gross profits they desire and expect. Rather, it’ll be up to dealers and used vehicle managers to return to the task of proactively preserving and protecting the profit potential of every used vehicle before the market takes it away.

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2021 Yields Two Positives to Remember in the Coming Year

Dale Pollak — Wed, 01 Dec 2021 17:53:34 +0000

As December arrives for dealers, it’s worth reflecting on two positive and proactive things the best dealers did this year to achieve record-setting used vehicle sales and profitability, despite the high cost and relative scarcity of available inventory.

The first thing could be described as “the Big Pivot,” wherein dealers effectively turned the tables on the traditional two-channel strategy for acquiring used vehicles. For years, auctions and trade-ins have been the primary sources for inventory. With historically high auction prices and fewer trade-ins coming from new vehicle sales through much of 2021, dealers pivoted to acquiring vehicles directly from customers.

Last week, the used vehicle manager at a Chrysler Jeep store in the Midwest shared that of the 80 vehicles he had in stock, half came through direct-from-customer purchases as new vehicle sales and related trade-ins have effectively dried up. For many dealers, auctions now occupy the equivalent of a third-row seat in an SUV—you go there only when it’s absolutely necessary to get inventory.

The second positive thing relates to the wholesale market, and it’s directly tied to the “Big Pivot” to direct-from-customer vehicle acquisitions. In the past, I think it’s fair to say dealers would often cherry-pick the cars they acquired from customers. If a customer had a vehicle that didn’t fit the dealer’s inventory or wasn’t needed, I’d submit it was a 50/50 chance someone would contact the customer.

Today, dealers leave fewer customers who want to sell cars in the wind. They are more likely to engage them quickly. Dealers know that, if they don’t respond fast, someone else, perhaps a Carvana or Vroom, will serve up an appraisal offer and capture the car and customer first. Another reason for the more proactive outreach relates to the wholesale market. Dealers and managers know that if they acquire a vehicle they don’t need or typically don’t sell, there’s a high likelihood they can send or take it to auction right away and make money.

As the Midwest manager notes, “In today’s market, you’ve got to wear two hats. You’ve got to look at wholesale and you’ve got to look at retail with every car.”

I regard both positive things—a willingness to acquire inventory from anywhere and a clear view of the best financial outcome for a vehicle in the retail or wholesale markets—as operational imperatives for dealers in the months and years ahead.

With acquisition, analysts expect limited supplies and high wholesale prices to persist into 2022 and beyond. At the same time, companies like Carvana and Vroom aren’t going anywhere. In fact, they’re gaining momentum, thanks in no small part to their ability to pick off and acquire cars that, in years past, would likely have found their way to dealers. In 2021, some dealers have proven they’re up for the competitive opportunity to make customer vehicle appraisals and purchases as easy, convenient and transparent as anyone else. The next step will be to ensure that, regardless of the acquisition channel, dealers understand and extend the best offer to acquire the car and customer, and make money.

With wholesale vehicles, the big lesson here relates to the manager’s “two hat” perspective. While the wholesale market in the future may not offer the seemingly guaranteed profit it does today, it’s been useful for dealers and managers in the past year to at least acknowledge the wholesale opportunity that may exist for each vehicle. In time, dealers and managers will need to be more aggressive about choosing the retail or wholesale exit strategy that produces the best financial outcome for the dealership and pursuing it in earnest. Today, dealers often put vehicles into the retail and wholesale market at the same time, which amounts to two-line fishing for the highest profit. This strategy won’t work when the markets normalize and each vehicle’s exit decision on Day 1 will need to stand on its own, just like it used to.

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A Look Behind Record-Setting Dealership Profitability

Dale Pollak — Thu, 18 Nov 2021 16:39:16 +0000

A piece in Automotive News this week underscores a remarkable achievement by dealers across the country. By the end of September, dealership net profit surpassed $3 million for the current year, topping the record $2.1 million in net profit dealers reported for all of 2020.

Even better, analysts expect the dealer-favorable market conditions that have occurred so far this year—strong demand for new and used vehicles and limited supplies of both—will carry into 2022, creating even richer net profits for dealers.

I am happy for dealers and their families. Those who want to expand and grow their businesses are blessed with cash-on-hand and profit-producing tailwinds for the foreseeable future. Those who want to exit the business are largely blessed with a buy/sell environment that rewards their recent record-setting profit performance.

But there’s a reality of the current state of dealership profitability that isn’t getting much attention, and I feel obligated to share it here. The reality relates to the used vehicle department, where I’ve seen a marked change in the level of discipline and focus dealers and managers apply to their inventory management:

Consider used vehicle pricing. We remain in an era of what I’d call “explore and exploit” pricing strategies. Dealers and managers can almost put any price on a vehicle and it will eventually sell. I see signs that dealers and managers aren’t analyzing the retail price positions of their used vehicles with the analytical depth and frequency many previously applied. There are also far too many high-risk/low return cars (e.g., Bronze vehicles in the ProfitTime system) that are priced higher than competing cars in the market and, in many cases, higher than the low-risk/high return vehicles dealers carry in their own inventories.

Consider used vehicle age management. As with used vehicle pricing, dealers and managers have relaxed age management strategies. In the current market, 30- and 45-day old cars get far less attention than they should—particularly when the vehicles represent high risk/low return investments. I fully appreciate why age doesn’t matter right now. In many cases, the aged inventory is selling and, even if a retail sale took a little longer and produces little or negative gross, the dealership still made money in F&I and service on the vehicle. Alternatively, some dealers and managers aren’t worried about aged vehicles because they know, at least for the moment, they can wholesale the vehicles that don’t sell at retail and likely make money.

Consider used vehicle stocking. Dealers deserve much credit for recognizing the necessity to source vehicles beyond the two channels they’ve depended on for years—trade-ins and auctions. Today, more dealers and managers are proactively sourcing from multiple channels, from their service lanes to the street. But it seems that for every dealer who’s diversified their sourcing channels, there is another who hasn’t moved beyond looking to third-party lead sources to supplement inventory. Some of these dealers are purposely staying away from auctions because they don’t want to pay high prices for inventory, even if they need the cars. The end result: While some stores are breaking volume records, others are lagging the sales volumes they achieved in the past. No one’s necessarily complaining about stocking and selling fewer cars. After all, there’s an inventory shortage and profits are already sky-high—two justifications for holding the present course.

I’m not sharing these observations to detract from the record-setting profitability dealers currently enjoy. Rather, my goal is to highlight how dealers have achieved record profits and sales with lesser levels of inventory management discipline and focus—a mindset that will no doubt come back to bite some dealers as the market becomes less dealer-favorable sometime next year.

When that time arrives, the dealers who have maintained disciplined age, pricing and stocking strategies, even in a market where such disciplines don’t seem necessary, will be in a better place. They’ll be like athletes who maintain their diet and exercise regimens in the off-season, arrive at training camp and leave with less pain and injury than those who weren’t ready.

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An Informative Convergence at Two Different Public Companies

Dale Pollak — Fri, 12 Nov 2021 21:20:40 +0000

Two public companies with distinctly different business models are learning they have similar strategic priorities.

The two companies are CarMax and Carvana. The former’s been a longtime competitor and player for dealers in used vehicles. They are arguably the first to turn the idea of buying inventory from customers into an operational advantage across their nationwide network of big retail stores.

Meanwhile, Carvana has also been impressive on the customer vehicle acquisition front. The company has used its digital platform to acquire an ever-growing share of inventory from customers to feed its ever-growing pace of digitally driven retail sales.

But now, it seems, each company seems to realize that their business would benefit by taking a page from the other’s playbook.

In the case of CarMax, the company is stepping up its digital capabilities to appraise and acquire more customer inventory online and shore up its inventory supplies. In addition, the company is working harder to build out digital capabilities that enable a larger share of its customers to complete at least part of the sale or purchase of a vehicle online if they choose to do so.

During a September 30 earnings call to discuss the second quarter of its 2022 fiscal year, CarMax president and CEO Bill Nash told analysts: “We’ve intentionally built our omnichannel platforms to give every customer the ability to progress to a sale or a buy regardless of how they shop with us. We found that most customers don’t want to shop for a car in a way that is tied solely to an in-store or digital experience. While we provide the ability for customers to buy a car 100% in-store or 100% online, our omnichannel capabilities really differentiate CarMax by enabling our customers to personalize their experience with a mix of digital and physical interactions to meet their needs.”

Meanwhile, Carvana executives aren’t worried about their digital capabilities as much as they are about efficiently managing the vehicles once they own them. The company is learning successfully buying cars directly from customers only goes so far if you don’t have the physical capacity to recondition the vehicles and get them ready for retail sale.

In a November 5 earnings call to discuss the third quarter of 2021, Carvana chief financial officer Mark Jenkins shared how constraints on the company’s ability to inspect and recondition vehicles forced a purposeful slowdown of retail sales activity: “The explosive growth in buying cars and customers we experienced in the past two quarters also placed significant constraints throughout our system in Q3. To ease the pressure on our system, we began metering both retail units and cars bought from customers mid-quarter to allow our operational capacity to catch up to demand. Most notably, to manage retail sales volume, we reduced the number of vehicles shown to customers in search results, which limited the benefits of higher immediately available inventory on retail units sold. We expect to increase our operational capacity in Q4 with an eye toward 2022.”

Cox Automotive analyst Jeremy Robb calls the latest moves by CarMax and Carvana “a rather uncanny juxtaposition of the two companies. One that started off very ‘digital’ and one that was very ‘physical’—yet both are moving to the center now.”

I’d have to agree with Robb’s astute observation, and I also believe the experiences of CarMax and Carvana point to two strategic priorities dealers should strongly consider for the coming year.

The first strategic priority rests with your digital capability. I appreciate how CarMax connects (and distinguishes) the dots between customers looking to sell their car and customers who have a car to sell/trade as part of a vehicle purchase. On the vehicle acquisition side, the company says its roll-out of an online appraisal tool is working; they’ve been able to acquire about 50 percent of their customer-acquired vehicles from appraisals that customers initiated online. Meanwhile, the company says about 9 percent of its retail sales came from “online transactions,” where customers completed all four elements of making a deal—reserving a vehicle, financing, trading a car (or opting out) and completing a sales order. The company says about half of its customers can complete all four stages online and they plan to expand the capability in the months ahead.

The company’s performance suggests a digital capability imperative for every dealer—you’ve got to find a way to enable customers to do what they want to do online or they’ll find someone else who will.

The second priority sits in reconditioning capacity and efficiency. I’d venture that many, if not most, dealers encountered reconditioning issues that crimped their retail sales activity, much like Carvana experienced, in the past year. Carvana is investing more in its ability to inspect and recondition vehicles faster, even if they’re customer-acquired vehicles that require more work. It’s a priority that every dealer should regard as an imperative, especially as analysts forecast that the current low-supply, strong demand used vehicle environment will likely carry over into at least the front half of 2022. It’d be a shame if dealers had to revisit the lesson many learned years ago when they transitioned to market-based pricing and turn-and-earn sales strategies—you can’t sell cars if they aren’t ready, and you won’t make the front-end gross you expect if you’ve spent it in your service department.

I was struck by another take-away from the CarMax/Carvana convergence: If nothing else, it’s helping dealers understand that despite the operational and physical differences between private and public retailers, the keys to success are increasingly the same.

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A Remembrance for a Dealer Friend and Community Pillar

Dale Pollak — Thu, 11 Nov 2021 14:43:10 +0000

I was sad to hear that Northwest Indiana dealer Cary Bosak died suddenly last week. I’m still processing the news.

My friendship with Cary began a few years ago at a tailgate before an Indiana University game, when another friend introduced us. Neither Cary nor I did much tailgating that day. Instead, we talked for at least an hour. He immediately impressed me as a smart, thoughtful and genuine person. It was a positive connection that sparked a friendship.

Prior to meeting Cary, I had known his father, Jack, and his uncle, Emmett, from attending Northwest Indiana dealer association meetings with my father. I was fresh out of college and starting out in the car business. The Bosaks owned a Chrysler dealership in nearby Merrillville.

Back then, if you were a dealer’s green pea son at a dealer association meeting, nobody gave you much attention or time. That wasn’t the case with Cary’s dad and uncle. They made time to get to know me. They remembered my name, and always said hello. They made me feel welcome and relevant from the very first meeting.

Today, I understand how the family’s true colors and values I experienced at those meetings carried through to Cary. I’ve followed his efforts to grow the family’s business while continually earning top marks for customer and employee satisfaction, which I consider hallmarks of positive, purpose-driven leadership. When family and friends in Northwest Indiana ask me where they should buy a car, I wouldn’t hesitate to recommend Cary and his family. I knew they would be in good hands.

The family posted an online tribute to Cary that underscores how much he cared for his community and family. Like the best dealers in the business, Cary and his family gave generously to their communities, supporting a wide array of causes and charities that mattered to them. This week, I also learned that Cary has been nominated for a Time magazine Dealer of the Year award, an honor that speaks to his esteemed place in the Northwest Indiana community.

Cary’s passing represents an immeasurable loss to his family and friends, the Northwest Indiana communities his dealerships served and our industry at large. Cary and his family represent all that is good and great about car dealers who understand that when they give, they get more in return.

I’ll miss my conversations and friendship with Cary. My deepest sympathies go to his family and friends. May they all find comfort and peace in this difficult time.

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A Case of Two Less-than-Ideal Choices in Used Cars

Dale Pollak — Wed, 03 Nov 2021 20:35:22 +0000

If you’re a used vehicle retailer in the current market, chances are better than good that your inventory has a sizable and possibly growing share of vehicles that you own for more money than you can get in the retail market.

The situation shows up every day in my calls with dealers who use the ProfitTime system to manage their used vehicle investments. Inevitably, a dealer’s Bronze vehicles, the units with the least investment value and the highest risk, arrive in inventories at Cost to Market percentages of 100 percent or more. Just last week, I spoke with two ProfitTime dealers whose Cost to Market averages for their Bronze ran 103 percent—a full 3 percent higher than current retail asking prices for the same/similar vehicles in each dealer’s respective market.

In many cases, the Bronze vehicles came from auctions, where wholesale prices have been on yet another unprecedented run of week-over-week value appreciation. In some cases, the Bronze vehicles came from customers to whom dealers rightfully paid up to acquire a car and/or make a deal.

But irrespective of how the Bronze vehicles arrive, their presence in dealer inventories puts dealers and managers in the unenviable position of figuring out how best to retail them and make money in the current market.

From what I can tell, dealers and managers face two choices with Bronze vehicles:

The first choice involves pricing the Bronze vehicles to make money. If a dealer’s average Cost to Market percentage for Bronze vehicles is 103 percent, he/she will likely price the vehicles at Price to Market percentages of 108 percent or even higher to ensure a sufficient margin for a front-end gross profit. Dealers understand the money-making pricing strategy might slow their sales volumes, but they absolutely do not want to put the Bronze vehicles on the market to lose money, at least not right away. It’s also not uncommon for dealers in this group to cheap-sell their Platinum vehicles to make up for the volume they’ve lost as their Bronze vehicles are priced above the current market.

The second choice is pricing Bronze vehicles to move and, in many cases, make only a little bit of money, if not a loss, on the front end. In this group, if a dealer’s average Cost to Market percentage for Bronze vehicles is 103 percent, he/she might price the vehicles at Price to Market percentages of less than 100 percent to ensure a faster retail sale. Dealers and managers who apply the price-to-move strategy don’t necessarily like the front-end profits or losses the retail sales produce, but they but they accept the outcome as a necessary evil to maintain their sales volumes. They also know the gross profits the Bronze vehicle sales generate in their F&I and service departments often more than make up for any front-end losses they incurred to sell the vehicles. In addition, dealers in this group take solace from the gross profits they achieve from Gold and Platinum vehicles, which they sell for all the money because they aren’t pressured to cut prices on these cars to build volume.

Given the two choices, I’m often asked by dealers to recommend the right choice for their store.

My recommendation would be the second choice. Why? Because I believe it represents sound decision-making from an investment management perspective. Dealers in this group are treating Bronze vehicles for what they are, troubled investments that represent risk and should go away quickly. In addition, the dealers aren’t sub-optimizing the outcomes of better, Gold and Platinum investments to make up volume lost due to an aversion to the current market’s little-or-no-gross environment for Bronze cars.

Some counter this recommendation with a valid point: “Dale, we’re in an appreciating market. Bronze cars aren’t Bronze cars when prices are on the rise.”

Totally true. Retail prices are on the rise. But they’re currently rising at a snail’s pace—.005 percent each (or one-half of 1 percent week over week)—compared to the 1.3 percent to 1.5 percent week-over-week increases we’ve seen in wholesale values. Theoretically, dealers who price Bronze vehicles above the market today will see the market catch up to them in the future.

But here’s the key question: How long is it appropriate to wait for the Bronze vehicles to find buyers? By some estimates and forecasts, retail prices won’t rise significantly until the spring. To me, while there might be a money-making opportunity for today’s Bronze vehicles next spring, it seems too long to wait for a return on the capital you’ve invested today—particularly when you consider all the opportunities for gross in F&I and service department you’d pass up waiting for Bronze vehicles you’ve priced above the market to retail.

Ultimately, dealers will have to choose the path they believe is the best for their business. Neither choice is appealing. Neither is optimal. The current market simply isn’t kind to Bronze vehicles, and nearly every dealer has them.

The situation reminds me of a line from The Clash’s “Should I Stay or Should I Go?”: “If I go there will be trouble, and if I stay it will be double.”

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A “Miss” that Matters with Customer Vehicle Acquisitions

Dale Pollak — Thu, 28 Oct 2021 17:44:57 +0000

In a recent post, I shared how dealers run the risk of missing customer vehicle acquisitions when they refuse to pay a customer as much as they would at auction for the same vehicle.

But there’s another way dealers, managers and appraisers can “miss” on a customer vehicle even if they ultimately win the car. This miss comes in the form of reconditioning cost estimates in appraisals that bear little resemblance to the actual costs required to recondition the vehicle and get it ready for retail sale.

Anecdotally, I’m told that for every 10 vehicles dealers might acquire from customers through trade-ins or direct purchases, about half of them will include reconditioning cost estimates that run $500 or $600 short of the actual expense charged to the vehicle once it gets reconditioned in the service department. I’m also told that such gaps between the estimated and actual reconditioning costs occur with appraisals where an appraiser or manager has entered a reconditioning cost estimate specific to the car. That is, they did not use a default reconditioning estimate; the estimate represents a cost someone considered appropriate for the vehicle.

On the surface, this situation represents a positive trend. For years, dealers, managers and appraisers used default reconditioning estimates with regularity. In vAuto, the most common default reconditioning estimate is $1,500. Today, it seems dealers and managers are more interested in putting a more relevant, vehicle-specific reconditioning cost estimate on appraised vehicles—a smart move in a market where competition for customer vehicles is more fierce than it used to be.

Mike Boyd, who heads vAuto’s iRecon solution, shares that 62 percent of dealership appraisals in vAuto include vehicle-specific reconditioning cost estimates; 38 percent include default estimates. These benchmarks would likely have been reversed just a few years ago.

Boyd and I suspect the shift owes to recognition among dealers that applying a default reconditioning estimate standard to every car can cause three unwanted outcomes. First, appraisers and buyers will pass on retail-worthy cars that don’t meet profit objectives due to the estimated reconditioning costs. Second, the service department might charge the full amount of the reconditioning estimate to the car, even if the vehicle didn’t require the work, because they can. Third, customers will say “No!” too often because the money you offer for their vehicles offered isn’t close enough to the money they expect for their vehicles.

All in all, the effort to capture a more accurate picture of a vehicle’s reconditioning costs in appraisals is a good thing. It’s an extension of the age-old axiom that if you want to know what you’ll get out of a car, you’ve got to know the car.

But let’s return to the roughly 50 percent of vehicles dealers acquire from customers where the reconditioning estimates are off by an average of $500 to $600. What’s up with those cars?

I suspect the biggest driver of the variance between estimated and actual appraisal costs owes to the appraisal process itself. Today’s best practices call for active, walk-the-car-with-the-customer appraisals to capture as much about the physical and mechanical condition of the vehicle as possible and convey the findings with the customer. Yes, it takes more time. But, if done correctly, the time flies as appraisers ask customers to help them assess the vehicle, and customers know the appraiser cares about their car. In these scenarios, it’s less likely that appraisers will miss $500 or more in needed reconditioning work.

Another reason for the reconditioning estimate-to-actual variance comes from appraisers and managers not really knowing what the true cost of reconditioning the vehicle in front of them might be. To be sure, everyone thinks they know. But I share Boyd’s view that guesstimates aren’t good enough if you want to optimize every vehicle’s investment return potential. That’s why some dealers now require that appraisers and managers base reconditioning estimates on actual costs incurred to get recent, similar cars retail-ready.

It’s also no doubt true that current market conditions contribute to variances in reconditioning estimated and actual costs—or at least they serve as a disincentive for dealers and managers to do anything about it. In the current market, you may be able to absorb the reconditioning cost estimate “miss,” price the vehicle as if the miss didn’t occur and still get all the money.

But let’s be real. That doesn’t happen all the time, even in the current market. What’s more likely to happen is that the vehicles will linger too long in inventory and the investment value or profit they ultimately produce is less than it should have been.

I’d encourage dealers and used vehicle managers to review the vehicles they’ve recently sold, where reconditioning estimates proved to misses. Compare the retail performance of these vehicles to those with reconditioning estimates that proved true to actual costs. I suspect you’ll find a sizable opportunity to do an even better job ensuring you make the money or return on investment you should from customer vehicles you acquire.

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A “Pay Up” Pitfall as Dealers Source Customer Vehicles

Dale Pollak — Thu, 21 Oct 2021 17:39:57 +0000

Last week, I shared some pointers to help dealers do a better job sourcing vehicles from customers.

But the post didn’t directly address a pitfall that often arrives as dealers move away from relying on auction and trade-in vehicles to feed their inventories, and expand their sourcing efforts to the service lane, off-street purchases and other channels to acquire vehicles from customers.

The pitfall relates to a longstanding belief or understanding among dealers that they shouldn’t pay “auction money” to acquire a vehicle from a customer.

The understanding is at least partly rooted in the knowledge that you’ll always pay more for auction vehicles compared to those you purchase from customers. At auctions, you’re bidding for cars against other buyers. You also face additional fees/costs to purchase, inspect, insure and transport the vehicle—expenses you don’t typically pay when you purchase vehicles from customers.

There’s also the reality that, in many if not most cases, dealers can acquire customer vehicles for less money than they’d pay to purchase the same car at auction. Customers may not know what their car’s worth. They may accept less for their vehicle to pay less for a vehicle they want to purchase. They might not really care what they get for their vehicle, provided they get something that seems like a fair offer. They may also accept less for their vehicle because they appreciate a dealer’s easy and convenient appraisal/purchase process.

Dealers have fashioned their appraisal strategies to account for the understanding that they should be able to acquire vehicles from customers for less money. In many stores, the used vehicle department has long followed what might be considered a two-tier appraisal strategy—one that applies to auctions, the other to trade-ins. With auction vehicles, a dealer’s strategic appraisal objective might be an average acquisition Cost to Market of 85 percent (or less), and an average gross profit target of $1,000. With customer vehicles, the same dealer’s strategic appraisal objective might be an average acquisition Cost to Market of 80 percent (or less), and a gross profit target average of $2,000.

Today, as dealers have put a greater focus on acquiring customer vehicles from a wider array of sourcing channels, the two-tier appraisal strategy has morphed into a multi-tier strategy, with objectives that are specific to each distinct appraisal/acquisition environment. For example, the appraisal strategy objective for a service lane purchase, from a customer who brings their car back at every service interval, might be different than the objective for a vehicle purchased from a customer who’s just selling a vehicle he/she doesn’t need or use much.

Generally, I’m OK if a dealer sets strategic objectives to optimize outcomes for individual acquisition environments. There’s absolutely no question that purchasing an auction vehicle, and purchasing a vehicle from a customer, are totally different, even if they both serve the same purpose of supplying inventory to the used vehicle department.

But there’s a problem with two- or multi-tier appraisal strategies when their underlying foundation—the understanding that you should acquire customer vehicles for less than you’d pay at an auction—gets put to the test. Too often, we’ll see dealers or managers miss acquisition opportunities for customer cars they need because they refuse to pay up to, or even beyond, “auction money” to acquire the customer’s vehicle.

To me, the decision not to pay up to, or even beyond, auction money to acquire a vehicle from a customer that you know you need is not OK. In fact, I’d submit it’s counterproductive.

Sometimes you must do what’s necessary to get a car you need and/or make the deal. Plus, if you pay up and get the car, you’ve acquired a new customer who may well do business with you again.

In my recent conversations with dealers about acquiring customer vehicles, I’ve been suggesting that they flip the script. Rather than refusing to pay “auction money” for a customer vehicle, they should consider the purchase price they’d pay for a vehicle at auction as the minimum they’ll pay a customer for the same car—especially if you need the vehicle and the market likes it.

It’s not always a popular view. But it’s a view that fits the current moment, when no dealer can afford to miss any customer acquisition opportunity for inventory they need.

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A Brighter View of Used Vehicle Buying Power

Dale Pollak — Wed, 20 Oct 2021 21:34:53 +0000

I appreciate moments when someone offers an insight or perspective that gives me pause and shapes my thinking.

One of these moments arrived this week in a conversation with John Ellis, who works as an inventory solutions strategist for Cox Automotive. Ellis shared a brighter view of the used vehicle buying power consumers have lost during the past 18 months, which I recently wrote about.

While Ellis acknowledges the lost buying power, he also believes used vehicle buyers can still win in the current market. Ellis pointed me to a recent blog post of his own, where he writes:

“The messaging of what feels like overpaying today is actually under paying tomorrow; that is, at least until the market starts turning again. If you bought in June, you didn’t lose. You win as compared to the car buyer who could’ve bought in June but waited until October hoping the price goes down. The deal on the desk now is most likely their best deal.”

It’s a good point that I thought should be shared more broadly, particularly as dealers work new/used vehicle deals with customers in the weeks and months ahead.

Ellis and I will be staying in touch. I’m confident you’ll see more from him here in the future.

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5 Best Practices for Customer Vehicle Acquisition Success

Dale Pollak — Fri, 15 Oct 2021 18:55:02 +0000

There’s been a remarkable shift by dealers in the past 18 months to acquire more vehicles directly from customers rather than rely on auction and trade-in purchases.

Among the dealers I’ve been talking to recently, most, if not all, are actively working to refine and rethink how they appraise vehicles customers bring to their service lanes, submit for consideration through trade-in tools like Kelley Blue Book Instant Cash Offer or list them online, in places like Facebook Marketplace or Craigslist.

In some cases, dealers are realizing that the team members they’ve relied on the past to acquire vehicles from online auctions may not be the best-suited to appraise cars from customers. Similarly, dealers are recognizing that the expectations and metrics they use to manage vehicle appraisals—whether it’s Cost to Market, front-end gross, Look to Book or other targets—may need to vary based on how/where the customer’s vehicle came to their attention and how badly their inventory needs the vehicle.

My conversations about the current push to acquire vehicles from customers rather than auctions also reveal that some dealers are more successful making the shift than others. I thought it would be relevant and useful to share some of the best practices I’ve gleaned from the more successful dealers to help others acquire more cars from customers:

Recognize you’re not alone. There’s a long-standing belief, particularly when it comes to customer trade-ins, that purchasing a vehicle from a customer has an innate advantage compared to buying at auctions: It’s just you and the customer, not you and a group of other interested buyers. Today, this mindset can get dealers into trouble. Customers know the used vehicle market is hot. If they’ve got a vehicle they might want to sell, they’ve probably gone online to determine its value, and some may already have an offer in hand, from one of the digital retailing companies or another dealer, that they aren’t telling you about. The upshot: If you don’t present your best offer as your first offer, you probably won’t get the car.
Follow up fast. With the understanding that customers may have offers in hand from someone else, and the customers may have also listed a vehicle for private sale, dealers tell me that if they don’t work incoming leads right away, they’re missing opportunities. A corollary: If your follow-up process conveys something other than a convenient and easy way for customers to sell their vehicle, you probably won’t win the car.
Walk cars with customer. Parents tend to overlook some of the less-than-ideal characteristics of their children that others might readily notice. The same is true with vehicle owners. They don’t look at vehicles with the same discerning eye as dealers. They need to understand that the next buyer isn’t interested in the story behind the dent or scratch on a door; they want to know what you’ve done to fix it. Dealers and managers share that when you take the time to walk a car with a customer and explain your process and related costs to get the vehicle ready for the next customer, vehicle owners tend to be receptive and understanding to the plain-to-see reasons the vehicle isn’t worth as much as they originally thought.
Separate vehicle acquisition from a vehicle purchase. It’s important for dealers and managers to remember that not every customer who wants to sell a vehicle wants to buy another one. In light of this reality, some dealers have created, and branded, separate acquisition or buying centers where every customer who has a car to sell or trade gets a value for their vehicle. If the customer doesn’t want to purchase a vehicle, the acquisition deal’s often done. If they want to purchase a vehicle, they have a firm value for their trade-in as they move to the vehicle purchase. Some dealers might bristle at the idea of separating the appraisal from the purchase deal, but I’m told the distinct transactions typically turn into a win-win for the customer and dealer. The customer likes the simpler, more straightforward, and transparent process, and the dealer’s profit potential for both transactions improves because of it.
Check your “retail only” mindset. In the current market, dealers who are selective about the vehicles they might acquire from customers, and only pursue those that offer clear-cut potential as a retail unit, will inevitably acquire fewer vehicles. Such dealers will also probably turn off customers who believed the “We’ll Buy Your Car!” advertising. Dealers tell me that, if they accurately capture a vehicle’s condition and put a good number on a vehicle they appraise, there’s often a money-making opportunity irrespective of whether they choose a retail or wholesale exit strategy.

It’s my hope that this rundown of best practices helps dealers seize what increasingly seems to be a customer vehicle acquisition imperative. By most accounts, we can expect the same conditions we experienced in 2021—robust, if not strong, retail demand for used vehicles, high wholesale vehicle values and reduced supplies of new vehicles—to extend into 2022, and perhaps beyond.

This forecast does not bode well for dealers remain content relying on auctions and trade-ins to feed their used vehicle inventories in the months ahead. Ultimately, they’ll be standing in auction lanes, or watching them online, waiting for vehicles that went to someone else further up the food chain.

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A Look at Winners and Losers in the Current Used Vehicle Market

Dale Pollak — Fri, 08 Oct 2021 19:26:18 +0000

There’s a general rule in business and life that if someone’s winning, someone else is losing.

If you consider the used vehicle market so far in 2021, I think most everyone would agree that the winners are those with cars to sell. Dealers retailing used vehicles have seen phenomenal growth in front-end grosses and overall used vehicle department profitability due to the tailwinds of solid demand, retail price growth and limited selection/supply.

Consumer sellers have fared well, too. Broadly speaking, their vehicles are worth more, and they’re getting it when they choose to sell their vehicles to dealers or other entities. Many consumers have realized the “extra” car that’s been sitting in their driveway is a potential money-maker.

On the flip side, I’d submit that if used vehicle sellers have been winners in this year’s market, used vehicle buyers have been the losers. By “buyers,” I’m not talking about dealers who have had to pay historically high prices for wholesale vehicles. True, these cars may not have produced the front-end gross profits you’d like, and some produced losses, dealers generally made a profit, if only in F&I and service.

No, it’s becoming clear that the buyers who have lost the most in this year’s used vehicle marketplace are consumers, who have been paying historically high retail prices for used cars. In short, their buying power—both in terms of what they are required to pay to own a used vehicle and the type of vehicle they can purchase for higher prices—has suffered.

Consider the following used vehicle financing data Cox Automotive’s astute analysts shared with me this week:

Average down payments are up: If you average the down payments consumers are making to finance used vehicles for 60-, 72- and 84-month terms, the overall average down payment has increased since 2019, from around $2,000 to $2,800. The chart at right shows how down payments have changed across different loan terms.

Average monthly payments are up: The data on monthly payments offers an intriguing story. Across the top credit tiers, Prime and Super Prime, consumers are making higher monthly payments than they did in 2019. In the Prime category, the average monthly payment increased nearly $20 a month for a 60-month loan, and $44 a month for a 72-month loan. In Super Prime, the average monthly payment increased $18 per month for a 60-month loan, and $46 per month for a 72-month loan. The chart at right shows how increases in monthly payments are up, even when loans get extended to 84 months. If you’re wondering why monthly payments have gone up in an environment where interest rates across 60- and 72-month loan terms have decreased in the past two years, the answer rests in the ever-higher loan amounts consumers are financing. The data shows that the amounts financed for 60- and 72-month loans have increased roughly 8 percent and 15 percent, respectively, for both the Prime and Super Prime credit tiers.

Average loan terms are increasing. Recent reports from Edmunds and Experian show that the average term for used vehicle loans is growing. The average term currently close to 70 months. Anecdotally, I know dealers are inking more 84-month loans for used vehicles than they have in the past.

More money buys less car. I asked the Cox Automotive analysts to go a step beyond just the money consumers are paying to finance used vehicle purchases. I wanted to know what they’re able to buy as they commit more of their monthly budgets to used vehicle purchases. Here’s what Cox Automotive analyst Jeremy Robb shared: “In 2019, a five-year loan with a $356 monthly payment would buy a roughly 3.5-year-old vehicle. In 2021, a five-year loan with a $376 monthly payment would buy a roughly 5.5-year-old vehicle. Overall, the consumer loses about two model years when they’re buying today.”

I’m sharing this dive into used vehicle financing data because I think it points to a broader issue that dealers and used vehicle managers should be aware of—that we’re seeing increased pressure on the ability of consumers to afford the vehicles we’re trying to sell them. This is not to say that consumers can’t currently buy cars. Economists point to a record-high $4.1 trillion in as-yet untapped household savings across the country and a healthy credit market that remains willing to finance older cars at higher prices and longer terms. Both stand as evidence that used vehicle affordability has not dipped into a danger zone.

Still, I don’t think anyone would disagree that while the go-go used vehicle market has been a boon for dealers, it’s diminished the buying power for consumers we serve.

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A Curious, Cautionary Moment in the Used Vehicle Market

Dale Pollak — Mon, 04 Oct 2021 19:59:54 +0000

If you’ve been busy buying used vehicles to stock up your inventory, you may want to temper your acquisition efforts. This suggestion comes as Cox Automotive economists have found a curious wrinkle in current data for retail and wholesale prices of used vehicles.

Everyone’s aware that wholesale values have been on the rise since late August/early September. The appreciation of wholesale values has been steady not steep. But, in the past week, we saw a spike. On a week-over-week basis, wholesale values increased 1.5 percent.

Meanwhile, on the retail side, we’ve also seen prices appreciate. The rate of retail price appreciation hasn’t been significant. In the past few weeks, retail prices have increased two-tenths to three-tenths of 1 percent on a week over week basis. Last week, retail prices barely moved at all, increasing a meager one-tenth of 1 percent.

But here’s the curious wrinkle: When wholesale and retail prices move in the same direction, the rate of increase or decrease tends to be similar. We saw this parity earlier in 2021. When wholesale prices went up about 1 percent a week, we saw a similar lift in retail prices. Today, wholesale values are rising at a significantly faster rate than retail prices, even when you account for differences in specific vehicle segments.

The significant difference in the appreciation rates of wholesale and retail vehicles raises two critical questions: What’s causing the disparity in appreciation rates? And, what does it mean for dealers?

To answer the first question, it’s important to consider supply/demand fundamentals. On the supply side, you might expect a rise in wholesale values if dealers were short on inventory and they needed used cars to sell. Yet, if you look at dealer inventories across the country, there’s an average of a 40-day supply of used vehicles on the ground. Indeed, the supply of wholesale vehicles is lean, but the lanes aren’t empty.

On the demand side, rising strength in retail demand would normally contribute to higher wholesale prices. In turn, you’d expect rising retail demand to spur strength in retail prices, too. But we’re seeing a different situation taking shape in the current market—retail prices aren’t rising at the rates you’d normally expect. The reason? Retail demand appears to be softer than it was earlier in 2021. And, if you go back to the late September/early October 2019 timeframe, current retail demand is softer today than it was then.

In sum, the current rise in wholesale values isn’t driven by typical market fundamentals. Rather, it’s being driven by a desire among dealers and used vehicle managers to stock up their inventories, particularly because they are worried that, in the absence of sufficient new vehicle inventory, they need cars to sell.

I’ve discerned the desire to acquire more cars in recent conversations with dealers. A Northeast dealer shared that he’s “hitting the buy button as often as he can.” Why? Because he believes that there will be an opportunity to buy cars today and retail them at higher prices tomorrow—just like he did earlier in the year.

From what the Cox Automotive economists tell me, and from the rising days supply I see on dealer lots, the dealer’s gamble seems driven by false confidence and fear rather than an objective view of current market conditions. The false confidence comes from believing the current market is stronger than it really is, and the fear is that the dealer will lose retail customers to someone else if he doesn’t have more cars on the ground to sell.

My concern for the dealer, and others who are making a similarly strong push to acquire inventory, is that the indicators suggest there aren’t as many retail customers in the pipeline as there has been for much of the year. The current softening in retail demand is no doubt seasonal and, to some degree, it’s probably economic, too. In August, the average listing price for used vehicles set a record, climbing above $25,800, according to Cox Automotive data.

Such circumstances bring us to the second question: What does the disparity between current retail and wholesale prices mean for dealers? I believe the answer is that while dealers may feel bullish about the current market as they stock their inventories beyond their rolling 30-day total retail sales, there’s a risk they’ll soon be carrying more cars than their customer counts warrant.

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4 Factors to Consider as Opportunity Rises (Again) in Used Vehicles

Dale Pollak — Thu, 23 Sep 2021 20:21:30 +0000

It’s a tempting moment in the used vehicle market for dealers to stock up on vehicles, knowing that both wholesale and retail prices are currently on the rise, and there will be money making opportunities in the weeks ahead with the cars you acquire and stock today.

In fact, the current dealer-favorable moment in used vehicles looks very similar to what we experienced this past spring, when wholesale values took off and retail prices soon followed. Today, some dealers may be thinking that now’s the time to make up for the opportunity they missed, or didn’t fully exploit, earlier this year.

But I would caution every dealer that while the current rise in wholesale and retail prices will most definitely bring opportunity, this opportunity won’t be as rich or widespread as we experienced in the spring and summer months. Consider the following:

The current rise in wholesale and retail prices isn’t as rapid and steep compared to last spring. Back then, it was like wholesale and retail prices took off like a rocket. Today, it’s more like the steady climb of an airplane leaving the runway.
The current rise in wholesale and retail prices isn’t occurring across every vehicle segment at the same rate. Last spring, it was uncanny how the rising tide value appreciation effectively lifted all vehicles across all segments. Dealers could pretty much stock anything, and as much of anything, as they wanted. Vehicles would sell quickly and produce gross profits we haven’t seen in a decade or more. Today, things are different. This past summer, we saw wholesale and retail prices cool off at different rates across different vehicle segments. For example, SUVS and trucks, which were red hot in the spring and early summer, saw larger drops in wholesale and retail values as the market cooled compared to compact vehicles, where wholesale and retail prices went the other direction. The upshot: While wholesale and retail prices are currently rising in total, we are also seeing more nuanced and varied dynamics within specific vehicle segments. This reality means the opportunity and risk for vehicles you acquire and own depends on the vehicle segment more than it might have earlier in the year.
Late-model used vehicles face greater risk from new vehicles today than they did earlier this spring. Back then, everyone knew new vehicles weren’t coming. New vehicle buyers flipped to late model used vehicles, and every dealer scrambled to find cars to satisfy and sell these buyers. The story’s a bit different today, depending on a dealer’s franchise partner. Generally speaking, factories have been allocating their still-scarce supplies of microchips to the SUV and truck models they know are in highest demand and will produce the highest profits. Some of these vehicles are now coming back to the market. They’re not arriving in droves. Still, these new vehicles could temper demand for the same/similar late model used vehicles in the same segments.
Retail demand isn’t as robust today compared to last spring. This reality shouldn’t come as a surprise to anyone in the car business. Retail demand typically rises in the spring and subsides in the final months of every year. While retail demand remains good, it’s not as universally strong across all vehicle segments like we experienced earlier this year. Add in the pull-away effects fresh new vehicle inventory may create for used vehicle-minded customers and you’ve got a retail demand forecast that’s less bright and more segment-specific than it has been in recent months.

I share these current used vehicle market conditions to serve as check valve on the desires of dealers and used vehicle managers to take advantage of what appears to be a repeat of last spring’s selling frenzy. Current conditions do, in fact, represent an opportunity for dealers to relax their age policies, reduce the degree of price reductions they might otherwise make for vehicles that haven’t sold and, in some cases, ease the discipline they’ve exercised to balance their current inventories to their rolling 30-day total of retail sales.

But I would caution that such opportunistic moves should be guided by a deeper understanding of what’s happening in the vehicle segment the vehicle in front of you represents. I would ask several questions—Are wholesale and retail prices on the rise or decline in the segment and, if so, by how much and for how long? Is the Market Days Supply for the segment, and the vehicle in question, going up, staying the same or going down? Is the number of retail shoppers in the market for your car, and its segment, on the rise, staying the same, or declining in your market?

Once you’ve found satisfactory answers to these questions for each vehicle and its segment, you’ll be better positioned to know whether it makes sense to give specific vehicles in each segment more time as retail units, to raise or cut prices on select vehicles in the segment that you already own and/or to acquire more vehicles in a segment because you believe there’s an opportunity.

You can bet that the richest spoils of the current market opportunity will go to dealers who have the discipline to ask the questions, the right technology and tools to provide the answers they need and the will to use the insights to guide their decision-making. It’s also true that such success will come at the expense of other dealers who chase the opportunity without regard for the more nuanced, segment-specific nature of the current market.

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A Misunderstood Aspect of Investment Value-based Pricing–“the Overlap”

Dale Pollak — Tue, 21 Sep 2021 18:10:41 +0000

When dealers use ProfitTime’s investment value-based method of pricing vehicles, they will often see vehicles where the ProfitTime price recommendation range doesn’t seem to make sense.

For example, a dealer might have a vehicle that ProfitTime ranks as a Platinum vehicle, the highest investment class in the system’s Bronze, Silver, Gold and Platinum scale. The dealers would expect that the vehicle should be priced like other Platinum cars.

But that’s not how the ProfitTime pricing system recommends the car should be priced. In fact, despite the vehicle’s ranking as a Platinum vehicle, the ProfitTime pricing system suggests the vehicle should be priced as a Gold vehicle (see image at right).

Dealers often ask, “What gives? If it’s a Platinum car, why isn’t ProfitTime recommending a Platinum price?”

The answer goes to the heart of how the algorithms the ProfitTime system uses to determine vehicle investment values and recommended retail prices are different. For example, ProfitTime determines the investment value of a vehicle, and assigns an investment score and precious metal designation, strictly based on the vehicle’s Cost to Market, like-mine Market Days Supply and Retail Sales Volume. These three factors, in proper weighting for a specific vehicle, are statistically proven to predict the vehicle’s investment potential.

Meanwhile, the ProfitTime pricing algorithm accounts for these factors and then overlays others that have a more direct bearing on the vehicle’s retail sale. Such factors include the vehicle’s condition, its specifications and equipment, seasonality, current inventory and market dynamics and, importantly, the dealer’s demonstrated past retail performance with similar vehicles.

Hence, in the case of the Platinum vehicle in the illustration, the ProfitTime pricing algorithm knows that while the investment value of the vehicle is strong (due in part to the dealer’s highly favorable Cost to Market position), it also determined that there’s something about the vehicle and the circumstances around it that pose a risk for the dealer’s investment. It might be that the market doesn’t really care for the car, or perhaps the vehicle’s retail prospects face risk from other cars in the dealer’s inventory.

As a result, the ProfitTime pricing algorithm recommends a retail asking price that’s more akin to Gold vehicles than other Platinum vehicles in the dealer’s inventories. At vAuto, we call such occurrences “overlaps.” The overlaps represent situations where the ProfitTime pricing system recommends a price for a vehicle in an investment category that overlaps with a different investment category.

It should be noted that the overlaps can occur with vehicles in any of ProfitTime’s Bronze, Silver, Gold and Platinum investment categories. In addition, the overlaps can go both ways. For example, a dealer could have a Bronze vehicle for which the ProfitTime pricing system recommends a Silver-level price, due to a positive attribute that distinguishes the vehicle and its optimal retail price range it from other Bronze vehicles.

When dealers ask about their overlap vehicles, I’ll assure them that it’s a good thing. The presence of pricing overlaps for their vehicles demonstrates that the ProfitTime pricing algorithm is doing exactly what it’s supposed to do. It’s finding the most optimal retail price range recommendation for a vehicle, given all the opportunities and risks at hand.

In this way, the ProfitTime pricing algorithm is doing what dealers and used vehicle managers sometimes are challenged to do–pricing cars based on the dispassionate, objective truth of a vehicle’s investment value, in conjunction with all the other price-relevant factors surrounding the car.

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Rising Retail Prices Bring Relief in Used Vehicles

Dale Pollak — Fri, 17 Sep 2021 15:59:16 +0000

It’d be easy for dealers to view the sustained, unprecedented rise of wholesale values for used vehicles this fall as another sign that the wholesale market in 2021 simply doesn’t make any sense.

As I’ve noted here, it’s atypical for wholesale prices to rise during the fall, which is happening right now. Similarly, the industry’s never seen a stretch of consecutive months of wholesale value appreciation like we experienced from spring to summer this year.

But neither one of these previously rare market dynamics suggests that one can’t make any sense out of the way the wholesale market has moved this year. In fact, if you consider the relationship between wholesale and retail prices, it’s perfectly clear what’s going on. Historically, wholesale and retail prices run in tandem. If wholesale prices go up, retail prices will eventually climb, too, after a roughly six week lag. On the flip side, if wholesale prices go down, retail prices come down, too, after a roughly four-week lag.

This relationship between wholesale and retail prices hasn’t changed at all during 2021, despite some believing the wholesale market has been defying normal rules of operation.

I share this bit of history because it’s relevant right now: It’s been approximately six weeks since wholesale prices began an unexpected rise in early August. And, almost like clockwork, we are now seeing retail prices for used vehicles to rise, too, just as historical data and trends suggest they would.

This news should bring relief to dealers in at least three ways:

First, for dealers and used vehicle buyers/managers who have balked at the prospect of paying more for wholesale vehicles than retail prices of vehicles they’ve just sold or those that remain on their lots, there’s good reason to be confident that if you buy a wholesale vehicle today, there will be profit-making opportunities for you in the weeks ahead.

Second, if you’ve been buying vehicles, marking them up to make a profit and (possibly) seeing age-creep in your inventory, you can rest a little easier knowing that retail market prices are coming your way.

Third, if you’ve been reducing your retail prices to clear out aged vehicles, you may not need to be as aggressive as you thought you needed to be with some vehicles.

It’ll be wise for every dealer to keep a close eye on wholesale prices in the coming weeks. Rest assured, when wholesale values begin to plateau, or even diminish, you can almost bank on the fact that, after a few weeks, retail prices will begin to move, too.

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A Revised View of Wholesale Market Conditions in 2021

Dale Pollak — Fri, 03 Sep 2021 20:49:11 +0000

Just last week, I shared how wholesale values had begun to appreciate as dealers and consumers learned that expected incoming supplies of new vehicles would not arrive.

In my post, I noted how Cox Automotive analysts projected that the used vehicle market would see appreciating values through the month of September, followed by a plateau in October through the end of the year.

Well, things are different now, thanks to the unprecedented destruction and loss left by Hurricane Ida as it passed from the Southeast to the Northeast sections of the United States. Families lost loved ones, homes, cherished possessions and, in some cases, their ways of life. It’s difficult to fathom the magnitude of the losses. I feel for every family and individual affected by this tragedy.

Ida’s aftermath will unquestionably affect the wholesale market for used vehicles. Analysts are still tallying up the number of vehicles destroyed due to the storm due to flooding and other damage.

But early estimates suggest the number of lost vehicles will be significant, and the impact on the wholesale market will likely play out through the end of the year.

Cox Automotive analysts tell me that dealers should expect wholesale values to continue to appreciate through the end of the year. A week ago, the analysts were predicting that we’d see a 1 percent rise in wholesale values through the month of September, followed by a plateau in October through December.

Today, the analysts expect wholesale value appreciation to continue through October, and potentially all the way through December. They expect wholesale values to appreciate by 1 percent or more each month.

With this outlook, I’ve begun advising dealers that it’s OK to relax your efforts to maintain your used vehicle inventory to meet your rolling 30-day total of retail sales, provided you keep the following three things in mind:

First, know that the appreciation of wholesale values won’t be as steep or sudden as we saw this past spring. Put another way, while it’s reasonable to expect that the vehicles you acquire today will be more expensive to acquire in 45 or 60 days. But I would caution that the “deals” you see today won’t offer the same degree of potential gross profit or return as they did earlier this year. This emerging reality should temper how far above your rolling 30-day total of retail sales you choose to go.

Second, if you’re going to stock up due to expected wholesale appreciation through the end of the year, be prepared to move the additional inventory, and right-size your inventory to your rolling 30-day total of retail sales, by the time the 2022 tax season starts. That’s precisely when analysts expect we’ll see more available supply of new vehicles, which will diminish demand and sales for used vehicles.

Third, pay close attention to retail demand in your market. Despite the disruption we’ve seen this week with Ida, and in the past few weeks with the rise of COVID-19 cases related to the Delta variant, retail demand has remained relatively robust and strong. Analysts expect retail demand to remain healthy through the end of the year, but they offer a caveat that we all know to be true–market conditions can and do change quickly.

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An Unexpected Upward Turn in the Wholesale Market

Dale Pollak — Fri, 27 Aug 2021 17:49:24 +0000

If you haven’t been following the wholesale market closely in the past two weeks, you may have missed what amounts to a historic and unexpected upward turn in wholesale values.

You can see evidence of the upward turn in wholesale values through Manheim’s MMR Retention metric, which measures how closely wholesale vehicles sale compared to Manheim Market Report values. In the eight weeks prior to August, we saw wholesale values return to a more normal-looking trend of depreciation over time. MMR Retention ran at or below 100 percent for this stretch, which arrived after historic week-over-week increases in MMR values.

Then, in August, MMR Retention climbed back to 100 percent and, this week, it’s approaching 101 percent. At the same time, more vehicles at Manheim are selling the first time they run. Conversion rates at Manheim auctions are running above 60 percent at a time of year they typically hover around 55 percent.

Analysts at Cox Automotive and Manheim tell me that, in the recorded history of sales at Manheim, there’s only been one other time in the company’s history when wholesale vehicles, and conversion rates, went up rather than down in the month of August. This dynamic occurred in August 2017, when Hurricane Harvey ravaged southern states and took 1 million used vehicles out of the market almost overnight.

The current rise in wholesale values begs the question–why is it happening now?

The primary reason, according to analysts at Cox Automotive and Manheim, is that many dealers, particularly those who represent Asian brands, received notice from their OEM partners that their dealers would not receive the number of new vehicles in the final months of 2021 that they had expected. In turn, dealers are doing what dealers do–they’ve begun stocking up on used vehicles to have inventory to sell to customers who won’t be able to find and purchase their new vehicle of choice.

Another reason the wholesale market is heating up and showing signs of value appreciation at a time it effectively never occurs, is that retail demand remains strong for used vehicles, particularly for the month of August. Analysts believe some used vehicle buyers have given up on waiting for new vehicle inventories to replenish, and they’re purchasing late model used vehicles instead. At the same time, the month of August has seen the arrival of additional stimulus money, in the form of expanded child tax credit payments, for families with younger children.

I asked Cox Automotive chief economist, Jonathan Smoke, whose analysis of in-the-moment market trends and what they mean has proven to be reliably accurate since the start of the COVID-19 pandemic, for his take on how long the current appreciation of wholesale values will continue. His take: Dealers will See wholesale values continue to rise through the end of September, followed by plateau in the final months of 2021.

This outlook suggests two take-aways for dealers as they manage their current inventories.

Be less aggressive with price reductions to move inventory. At this time of year, dealers are typically aggressive with price reductions as they’re looking to reduce inventories as the fall months arrive. I’m not suggesting that dealers shouldn’t reduce prices on investment-distressed or over-age vehicles; I am saying that the price reductions you’d normally make to move the cars this time of year may not need to be as severe.
Temper your impulse to stock up on used inventory. As regular readers know, I’ve long advised that dealers should maintain a 1:1 ratio between the number of vehicles they keep in stock and their rolling 30-day total of retail sales. Currently, dealers across the country have a roughly 40-day supply of vehicles on the ground. In other words, dealers aren’t necessarily short on used vehicle inventory, even though they may feel like they need more cars.

As a final point, it’s striking to me that the quick, upward swing in wholesale valuations, and the impact it creates on retail asking prices for used vehicles, isn’t causing any significant concern or consternation for dealers who use the ProfitTime system and follow its investment value-based method of managing their used vehicle inventories. That’s because ProfitTime is built to guide dealers to the most optimal outcomes for their used vehicle investments no matter how much, or how quickly, the market moves.

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A Closer Look at Current Dealership Buy/Sell Activity

Dale Pollak — Tue, 17 Aug 2021 11:26:40 +0000

I had the honor of being asked to participate in a Q&A panel on the reasons behind a remarkable rise in dealership buy/sell activity in 2021. The other participants where two individuals for whom I hold a great deal of admiration and respect–dealer Don Flow, Chairman and CEO of Flow Automotive Companies and Alan Haig, Founder and President of Haig Partners.

The piece offers perspective on why consolidation has taken off this year, creating a level of buy/sell activity the industry hasn’t seen since public dealer groups began purchasing stores in the 1990s, and the factors driving some dealers to decide now’s the right time to exit the business.

You can read the Q&A discussion in this week’s Automotive News here.

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ProfitTime in Practice: How Days in Inventory, Days to Sell Work Together

Dale Pollak — Wed, 11 Aug 2021 20:24:19 +0000

One of the biggest benefits the ProfitTime system provides dealers is the ability to manage and price vehicles based on their unique investment values. It’s a more sound and sophisticated approach to inventory management than using a vehicle’s days in inventory, or days on the lot, as the primary basis for critical decisions.

But that’s not to say that days in inventory or days on the lot is completely irrelevant for ProfitTime dealers. The truth is, Days in Inventory has significant merit when it’s used in conjunction with another metric–Days to Sell–to manage the outcomes of vehicles that fall into each of ProfitTime’s precious metal designations.

To better understand how Days in Inventory and Days to Sell can work together to help dealers optimize turn and gross profit across their Platinum, Gold, Silver and Bronze categories, it’s important to know the distinction between the two metrics.

The primary distinction relates to what the individual metrics measure. In the case of Days in Inventory, it’s a metric that measures a present condition–the number of days a vehicle, or a group of vehicles in a ProfitTime investment category, has been on a dealer’s lot. Meanwhile, Days to Sale measures a past condition–the number of days, on average, it typically takes for a dealer to sell vehicles in a specific ProfitTime investment category.

As ProfitTime launched and I’ve worked closely with dealers to optimize the outcomes the system delivers, I’ve come to understand that Days to Sell is perhaps the most-valuable metric for helping dealers slow the turn of their Platinum and Gold investments to maximize gross profit, and speed up the turn of their Silver and Bronze investments to maximize volume. To achieve these outcomes, I’ve coached dealers to achieve higher Days to Sell averages for Platinum and Gold vehicles, and lower Days to Sell averages for Silver and Bronze vehicles.

But I’ve also learned that Days to Sell, and its relationship to Days in Inventory, for a specific ProfitTime investment category also provides valuable insight. Generally speaking, there should be an inverse relationship between Days to Sell and Days in Inventory in each ProfitTime investment category.

For example, if Gold and Platinum vehicles have an average Days in Inventory of 35 and 40, respectively, the corresponding Days to Sell figures should be higher (say, 40 and 45, respectively). Why? Because a higher Days to Sell metric tells us that a dealer is, in fact, giving the Gold and Platinum vehicles the time they deserve and need to deliver maximum gross profit.

There should also be an inverse relationship between Days in Inventory and Days to Sell for Silver and Bronze vehicles. For example, if Silver and Bronze vehicles had an average Days in Inventory of 30 and 25, respectively, we’d want the corresponding Days to Sell figures to be lower (say, 25 and 20 days, respectively). Why? The lower Days to Sell metric tells us the dealer is turning Silver and Bronze vehicles quickly and in accord with their respective ProfitTime investment scores and values.

From what I’ve seen, top-performing ProfitTime dealers who follow the system’s pricing recommendations don’t need to proactively manage the relationship between Days in Inventory and Days to Sell. Why? Because the algorithm that drives the ProfitTime pricing recommendations accounts for each vehicle’s time in inventory and its probability of selling at the recommended price in the next seven days. In effect, when dealers accept the lion’s share of ProfitTime pricing recommendations, the system manages the Days in Inventory and Days to Sell relationship for them.

Of course, the opposite is also true. Inevitably, when I see that the relationship between Days in Inventory and Days to Sell in a ProfitTime investment category is out of whack, the root cause usually rests with a dealer or manager ignoring or rejecting ProfitTime price recommendations. Such discoveries are often valuable teaching moments. They often reflect instances where a dealer is pricing their Gold and Platinum vehicles too cheap and giving up gross. Or, the dealers are asking too much for their Silver and Bronze vehicles and giving up opportunities to grow their sales volumes.

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ProfitTime 2.0 in Practice: A Tale of Great and Greater

Dale Pollak — Fri, 30 Jul 2021 19:15:23 +0000

Most dealers and used vehicle managers would agree that the used vehicle market has settled down in recent weeks.

Gone are the days when wholesale values were appreciating rapidly week after week. Retail prices have begun levelling off, too, as depreciation returns to the market. I’m also told dealers are selling fewer cars to customers before the vehicles are fully reconditioned or even on the ground at dealerships.

In some ways, the situation reminds me of the times when my wife, Nancy, and I, would ride through the turmoil of three boys who had either taken in too much sugar, hadn’t had enough sleep or got over-excited about something. As parents, we knew the chaos would inevitably end, and the boys would settle down.

Even in its more-settled state, dealers are still blessed with a strong used vehicle market. Supply is low, and demand remains relatively high. Analysts expect these conditions to continue through late summer and early fall, barring any unforeseen circumstances or events. Overall, I suspect we’ll find that at least the front-half of 2021 may go down as the single-best run, in terms of used vehicle sales and profitability, that dealers have ever seen.

But this moment also affords an opportunity to take a closer look at how dealers fared during this unprecedented period. I’ve wondered, for example, if there’s any discernible difference in the performance of dealers who manage their used vehicles as investments versus those who manage their inventories as merchandise where every car should sell as quickly as possible.

I asked the data scientists at vAuto to examine this question. They went to work, comparing a handful of data points from the inventory data of dealers who use ProfitTime 2.0, which enables dealers to execute an investment value-based management strategy and those who don’t. They pulled recent data from dealers defined as “high adopters” of the investment value management and from dealers who don’t use the system.

The results of the examination were eye-opening. They effectively tell two stories–one of great performance by dealers who manage inventories as merchandise, and even greater performance by dealers who manage their inventories as investments.

Here’s what the data scientists found:

Average sales rate: The high-adopter investment management dealers sold vehicles four days faster compared to the average sales rate of other dealers (37 days versus 33 days, respectively).

Sales volume: The high-adopter dealers sold more vehicles per month on average than other dealers (98 vehicles versus 81 vehicles, respectively).

Gross profit margin: The high-adopter dealers sold their vehicles for an average of $400 more gross profit than other dealers ($3,168 versus $2,790, respectively).

The performance differences immediately begged a follow-up question: Why were dealers who manage used vehicles as investments able to sell more cars and make more gross than other dealers at a time when the market was good for everyone?

The answer appears to rest on the ways each group of dealers manages their best and worst investments. That is, the high-adopter investment-focused dealers were able to price their best investments at higher price points recommended by the ProfitTime 2.0 system, and get the money when the vehicles sold, compared to other dealers. Meanwhile, the performance data suggests that when high-adopter investment-focused dealers knew they had a low-investment-value vehicle, they were more likely to price it to sell quickly. By contrast, other dealers tended to ask too much for these vehicles, which diminished overall sales volume and gross profits.

As I’ve shared the performance data with dealers, the reactions have been profound. On one hand, the results affirm what dealers who manage used vehicles as investments believed to be true about their performance. They were selling more cars and making more money than their peers. On the other hand, the data is serving as a wake-up call for other dealers who thought they were doing as best as they possibly could.

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ProfitTime 2.0 in Practice: How VDP Values Vary Across Used Vehicle Investments

Dale Pollak — Wed, 30 Jun 2021 15:47:36 +0000

More than a decade ago, dealers were coming to understand the value of Search Results Pages (SRPs) and Vehicle Details Pages (VDPs) metrics for their used vehicle inventories.

In October of 2009, I wrote a post that highlighted how a Wisconsin dealer achieved 10,000 VDPs in a month, and how this achievement gave him a significant leg up on the competition. The post included this passage that attempted to explain why SRPs and VDPs should matter to every dealer:

“Because an SRP is the virtual equivalent of a shopper driving by your dealership and a VDP is the virtual equivalent of somebody coming in off that street and saying, “I want to take a closer look at that car.” Can you imagine running your dealership without knowledge of the drive by’s or walk-ins? Well, if you don’t know SRPs and VDPs you’re missing the virtual equivalent of these two critical pieces of information.”

Today, it’s almost second nature for dealers and used vehicle managers to consider VDP counts as they re-price their used vehicles. If they’ve had a vehicle in inventory and on the market for some time, they will invariably look to see whether the vehicle is getting any VDPs and, if so, whether there is any trendline in the data. The analysis is a precursor to a re-pricing decision. If the vehicle hasn’t received any VDPs, or the VDP counts are smaller than they should be, dealers and used vehicle managers typically lower the vehicle’s price to garner more attention/interest from online buyers. The converse scenario is also true.

The VDP analysis remains relevant in today’s era of investment value inventory management, but the degree of relevance depends on a specific vehicle’s investment value.

For example, in recent weeks, I’ve heard from several ProfitTime 2.0 dealers that they’re being advised by used vehicle consultants to lower the prices on their best investments, the Platinum and Gold cars. The consultants believe that, because the vehicles have reached a specific point of time in inventory (call it 30 days or so) and the vehicles have not received a sufficient number of VDPs, dealers should lower the prices to get more attention for the vehicle and sell it.

Dealers say they’re often pushing back on the advice, preferring to leave their prices aligned with ProfitTime 2.0 recommendations. In almost every case, the dealers have resisted the guidance to lower prices on Platinum vehicles, despite an apparent dearth of VDPs, and the vehicle sells soon anyway for all the money.

“Are these guys wrong?” a dealer asked the other day. “I’m not sure I should be paying them to tell me to give away my best cars.”

I answered the dealer’s question by explaining that the consultants are not yet familiar with, or they don’t fully understand, the investment value strategy dealers deploy through ProfitTime 2.0. If the consultants were more familiar with investment value inventory management principles, they would know two things.

The first is that time in inventory, and more specifically a milestone like 30, 45 or 60 days, is no longer relevant when you manage used vehicles by their individual investment values. The most disciplined ProfitTime 2.0 dealers no longer look at the calendar as they make pricing decisions. They understand that if they price a vehicle appropriate to its investment value in the market and their inventories, it will sell when it’s supposed to for its optimal profit (assuming all the requisite elements of sound merchandising have been applied to the vehicle). This is why ProfitTime 2.0 dealers give Platinum vehicles more time to sell and maximize gross profit, and work hard to ensure their lesser investments, their Bronze and Silver vehicles, sell in a matter of days, not weeks.

The second thing is that the investment value method for managing used vehicle inventory has given us the insight to understand that VDP counts matter more with some cars compared to others. For example, ProfitTime 2.0 dealers routinely see Platinum vehicles selling with fewer VDPs than a Bronze or Silver vehicle might receive before it sells. The primary reason for the distinction is that Platinum and Gold vehicles possess all the characteristics of vehicles customers actively seek out. They understand these vehicles are in high demand and short supply. They’re the cars that generate calls from customers, and calls to customers from sales associates, when they arrive in your inventory. We’ve seen time and time again that Platinum and some Gold vehicles often sell without the VDPs and price reductions that consultants may recommend.

I’ll tell dealers that they should hold their current course and heed the ProfitTime 2.0 price recommendations that enable them to maximize gross profit on their best investments, even if the absence of VDPs makes them nervous. Over time, I’ll add, the consultants will likely see the light, too.

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4 Reasons We Won’t See a “Crash” in Used Vehicle Values

Dale Pollak — Fri, 25 Jun 2021 15:08:33 +0000

A recent Forbes article suggested that dealers and vehicle buyers will soon see a crash in used vehicle values that causes negative financial consequences.

The article discusses how the unprecedented appreciation of used vehicle values has resulted in customers purchasing late model used vehicles at prices that, in some cases, land higher than the original MSRP of the vehicles. The piece suggests that the conditions amount to a used vehicle pricing bubble that will eventually burst, with negative outcomes for consumers, lenders who financed the purchases and investors who purchase asset-backed securities that include auto loans.

The Forbes article concludes: “Temporary forces caused an unprecedented (and unsustainable) used car pricing bubble. When it pops, car owners will owe thousands of dollars more for their vehicles than what they are worth. For those needing to purchase a car, they should delay their purchase until later this year. If they can’t, they better brace for impact.”

But Cox Automotive analysts and I have a different view. We don’t believe the current used vehicle price bubble will burst. Instead, we believe the normalization of the market will be more like a balloon that deflates over time. Our perspective is shaped by four important factors emerging in the current market.

The first is that, just as Cox Automotive analysts predicted earlier this year, the month of June has seen a levelling-off of the appreciation rate of wholesale vehicle values and the ever-so slight return of used vehicle depreciation (about 2/10ths of 1 percent, week-over-week). This moment marks a significant shift in the wholesale market, where values have been increasing on a week-over-week basis almost every week of the current calendar year.

Second, our analysis suggests that the pace of used vehicle depreciation will increase over time, with a little bit of a snowball effect. For example, if used vehicle values depreciated 2/10ths of 1 percent week-over-week in June, we are likely to see weekly depreciation rates of 1 percent or higher by the end of the summer and through the remainder of the year. This hastened and heightened rate of depreciation will occur because of the way vehicle values appreciated so quickly this past spring. It’s a case of what goes up fast is likely to come down quicker.

Third, as used vehicle depreciation returns to the market, the Cox Automotive outlook suggests we’ll see a restoration of the traditional relationship between wholesale and retail prices. Historically, retail prices generally run higher than wholesale prices. That hasn’t been the case since this past spring. Dealers know that, almost across the board, wholesale prices have been higher than retail prices. Our analysis suggests this condition will reverse in a few weeks, and retail prices will once again exceed wholesale prices for most used vehicles, if only by a little.

Finally, there’s retail demand. It’s outpaced supply for much of the current year, creating profit-favorable circumstances for dealers, even when they must pay up to acquire vehicles. The Cox Automotive forecasts projects that while demand for used vehicles may wane some in the weeks and months ahead, it’ll remain strong. American households have historically high savings, and they are likely to spend some of this money on used vehicles as they return to more normal family, travel and work routines. In addition, we all know some vehicle buyers are sitting on the sidelines, waiting for the market (and prices) to cool, which is starting to happen.

It is for all these reasons that I caution dealers to be wary of predictions that we’ll face a precipitous crash or decline in used vehicle prices and values. Instead, I believe we’re entering a period of adjustment that will be marked more moderate and nuanced changes to used vehicle values and opportunity for those who mind the market most closely.

The post 4 Reasons We Won’t See a “Crash” in Used Vehicle Values appeared first on Dale Pollak.

ProfitTime 2.0 in Practice: Five Take-Aways from a Fast-Moving Market

Dale Pollak — Mon, 14 Jun 2021 18:20:42 +0000

If there’s one thing that dealers might conclude from the used vehicle market through much of this year, it’s that if you’re not paying close attention to vehicle values and retail prices, you’re likely missing opportunities to make more money.

I say this following several conversations with dealers who have adopted the Investment-Based Method of Used Vehicle Management available through the ProfitTime 2.0 system. The system uses data science to deliver in-the-moment retail pricing recommendations that enable dealers to optimize turn and gross at the same time.

To an individual, the dealers have been struck by how fast, and by how much, the market changes, particularly when every dealer has had the good fortune of retailing cars in an environment of limited supply and strong demand.

“If the competition has an Equinox for $20,000, and it’s the cheapest on the market, and mine is next for $21,000, and they sell it today, it changes the investment value and price position of my car,” says Steve Jackson, pre-owned manager at Shaheen Chevrolet, Lansing, MI. “ProfitTime 2.0 literally gives me a minute by minute view of what’s going on in the used car business in my market. It’s almost a live thing, like it has a heartbeat.”

In the current market, the up-to-the-minute view of the market means that dealers who are paying close attention recognize the need for more pricing discipline than they’ve exercised in the past. They are reviewing vehicles that fall in/out of alignment with ProfitTime 2.0 pricing recommendations at least once, if not several times, a day.

When I spoke to Jackson the other day, he started his morning by increasing prices on 17 vehicles in his inventory based on ProfitTime 2.0 recommendations. “I wasn’t raising prices by $100,” he says. “It was a lot–$500, $600, $1,000, $1,200. This is a daily thing.”

The same is true for Bo Johnson, pre-owned manager at White Allen Chevrolet in Dayton, OH. “I go in daily and look at the recommendation for a vehicle and decide if I need to raise or lower the price,” Johnson says. “I don’t know that I’d be raising prices the way I’m raising them, or even raising them, like I’m doing now if I wasn’t using ProfitTime 2.0.”

In addition to underscoring the need for what might be called ultra-vigilant pricing, dealers who use ProfitTime 2.0 shared five other take-aways from their experience of managing their used vehicle investments in the current market.

Take-away 1: Patience pays off with Platinum vehicle investments

In the ProfitTime 2.0 system, Platinum vehicles rank as the highest investments. The vehicles are blessed with the combination of low Market Days Supply, relatively low Cost to Market percentages and solid retail sales volumes. The general manager of a Midwest Honda store shared that he recently faced questions from an Internet consultant about a 60-day-old Platinum BMW priced to deliver a $6,000 front-end gross. “They were asking, ‘what are you doing with this car? It’s been here 60 days. It doesn’t have any VDPs. You’ve got to move on it. You should reduce the price by at least $2,000. You’d still make $4,000,’” the GM recalls. “I told them, ‘I’d love to do that, but we just sold it two hours ago for all the money.’”

Take-away 2: Bronze vehicles are still Bronze vehicles

ProfitTime 2.0 ranks a dealer’s least-valuable investments as Bronze vehicles. For most dealers in the current market, their Bronze vehicles often consist of the vehicles they’ve purchased at auctions because they absolutely need the vehicles to meet their overall goals for sales volume and to satisfy factory-set targets for certified pre-owned sales. When you effectively pay retail money to acquire an auction vehicle, it can be tempting to price the vehicle higher than ProfitTime 2.0 recommends to get gross profit you believe the vehicle should produce.

I asked Johnson at White Allen Chevrolet about this temptation, and he’s not falling for it. “They are Bronze cars for a reason, and mostly it’s your Cost to Market position,” he says. “You can’t fall in love with anything. This week the wholesale market is starting to dip. That’s why I’m trying to get rid of the Bronze cars in less than 30 days because they won’t look any better tomorrow.”

Take-away 3: Knowing each vehicle’s investment value protects profit potential

Virtually every dealer is focused on how they appraise vehicles. The focus primarily owes to the need to ensure that the used vehicle department doesn’t miss an acquisition opportunity. At the same time, customers with trade-ins know that their used vehicle is worth more now than it might have been three to six months ago, and the new car department is likely to be hungry to make a deal without discounting the new vehicle.

It’s a confluence of circumstances that can create more pressure on used vehicle managers to bump appraisals to make deals. But used vehicle managers say that vehicle investment value ProfitTime 2.0 generates from the initial appraisal offer helps them manage the frequency and size of requests to give the customers more for their trade-in.

Here’s Jackson’s approach: “If I’ve appraised a car and it’s Platinum, and I get a request to bump the appraisal, I can usually put more money into it, because there’s a much higher chance we’re going to make money,” he says. “But I’m not going to hurt myself. If we need the car, we’ll put the money into it that we need to make the deal, as long as it stays the same metal in ProfitTime 2.0.”

I would also add that, when a bump or over-allowance on a trade-in gets charged to the used vehicle, ProfitTime 2.0 helps dealers understand the impact and manage the vehicle’s lesser investment value appropriately.

Take-away 4: Discounts requests are easier to handle

If your sales team is well-trained to explain how you arrive at your market-based prices for used vehicles, the current market is ready and ripe for you to hold on your price with customers who want a discount. Why? Dealers say customers, whether they are looking to buy a new or used vehicle, are well-aware of current market conditions. In used cars, they’ve seen prices for vehicles increase during their online research and shopping. They can also see that your new vehicle inventory has far fewer cars than normal. As a Southeast dealer put it the other day, “if you can’t hold your price with customers now, you’re doing something wrong.”

Take-away 5: Turning every car fast isn’t everything

When dealers adopt the investment-based method of inventory management, they soon recognize that their ability to turn inventory doesn’t go away, it just looks different. Rather than apply a standard policy of reducing vehicle prices as vehicles age in inventory, ProfitTime 2.0 dealers simply ensure individual vehicles are priced according to their investment designations. As such, the turn rates of individual investment classes are different. Bronze cars are priced to move quickly to optimize their ROI, while others, like the Platinum vehicles noted above, are priced to command their optimal ROI by maximizing gross profit.

Dealers who follow the investment-minded strategy find that their overall turn rates don’t suffer–and they marvel at dealers who maintain a strict turn-and-earn strategy in the current market.

“If there’s a dealer turning their inventory 18 to 20 times, they are missing the boat and missing money,” Johnson says.

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ProfitTime 2.0 in Practice: How the Fallacy of “Fresh Cars” Lives On

Dale Pollak — Fri, 04 Jun 2021 18:24:43 +0000

There’s a bit of what I would call an investment value disconnect with dealers and their used vehicles that offer the least amount of potential profit return.

In the ProfitTime 2.0 system, these vehicles are typically Bronze investments. They fall on the lowest rung of ProfitTime 2.0’s Platinum, Gold, Silver and Bronze investment scale.

Generally speaking, dealers are Bronze vehicles today from auctions, where purchase prices are sky-high due to limited inventory supply. As a result, the vehicles often enter dealers’ retail inventories at Cost to Market percentages at or near 100 percent. In plain terms, the metrics indicate that dealers are effectively paying retail prices for these vehicles in the wholesale market.

But then the investment value disconnect occurs. Rather than price the vehicles to reflect their investment distress, dealers are gunning for gross profit. For example, I examined the inventory of a high-volume Chevrolet store in the Midwest earlier this week. The overall Cost to Market average for the store’s Bronze vehicles was 99 percent, and the overall Price to Market average was 106 percent.

I asked the used vehicle manager to explain his strategy. Here’s what he said:

“I know I’m asking more than the market average for my Bronze cars. But I had to pay up to acquire them, and they’re all mostly fresh units. I have to at least try to get some gross out of them to keep my dealer happy.”

I’ve taken to call this pricing dynamic and rationale the “fallacy of the fresh car.” This fallacy dates the earliest days of the car business, when fresh cars typically did offer the highest gross profit potential, due to depreciation that occurs as vehicles age in inventory over time.

Today, however, we have a more complete picture of the truth about fresh cars. The ProfitTime 2.0 system is built on data science that proves not every fresh car holds the same profit potential, and probably never did. Some vehicles, the Platinum cars, arrive in inventory full of gross profit potential, while others, the Bronze cars, arrive with little or no potential to yield a positive investment return.

The used vehicle manager at the Midwest dealership knows his current pricing strategy isn’t optimal. It takes an average of 40 days to sell his Bronze units. And guess what? The retail sales typically occur only after the manager has lowered their prices to more market-realistic Price to Market percentages, which are typically around 95 percent. The dynamic means that many of the store’s Bronze vehicles retail as net profit losses.

I see similar scenarios in used vehicle inventories across the country. Dealers don’t want to face the investment reality of their Bronze vehicles, and the fallacy of fresh cars provides a rationale to stay the present course. It’s also true that the pain of this fresh car practice isn’t as sharp as it used to be. Even though dealers are achieving sub-optimal investment outcomes with Bronze vehicles, grosses are really good on Platinum vehicles–so good, in fact, that the profitability of the used vehicle department looks better than ever.

Such are the blessings of a market where retail demand is strong, used vehicle supplies are limited, and dealers are enjoying the benefits. It makes you wonder how much better dealers might be doing if they used the current moment to finally face the fallacy of fresh cars. In the case of the Midwest dealership, we’ll never know.

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Missing the Import of Current Retail Automotive Conditions

Dale Pollak — Fri, 14 May 2021 17:53:29 +0000

It seems as if nearly everyone in the industry, especially dealers, wants answers to two important questions:

When will the current chip shortage, which is affecting new vehicle production levels and limiting available inventory for dealers, be over?

When will wholesale supplies come back and high wholesale values for vehicles come down?

Both questions reflect the stresses dealers are feeling in their new and used vehicle departments. Many believe that if they had more new and used vehicle inventory, they would be selling more vehicles.

But as I’ve fielded these questions from dealers, and tried my best to provide some answers, it has occurred to me that dealers and others in the industry may be missing or overlooking the import of the current moment. While dealers worry about when new and used vehicle inventories return to more “normal” levels, I believe they should be more concerned that conditions will return to normal and the consequences for their bottom lines.

Consider, for example, that so far this year, dealers are selling larger numbers of new and used vehicles out of smaller-than-ever inventories–and making record profits–than they did by this time last year. The National Automobile Dealers Association’s Dealership Financial Profile shows that, through the end of March, the average dealer’s net profit before tax is up nearly 200 percent. The profile also shows that the average retail net profit per new and used vehicle retailed is a healthy $248 and $613, respectively.

It seems to me that such record levels of profitability owe precisely to the conditions dealers are complaining and worrying about right now–lower-than-ever levels of inventory. We know, for example, that if dealers had twice as many new and used vehicles on the ground today, with the same level of demand, profitability would suffer. There would be higher carrying costs, more aged units and less control of vehicle prices.

Broadly speaking, these conditions reflect what might be regarded as the best of all possible worlds for any business–high demand and limited supply. Even better, new research from Kelley Blue Book suggests that consumers understand the current conditions. They expect to see less selection and higher prices when they shop for a car. Sixty percent of new vehicle buyers say they plan to buy a vehicle despite less selection and higher prices.

It should also be noted that the current highly profitable nature of the car business in the current moment doesn’t largely owe to disciplined management decisions on the part of dealers. Rather, it’s a positive outcome of COVID-19, the chip shortage and a host of other factors that have brought a level of equilibrium to demand and supply that many car business veterans like me have never seen in our careers.

And yet, it seems like many dealers are longing to return to the way things used to be. They would feel better if they had higher numbers of new and used vehicles on the ground. They would prefer to suffer less discomfort and stress from current reconditioning backlogs and the need to convince some customers to order vehicles or purchase the less-desirable vehicle that’s available on your lot.

Such discomfort seems like a small price to pay for the highly profit-favorable circumstances that a limited-supply, high-demand market gives to dealers today.

If nothing else, the current market disproves the long-standing belief that you need to have more inventory on the ground than you sell. It shows that dealers can successfully operate in an environment that requires everyone to work faster and harder to acquire the cars, get them ready to sell and capture your share of current demand.

From now on, when dealers ask me when the chip shortage might end, and new and used vehicle supplies will return to normal, I’ll respond with a different question: Are you sure that’s what you really want?

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Reconditioning Inefficiency Comes Back to Bite–Hard

Dale Pollak — Tue, 11 May 2021 17:56:47 +0000

Amid the current, incredible run of strong retail demand for used vehicles, some dealers are forced to do something many would have considered unheard of in recent years–selling cars to customers and reconditioning them after the deals are done.

Other dealers are in an even more troubling position. They aren’t selling cars because the vehicles aren’t yet reconditioned and ready for retail customers. In the company’s most recent investor call, Carvana executives noted how reconditioning capacity has been a constraint on inventory growth and sales.

The root cause of the current problem rests with the rapid rate of retail sales throughput. Dealers are selling through their inventories and working to acquire vehicles to replace the ones they’ve sold, at a faster pace than they have in recent years. The situation puts pressure on the processes dealers and used vehicle managers follow to recondition cars. In this environment, any inefficiency in a dealer’s reconditioning process gets amplified. Put another way, the typical seven- to 10-day timeframe to recondition vehicles that dealers accepted in the past isn’t working any more. In fact, it’s becoming a big problem.

At Steven Toyota in Harrisonburg, VA, used car manager Jim Mason says it’s not uncommon to see a backlog of vehicles in the spring selling season, when he/his team build their inventories to meet a seasonal rise in demand. This year, however, the situation’s unprecedented.

“It’s been exponentially worse this year,” Mason says. He estimates that of the roughly 125 cars he’s got in inventory, 30 are reconditioned and ready for retail sale. Another 50 vehicles are parked at the dealership, waiting their turn for reconditioning. The remainder are vehicles he’s purchased from auctions that are in transit to the dealership.

The backlog of cars waiting for reconditioning isn’t necessarily slowing retail sales. Customer demand and interest is strong enough that Mason has sold several vehicles that weren’t reconditioned, and customers agreed to take delivery a week or so after they made a deal. “It’s not uncommon to have three or four customers asking about a vehicle we just sold,” Mason says. After some discussion, the service department now gives reconditioning priority to vehicles they’ve sold or recently acquired that have generated customer interest.

But moving cars more quickly through service is only part of the current problem. When dealers sell cars before reconditioning work is complete, you’re never really sure how much you made on the deal. The uncertainty owes to relying on estimated, rather than actual reconditioning costs, to set your retail asking price. The uncertainty is familiar to dealers who prioritize inventory turns, sell cars and reconcile RO costs against recent deals after they occur. They know what it’s like to sell a car, potentially discount the asking price to satisfy a customer or absorb a bank fee, and wonder whether the deal made or lost money.

“We do pretty good with our recon estimates,” Mason says. “But you know, I know and everybody knows that there will always be cars that surprise you. We have to make sure the car comes in at or under budget so we make the gross we thought we made.”

I appreciate how Mason and team have decided to attack the back log of reconditioning work. I’ve also been advising ProfitTime 2.0 dealers to be mindful of each vehicle’s investment value as they decide the cars that get reconditioned before others. It makes sense to give lower-grade investments, the Bronze cars, highest priority since they will need to be retailed quickly to optimize their investment return or net profit potential.

The current situation is also causing some dealers and used vehicle managers to once again consider whether they should be outsourcing work they’ve preferred to keep in house. Tapping an outside vendor to help speed up the current throughput of vehicles might offer a temporary solution.

But I would reiterate a point I’ve been making for years: The beauty of used vehicle retailing is its ability to drive a wheel of fortune across your dealership, generating profit in used vehicles, service and F&I. In turn, the strength of your used vehicle retailing operation is only as good as its least-efficient link. If your least-efficient link is the service department, now seems like an opportune time to fix the problem for good.

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Ripple Effects of Current New Vehicle Inventory Constraints

Dale Pollak — Thu, 06 May 2021 21:03:48 +0000

There is absolutely no question that the micro-chip and COVID-19 constraints on factory production and sales of new vehicles has landed franchise dealers in uncharted territory.

I can’t recall a time in my 40 years in the car business where new vehicle inventories have ever been this low for this long. This week, Automotive News reports that factories have begun stripping out navigation systems, rear-view monitoring systems and other high-tech features to keep at least some vehicles rolling through assembly lines. Analysts expect millions of new vehicle fleet and retail sales, whether they are leases or outright purchases, won’t occur this year due to inventory constraints.

To be sure, the pain dealers feel in their new vehicle departments has created challenges, and opportunities, in used vehicles. Fewer new vehicle sales reduce lease turn-in and trade-in opportunities, forcing dealers to source a larger share of inventory from auctions, where supplies of late-model vehicles are limited and likely to decline further as rental car companies turn to auctions, rather than factories, to freshen their fleets. In addition, the need for used vehicle inventory has spurred many dealers to begin mining their local markets and service lanes to purchase vehicles from customers. “We’re high-balling every offer we make just to get cars,” a used vehicle manager at a mid-Atlantic dealership told me.

If nothing else, the production problems in new vehicles reflect the inter-connected nature of the car business–when something happens, good or bad, in one aspect of the business, it creates a ripple effect felt everywhere else.

It may be too soon to fully understand how the ripple effect of the current crunch on new vehicle production will play out. But I believe there’s enough evidence to suggest three outcomes dealers can expect to see over the next year or two.

The first outcome is that wholesale prices and valuations will remain high. As I noted in my last post, while the rate of wholesale value appreciation has slowed down, dealers aren’t likely to see a return to normal depreciation rates and timelines anytime soon. Wholesale vehicle supplies remain limited and low, and strong retail demand (driven by depleted new vehicle availability) will cause the current high-cost wholesale environment to continue.

The second outcome is that dealers will likely see a shortage of late-model used vehicles. Last year, the industry saw new vehicle sales decline by 2.5 million vehicles, a loss that was roughly split between fleet and retail sales. This year, factories are putting a greater emphasis on producing vehicles for retail customers. The result is the industry will end up losing the better part of two years of commercial vehicle and rental car production. These cars weren’t built. They weren’t sold, and they won’t end up at auctions. At the same time, the number of leased vehicles declined in 2020, as customers opted to extend current leases or return leased vehicles without acquiring a new one. In 2021, the state of high wholesale valuations creates an incentive for lease owners to buy out their leases and keep the cars. The combination of these conditions will help late-model vehicles, and particularly those offered as part of factory pre-owned certification programs, command top dollar in the retail market.

The third outcome relates to how the current and future high-value state of the wholesale market and low levels of late-model supplies will affect new vehicle sales when production stabilizes. For the past few years, new vehicle affordability has become a bigger issue as vehicles have become more high-tech, expensive and out of reach for some buyers, many of whom were in negative equity positions in the vehicles they wanted to replace. The high-value wholesale market is easing new vehicle affordability in two ways. First, it means the negative equity position of some vehicle owners has been reduced, if not eliminated. These owners will be in a better position to afford a new vehicle purchase or lease. Second, high wholesale values will translate to lower depreciation rates and lease payments for new vehicles, as one- to three-year-old vehicles will likely be worth more as a percentage of their original Manufacturer’s Suggested Retail Price (MSRP) than they have been in years past. In some cases, leasing will likely become more financially attractive option than conventional financing for a larger share of customers.

It is for all these reasons that I believe that the silver lining for dealers in the currently challenged new vehicle market will be a return to a bright, robust and even more profitable environment as dealers are able to satisfy pent-up demand. Of course, as the Grateful Dead tune goes, “every silver lining has a touch of grey.” In this case, the degree of grey may largely depend on how fast factories bring production back online and whether the vehicles they produce reflect the mix and volume their customers want and need to buy.

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Early Signs of a Market Moving to More “Normal” Dynamics

Dale Pollak — Fri, 30 Apr 2021 19:33:08 +0000

When you boil eggs or pasta on a stovetop, there’s a point when it’s wise to lower the heat to avoid a boil-over. You shouldn’t drastically reduce the heat; you lower it just enough to prevent the boil-over and maintain the cooking process.

I believe we’re about to reach a similar moment in the used vehicle market, particularly for dealers who have been stocking their inventories to achieve a 60- or even 90-days supply of vehicles. These dealers should at least consider lowering their inventory levels to a 45-days supply, or even less–the equivalent of reducing the heat on the stove to prevent a boil-over.

This cautionary guidance follows fresh wholesale and retail market trendline data from Cox Automotive.

This week, Cox Automotive’s wholesale market data suggests that the rapid acceleration of wholesale vehicle values we’ve seen in the past 60 to 90 days has reached its peak. Historically, when such valuations rise and peak, we know that wholesale values are likely to continue to rise for the next six to eight weeks. The difference, though, is that the rapid rate of appreciation we’ve seen in recent weeks has begun to slow down. By the end of summer, analysts expect some wholesale value depreciation to return and move the market off its current high point.

At the same time, retail trendline data suggests that the rapid rise of retail demand that’s occurred in the past 60 to 90 days has also peaked. Analysts expect retail demand for used vehicles to remain strong, but they don’t expect the month-over-month growth of consumers looking to purchase used vehicles to continue.

The twin peaks in the wholesale and retail markets means that the favorable conditions that enabled dealers to speculate and stock inventory ahead of their rolling 30-day average of retail sales have begun to wane. This week, I spoke to an independent dealer in the mid-Atlantic who began stocking up on cars at the end of 2020. He entered 2021 with a roughly 120-days supply of used vehicles. He’s sold virtually all of them, making handsome profits in the process.

Today, he’s back to a more disciplined stocking strategy. “We gambled big and it paid off,” the dealer says. “I’ve got about a 45-day supply on the ground now, and I expect to be at a 30- to 35-days supply by the end of May.”

The dealer’s decision to reduce the heat on his stocking strategy strikes me as smart, given the wholesale and retail trendlines. If a dealer has a 60-day supply of vehicles on the ground today, it’s likely that some of those vehicles won’t produce their expected gross profits or investment returns when they sell in late June or early July. By then, it seems reasonable to expect that retail demand won’t be quite as strong.

Given these conditions, I’ve been advising dealers to proceed with care and caution as they re-stock their inventories. The market appears to be past the point where you can acquire vehicles today and expect their values to appreciate as much, if at all, over the next 30 to 60 days as they have in the recent past. Similarly, as the positive effects of stimulus payments and tax refunds wear off, there’s no guarantee dealers will be able to continue putting almost any price on a used vehicle and seeing it sell quickly.

Perhaps the most telling signs that the wholesale and retail markets are returning to what might be regarded as more “normal” conditions will arrive in dealer inventories, through key metrics like average days to sell, average age of inventory and Market Days Supply. For the past three months, it’s almost as if these metrics didn’t matter. Dealers have been able to sell inventory quickly, despite what might be considered the moonshot prices I wrote about earlier this month. At the same time, I’ve never seen Market Days Supply metrics for vehicles, and overall inventories, dip as low as they have been in recent weeks. A used vehicle inventory consultant summarized the phenomenon nicely: “A Market Days Supply of 30 is the new 60.”

But as more normal dynamics return to the wholesale and retail markets, we can expect that each of these three metrics will start to rise–just like boiling water that’s reaching the top of a saucepan.

That’s what makes the current moment critical for dealers. The trendlines suggest we’re in the early stages of a transitioning used vehicle market. Historically, dealers tend to miss the early moments of a market transition, and only recognize the market’s changed after it’s too late to make meaningful operational adjustments. My hope is that this post gives dealers ample notice to avert what might be a boil-over in their used vehicle departments in the coming months–where they have too many cars purchased for too much money and priced too high for current conditions.

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ProfitTime 2.0 in Practice: A Case of Moonshots and Missed Shots in Used Vehicles

Dale Pollak — Fri, 09 Apr 2021 15:54:01 +0000

If you examine how dealers are pricing used vehicles in the current market based on the investment value of each vehicle, it amounts to a tale of two cities. Or, more specifically, it boils down to a case of moonshots and missed shots.

The moonshots relate to the most investment-distressed vehicles in dealer inventories. Typically, these vehicles come from auctions, where dealers and managers are now paying wholesale prices that are often higher than the current retail asking prices for the same and similar vehicles.

In recent years, such moments of imbalance between wholesale and retail prices were more in-the-moment or temporal. You could walk away from the cars and know, with some level of certainty, that you could probably buy the same cars for more market-rational prices a week or two later.

But there’s nothing rational about the current market. If you walk away today, you might end up paying even more the following week, as wholesale values continue to appreciate. If you commit to acquiring the car to maintain sales volume, you may pay more than you’ll get back when you sell it at retail.

This is exactly the reason we’re seeing moonshot pricing across the country.

In ProfitTime 2.0, auction-purchased vehicles almost always rank right now as Bronze investments, the lowest level on the system’s Bronze, Silver, Gold and Platinum scale. These vehicles arrive in inventories at Cost to Market percentages at, near or above 100 percent. In turn, managers price these vehicles at Price to Market percentages above 100 percent to ensure that, when the vehicle sells, there’s at least some front-end gross profit. Across dealer inventories, we can see that dealers are pricing their Bronze vehicles an average of $1,200 above where the ProfitTime 2.0 system recommends they should be priced.

Under more normal market circumstances, these vehicles wouldn’t sell until someone prices them more rationally to the market. In today’s market, there’s a chance they might sell anyway.

On the opposite end of the moon shots, there are missed shots.

The missed shots typically occur on vehicles dealers acquire from customers, through trade-ins or off-street purchases. These cars come in at Cost to Market percentages that, as you’d expect, are more profit-friendly than anything you’ll see at an auction. The Cost to Market percentages for these vehicles average 85 percent or lower. In the ProfitTime system, these vehicles are Platinum investments, the best you can have in your inventory portfolio.

When dealers and managers price these Platinum vehicles, they amount to missed shots. Retail asking prices on Platinum vehicles fall an average of $350 below the price range ProfitTime 2.0 recommends. This gap represents gross profit potential that dealers and managers are either actively giving up, possibly in favor of maintaining sales velocity, or simply missing because they aren’t paying attention to the data, or they don’t believe it.

Whatever the case, the pricing polarity across dealer inventories represents opportunities for dealers to do even better in a market where no one can seem to do wrong.

The first opportunity rests in capturing the gross profit that’s currently going out the door with Platinum vehicles. It’s difficult, even counter-intuitive, for dealers to raise prices on used vehicles, particularly when you consider the seemingly always-down nature of used vehicle pricing/re-pricing in recent years.

But today’s market presents a great gift for dealers willing to accept it–the opportunity to make even more money on some vehicles than they would in more normal market conditions. In fact, the market appears to be blessing dealers with a higher share of Platinum vehicles than they’ve had in the past–all the more reason to optimize the gross-making opportunity the vehicles represent.

The second opportunity arrives with more rational pricing of Bronze vehicles. I understand it can be difficult, if not debilitating, for dealers to put vehicles on the retail market at prices that will result in a break-even or money-losing proposition on the front-end of a deal. In the current market, it’s far easier to put moonshot prices on the vehicles and believe they’ll sell and make some money.

But a vehicle with a moonshot price won’t move as fast as it would if its price more accurately reflected its investment value. Similarly, you won’t realize the F&I and service gross profits the vehicle will produce as quickly, either. With more investment-aligned prices, dealers can sometimes sell two Bronze vehicles in the current market, create two separate F&I and service gross opportunities, in the time it takes to sell one with a moonshot price.

In the end, it’s every dealer’s prerogative to do what they believe is right when it comes to pricing used vehicles in a market where everything you do seems to be working just fine.

My hope, however, is that dealers and their managers, particularly those who know each vehicle’s investment value through ProfitTime 2.0, might reconsider whether the current mix of moonshots and missed shots represents the best way forward to maximize returns on the money they invest in used vehicles.

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4 Pointers for Acquiring Inventory in an Appreciating Market

Dale Pollak — Wed, 31 Mar 2021 17:18:29 +0000

With wholesale values of vehicles reaching record highs, dealers are asking if it makes sense to continue acquiring inventory at costs at, near or sometimes above current retail asking prices for the same or similar vehicles.

Here’s an example of the acquisition questions that have been a constant in recent conversations with dealers and managers. The example comes from a ProfitTime 2.0 dealer in the Midwest who’s a thoughtful student of the market and deserves credit for reaching out to understand what is, in fact, a highly unnatural used vehicle market right now:

“As the market accelerates into the spring and summer, we can see an acquisition problem brewing. We like to own our purchase cars for under 92 percent Cost to Market. My buyers are telling me that to continue to keep up with the pace of the market they are going to have to pay 95, 96 or 97 percent Cost to Market, maybe even more. My theory is pretty simple. Stay to the fundamentals, follow the strategy page, stretch on cars you need. My buyers are wanting more direction. I can’t see a scenario where acquiring vehicles in the mid- to upper 90’s makes sense given the fact that we are currently priced 96 percent and 97 percent and 97 percent Price to Market on Bronze and Silver cars, respectively. Do you see any merit to paying those kind of acquisition costs to maintain your sales rate? Do you think the market is likely to accelerate 2 percent to 3 percent week over week meaning cars we buy today are going to be a little better investment when compared to last week? Any direction you can provide would be a huge help.”

In my response to questions like this, I’ll affirm what we don’t know–which is whether the crazy state of value appreciation in the wholesale market will continue and, if it does, for how long. I do believe that we have yet to see the market peak, given the experience of last year when dealers enjoyed strong retail sales and profits, despite rising wholesale values and concerns about COVID-19, well into the mid-summer months. This year adds a another challenge to the mix. Wholesale vehicle supplies are lower now than they were at any time in 2020, a factor that means higher Cost to Market percentages on auction purchases appear likely to continue near term.

More important, though, is how to think about acquiring cars amid these market conditions. On this front, I’ve been offering four pointers for dealers and managers:

Find your balance between risk and reward. Some dealers are buying everything they can, even using off-site locations to store the vehicles. These dealers have effectively put aside what might be regarded as the more balanced approach to inventory acquisition I typically advocate. That is, you should generally not stock more cars than your rolling 30-day total of retail sales. This best practice ensures you aren’t too heavy or too short of inventory as the market changes. With the current market, it’s reasonable for dealers to stock ahead of their 30-day rolling total of retail sales, given the prospect that vehicles will cost even more in the future. But how far ahead should you stock? I think the answer goes to each dealer’s tolerance for risk and reward. Stocking up now could pay off big if value appreciation continues; it also poses a risk, if the market slows, that you’ll have too many vehicles you own for too much money. In the current moment, it seems to me that dealers could elevate their stocking levels to achieve a 40- to 45-days supply without significant risk of a downside.

Acquire the cars you need and know are right for your dealership. Given the current high acquisition costs, I don’t think it makes sense for dealers to acquire vehicles that fall outside their wheelhouse or would augment a vehicle segment or type where you’re currently over-stocked. In these times, dealers need to be very intentional and strategic with inventory acquisitions. Dealers and managers should pay close attention to the vehicle segments and types that are selling now, and where you perceive there may be shortages. Focus your attention to fill the inventory gaps you anticipate in the weeks ahead.

Handle the cars with utmost care, efficiency and speed. When the market effectively forces you to acquire vehicles with Cost to Market percentages at 95 percent to 100 percent, or even higher, it’s important to recognize that these vehicles likely won’t offer significant front-end gross profit potential, if any. These vehicles may only provide money-making opportunities in your F&I and service departments. This does not mean that these are “bad” cars. But it does mean that they need to be reconditioned, merchandised and priced with utmost urgency. The care, efficiency and speed you apply to selling these vehicles to retail customers represents your most effective strategy to mitigate the risk of having too many vehicles for too much money if market conditions change for the worse.

Look for retail pricing opportunities. In a market where vehicle values appreciate, there are likely some opportunities for dealers to increase retail asking prices. Such instances often relate to a combination of favorable circumstances for the vehicle–you own it right, its Market Days Supply is low and the vehicle is selling well in your market. The ProfitTime 2.0 system automatically identifies when these favorable circumstances converge and recommends an optimal pricing range. At a minimum, now’s the time to pay more, not less, attention to your retail pricing to ensure you’re not missing opportunities to optimize gross profit or mitigate risk on a vehicle that needs to sell fast.

In my next post, I’ll address another topic that’s come to the forefront in recent days and weeks–how to view wholesaling vehicles when values are red hot.

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A Remarkable–and Familiar–Time for Used Vehicle Retailing

Dale Pollak — Fri, 05 Mar 2021 17:01:48 +0000

This is normally the time of year when I caution dealers about their high hopes for a strong spring selling season in used vehicles. The caution relates to the tendency of dealers to speculate about the future of retail sales, and stock up on cars in anticipation of selling them as customers come out of their winter mode, often with tax refund checks in hand, and start buying used vehicles.

This year, I must say, the situation is dramatically different. In fact, for some dealers, the situation probably seems like “déjà vu all over again,” as baseball great Yogi Berra once quipped.

Here’s why:

The days supply of inventory on dealer lots has dropped to roughly 32 days–the same level it reached in July 2020, when dealer inventories were at their lowest the entire year.

Retail sales have been steady and strong in recent weeks, a surge that has thinned dealer inventories. This week, dealers achieved a remarkable milestone. The daily total of retail sales across the country topped 32,000 vehicles this week–a tally that’s higher than any single day of sales in 2020.

Federal stimulus money is propelling retail sales, just as it did when checks arrived from the federal government last year. It seems certain that we’ll see additional stimulus payments, on top of federal and state tax refunds, fueling additional interest in used vehicle purchases.

Interest in used vehicles has been driven, at least in part, by an affordability gap with new vehicles. New cars are more expensive and demand is strong. Factories aren’t plying the market with incentives the way they have in years past. Such factors put new vehicles out of reach financially for some consumers, who then turn to used vehicles if they need a different or newer vehicle.

To top it off, supplies of vehicles in the wholesale market are lower than they’ve been in decades. The dearth of inventory might usher in something I have never seen in 40-plus years in the car business–an actual, not imagined, shortage of used vehicle inventory.

When you consider these circumstances, it appears that we may be seeing the hottest market for used vehicles in decades, possibly even the entire history of the used vehicle business.

These days, when dealers ask me if they should be stocking up on inventory to take advantage of the strong run in retail demand and the spring selling season, I don’t talk about the necessity of maintaining a balance between your rolling 30-day total of retail sales and your current inventory. I talk about risk, and a dealer’s tolerance for it.

For example, I’ve been telling dealers that the unprecedented nature of the current retail and wholesale used vehicle markets suggests that it’s OK to stock as much as 30 percent to 50 percent ahead of your rolling 30-day total of retail sales. I’ll add that while such decisions are speculative in nature, all the evidence points to an ongoing run of strong retail sales, barring some as-yet unforeseen circumstances.

Some dealers, who are less risk-averse, are going even further. They are striving to double their inventories right now in anticipation of being able to sell the vehicles at retail prices that will cover historically high acquisition costs and still provide healthy front-end gross profits.

It’s a remarkable time to be retailing used vehicles. It’s also especially rewarding for dealers who have the benefit of knowing the investment value of every vehicle in their inventories. Lately, my e-mail inbox has seen a steady stream of stories from ProfitTime 2.0 dealers who relish the opportunity to raise used vehicle prices as the market gains additional steam, just like they did for a time last year.

In fact, the only cautionary points I’m sharing with dealers in this unprecedented moment relates to their days to sale metrics. I’ll counsel dealers that they need to closely watch days to sale data for each investment class of used vehicles. If the days to sale drops off too fast, it’s often an opportunity to raise prices and slow sales throughput in favor of maximizing front-end gross. This scenario is particularly true with Platinum and Gold vehicles, which are more difficult to acquire in the current market. Conversely, if the days to sale metrics start to increase, particularly with lower-tier Silver and Bronze investments, it can be a sign that a go-go retail market is losing momentum.

To date, the most-prevalent days to sale dynamic relates to cars selling too fast, which affords dealers the opportunity to improve profitability. This is a good problem for dealers to address and it’s a reminder of another classic Yogi Berra quote–“it ain’t over ‘til it’s over.”

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NADA 2021: A View from the Home Office

Dale Pollak — Wed, 10 Feb 2021 21:54:27 +0000

Like a lot of dealers, I’m missing NADA this year.

This year’s NADA would have marked my 52nd trip to the annual gathering of the dealers, partners and others who drive the car business. Every year, I most look forward to my time on the exhibit hall floor, catching up with dealers and getting a pulse on where they, and the business, are headed in the coming year. This year, I’m taking in NADA from my home office.

That’s the subject of a column this week by Dave Versical, chief of editorial operations for Automotive News. He wanted some perspective on this year’s NADA, and what I’d be sharing with dealers if I had the opportunity to meet with them outside the vAuto booth on the exhibit hall floor.

I shared how I’m optimistic about the year ahead for car dealers, especially in used vehicles, given the prospect of additional stimulus money, healthier household savings levels and the need for personal transportation. While inventory availability is likely to pose a challenge for dealers in used vehicles, retail demand should help them manage through any supply/demand imbalance with improved profitability.

The column also highlights my belief that while times may be getting better for dealers, they should take care not to lose the discipline that resulted in right-sized inventories, teams and expense structures when market conditions were far less certain.

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A Better Way to Price Used Vehicles Arrives

Dale Pollak — Wed, 27 Jan 2021 19:27:51 +0000

It’s a big week for vAuto as we unveil ProfitTime 2.0 at the Cox Automotive Experience, a precursor to the system’s official launch at the upcoming virtual National Automobile Dealers Association convention.

I’d encourage dealers to see for themselves how easy pricing used vehicles to their intrinsic investment value has become with ProfitTime 2.0. The system offers a recommended pricing range for every vehicle, based on its Platinum, Gold, Silver or Bronze investment value. With ProfitTime 2.0, you and your managers no longer need to determine each vehicle’s optimal investment-based pricing position on the market. In effect, the system does the thinking for you.

I share the following analogy when dealers ask how ProfitTime and ProfitTime 2.0 are different.

When vAuto launched ProfitTime about two years ago, the system’s ability to predict a used vehicle’s investment value served as a compass for every dealer. ProfitTime always pointed to what might be considered each vehicle’s “True North,” just like a compass. ProfitTime 2.0 goes further. It not only points you to a vehicle’s investment value, or True North, it shows you how to get there, like a navigation system.

Just like the best navigation systems, ProfitTime 2.0 also tells you when you’re off-course. All-new vehicle and inventory summary pages make it easy to measure and monitor your investment management performance. You can immediately see the vehicles that, due to changes in the market or a manager’s discretion, fall out of alignment with your investment strategy. You know the cars that require immediate attention to ensure they are properly priced for the current moment.

In many ways, ProfitTime 2.0’s recommended pricing guidance represents a big step forward for dealers and the industry. The pricing recommendations flow from the ever-growing ability and sophistication of data science to deliver accurate, actionable insights. By knowing a vehicle’s investment quality, regional market performance, a dealer’s past performance, current stocking levels and current pricing of similar vehicles, ProfitTime 2.0 appropriately weighs the factors that matter most for a specific vehicle and generates an investment value-appropriate pricing range. From there, dealers can price each vehicle and know if the vehicle’s priced to maximize its investment return potential.

Kelly Summers, general manager of Bill Knight Ford in Tulsa, OK, says ProfitTime 2.0 helps his managers efficiently execute their inventory investment management strategy.

“We love the science behind ProfitTime 2.0,” Summers says. “It fits our goal being disciplined and following the same process every day. The pricing tool lightens the workload for managers. They don’t have to dig and dig to try and figure out the right way to price a car. I’m excited for them in that regard.”

I’ll be sharing more stories of how dealers are finding greater success as they trust ProfitTime 2.0 to help them make the best pricing decision for every vehicle in their inventories.

In the meantime, you can get a closer view of ProfitTime 2.0 and other vAuto innovations at the Cox Automotive Experience. You can access vAuto’s page here.

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Saying Goodbye to the ‘Godfather of Automotive Digital Marketing’

Dale Pollak — Wed, 30 Dec 2020 18:53:35 +0000

If you’ve been in the car business for the past 20 years and wanted to better understand how digital marketing could help your dealership, you probably know Ralph Paglia.

Ralph was among a handful of people in and around the car business who understood how the Internet would change the way we do business. Through the 2000s, Ralph was a mainstay at automotive conferences, helping dealers bring digital technologies, tools and processes to their business development, customer relationship management and sales efforts.

I first met Ralph about 15 years ago, when he led the CRM/eBusiness team for Courtesy Chevrolet in Phoenix. I was pitching vAuto, and Ralph instantly understood how retail market-based pricing would benefit the dealership’s desire to connect customers with used cars online.

From that moment, Ralph and I remained friends and stayed in touch. This morning, when I checked my Facebook feed, I was saddened to learn that Ralph had passed away due to COVID-19.

I’ll forever cherish the times that I would see and talk to Ralph over the years. I could always count on learning something new and sharing a hearty laugh.

Ralph was a giant of a man, in physical size, in his capacity to generously give whatever attention and time anyone needed, in his commitment to honesty and integrity, and in his profound influence on the online marketing practices and principles many dealers employ to great success today.

Ralph touched the lives of many in the car business and beyond. He wasn’t just one of the good guys, he was a great guy. His loss is our loss.

RIP, Ralph, and thank you for being a great friend.

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ProfitTime 2.0 Offers Superior Investment Management Power

Dale Pollak — Mon, 23 Nov 2020 17:54:27 +0000

It was a big step for the industry when vAuto officially launched ProfitTime two years ago. For the first time, dealers had the ability to know the investment value of every used vehicle in their inventories.

Regular readers will recall the stories of how ProfitTime dealers reversed a trend of net profit declines in used vehicles as they understood what it meant to own and retail a Bronze, Silver, Gold or Platinum investment. ProfitTime dealers saw gross profits and sales volumes improve.

Today, we are on the cusp of another big step to help dealers manage their used vehicle investments. Our developers are putting the finishing touches on ProfitTime 2.0, a new system that makes it easier for dealers to implement an investment value-based management strategy. Whereas ProfitTime helped dealers know the investment value of each vehicle, ProfitTime 2.0 helps dealers apply these insights easily and efficiently to ensure every used vehicle delivers its optimal investment return.

We’ve seen how effective ProfitTime proved to be for dealers through much of 2020. Because they understood each vehicle’s investment value, ProfitTime dealers were selling cars just as fast as other dealers, but they were selling them smarter, with a clearer eye on each individual vehicle’s investment value.

ProfitTime dealers knew the cars that needed to move quickly, and the ones that could and should command a big gross profit. ProfitTime dealers weren’t trying to manufacture a gross opportunity where it didn’t exist. They weren’t giving away cars that could have grossed more.

I suspect 2021 will bring its share of ups and downs in used vehicles. I’m excited that ProfitTime 2.0 will be there to help dealers optimize their used vehicle investments, no matter which way the market moves.

If you want to be among the first to learn more about ProfitTime 2.0, you can register here.

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Three Principles to Fuel Your Fourth Quarter in Used Vehicles

Dale Pollak — Mon, 02 Nov 2020 17:46:01 +0000

My phone’s been buzzing with dealers asking for input on how they should manage and stock their used vehicle inventories as 2020 comes to close.

The questions come from a confluence of factors that have dealers wondering, if not worrying, about what we might expect in the weeks and months ahead.

First, we’re on the eve of a presidential election where it appears the country won’t be united around whoever’s elected president, and we’ll see challenges to the legitimacy of the election in courtrooms and the streets.

Second, the COVID-19 pandemic continues. Local and state governments that had lifted restrictions on business, family gatherings and travel during the summer are putting them back in place.

Third, we still don’t have any clarity on whether we’ll see another round of federal stimulus money to help households hurt by the job and wage losses.

A fourth factor, declining consumer sentiment and softening of vehicle credit application volume, is likely a product of the first three.

Despite all this, dealers have fared pretty well. Consumers are still buying new and used vehicles at rates that remain surprisingly strong overall. Meanwhile, dealership profitability is higher than it’s been in a very long time.

But as we’ve all learned in 2020, the current situation could turn on a dime, for better or worse. As a result, I’ve been sharing a few broad operational principles I believe will help dealers navigate whatever comes next:

Keep a close eye on your retail pricing. We’re seeing the days in inventory increase for vehicles that rank as Bronze and Silver investments—units that, because of how they were acquired, often have higher Cost to Market percentages than other inventory investment segments. From my conversations, the days in inventory is creeping up because dealers aren’t paying close attention to where the vehicles stand in their respective competitive sets. In many cases, the Bronze and Silver cars dealers thought they priced competitively have moved farther back in their competitive sets (thanks, in part, to other dealers bringing lower cost competing cars to the market). The inattention seems to be a hold-over from the red-hot summer months, where everything sold almost irrespective of its retail price. If dealers hope to realize any profit from these distressed investments, they need to price them to sell faster, before they become retail net profit losses.

Tie your inventory levels to your rolling 30-day total of retail sales. Through October, we’ve seen the days supply of retail inventories creep up, even as retail sales remained steady or softened, depending on the market. Today, the days supply of retail inventory runs close to 45 days, essentially the same level dealers maintained on average through 2019. I’m encouraging dealers to maintain a 30-day supply, based on their rolling 30-day total of retail sales, as a hedge against any downturn in the weeks ahead.

Tighten up your appraisal/trade-in process. While the retail tailwind dealers enjoyed through the summer and early fall helped nearly every dealer sell more used vehicles and make money, some dealers did better than their peers. The difference? These dealers did a better job of acquiring inventory directly from customers, through trade-ins or off-street purchases. In turn, the dealers retailed these vehicles for better returns on investment than competitors who relied more heavily on higher-cost auction vehicles to feed their used vehicle inventories. This strategy proved to be a winner for private and public dealers alike. Looking ahead, it’s important for dealers to recognize that if their Look to Book ratios are less than 50 percent on a consistent basis, they’re missing profit-making opportunities.

As a final point, I would add that no matter how much the market changes in the days and weeks ahead, one thing will remain true this year as it does this time every year: The decisions you make today in used vehicles will set the stage for whether you start the new year off right, or you need to scramble to fix what went wrong.

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Take-Aways from Cox Automotive’s “Dialogue Series”

Dale Pollak — Tue, 13 Oct 2020 15:58:44 +0000

I’m taking part in a new “Dialogue” series with Cox Automotive. The ongoing series offers dealers and industry stakeholders to ask questions, and get answers, from Cox Automotive leaders. Last week, I received several questions that I thought would be relevant to share here. Below, I’ve included the questions and my responses.

Question from a Mid-Atlantic dealer group sales associate : “In the height of Covid-19, Dale, you took the position to sell sell sell and take advantage of all these outstanding Buys at Auction—that it was a fire sale at auctions all over the country. We as a company elected not to take that position and hold!! We felt as though the market was going to bounce back, which it did. I personally feel there’s a market correction coming, which there typically is this time of year. Where do you the market is headed after the election?”

Answer: Thank you for your question. I appreciate your perspective and decision to hold inventory earlier this year as the pandemic disrupted the wholesale and retail markets. I would point out, though, that dealers who took a different path and chose to liquidate their inventory found themselves with a once-in-a-lifetime opportunity to replenish their inventory at historically low wholesale values and sell them in a market with higher-than-normal retail values. This rare opportunity to buy low and sell high more than made up for any losses the dealers incurred as they liquidated their inventory.

I would also agree with your instinct that a market correction is coming. In fact, I am concerned that uncertainties about the outcome of the election, coupled with ongoing issues related to COVID-19 and unemployment, will weaken retail demand in the final quarter of the year. The wild card, of course, will be whether Congress passes another round of stimulus spending. If they do, it may be enough to soften any market correction and re-energize retail demand for new/used vehicles. If they don’t, I tend to agree with the Federal Reserve chairman Powell’s assessment that our economy and consumer spending power will suffer. Given this outlook, I’ve been encouraging dealers to align their inventory levels to current retail demand on a rolling 30-day basis. When dealers do this, the corrective action they need to take, if the market gains or loses steam, is typically less disruptive and drastic than if they had stocked up in anticipation of a strong retail close to 2020.

Question from a fleet management company executive: What does the forecast for 2021 look like? Do you see the wholesale market leveling back to normal? Will repo’s flood the market and drive the average wholesale value down?

Answer: Thank you for your question. I wish I had a crystal ball to inform everyone what 2021 might look like. If I had to guess, I would submit that the wholesale market will appear much more “normal” in 2021 than it has been this year. I think everyone has been surprised that wholesale values appreciated, rather than depreciated, during the late spring and summer this year.

On repos: I have noted the recent rise in loan delinquencies and vehicle repossessions. I am not able to say, in the current moment, whether such circumstances will bring a flood of vehicles to the wholesale market in the coming months. But I would agree with your assessment that, if these vehicles come to the wholesale market, they would increase supply at a time when demand appears less strong—a condition that typically translates to diminished wholesale values. The good news, though, is that the wholesale market’s return to more “normal” conditions would suggest that an increase in supply from repossessions probably won’t trigger any dramatic, downward changes in wholesale valuations.

Question from a Northeast dealer group partner: What are your appraising best practices??

Answer: Thank you for asking a question that gets to the heart of making money in today’s used vehicle market. We are at a point and time, I believe, where the money dealers make in used vehicles increasingly comes from how well and right you purchase a vehicle rather than its retail sale. It goes back to the old saying, “you make your money when you buy the car.”

With appraisals, I encourage dealers to follow what our vAuto Performance Managers call an “active appraisal” process. An “active appraisal” means your appraiser and the customer evaluate the vehicle together, noting the good, bad and ugly aspects of the car in an objective, shared fashion. This process is transparent and leads to a greater level of trust than the traditional appraisal process, where a customer hands over the keys and, later, gets an offer. It’s also important for dealers to measure and monitor their appraiser performance. Top-performing dealers now achieve Look to Book ratios of 55 percent to 60 percent (an achievement that owes, in most cases, to a more customer-engaged process). The dealers also measure the Cost to Market percentages for each appraiser to ensure they aren’t losing too many deals, or over-paying to get inventory they need. As a final point, I encourage dealers to validate their offers with figures from Kelley Blue Book or another third-party entity that’s known and trusted by customers. The third-party validation adds credibility to your offer and comfort to your customer.

Questions from an independent dealer in the Southeast: I think both sellers and buyers would benefit if cars being sold “as-is” should give the reason they are being offered that way and not necessarily because of miles. If the buyer knows that that the A/C compressor is bad, then he can figure that in his recon costs and bid accordingly. I feel that sellers will get more bids because it would take the mystery out of the “as-is” announcement.

Also, how does Manheim come up with MMR numbers? They are extremely high on trucks and when I look at recent transactions, I don’t see where most trucks brought those high numbers. Some of the MMR numbers for trucks are also high on the suggested retail price, which affects what banks will loan on these units.

Answer: Thank you for your questions. On “as-is” disclosures, you are 100 percent correct. Interestingly, I am working on a project with Manheim leaders that aims to bring more clarity, confidence and transparency to the wholesaling process. We know, for example, that many dealers simply won’t consider vehicles with condition grades below 3. But we also know that some buyers would buy vehicles with lower condition grades if they knew what a vehicle needed to make it retail-ready. The effort is in the early stages, but I think it’ll ultimately move Manheim, and wholesale markets in general, to a level of clarity about a vehicle’s condition that would benefit both buyers and sellers.

On MMR: Manheim creates an average value or MMR based on the past 45 days of auction transactions for specific makes/models, with adjustments for mileage and some specific configurations. As such, MMR is an aggregate number that may not directly reflect the characteristics of specific trucks you’ve seen transact in more recent auction sales. In addition, your observation about lower-than-MMR transaction prices might reflect a softening of wholesale values as dealers see less retail demand for trucks in their markets, which translates to less competition to purchase the vehicles at auctions.

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An Unprecedented Market Teaches Three Important Lessons

Dale Pollak — Fri, 25 Sep 2020 15:39:10 +0000

Unprecedented times tend to yield unprecedented outcomes.

That’s been the story for dealers during the past several months in used vehicles. As I’ve noted here before, many dealers were able to achieve record-setting levels of sales and profitability in their used vehicle departments—despite the unprecedented combination of the COVID-19 pandemic, huge job losses and a level of economic and social instability that many of us have never experienced.

I’ve heard more than one dealer describe the rise in used vehicle sales and profits as “amazing” and “totally unexpected.” I’d have to agree, especially when you consider some market forecasts in late spring that projected a far worse outcome for dealers and other retailers.

You can see the remarkable results dealers achieved in used vehicles in the National Automobile Dealers Association (NADA) Dealership Financial Profile data. As of the end of July, dealers were seeing an average retail net profit per used vehicle retailed of $251; a year ago, the number was $81.

In addition, the used-to-new vehicle ratio for dealers surpassed 1:1 as of July 31. Not so long ago, dealers often sold twice as many used vehicles than new vehicles. In more recent years, the ratio’s run closer to .75:1. But during the past several months, used vehicle sales have proven to be the primary lifeblood of variable operations in dealerships across the country.

To be sure, these impressive results arrived thanks to highly dealer-favorable market conditions. The pandemic effectively paused the retail market and, when retail sales resumed, they were powered by pent-up demand, decreased supply and federal stimulus payments. These conditions combined to put dealers in a position to win and made it easier for them to win.

But now we’re arriving at a moment when the market conditions aren’t as favorable. Dealers will need to work harder to sustain the sales volumes and profitability they’ve enjoyed in recent months.

My guidance for dealers in this unique moment is to focus on the things that went really right for them in the recent past and work to maintain them in the weeks and months ahead. From my perspective, three things went really right for dealers through the course of the late spring and summer.

First, inventories were leaner. Constraints on used vehicle supplies effectively forced dealers to sell through what they had on the ground. In addition, as the supply deficit caused used vehicle values to appreciate, many dealers adopted a higher degree of acquisition discipline as they scoured the country to find retail-worthy cars. In effect, the market forced dealers to operate with a roughly 30 days supply of inventory. This level of inventory investment efficiency served dealers well as the market moved up and down. While dealers might have wished they had more cars when the market was up, they most certainly benefited from carrying fewer cars when the market dipped.

Second, cars retailed quickly. I’ve noted that this past summer was unlike any I’ve experienced. Typically, I’d be counseling dealers on the necessity of working their price and promotion levers to retail slow-moving vehicles more quickly. Thanks to this summer’s retail tailwind, dealers haven’t had to worry much about whether they’ve got the right car, the right price or the right promotional placement. Used cars have been selling fast, and age hasn’t been an issue.

Third, dealers could command their price on almost any car. I spoke this week to a Midwest Nissan dealer who’s been in the business 20-plus years. “I’ve never seen a 90-day period when the vast majority of the price changes we made to used vehicles were increases rather than reductions,” the dealer says. “We’d raise the price and the car would sell.” Contrast this comment with another I heard from an independent dealer the other day: “We were selling cars so fast, I’m sure I left money on the table.”

As dealers look ahead to the final quarter of 2020, let’s not forget the three lessons that led to success during this year’s memorable and unprecedented retail run in used vehicles—leaner inventories, selling investment-troubled cars quickly and making sure your asking prices match the market.

When dealers follow these principles, I believe they’ll find that, despite all the disruption and uncertainty this year, 2020 won’t be so bad after all for their bottom lines.

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Why It’s Time to Get Back to Business In Used Vehicles

Dale Pollak — Tue, 15 Sep 2020 19:25:26 +0000

Like many dealers, I’ve been amazed by the resilience of the retail market for used vehicles during the past four months.

I’ve heard from multiple dealers who set sales records in May, June and July. For them, August was a little less rosy, but the dealers managed to finish the month on a high note. If you look at the cumulative year-to-date totals of retail used vehicle sales across the country, they are only down by single-digit percentages—a performance I think we’d all consider positive, given the disruption and uncertainty we’ve seen in the economy and market this year.

In many ways, dealers could almost do no wrong from late spring and through the summer. Retail demand was strong enough, and used vehicle supplies were light enough, that dealers found themselves selling vehicles almost as fast as they could stock them. And, if for some reason a vehicle didn’t sell in 30 or 45 days, a super-hot wholesale market meant dealers could take a car to auction and get their money back, if not a little more.

But we’re now seeing signs that these remarkable and arguably unnatural market conditions may be going away.

Take retail sales. As regular readers know, I’ve been tracking the rolling seven-day total of retail used vehicle sales across the country. Since the start of September, we’re seeing retail sales soften. As of this past Sunday, the rolling seven-day total dropped nearly 8 percent from the prior week.

Take dealer inventories. From early May until a week ago, the days supply of used vehicle inventories largely hovered between 30 and 35 days—roughly 10 fewer days of supply than many dealers would normally carry. As of this week, the average days supply of used vehicles is nearing 45 days, a sign that dealers aren’t selling as many cars as quickly as they were a few weeks ago.

Take the wholesale market. In the past week or so, the Manheim Retention Report (MRR), the daily read of how well auction prices compare to the Manheim Market Report Index (MMR), fell below 100 percent. For much of the late spring/summer, MRR has tracked above 100 percent, which means dealers had to pay more than MMR to acquire auction vehicles.

Industry analysts at Cox Automotive and other companies view these data points as signs of the market slowdown that many predicted. Thankfully, no one expects the used vehicle market to drop off a cliff like it did in mid-March as the COVID-19 pandemic began to take hold.

Still, the market’s gradual softening suggests it’s time for dealers to get back to what might be considered business as usual in used vehicles. Here are three recommendations for dealers to make the most of what may be a less-robust used vehicle market in the days and weeks ahead:

Align your inventory size to your rolling 30-day total of retail sales. The recent rise in the days supply of used vehicle inventories suggests that, if demand continues to diminish, dealers will be over-stocked with cars that aren’t selling fast enough to deliver a positive contribution to the bottom line of their used vehicle departments. Despite what seems to be a cool-off in the wholesale market, I would encourage dealers to only acquire auction cars if/when their current stock lags their rolling 30-day total of retail sales.

Stay on top of your days to sell data. For much of the summer, dealers didn’t really need to pay much attention to the time it took used vehicles to sell; positive market conditions effectively meant that everything was retailing quickly. But, as the market slows down, it’ll once again be important for dealers to mind the days to sell based on each vehicle’s investment value. If a vehicle represents a distressed investment, it should be priced to retail as fast as possible. Conversely, if a vehicle represents a top-tier investment, which means it’s got high demand, low supply and a favorable Cost to Market position, it should be priced to reflect its market appeal and profit potential.

Don’t count on a favorable wholesale market. During the summer, I found it somewhat disturbing when dealers told me that they were making money wholesaling cars they couldn’t retail. It bothered me that these dealers seemed to view wholesaling a vehicle as an equally effective fallback to retailing the car and taking the opportunity to earn F&I gross and a possible trade-in. Now, as we’re seeing what seems like a cool-off in the wholesale market, it’s important to remind dealers that they’re in the business of retailing cars and that they should return to viewing a decision to wholesale a vehicle that hasn’t retailed as the management failure it really represents.

Some dealers may view the apparent slowdown in the retail and wholesale markets as more of the same. They’ll point to July and August, both of which featured slower retail sales in the beginning of the month followed by retail bounce-backs that resulted in relatively strong sales by month’s end.

But the data shows that the bounce-back in August wasn’t as strong as the bounce-back in July. In addition, consumer confidence appears to be declining, in part due to concerns that another round of federal stimulus money may not be available to help households suffering from income and job losses.

That’s why I’m advocating that dealers get back to business. It seems a more prudent course than hoping for a bounce-back that may never arrive.

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A Case for Stocking Up Now on Used Vehicle Inventory?

Dale Pollak — Tue, 18 Aug 2020 22:34:44 +0000

For much of the past several months, I’ve advocated that dealers take a cautious approach to the way they replenish their used vehicle inventories. Last week, I shared how dealers should cross-check their rolling 30-day and 14-day totals of retail sales to determine how many vehicles they really need.

My guidance is rooted in a belief that dealers don’t want to be caught with too much inventory if the market suddenly stalls, or even stops, like it did in the early stages of the COVID-19 pandemic. Thankfully, for much of the past four-plus months, the market has remained strong and, even now, dealers can pretty much retail whatever they choose to bring into their retail inventories.

But these current conditions, and some emerging data and circumstances, lead me to a very important two-part question: Could we, in fact, see a surge in retail demand for used vehicles in the coming weeks and, if so, wouldn’t now be the right time to stock up in anticipation of another round of strong retail demand?

Let’s examine both parts of the question.

The Historical Case for a Retail Surge

Every year, a remarkable thing happens on the day federal tax return checks begin to arrive in mailboxes and bank accounts across the country. On the day these payments arrive, dealers see a spike in new and used vehicle sales. It’s uncannily like clockwork.

Of course, this isn’t news to dealers. Across the country, every dealer preps for the tax-time selling season. We know when the payments arrive, we’ll see customers online and in showrooms.

This same dynamic played out this year on April 15, the day the first federal stimulus checks of $1,200 per individual began to boost household budgets. Across the country, we saw a spike in vehicle sales that only got better as the spring turned to summer, a dynamic buoyed by the ongoing weekly $600 bonus payments sent to those who lost their jobs or work during the pandemic.

With this backdrop, we have good reason to believe that a second round of stimulus checks and bonus payments, which Congress and President have yet to formally define, will produce a similar lift in retail sales. While we don’t yet know when any additional federal stimulus or bonus payments might arrive, we know two things that appear likely to occur if/when they do:

Roughly 8 percent of consumers say they’ll spend the stimulus money they receive on a vehicle purchase. This insight comes from an ongoing Cox Automotive survey of consumers amid the pandemic. Interestingly, when Cox polled consumers about how they might use the federal money they would receive in April, the same percentage—8 percent—said they would apply the proceeds to a vehicle purchase.
The federal government expects to make the payments fairly quickly once Congress and the President formally approve them. We can already see some estimates that U.S. households will see payments by the end of next month if the approvals come when business resumes in Congress after Labor Day.

The Cost-Minded Case for Stocking Up

When dealers returned the auction in force to Manheim auctions this past spring, there was a good supply of available inventory—roughly 500,000 vehicles. Today, Manheim auctions have roughly half that number available for sale.

Despite a recent cooling in auction activity, wholesale prices remain high. Manheim data shows that wholesale vehicles are selling at or above Manheim Market Report (MMR) values—a dynamic that’s been consistent for much of the past several weeks.

Not so long ago, I was among those who thought that wholesale values would diminish when rental companies and other businesses took their existing fleets of vehicles to auction. To date, this influx of supply hasn’t occurred, and analysts believe it’s not likely to occur as rental companies, in particular, plan to run their current fleets longer than they otherwise would.

So what will happen if a retail sales surge arrives in late September, and dealers go back to auctions to get inventory? They’ll find a wholesale market with diminished supplies, increased demand and, potentially, even higher wholesale prices than dealers are paying today.

This forecast suggests that the current moment might make for a good opportunity to acquire additional inventory if you can, in anticipation of a retail sales surge.

I want to make it crystal-clear that I’m not advocating or recommending that dealers go out and acquire more inventory than they currently need in anticipation of a sales surge in the weeks ahead. I’m still the same, conservative-oriented person I was before the pandemic. I wouldn’t have the guts to make such a speculative play.

But I can see and understand why some dealers will take this exact course. The current signs, and history, suggest a decision to stock up today may well be a boon for business as they head into the fall.

Of course, this stock-up strategy faces some risks.

The stimulus checks/payments may not come to fruition. I highly doubt this will happen in an election year, but it’s important to call out the possibility. Similarly, we could see a resurgence in COVID-19 infections as schools get underway and fall arrives in full—something the epidemiologists have been predicting all along. In addition, credit markets may tighten up as restrictions on reporting delinquent payments have eased and credit reports will begin showing the effects of the pandemic on household budgets and spending power.

As a final point, I would add that if a retail surge occurs in the weeks ahead, it probably won’t be as robust as the run of retail sales that followed April 15. I think we can all agree that the strength of the retail market this summer has come from the wash-out of pent-up demand that resulted when dealerships across the country shut down during what would otherwise have been one of their busiest periods for retail sales.

Ultimately, it’ll be up to every dealer to answer the “should I stock more now?” question for themselves. The answer will rest in whether history repeats itself or doesn’t.

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A Calculation to Cross-Check Your Used Vehicle Inventory Levels

Dale Pollak — Fri, 14 Aug 2020 17:11:33 +0000

It’s been impressive to see dealers retailing more used vehicles despite the smaller inventories many have been forced to carry due to lower-than-usual availability of wholesale supplies.

Across the country, the days supply of used vehicles in dealer inventories has stayed below 35 days for much of the past four months; the days supply would be typically be roughly 45 days. During the four-month stretch, many dealers have been able to out-sell their year-over-year monthly volume totals as retail demand, despite some dips and drops, has remained strong. As I noted in a recent post, this stock-to-sales streak may well mark a historic first for dealers in terms of their collective inventory investment efficiency. Dealers have proven that they can sell more vehicles with less inventory.

But this achievement doesn’t mean dealers wouldn’t be acquiring more inventory if they could. Indeed, I continue to hear frustration from dealers that if they were able to acquire more used vehicles, they’d be able to sell the cars.

I appreciate this perspective. It reflects the opportunistic nature of many dealers. When their instincts suggest an opportunity, dealers go after it at full throttle. In fact, dealers who were able to act quickly in the early stages of the COVID-19 pandemic had a field day. For a brief time, these dealers were able to acquire inventory at historically low costs and sell them in a market where retail prices hadn’t really moved. These dealers enjoyed front-end gross profits that were far healthier and richer than many had seen in years.

Through all this, dealers haven’t worried as much about if/when the market might slow down. They’ve been too busy selling cars to consider darker, what-if scenarios that, in the moment, seem too distant for any significant concern. Dealers are more focused on replacing the cars they’ve recently sold to maintain their respective runs of retail sales.

But I’ve been advising that dealers should exercise care and caution as they replenish their inventories, since no one can be sure what the next 30 days will bring. Will it be the same or better than the last 30 days? Will it be a whole lot worse? There are a lot of factors in play. COVID-19 cases remain high. Federal unemployment benefits and bonuses have waned, at least for the moment. Unemployment claims have diminished, but the nation is still losing more jobs on a monthly basis than it did during the Great Recession that started in 2008. On top of all that, retail sales of used vehicles seem to have hit a lull in recent days.

There are a lot of unknowns. Given this backdrop, I’m advising dealers to run two comparative calculations to determine the appropriate inventory levels in the current moment.

The first calculation is your rolling 30-day total of retail sales. The calculation is as straight forward as it sounds: On any given day, you tally up the past 30 days of sales, and compare it to your current inventory. If your sales number is higher than your current stock, you effectively know how many vehicles you need to acquire to maintain your retail sales pace.

The second calculation serves as a cross-check on the rolling 30-day number. The calculation takes your rolling 14-day total of retail sales, divides that number by 14 to achieve a daily sales rate and multiplies the daily rate by 30 to give you a 30-day view. I’m encouraging dealers to compare the rolling 14-day and 30-day calculation and note the difference.

For example, I recently conducted this exercise with a Southeast dealership. The rolling 30-day calculation showed the dealer needed 15 cars to meet the window’s projected sales pace of 96 units. Meanwhile, the 14-day calculation showed the dealer should only acquire six vehicles, given what had been a relatively slower period of recent sales (see chart at right).

The dealer opted to split the difference and acquire 10 vehicles—a decision that reflected the dealer’s belief that he might make up the difference by acquiring a few more trades than he had in recent weeks, and the dealer’s desire to ensure a leaner inventory if the market suddenly went south.

Some dealers don’t think the 14-day cross-check calculation is necessary. They prefer to use their rolling 30-day total as the sole means for determining how many vehicles they should stock. I’m not here to suggest this approach is incorrect. In fact, I’d submit it’s far better than stocking a 45- or 60-day supply of inventory, a strategy that can leave dealers too long in inventory if the market suddenly slows down.

My overall point is that, in a market where no one can know how the market might turn and how quickly a turn might occur, dealers should assess as many data points as possible to make the best decisions.

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Reflections on A Cox-Sponsored Diversity, Equity and Inclusion Program

Dale Pollak — Tue, 11 Aug 2020 21:20:09 +0000

When I was in fourth grade, a teacher saved me.

I distinctly remember the first day of school as a fourth grader. When I got to class, I thought it would be just like my third-grade experience. I had been labeled a slow learner. The laggard in the class. Worse yet, I had come to believe that’s who I was, the kid who just couldn’t and wouldn’t get it.

The first week or two in fourth grade proved my expectations. It got the point where my parents had to force me to get on the school bus. I didn’t want to go. I knew that when I got to school, I would feel more lost and further behind everyone else than I had the day before. I couldn’t wait for weekends, when I would do anything and everything I could to forget about school until Sunday night, when a feeling of dread about going back to school on Monday would eat at me again.

But one day, Eloise Gentry, my fourth-grade teacher at Nobel Elementary School in Gary, Ind., pulled me aside. She knew something wasn’t right. She had an intuition that my problem wasn’t that I was slow. It was something else. Years later, I learned that my early academic troubles owed to an as-yet undiagnosed vision problem that made it difficult for me to read or follow along in the classroom.

I still don’t know why Ms. Gentry took me under her wing. But her efforts, which I now consider a form of divine intervention, made all the difference.

When I felt defeated, she refused to let me give up on a lesson. She’d pull me into the hall. I’d be crying and complaining that I couldn’t do it. She’d hold me by my shoulders, look right into my eyes and tell me as firmly and kindly as she could: “No, Dale, you can do this, and you will.”

For two years, Ms. Gentry spent a lot of her time and attention on me, in the classroom and after school. Years later, I learned that she made a special request to teach fifth grade so that I could pass fourth grade despite my deficiencies and continue being her student. She had a plan: By the time I moved to sixth grade, she would make sure I was back on track with the rest of my classmates.

Ms. Gentry picked me up and turned me around. To this day, I credit her with giving me confidence to believe in myself. She restored my ability and desire to learn. She reignited my curiosity and interest in diving into something I don’t understand. These are all blessings I carry today.

My memories of Ms. Gentry came back last week as I was asked to join a 20-hour program, called Deepening Partnerships to Create Inclusive Organizations, for nearly two dozen executives at Cox Automotive and its parent company, Cox Enterprises. Initially, I thought I was the last person who needed the program. I had grown up in Gary, which was then considered an integrated community, and the most influential person in my childhood, Ms. Gentry, happened to be African American.

Those experiences, I believed, had given me a deep appreciation and respect for anyone who didn’t look like me. Ever since childhood, I’ve always strived to embody the lessons of compassion and grace toward others that Ms. Gentry and my parents had instilled in me.

The program’s homework assignment also gave me pause. Before the first session, we were required to read the book, White Fragility: Why It’s So Hard for White People to Talk About Racism, by Robin DiAngelo. I began the reading assignment, thinking the book probably wouldn’t tell me anything I didn’t already know.

But, boy oh boy, was I wrong about the book and the program.

In fact, I now regard the book and the immersive leadership sessions as life-changers. They are experiences that have made me—a white, Jewish guy in his early 60s who thought he was open-minded and sensitive about racism and its effects—realize that I have been, in fact, largely unaware of the way inequity, prejudice, privilege and racism affect people of color and women every day.

For example, the program facilitators asked participants to review a list of 200 statements written by people of color and women. I reviewed these as part of a group of white, male executives. Collectively we all realized that:

We don’t have to think about walking in a store, knowing that we’ll be sized up by a cashier or proprietor who suspects we’re there to steal something.

We don’t have to think about what we wear when we go out, and how it might draw catcalls, whistles or unwanted advances.

We don’t have to think about our weight, or how our hair sits on our head, and know that it might be categorized or criticized.

We don’t have to worry, when our child is invited to a birthday party, if the host’s parents are aware that our child isn’t white.

We don’t question whether anyone else around a conference table at work views us as undeserving or unworthy.

Through the course of the program, my colleagues and I began to feel weighted down, and very depressed—exactly how and where the facilitators wanted us to land. In fact, we just had a taste, however indirect and small, of what it felt like to walk in someone else’s shoes, specifically those worn by people of color and women.

On another day, the facilitators grouped the white guys together. We were tasked with writing questions for the women and people of color in the Cox leadership group. The questions were meant to facilitate discussion and understanding about our differences and how racism functions even in the absence of any hostile or overt racist acts or words.

My group asked: Given that racism and our privilege is much more pervasive and profound than we previously understood, what can we do to make things better for all of you?

Well, we were surprised by the collective reaction. After much reflective discussion, we realized that the question suggested we had missed the point and purpose of our shared learning. We came to understand that the harm and hurt caused by racism and the privileges we enjoy can’t be solved with quick fixes. We also learned that our desire to “fix” the problem was, in and of itself, a problem. The women and people of color in our sessions didn’t want our help or solutions, they wanted our empathy and understanding, two things our question didn’t contain or convey.

That’s where the Cox leaders and I left the sessions. We are fueled by a new sense of responsibility. We are motivated to exhibit more empathy and understanding. We are committed to speaking up and stepping out when we encounter circumstances that aren’t appropriate, fair or just for women and people of color. We are focused on advancing a more diverse, equal and inclusive culture across Cox Automotive and Cox Enterprises.

All in all, it was a heavy week. I went from thinking I didn’t need to learn anything about diversity, equality or racism to knowing that I have much more to learn, and much more to do. I am ever-grateful to Alex Taylor, president and CEO of Cox Enterprises, and his team for investing in this unique learning opportunity and leading my colleagues and me to a very important new place.

It’s rare for anyone to say, much less believe, that their employer has helped them become a better person. But that’s exactly how I feel right now.

I’m also thinking a lot about Ms. Gentry. Nearly two decades after I left her classroom, she was there when I graduated first in my class from DePaul University’s College of Law in Chicago, and she was there when I received the 2010 Ernst & Young Entrepreneur of the Year Award for my work with vAuto. I believe Ms. Gentry is smiling today, knowing that the frustrated, teary-eyed kid she helped 50-plus years ago, is still learning valuable lessons in life.

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A Strong Market Exposes Gross Deceptions in Used Vehicles

Dale Pollak — Thu, 06 Aug 2020 14:59:17 +0000

In my latest book, Gross Deception: A Tale of Shifting Markets, Shrinking Margins and the New Truth of Used Car Profitability, I address several “gross deceptions” that have long been part of the business of retailing used vehicles.

For example, the book discusses the gross deception that every “fresh” car deserves the same chance to find a buyer. This belief often translates to dealers pricing every vehicle in essentially the same way—start with an asking price that will give you the gross profit you expect, and then reduce the price as the vehicle ages.

In the book, I describe the problem with this gross deception. The problem is that no two “fresh” vehicles are ever the same in terms of their ability to deliver a return on investment. In fact, as the book details, we found that a sizable share of dealers’ used vehicle inventories consists of vehicles that had little or no investment return potential when they came in as “fresh” units.

I’ve been thinking about this and other gross deceptions as I reflect on conditions in the current market. Today, we’re in a place where the age-old problems of too much inventory and too many aged cars aren’t chronic issues. The principal problem right now is that dealers can’t get enough inventory to sell all the retail customers who want their cars. I honestly can’t recall a time when dealers have had such a strong retail run despite the economic and social challenges posed by the COVID-19 pandemic.

But the market is also delivering another blessing to dealers, although I’d submit the blessing isn’t readily apparent to everyone. The blessing is that the market is exposing the fallacy of several gross deceptions that have gone unacknowledged or unnoticed for a very long time.

Here are three gross deceptions that current market is laying bare for everyone to see and understand:

You need to stock more cars than you sell to find success. In Gross Deception, I make the case that the pace of margin compression in today’s market has effectively shortened the viable retail shelf life of most used vehicles. It wasn’t all that long ago that dealers could expect to see a 60-day-old unit deliver at least some front-end gross profit. Today, the viable shelf life has shrunk to 30 days—a fact that I believe necessitates dealers maintain their used vehicle inventories in accord with their rolling 30-day total of retail sales. If you carry a 45- or 60-day supply, you’ll inevitably end up with cars aging past the point that they provide a positive contribution to your used vehicle department’s bottom line.

This guidance has met resistance from dealers who believe that if they don’t stock more cars than they sell, they won’t have enough cars to attract and close customers.

Today, I’d encourage these dealers to consider what’s been happening over the course of the last nearly three months. Across the country, dealers have maintained lighter inventories than they’d normally carry this time of year. Cox Automotive data puts the days supply at 34 days, compared to its normal 45-day mark. Even with fewer vehicles, many dealers enjoyed record-breaking used vehicle sales in June and July. I know many of these dealers believe they would have sold more inventory if they had more cars.

But dealers should also recognize what current conditions allow them to achieve: You didn’t need an out-size inventory to achieve a stellar sales volume. It’s my hope that this recent run of inventory investment efficiency offers a lesson for dealers about what the “right” level of inventory truly needs to be to find success.

It’s better to walk away than over-pay. I’ve talked to more than one dealer who laments that the only people making money off auction vehicles are the sellers and the auction houses. The wholesale market is extremely hot right now, and we’ve seen average sale prices ride above MMR for several consecutive weeks. This situation has turned some dealers away from auctions, while others are walking away from auction cars rather than paying what they believe is too much money.

But as I note in the book, the problem isn’t over-paying for a vehicle your inventory needs and your market wants. The problem, and the gross deception, is how you handle the vehicle once you own it.

In fact, the current market is helping dealers correctly handle the vehicles they paid up to acquire. Retail demand is helping these vehicles sell quickly, allowing dealers the opportunity to at least make some gross profit from reconditioning and F&I sales, even if front-end gross profits are anemic (or worse) due to high acquisition costs. The lesson is that if you must over-pay for a vehicle, it’s retail exit should occur as quickly as possible.

“I can’t replace the car for what I’ve got into it.” When I wrote the book, this statement almost always came from dealers or used vehicle managers as a justification to keep a vehicle, often one priced above its competitive peers, past 45 or 60 days in inventory. The statement is a gross deception because the replacement value of the vehicle is completely irrelevant to the problem at hand—which is that you’ve got a vehicle that hasn’t sold and has lost its ability to make a positive financial contribution to the department’s bottom line.

The current market is showcasing the fallacy of the “can’t replace the car” gross deception. Across the country, dealers are retailing vehicles and replacing them with units that, if they’re acquired from auction, tend to cost more than the one they just sold. In most cases I’ve seen, everything works out just fine. Dealers make money on the car they retailed, and they make money on the one that replaced it, irrespective of its acquisition cost. I dare say this has been the recipe for dealers who have found the greatest success in the current market.

In my book, I write about how the gross deceptions of the used car business often lead to sub-optimal results in dealers’ used vehicle departments. When the gross deceptions prevail, dealers ultimately sell fewer cars and see less return on their used vehicle investments than they otherwise would.

Strangely, the current market doesn’t seem to be exacting this price from dealers who allow gross deceptions to drive their used vehicle management decisions. It’s like the market is offering dealers a moment of clarity and grace to see the gross deceptions for what they are and work to get past them for good.

I’ve been actively encouraging dealers to take advantage of this rare opportunity before the market returns to its normal, less-forgiving self.

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Dealers Achieve An Industry First for Inventory Efficiency

Dale Pollak — Thu, 23 Jul 2020 19:55:07 +0000

It’s almost a tired saying these days: We all must learn to do more with less.

But I’d like to point out what amounts to a true-blue, and potentially historic, example of dealers doing more with less as the COVID-19 pandemic disrupted retail automotive.

For the first time in my 40-year career in the car business, and perhaps in the history of the business itself, dealers have collectively proven that you don’t need to stock more inventory to sell more cars. In fact, some dealers went a step further and proved for themselves for the first time that you can stock fewer cars than you sell, and still retail more vehicles.

This achievement has profound implications for dealers who acknowledge what they’ve achieved and do their best to replicate the experience in the weeks and months ahead. I’ll talk more about the implications in a moment. First, however, let’s look at the data behind dealers’ incredible achievement.

After a steep fall in April, dealers saw retail sales of used vehicles climb back in mid-May to 100 percent of the retail sales levels they achieved in mid-May in 2019. By mid-June, retail sales were running 117 percent above their levels in June 2019. Sales have since softened a bit, but as of July 20, retail sales remain 107 percent above year-ago levels.

Given all the headwinds and uncertainty, the retail tailwind has been good for dealers. But here’s what’s even more impressive—dealers achieved these better-than-before sales levels with far less inventory than they would normally (and probably preferably) carry. For example, at the same time retail sales began heating up in May, dealer inventories were running 100 percent of their levels in May 2019. By mid-June, dealer inventories were 88 percent of their levels in mid-June of 2019. As of this week, dealer inventories are 87 percent of where they were this time last year.

We can also view this achievement through the lens of dealer days supply: The first week of April, dealers collectively had an overall inventory days supply of 103 days. By mid-May, the overall inventory days supply average for dealers ran 40 days, and the days supply average has hovered below 35 days ever since. In normal conditions, the dealer days supply of used vehicle inventory would be close to 45 days this time of year.

I should note that I’ve seen numbers like these before, posted by dealers who have always worked hard to maintain their inventory levels at or even below their rolling 30-day total of retail sales. But I have never seen such inventory efficiency writ large, effectively occurring at most, if not all, dealerships across the country.

That, my friends, is an amazing achievement. It means that, for at least the past several weeks, dealers managed their way past and through the perpetual problems of aged inventory, retail net profit losses and sub-optimal profit outcomes that typically follow a stock-more-to-sell-more perspective.

We should all take a moment to acknowledge, if not celebrate, this achievement. It should serve as a reminder to dealers that, intentional or not, you have proven that you can sell more cars with less inventory and, when you do, it means really good things for the bottom of your used vehicle department and dealership.

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ProfitTime in Practice: Discipline Drifts in Today’s Retail Tailwinds

Dale Pollak — Thu, 16 Jul 2020 18:37:25 +0000

I’ve spent way more hours than I can count on airplanes in the past decade. Truth be told, I miss the travel and the daily get-up-and-go routine it requires.

But current market conditions remind me of one of my favorite aspects of flying—the pilot’s announcement that our flight will enjoy a tailwind to our destination. For me, it’s good news. I know the tailwind will push us forward, and we’ll get to where we’re going faster than we would if the tailwind wasn’t there.

Dealers are enjoying their own tailwind right now, and it’s a remarkable development in the used vehicle market. For roughly the past two months, dealers enjoyed a rapid rise in retail sales of used vehicles. The retail resurgence has surprised just about everyone.

And, best of all, it’s been great for dealers. Across the country, dealers share stories of the record-setting sales and profits they achieved in June and, in some cases, May as well. We’re at a moment in this market where dealers can sell just about everything they put on their lots. The data suggests that federal stimulus and unemployment checks, as well as pent-up retail demand and lower supplies of new vehicles, have combined to create a tailwind that’s pushing everyone forward.

But I’ve also noticed what might be considered a downside to the retail tailwind for dealers. That is, as the going gets better and better, dealers tend to lose the discipline and focus they applied to their used vehicle acquisition and pricing decisions prior to the COVID-19 pandemic.

At store after store, I’m seeing a return of what I consider an “investment inversion” in dealer inventories, where dealers are pricing their worst investments the most proudly and their best investments least proudly. You can see this inversion clearly when you examine a dealer’s inventory through the lens of Provision ProfitTime, the system that classifies used vehicles by their individual investment values, and assigns a Bronze, Silver, Gold or Platinum investment designation.

At a Southeast dealership, for example, the dealer’s Bronze vehicles are priced at an average Price to Market percentage of 103 percent, while the Platinum vehicles are priced at an average Price to Market percentage of 98 percent. Not so long ago, the Price to Market averages for Bronze and Platinum vehicles were reversed.

The rise of the investment inversion begs two questions—why is it happening and how much is it hurting dealers to treat their investments in such a sub-optimal manner?

The first question’s easy to answer. In the current market, dealers are relying more heavily on auction inventory to keep up with retail demand. Prices at auction are sky-high. In some cases, dealers are paying more today than they did for the same vehicle a year ago. From an investment perspective, these vehicles typically rank as Bronze investments.

But dealers aren’t paying attention to the investment classification. Instead, they’re more worried about making a gross profit on a vehicle that they paid a lot to acquire. Hence, dealers are taking vehicles they acquired at Cost to Market percentages near or above 100 percent, and marking them up from there.

On the opposite end, dealers are following a similar cost-up pricing approach with Platinum vehicles. They’re acquiring these vehicles at Cost to Market percentages at or near 80 percent. Dealers are marking up these cars to make good grosses, but they aren’t asking all they could for these premium investments.

The answer to the second question is also pretty clear—in the current moment, the investment inversion isn’t really hurting dealers. Thanks to the retail tailwind, dealers can put Bronze vehicles on the market at higher prices and still manage to sell them quickly enough to avoid aging units and retail net profit losses. Indeed, the only real downside to the investment inversion right now is that dealers could be selling more vehicles, more quickly, and making more gross profit, if they had retained their discipline and focus to manage their used vehicles as investments.

When I see the inversion at ProfitTime dealers, I feel it’s my duty and obligation to point out that dealers could be doing even better if they weren’t sub-optimizing the potential return on their used vehicle investments.

But my message seems to be getting blown away by the retail tailwind. It’ my hope that, when the tailwind subsides as it inevitably will, dealers are able to remember, and quickly restore, the investment discipline and focus that allowed them to take advantage of the tailwind in the first place

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Taking Notice of Two Used Vehicle Market Trendlines

Dale Pollak — Thu, 09 Jul 2020 16:41:47 +0000

There are two trendlines in the used vehicle market that merit every dealer’s attention.

The first is the rolling seven-day average of retail sales across the country. A month ago, the rolling seven-day average showed dealers were selling 30 percent more used vehicles than they did in February, just before the COVID-19 pandemic hit the country. It was a go-go time to sell used cars. Dealers were hungry for inventory, and their return to auction lanes advanced a rise in auction prices.

But as of early this week, the rolling seven-day average shows dealers are selling 10 percent more used vehicles than they did prior to the pandemic cooling off in retail sales. The slight softening in sales suggests that while retail demand remains robust, its strength may be diminishing as consumers contend with the economic fall-out of the pandemic.

In a webcast this week, Cox Automotive chief economist Jonathan Smoke relayed that the retail market has “definitely lost momentum.”

Now, let’s turn to a second trendline, the dealership days supply of retail inventory. At the beginning of April, as the pandemic gained steam, dealers had more than a 100 days supply of retail inventory on their lots. Over the next two months, as retail demand rose and dealers were able to retail their way out of their pre-COVID inventory, the dealership days supply of inventory began to fall. By the first week of May, it had declined to less than 50. For much of June, the days supply ran a bit more than 30 days.

This week, the dealership days supply increased to 35 days. In and of itself, the increase isn’t a big deal, particularly since dealers’ inventories remain well below the nearly 45 days supply average dealers maintained in 2019. Further, we know that dealers aren’t capturing as many trade-ins as they normally would this time of year, and auctions are seeing record numbers of buyers and bids for vehicles. Manheim reports that the number of bids on vehicles has tripled, a sign that dealers are hungry for inventory.

The trendlines give me pause when you consider them together. On one hand, retail sales appear to be declining and, on the other hand, dealers’ inventories are increasing. The divergence, in the present moment, is not a cause for alarm, but it is most definitely something dealers should watch closely.

I say this because, historically, when dealers are in the middle of a strong period of retail demand, which is exactly what we’ve seen the past two months, their natural tendency is to keep the good times going. They continue to buy inventory with the expectation that retail sales will at least maintain their current pace.

I would add that dip in the rolling seven-day average of retail sales across the industry might be a blip. Here in the Midwest, we’re seeing a consecutive string of days with record-setting heat and humidity levels. I suspect some buyers are simply waiting for better weather.

But we also know that millions remain unemployed, and their federal unemployment benefit and bonus checks won’t last forever. Further, it appears that COVID-19 is on the rise again, forcing retail shutdowns and social distancing requirements in places that reopened (and in some cases never closed). These circumstances lead me to wonder if even another round of federal stimulus would be enough to keep retail demand from declining even further.

If I were a dealer today, I’d most definitely continue acquiring the inventory I know I need to satisfy current retail demand. But I would not allow my acquisitions to inflate my inventory beyond my rolling 30-day total of retail sales. If I’m selling 100 used vehicles a month, I would do my best to maintain 100 units in stock.

As I’ve mentioned before, this strategy of aligning inventory size to your rolling 30-day total of retail sales may cost you a deal or two. But I’d submit those opportunity costs will be far less significant than the cost of carrying too many vehicles when buyers either aren’t interested in or can’t afford the cars you’re trying to sell.

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A Few Thoughts for the July Fourth Weekend

Dale Pollak — Fri, 03 Jul 2020 15:23:16 +0000

I suspect I’m not the only one who’s headed into this year’s July 4^th holiday weekend feeling much different than I did in years past.

For one thing, I can’t remember the first half of a year bringing as much disruption and volatility as we’ve seen in 2020. I also can’t remember a time in my car business career when I’ve been completely surprised at the resilience of the industry, and consumers, even as COVID-19 gripped the country and the world.

For many business leaders, especially dealers, the onset of the July 4^th holiday brings a time of reflection. It’s a midpoint in the year and a time to reflect on what’s gone right, what’s gone wrong, and what could be better from the past six months.

I used this trifecta and came up with a few thoughts that I believe are relevant for dealers and our industry to consider this weekend and beyond:

What’s Gone Right

It’s tempting (and easy) to simply wipe away the first six months of 2020 and say, “Nothing’s gone right.” But this view would miss several noteworthy things that went right and are worthy of remembering in the months ahead.

Agility of dealers: By late April, it was clear to me that dealers who were able to be in business, and chose to get back to business, proved their mettle at serving customers at a time when they wanted to purchase a vehicle but had little, and sometimes no, interest in visiting a dealership. Dealers solved that problem quickly, adopting digital tools to start and finish deals, and set up details for at-home or remote-location deliveries. We saw similar flexibility in service departments, where dealers made it convenient and easy for customers to get their vehicles repaired and serviced. This effective industrywide pivot to efficiency-minded, technology-driven processes and tools has shaved at least five years from what might be considered a more normal adoption timeline. That’s not just good, it’s great. Today, it’ll be important for dealers to recognize and sustain the elements of their digital adoption efforts that really worked, and to continue refining them to perfection.

Dealership profitability. Thanks to a combination of expense reduction and strong retail demand, many dealers ended the first half of the year in better shape profitability-wise than they might have if the pandemic hadn’t happened. Dealers learned how to do more with less, and many took the time to map out new ways to run their businesses more efficiently. I suspect the bottom lines of many dealership department financials had more scrutiny in the past three months than the past three years combined. Despite the pandemic, some dealerships made more money even when they took in less money. This, too, is a good thing. Over time, dealers will have the opportunity to bring in more money. But it’ll be critical that dealers ensure the rise in revenue doesn’t come at the cost of losing the profitability improvement dealers gained in a very short time.

What’s Gone Wrong

You could also say just about everything went wrong as the pandemic hit. Wholesale and retail markets effectively stopped. Valuations tanked. Dealers were forced to lay off longtime and loyal employees, some of them permanently. Some dealers faced a bloodbath on their balance sheets thanks to inventory that lost value. But out of what could be a very lengthy list of things that went wrong, I’d like to call out one that struck me the most.

Inventory size. While nearly every dealer was able to take advantage of the fast rise in retail demand in used vehicles, some dealers had a field day that lasted for weeks. The difference? When the pandemic hit, some dealers were not carrying excess inventory they’d acquired in anticipation of spring sales. These dealers were maintaining their inventory at or near their rolling 30-day total of retail sales. When the pandemic hit, the dealers weren’t burdened by the weight of too many cars that had lost too much value. The inventory investment-efficient dealers were more quickly able to reset to current conditions. In the end, they sold more cars, and made more money, than dealers who needed more time to right-size their inventory to local market demand. The lesson here is that inventory investment efficiency—the proper alignment between the size of your inventory and retail sales—provides a more market-resilient path, even if it costs you a few retail sales because you didn’t have the extra cars.

What Could Be Better

This may seem like a cop out, but I truly believe that every dealer, faced with his/her own unique set of circumstances as the pandemic hit, did the best they could. In many ways, it wasn’t a choice. Dealers had to rise to the occasion or their businesses, and family fortunes, would be at great risk. I would also grant that each of us likely has our own individual list of things we could have done better, for our businesses and our families, as the pandemic put pressure on all of us. These lists will be important crib notes to keep handy as we navigate through the final months of 2020. But, if I lift above the car business, and look to the broader world, there’s something larger that we all could have done better in the past few months.

Greater respect for each other and our communities. I say this because we’re entering a July 4 weekend with an urgent call from federal and state officials to stay home. The country is seeing an unprecedented number of new COVID-19 cases, and we’re all at greater risk if we do things we traditionally like to do every July 4 without changing how we do them. The missing link, it seems to me, is greater respect for the ways our individual behaviors can and do pose risk to others. I am convinced that as we all extend greater respect to each other and our shared communities, we’ll collectively find ourselves in a better place.

Here’s wishing you all a safe, happy and healthy July 4^th holiday weekend.

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A Post-Pandemic Question on Factory Facility Requirements

Dale Pollak — Tue, 30 Jun 2020 15:15:09 +0000

I’ve been wondering if the shakeout from the COVID-19 pandemic across the retail automotive industry will result in any significant changes in the requirements factories place on dealers for their facilities.

The question arrives after hearing dealer after dealer tell me they don’t plan to bring all of their employees back to work who were either furloughed or laid off as the pandemic disrupted the industry. This week’s Automotive News brings a piece that suggests that the industry will lose 5 percent to 10 percent of the jobs it provided prior to the pandemic. The article also notes that permanent staff reductions at public dealer group run close to 15 percent.

The job reductions resulted because dealers closed their businesses and, for at least a few weeks, were selling far fewer cars than they had been. At the same time, as the retail business picked up, many dealers realized that they could do more with less, thanks to digital retailing tools and remote work models they adopted to serve sales and service customers.

No matter how you slice it, these developments raise a key question about the role of dealership facilities, and whether the size and standards of the facility investments factories require of dealers make sense moving forward. I know of at least one dealer in the Northeast who doesn’t have any current plans to fully re-open his dealership facilities, despite the millions he invested to build and maintain them. The dealer’s gone digital and, until he’s convinced COVID-19 doesn’t pose a risk for his employees or customers, he’ll continue selling cars and scheduling service visits via online tools.

I spoke to a buy/sell expert this week who says that, at least for the moment, factories don’t seem as focused on facility requirements as they evaluate ownership transfers. Instead, they are more concerned about profitability and the safety of their dealership work teams. “The factories are aware and thinking about how the processes for selling and servicing cars have changed,” the expert says.

We also know that OEMs are rethinking what’s right for their own work facilities and teams. Last week, an Automotive News article highlighted how some factory executives may allow some employees to continue working remotely long-term rather than return to traditional office settings. Like many of us, the factories are learning that working in offices may not be as necessary for optimal levels of performance and productivity as we previously believed.

When it comes to factory facility requirements for dealers, it’ll be important for factories to recognize how much the car business has and could change as a result of the pandemic. Perhaps the mandates for big showrooms and service waiting areas should be less important as consumers look to engage dealers in a different, online-driven fashion. Perhaps the number of service stalls factories require could be fewer as dealers discover more efficient ways to schedule customers and technician workloads.

It’s my hope that factories recognize that the moment is ripe to rethink facility requirements. Maybe we’ll enter an era where dealers welcome factory facility mandates rather than view them as many have in recent years—as a source of potential financial harm, friction and frustration.

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How Four “Cs” Drive Strength in Retail Used Vehicle Demand

Dale Pollak — Fri, 19 Jun 2020 17:16:50 +0000

There are two questions on the minds of many dealers and industry observers as retail sales of used vehicles continue an impressive run during the nation’s recovery from the COVID-19 pandemic.

The questions are: How is it possible, given the pandemic’s economic disruption that caused 45 million lost jobs across the country, that consumers continue to buy used vehicles? This week, Cox Automotive data shows the retail sales are up 26 percent from their pre-COVID levels, a rebound that we’re all happy to see.

The second question is how long can and will this impressive retail run, which few expected to be so strong, last?

I’ll try to answer both questions in the balance of this post.

To be sure, you could answer the first question with another question—Who cares how or why it’s possible that consumers are buying used vehicles? The fact is, they’re buying and that’s all that matters.

But this answer isn’t satisfying for those who, like me, need and want a more evidence-based explanation for why the retail used vehicle market appears so resilient. In fact, this question is a primary topic in the weekly calls and conversations among the top economists, data scientists and retail-focused people like me at Cox Automotive. I dare say it’s a group that boasts a solid blend of brainpower, credentials and experience. We’ve gathered every week since the pandemic started to assess and think about wholesale and retail market conditions for the purpose of helping our client dealers and partners plot a way forward.

This week, we landed on what could be dubbed the four “Cs” that are driving the strength of the current used vehicle market.

The first “C” is credit. The credit markets are working. Buyers who qualify can get great credit from the lending community to purchase a vehicle. To be sure, the loan-to-value ratios have tightened, but finance companies and lenders are still offering money to those who need and want it.

The second “C” is cash. I’ve heard more than one dealer relay that even though loan-to-value ratios have tightened, buyers appear to have sufficient cash to satisfy lender requirements. For example, if a consumer wants to purchase a $23,000 vehicle, and a lender will only finance $18,000, buyers appear to have the means to bring the additional $5,000 to the table to make a car deal. This situation seems to reflect the fact that, even prior to the pandemic and certainly during the pandemic, the savings rate of many households has been higher than it might normally have been.

In addition, the federal program that pays an additional $600 unemployment benefit bonus appears to be doing its job to supplement and support household budgets across the country.

The third “C” is confidence. This week, Cox Automotive’s industry insights team shared results from a survey of consumers that asked them to list their top 10 concerns about the current environment. Respondents listed the coronavirus, the upcoming presidential election, civil unrest, paying bills and crime as their top five concerns. I wasn’t the only member of the Cox Automotive group who thought consumers would be more concerned about their employment status, which ranked as the seventh concern.

The group took this data to mean that, despite the upheaval in the job market, consumers have a sufficient level of confidence about their household budgets to support a vehicle purchase. The group also posited a corollary to this confidence—there’s sufficient evidence to suggest that current vehicle sales are buoyed by pent-up demand that resulted from the effective shutdown of retail markets as the pandemic began, and a desire among some buyers to drive themselves to work and other obligations rather than using public transit systems.

The fourth “C” is tied to the first “C”—money is cheap in the current environment. When consumers need to finance a vehicle purchase, the interest rates are more favorable than they’ve been in anyone’s recent memory. The availability of cheap money also appears to be spurring home sales and mortgage refinancing, two additional signs of positive economic activity.

The Cox Automotive group reasoned that when you mix the four “Cs” together, you at least begin to have a plausible answer to the question of how/why retail sales remain strong despite the unprecedented market disruption we’ve seen in recent weeks.

Now, let’s touch on the second question—how long can or will the retail run last? When the Cox group discussed this question, we all agreed that, in the end, we don’t really have a good answer. But the discussion pointed to a couple factors that suggest the retail market may look different as unemployment benefits and bonuses run their course and we see an expected influx of wholesale supply from fleet and rental car companies in late summer and early fall.

The good news is that, as time passes, the Cox group will be keeping close tabs and reporting their insights to the industry. It’s our collective goal that whatever happens in the wholesale and retail markets, we’ll at least see early signs of what’s coming to help everyone adapt in sufficient time to make a positive difference.

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ProfitTime in Practice: Finding Balance in a Bipolar Used Vehicle Market

Dale Pollak — Tue, 16 Jun 2020 11:58:06 +0000

I’ve noticed what might be considered a case of bipolarity in used vehicle inventories at dealerships across the country.

On one hand, there’s a sizable share of vehicles dealers purchased a month or so ago, before the wholesale market heated up, and we saw an unprecedented gap between wholesale and retail prices. Dealers who were fortunate to acquire this inventory owned their cars really “right.” In the context of Provision ProfitTime, these vehicles rank as Gold and Platinum investments. These are cars where dealers have the opportunity for significant front-end margin when they retail.

On the other hand, dealers also have a sizable share of inventory they acquired more recently—after the wholesale market heated up and the gap between wholesale and retail prices effectively evaporated. In some cases, dealers are forced to pay the equivalent of retail prices for vehicles they’re trying to acquire in the wholesale market. In the context of ProfitTime, a majority of these vehicles rank as Bronze units and consequently represent troubled investments, where margin for front-end gross is thin, if there’s any at all.

This current state of bipolarity in the used vehicle market is unquestionably an unavoidable consequence of unprecedented turmoil in recent months. If you think back to late March/early April, the value of used vehicles declined an average of 12 percent almost overnight as the wholesale and retail markets effectively came to a stop. A few weeks later, things turned in a more positive direction. Dealers were retailing cars and returning to auctions to get more inventory.

In my 40-plus years in the car business, I have never seen such fast-moving, wild swings in the used vehicle market. I can recall some memorable economic-, season- and storm-related shifts in the market. None of these arrived quite so suddenly and on the scale of significance that we witnessed as the COVID-19 pandemic stretched across the country.

In and of itself, the bipolarity of dealer inventories isn’t a problem. It’s merely a condition or consequence caused by current circumstances.

But I am finding a problem with the way dealers are managing the bipolar nature of their used vehicle inventories. In some cases, dealers are doing exactly the opposite of what they should be doing with the cars that rank as their best and worst investments.

Take the cars dealers acquired when buying conditions were ideal, and you could get Gold and Platinum vehicles at auctions without too much trouble. Today, these vehicles still represent sound investments, but dealers aren’t pricing them to achieve their maximum return on investment value. Instead, dealers appear to be pricing them to sell too quickly, which means they’re leaving money on the table. I see the evidence of this dynamic in the days to sell metrics for inventory investment classes. That is, dealers are pricing their Gold and Platinum vehicles to sell at a faster rate than their Bronze (and sometimes Silver) investments.

The opposite situation seems to be occurring with the more recently acquired Bronze units. For many dealers, these are fresh cars that they wish they could have acquired for less money. Now, after they own them, they are pricing them to make the gross profit they expect—without considering (or perhaps ignoring) the fact that the vehicles entered their inventories as distressed units. I see evidence of this dynamic in the days to sell for Bronze vehicles. In some cases, Bronze vehicles take twice as long to retail as long as Gold and Platinum vehicles.

I understand why dealers seem to be mismanaging the bipolar nature of their inventory investments. It boils down to following traditional inventory management instincts.

If dealers own a vehicle “really right,” their natural inventory management instinct is to price the vehicles to sell quickly. Meanwhile, on the other pole, it’s instinctive for dealers to over-price vehicles they believe they paid too much to acquire. Dealers want to give these “fresh” vehicles a shot to make gross profit, even though each vehicle’s investment value suggests that the ability to make gross is, to put it politely, a long shot.

In my view, the best way to find proper balance in the current bipolarity of dealer inventory investments is to move past traditional inventory management in favor of more proactively managing your inventory investments, using a tool like ProfitTime. When this shift occurs, dealers are better able to know where each vehicle stands as an investment from the moment they choose to own it. Next, they can make immediate peace with the truth—a right-away reckoning that tends to bring more favorable consequences than waiting on the retail market to reveal the truth about a vehicle’s investment value for you.

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ProfitTime in Practice: A Pandemic Teaches Important Lessons

Dale Pollak — Tue, 09 Jun 2020 18:41:56 +0000

For much of the past three months, I’ve been on a near-constant cycle of phone calls and conversations with dealers about their used vehicle business, conditions in the current market and next steps to take as the market rebounds.

Most of these conversations are very much in the moment. We’re addressing how dealers should be pricing vehicles and acquiring them to take advantage of the market’s recent upswing without stepping too far out in front of what some consider a rebound from the COVID-19 pandemic.

It’s interesting to note that, if you follow the storylines and threads of the wholesale and retail markets in recent weeks, there’s a soap opera-like quality to them. On one day, we’re all worried about the wholesale market and aged units. Then, as the retail market heats up, we’re focused on acquiring and pricing cars. The next day brings a dose of uncertainty with another spike in jobless claims or another possible sign of retail recovery.

Such is the nature of what might be considered the clean-up and restoration following a crisis. At any given moment, you face a set of tasks and to-dos that, given the circumstances a particular day brings, constantly compete for priority.

In more recent days, I’ve been thinking about what the hurly-burly nature of the current market might be teaching us that may be both relevant and useful to keep in mind moving forward. Here are three lessons I’ve gleaned so far:

1. Retail demand can move on a dime. I haven’t encountered a single dealer or industry observer who wasn’t at least somewhat surprised by how quickly the used vehicle market effectively shut down, and how quickly it’s bounced back. For many dealers, March was like a tale of two cities—the month started off strong, and then it suddenly died. Some dealers saw a similarly sudden shift in April and May, where the latter half of each month offset an otherwise sluggish start.

The lesson I draw from these experiences has two elements. The first, is that dealers should probably be paying more granular attention to the where their retail sales are moving than they have in the past. At vAuto, we’ve made sure that our Market Days Supply metric offers a complementary, snapshot view of recent retail activity to give dealers a more in-the-moment read on where retail demand for a particular vehicle may be headed. It’s an adjustment that became necessary due to the sudden, unprecedented way market conditions changed.

The second element is that, as dealers mind their own recent retail activity, they should compare their performance to the broader retail market around them. In some cases, I’ve found dealers who, after assessing their performance and share in the broader market, realized their robust retail activity actually lagged the market itself.

2. Pricing requires a proactive hand. In just a couple weeks, ProfitTime dealers have moved from lowering the competitive vRank position of vehicles in the system’s Bronze, Silver, Gold and Platinum investment designations to raising them. This change has become necessary amid strong retail demand and, for many dealers, a lighter-than-normal level of inventory. The dealers are making these pricing moves while following the lesson outlined above—as they pay more granular attention to retail activity, dealers proactively adjust prices to reflect each vehicle’s investment value and to maximize gross profit and volume in the current moment. It’s important to underscore that this pricing activity isn’t occurring once a week, every 10 days or when the used vehicle manager gets around to it. It’s a daily discipline that should continue in the weeks and months ahead.

3. A retail-right-sized inventory matters. I don’t know of any dealers who did not take some retail lumps as the COVID-19 pandemic upended the market. Some dealers are still working through their pre-COVID inventory as they aim to capture more retail sales.

But I’ve also observed that ProfitTime dealers who, prior to the pandemic, had been disciplined about managing each vehicle’s investment value and aligning their inventory levels to their rolling 30-day average of retail sale (or even a little less), are retailing more cars, and enduring fewer lumps, than their less-efficient colleagues. Some dealers have turned their inventories two or three times since the pandemic hit and wish they had been more aggressive.

This lesson reminds me of something we can all relate to in our personal lives—if your diet and exercise regimen are healthy, it’s a lot easier to move when you must.

These lessons are just some of the ones I’ve been learning and sharing with dealers as we collectively work our way through and out of the pandemic. I’ll be sharing more here. Stay tuned.

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ProfitTime in Practice: Should You Buy a “No-Gross” Car?

Dale Pollak — Fri, 05 Jun 2020 16:20:30 +0000

Across the country, dealers are complaining that they can’t acquire used vehicles at auction for the right money. The complaint most often comes from dealers who have seen strong retail sales in April and May and want to continue the run.

But the dealers are having trouble finding vehicles that meet their buying parameters.

For example, I spoke the other day with a multi-store group in the Midwest that followed a fairly strict rule for purchasing auction inventory. Prior to the pandemic, if they found a car with a “buy it now” price that offered a $700 or better margin for front-end gross profit, they’d acquire it.

Some background: The dealer group team members are ardent Provision ProfitTime users. They are disciplined about managing used vehicles as investments, not just inventory. Their adherence to this strategy has proven very useful the past two months. The group achieved retail sales records in April and May. The team achieved these results by following a ProfitTime investment-conscious strategy that began with retailing out of pre-COVID inventory and replenishing their supply with cars that reflected then-current valuations. The dealer’s auction buying parameters also tie to ProfitTime. The group arrives at its retail margin estimates by using ProfitTime to account for the vehicle’s purchase price, reconditioning, related fees and its target vRank position, based on the vehicle’s ProfitTime score.

But in recent days, the dealer has run into a problem. They can’t find vehicles that fit their buying parameters in the current wholesale market. The difficulty isn’t surprising or unfamiliar to many dealers right now. The virtual wholesale market is crowded these days. Bids are flying. Purchase prices, while still less than pre-COVID levels, are climbing due to strong demand.

Through this discussion, the dealer asked what I considered to be an astute question for the current time: Should I just make peace with the fact that I can’t find vehicles that fit my preferences and buy cars I know won’t offer me any front-end gross profit?

I thought long and hard before offering my answer. It’s a dangerous place to be when someone is asking for your advice on a strategy that, at first blush, runs counter to the very reason dealers are in business, which is to make money from the vehicles they acquire and retail.

“You have to buy the cars you need,” I told the dealer. “You shouldn’t stop looking for vehicles that offer at least a $700 margin for front-end gross profit, but you shouldn’t let that stop you from buying cars, particularly in the current moment, when you really need them. It’s not ideal to acquire a vehicle with little or no front-end profit, but it’s better to have the customer, sell the car, get the opportunity in F&I, make some money in service and potentially capture a trade-in you can retail.”

I also stressed three points that are necessary corollaries to this advice:

Buy the vehicles only if you truly need them. In the case of the Midwest group, their recent sales rate is the equivalent of selling 100 cars with only 60 in stock. Based on the best practice of maintaining inventory levels at a 1:1 ratio of your rolling 30-day total of retail sales, there’s no question this group needs the iron.
Move the low- or no-gross cars as fast as possible. The last thing any dealer should do is bring in a troubled used vehicle investment and then pretend it’s not a problem car. If you’re going to acquire a vehicle that offers little or no front-end gross potential, my advice is to price the vehicle in a position that ensures it will sell fast within its competitive set. For the Midwest group, ProfitTime serves as a reminder that they need to move their low- or no-gross cars quickly. The system tells them these units are Bronze vehicles, not Silver, Gold or Platinum. The group uses the insight to position these investment-troubled vehicles atop their respective competitive sets (e.g., a vRank of 1) to ensure speedy retail sales.
Pay close attention to where you stand. My instinct says the current situation, where it can be necessary to acquire vehicles that offer less-desirable front-end margin potential, will pass in time. Therefore, it’ll be important for dealers to pay extra-close attention to their pricing strategies and how they influence purchase decisions in the weeks ahead. Once the market gains its footing, dealers will find vehicles with more margin if they’re looking for them.

I’m curious to know how you’d answer the question of buying no-gross cars in the current moment. Would you do it? Is it wise? Is there a better way? Please include your thoughts in the comments to continue this discussion.

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A View of Bears and Bulls in the Current Used Vehicle Market

Dale Pollak — Tue, 02 Jun 2020 18:21:46 +0000

It’s refreshing to see what might be called a boost of confidence among dealers related to their used vehicle departments. Dealers are seeing surprisingly strong retail sales volumes, and many believe they could sell more cars if they had the inventory to make deals.

This dynamic makes sense if you look at the number of used cars in dealer inventories across the country. Cox Automotive data shows that the dealer day supply of used vehicle inventories is at its lowest point in at least a year—32 days currently versus an average of 44 days in 2019. If I were still a dealer, I’d probably have the same reaction many dealers are having when they arrive for work: “Man, we’re light on cars. We need more.”

Such reactions help explain why Manheim’s virtual auction lines have been quite busy. There are more buyers, more bids and higher transaction prices. The activity has dramatically reduced the day supply of wholesale inventory, which peaked near 140 days in early April, and now runs nearly 39 days. For comparison, Manheim’s day supply of wholesale inventory averaged 22 days in 2019.

But while the retail and wholesale markets are showing signs of strength, I worry that many dealers are giving the current conditions too much credit and are returning to auction to buy more cars with the belief that the next 30 to 60 days will be as robust as the past 30 to 60 days.

Here’s why I’m worried about a too-bullish view of the used vehicle market: If you look at retail sales over the past month, they have remained relatively strong but the rate of improvement, or their return to what might be considered normal for this time of year, has plateaued. We are no longer seeing retail sales activity rise from one day to the next. Instead, we’re seeing some days when retail sales decline.

To be clear, I’m not suggesting that retail sales are in decline. The current plateau only indicates that sales aren’t climbing the way they have been. But I am concerned where retail sales will be in the next 30 to 60 days. After all, it appears that much of the recent rise in retail sales activity resulted from federal stimulus checks rather than a fundamental improvement in market conditions.

Due to this questionable near-term outlook, I’ve been encouraging dealers to be more bearish, and less bullish, as they return to auction. Whenever a dealer tells me they’re going out to buy more inventory, I offer the following recommendations:

Tie your acquisitions to recent sales activity. As a rule, I’m encouraging dealers to maintain their inventory levels in accord with their rolling 30-day total of retail sales. If the rolling 30-day total shows you’ve sold 50 cars, and you’ve got 40 in stock, you’ve earned the right to acquire another 10 units. I might even suggest that dealers in this situation only acquire five more units as a hedge against getting caught with too many cars if retail demand drops off.

Buy the cars you need in smaller batches, more often. When dealers are feeling bullish about buying cars, it’s not uncommon that they’ll acquire a bunch all at the same time. In normal conditions, there’s nothing wrong with this approach. But, in the current environment where wholesale prices are climbing, and retail demand is uncertain, a more circumspect and staggered approach to replenishing inventory prevents buying a lot of vehicles at precisely the wrong moment.

Be careful about replenishing your inventory with near-new “switch cars.” Some dealers are actively buying every in-brand, late-model used vehicle they can find in anticipation of a new vehicle inventory shortage as the new vehicle market gains steam again. Here again, I’d urge dealers to proceed with caution for two reasons. First, a shortage of new vehicle inventory may not be as bad as some believe. And, second, it’s important to remember that just because you have a used car that’s comparable or even identical (aside from the model year) to the new car a buyer wants, there’s no guarantee the buyer will switch to your used car.

As I share my recommendations with dealers, some push back. They say I’m offering a recipe that will result in missing retail sales due to not having enough cars to sell. I get it. These dealers could be right. I may be overly concerned about the strength of future retail demand and too bearish or conservative in my prescriptions for stocking cars.

But I would counter that missing a few deals is a much smaller price to pay than the cost of having too many cars you paid top dollar to acquire in a market where no one wants to buy them.

The post A View of Bears and Bulls in the Current Used Vehicle Market appeared first on Dale Pollak.

A Perspective on Dealers’ Difficulty Finding Wholesale Inventory

Dale Pollak — Thu, 21 May 2020 16:35:01 +0000

In the past several weeks, as retail sales of used vehicles have grown, dealers have been returning to auction. In recent days, I’ve heard the same question so often, I’ve almost come to expect it in every conversation with a dealer.

Where can I find the auction vehicles I need for my inventory?

This question is reflected in dealer responses to an ongoing Cox Automotive survey of franchise and independent dealers to gauge their priorities and sentiments in the current COVID-19 crisis. This week’s survey found that 31 percent of franchised dealers and 53 percent of independent say their used vehicle inventories are lower than they’d like them to be. Going deeper, the franchise dealers reported their inventory levels were about 40 percent below normal, while independents indicated their inventories are 20 percent below normal.

Perhaps most interesting is that for dealers who reported lower-than-preferred inventory levels, a sizable share of franchise and independent dealers, 63 percent and 52 percent, respectively, say the current situation was “unintentional” and owed to lack of available inventory supply.

The survey results, and recent dealer conversations, lead me to my own questions: How can there be a lack of available cars when wholesale supplies are still above normal? Am I missing something?

I went to Cox Automotive data for insight. Indeed, while the days supply of wholesale inventory has declined significantly to more than 40 days, the supply is still nearly twice as high as what might be considered “normal” for this time of year. Also, if you compared the level of wholesale supplies to retail inventory in the current market compared to their respective levels prior to the COVID-19 pandemic, it would have been much more difficult to acquire vehicles earlier this year. Yet, I don’t recall dealers talking about a lack of available supply back then.

The data led me to consider what other factors might be at work, and I believe there are two principle reasons dealers believe they can’t find available wholesale vehicles.

The first reason relates to how dealers access wholesale inventory. Since the pandemic, physical auctions have gone from being totally shut down and largely remain so. If you want to buy vehicles at auction, you must do so online. It’s a situation that has some dealers and buyers, who have relied heavily, if not entirely, on physical auctions for inventory, stuck on the sidelines. I can see if they are reluctant or unwilling to transition to online auction-buying, they would be more likely to believe that wholesale vehicles can’t be found at the current time.

The second reason relates to a factor I discussed recently—where dealers are looking for deals that simply don’t exist in a wholesale market that is seeing ever-greater activity. We know, for example, that this activity is pushing wholesale purchase prices higher, sometimes climbing above Manheim’s MMR index. Even so, the data shows us that wholesale values remain 8 percent below where we would normally expect them to be. We also know that retail asking prices haven’t reset to reflect the rapid decline in wholesale values that followed the onset of the pandemic. In other words, if dealers are evaluating vehicles by comparing their wholesale costs to their retail asking prices (the “retail-back” approach), there are plenty of cars that provide suitable gross opportunities even if you need to pay above MMR for the privilege to retail them.

In the end, I think everyone can agree that the wholesale market is far different today than it was just a couple months ago. But I don’t buy the idea that dealers are suffering from a lack of wholesale supply. As I tell dealers, if you’re not finding the auction cars you need, it may be time to change where and how you’re looking for them.

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A Call for Caution As Dealers Return to Auctions

Dale Pollak — Thu, 14 May 2020 17:11:45 +0000

It’s good to feel good about the current state of the retail used vehicle market.

Retail sales are off last year’s totals by single-digit percentages, up significantly from the near-standstill that gripped much of the country two months ago. While the growth curve of the retail rebound has flattened, it’s not yet falling off—a good sign.

The current circumstances have some dealers feeling bullish as they return to wholesale auctions to acquire inventory and prep for what many believe is the beginning of a retail recovery.

But I would suggest dealers proceed with caution for a few reasons.

First, I believe that a sizable share of the recent retail sales owes to $1,200 and $2,400 federal stimulus checks arriving in bank accounts and mailboxes across the country. The retail rise doesn’t owe to an improvement in the fundamentals of the retail market, particularly when we know that more than 30 million Americans are out of work and seeking unemployment benefits.

Second, I’m concerned that while some of the recently unemployed will be coming back to work as more states ease social distancing restrictions, their rate of return won’t come close to how quickly they lost their jobs. Similarly, I have doubts that household earnings and spending power, which have taken a dramatic dive for many, won’t recover as fast as they diminished.

Third, there’s a very real possibility that many of the jobs that went away in recent weeks won’t be coming back. Retailers everywhere, including dealers, are rethinking how they provide their services, and how they can do more with less in an effort to maintain, if not restore, profitability.

All this isn’t to say that dealers shouldn’t be returning to auction and looking for opportunity. In fact, there is what I consider to be an unprecedented, if short-lived, opportunity in the wholesale market right now—the difference between current wholesale and retail prices. Since the pandemic started, wholesale values have dropped an average of 12 percent, while prevailing retail prices have dropped by 2 percent to 3 percent. If dealers are evaluating wholesale vehicles with an understanding of their current retail asking prices, they’ll find vehicles that offer gross profit opportunity.

Still, the current conditions, and the concerns about the resilience of retail demand in the weeks ahead, suggest dealers should exercise prudence as they acquire additional inventory. I’ve been advising dealers to consider two best practices:

Tie your inventory levels to recent retail sales. Prior to the pandemic, I advocated that dealers stock their inventories to achieve a balance between their rolling 30-day total of retail sales and their current inventory. If the rolling 30-day total shows you retailed 40 vehicles, you should have 40 in stock. In the current situation, however, I’m encouraging dealers to stock with a leaner, lighter hand, and maintain their inventory levels between 60 percent and 80 percent of their rolling 30-day total of retail sales. This adjustment is necessary, I believe, to ensure that dealers aren’t over-loaded with inventory if the retail market sputters or stops in the weeks ahead.

Recognize the risky cars. Late model used vehicles typically represent the most expensive investments in dealer inventories, and these vehicles compete most directly with comparable new vehicles. Given these circumstances, and a market where factories are offering ever-more attractive incentives to move new vehicles, late model used vehicles represent far riskier investments for dealers than usual. I’ve been urging dealers to be careful when they acquire these vehicles, particularly 2019 model-year units. If you know you need them, and believe the market will buy them, I’m advising dealers to price them to retail quickly to mitigate the investment risk.

My overall point here is that while the current market offers opportunity and may signal market strength in the weeks and months ahead, no one knows how things will play out. With such uncertainty, it seems wise for dealers to proceed with care and caution as they return to auctions to acquire used vehicles.

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A Call to Return to Retail-Back Used Vehicle Acquisitions

Dale Pollak — Wed, 06 May 2020 20:46:28 +0000

Since the start of the COVID-19 pandemic, everyone’s had their eyes on wholesale values for used vehicles.

The focus on wholesale valuation benchmarks like Manheim’s MMR was necessary because the retail market had essentially stopped and the wholesale market effectively became the only source of liquidity and valuation data.

But as we’ve all spent the past several weeks focused on MMR and other wholesale valuations to guide our used vehicle acquisitions, I believe the time has arrived when we can, and most definitely should, get back to the business of using the retail market to determine how we’ll get into cars we plan to sell to retail customers.

I’m making this call for two reasons:

First, the retail market is coming back on track. The latest stats I’ve seen suggest that, across the country, retail sales of used vehicles are only down approximately 10 percent from where they stood a year ago. A couple weeks ago, retail used vehicle sales were down upwards of 60 percent from the prior year. To be sure, we’d all like the market to come back faster and stronger. We’d all like to be selling more cars.

But the retail market is moving. It’s got liquidity. There’s sufficient sales volume today to trust the retail market data and use a “retail back” approach to acquiring inventory. (A quick definition for those who may need it: A “retail back” approach uses prevailing retail asking prices to help dealers determine how much to pay for an auction or trade-in vehicle. It follows the idea that the best way to get into a used vehicle is to know how you’ll get out of it.)

The second reason I believe it’s necessary to remind dealers of the relevance and value of the “retail-back” approach is that many seem to have forgotten about it altogether. It’s like the hyper-focus on MMR and other wholesale valuation guides has wiped away the memory of using retail data to determine what you’ll pay to acquire a used vehicle.

In the past several days, I’ve heard multiple dealers complain that they can’t find vehicles in the wholesale market, despite unprecedented levels of unsold supply. Inevitably, when I ask dealers to explain their trouble, I’ll find that they’ve been trying to purchase vehicles “back of MMR” without considering current retail prices.

Therein lies the problem. Dealers are returning to a wholesale market that’s already adjusted for current conditions. MMR values are down an average of 12 percent compared to pre-pandemic levels. The majority of auction sales are now occurring at or slightly above MMR. Dealers who limit auction acquisitions to cars that they can acquire “back of MMR” seem to be looking for a pot of gold or herd of unicorns that simply doesn’t exist in the current wholesale market.

I suspect if the dealers had been following a “retail-back” approach as they returned to auction, they would (or at least should) have noticed an unprecedented opportunity—the sizable gap that currently exists between wholesale and retail prices. This week, Cox Automotive data shows that this gap is now running close to $4,800 on average.

The gap has occurred because wholesale prices have fallen at a much faster rate in recent weeks than retail asking prices—about 12 percent and 2 percent, respectively. Cox Automotive’s data scientists say they’ve never seen such a high level of asymmetry between the wholesale and retail markets.

When you look at wholesale vehicles through a “retail back” lens, there is unquestionably plenty of profit-friendly vehicles available at auction. In fact, I’d submit that some of these vehicles may represent the best-grossing vehicle investments dealers have seen in some time.

But this opportunity won’t last for long. The wholesale-to-retail price gap will shrink as more dealers adjust their current retail asking prices on vehicles they purchased prior to the pandemic and retail out of this legacy inventory.

That’s why I’m encouraging dealers to dust off and don the “retail-back” glasses you left sitting on desks and shelves as you return to auction. When you do, you’re more likely to see a much larger number of vehicles that offer a significant, if short-lived, retail opportunity.

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A View of ProfitTime’s Utility in Today’s COVID-19 Pandemic

Dale Pollak — Mon, 04 May 2020 15:44:27 +0000

I’m seeing dealers take one of two paths as they work to right-size their used vehicle inventory costs and counts to fit current market conditions in the COVID-19 pandemic.

The first path might be called a fire sale approach. It’s where dealers make dramatic price reductions to retail as many vehicles as they can, as quickly as possible, to generate cash. The price reductions are often standard in application and size across a dealer’s inventory. It’s an “everything must go now” mentality.

Meanwhile, some dealers take a second path. It shares the same sense of urgency as the fire sale approach. But dealers on the second path don’t apply the same level of retail-now urgency to every vehicle. Rather, they discount cars based on each vehicle’s individualized investment value. If a vehicle represents a poor investment, it gets priced to retail right away. If a vehicle holds sizable investment value, its pricing reflects less urgency.

I’m highlighting this distinction because I believe the market has arrived at a time when the first approach, which seemed necessary and warranted in the darkest moments of doubt and uncertainty in recent weeks, seems to have run its course.

To be sure, current conditions remain a cause for concern. Retail used vehicle sales volumes have climbed back to about 80 percent of where they should be this time of year. That’s good news, given where volumes were a few short weeks ago. Meanwhile, many dealers are still carrying a disproportionate number of vehicles compared to current retail demand and sales volume. The dealers with the largest supply/demand imbalances are suffering the most from Inventory age and investment distress.

But these conditions do not justify what I’ve begun to see as I view dealer inventories through the lens of Provision ProfitTime.

Since the start of the pandemic, some dealers appear to have followed the fire sale approach and abandoned the discipline they’d previously shown to price vehicles based on their investment value.

For example, I’m seeing a return of the pricing inversion that spurred the development and introduction of ProfitTime in the first place: Dealers are pricing their best investments, which ProfitTime labels as Platinum and Gold vehicles, at lower Price to Market percentages than their worst investments, the Silver and Bronze vehicles.

When I call out the inversion in my conversations with dealers, it’s not uncommon for dealers or managers to say they have a higher priority—to move every car as fast as possible, take the cash and do it again.

“That’s fine,” I’ll reply. “But you shouldn’t price cars the way you spread peanut butter. Let’s not confuse a rightful sense of urgency with the belief that every car should move with the same degree of urgency as every other car.”

The better approach, I’ll advise, is to consider each vehicle’s price position in light of its investment value and current market conditions. For example, if dealers previously put Platinum and Gold cars on the market at Price to Market percentages of 100 percent to 102 percent, the current environment may merit offering these vehicles at initial Price to Market percentages of 95 percent or 96 percent, with lower Price to Market percentages for Silver and Bronze vehicles. Such price positions, even for top-level investments, mitigate the uncertainty of knowing where the market may turn in the days and weeks ahead.

The good news is that dealers say the price adjustments required to retail units faster aren’t always significant. “I’m finding that when I use ProfitTime and focus on each vehicle’s competitive set and vRank, I can put my cars in a more competitive position by adjusting the price by a couple hundred bucks,” says a dealer in Wisconsin. “I’m not adjusting prices by thousands, and I’m careful not to give away my best cars when I don’t need to.”

Those are wise words for every dealer to remember. While it’s completely appropriate and right to shorten the time you allow retail vehicles to remain in your inventory, the level of urgency you apply to any vehicle’s pricing and retail exit should always depend on its investment value.

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A Conversation with Dealer News Today

Dale Pollak — Fri, 01 May 2020 16:44:52 +0000

There’s a common structure to my conversations with dealers and media outlets. The conversations often cover current market conditions as COVID-19 continues to disrupt retail automotive, things dealers should do with their inventories to survive the current crisis and the outlook for when the market may come back to what we might consider normal.

My conversation this week with Dealer News Today follows the same trajectory, with perhaps a deeper-than-normal dive into what the industry could face when summer turns to fall.

You can listen to the conversation here.

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A Conversation About Used Cars, Retail Stimulus and More

Dale Pollak — Tue, 28 Apr 2020 19:39:42 +0000

I had the honor and privilege of being a guest on the Wisco Weekly podcast, which is hosted by Dennis Wisco, who worked in auto retail before creating an automotive-focused agency.

Our conversation started with some perspective on current efforts to stimulate retail demand and my belief that any effort should focus on used vehicles. We also discussed points I’ve shared here recently about the need for dealers to right-size their used vehicle inventories and pricing in light of current conditions in the wholesale and retail markets.

You can listen to the podcast here.

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A Letter for Dealers to Share with Federal Officials and OEMs

Dale Pollak — Fri, 24 Apr 2020 16:59:11 +0000

Author’s note: As federal officials and OEMs consider a program like Cash for Clunkers to help stimulate demand in the retail automotive industry, it’s important for them to understand the a more critical need for our industry—helping move late model used vehicles rather than new vehicles. I thought the following form letter might be useful for dealers to share with their elected officials and OEM representatives to make the case that stimulating demand for late model used vehicles would produce far better financial outcomes for OEMs, dealers and consumers than encouraging new vehicle sales at this time.

Dear (insert name of your OEM or elected representative):

As one of the thousands of retail automobile dealers across America, I appreciate your efforts and enthusiasm to find ways that would help stimulate retail demand and help my business survive the current COVID-19 crisis.

In recent days, there’s been much interest and talk about bringing back a program like 2009’s Cash for Clunkers to help our industry. The discussions underscore an awareness that the auto industry, like so many others across the country, needs outside help to bring our businesses back to some semblance of normal.

But I would ask you to consider a few reasons why a Cash for Clunkers program that provides incentives for consumers to purchase new vehicles would, at the present time, do more harm than good in moving our industry forward. Instead, I would encourage you to consider a program that would address the real problem manufacturers and dealers like me currently face—the millions of late model used vehicles that are sitting unsold at auction facilities, dealerships and inventory storage lots across the country.

Let’s examine the reasons why I believe a concerted and coordinated effort to stimulate demand for late model used vehicles would result in far better financial outcomes for OEMs, dealers and consumers alike.

First, let’s look back at the circumstances that led to the introduction of the Cash for Clunkers program in 2009. Much like today, the financial markets and the economy were in bad shape. The auto industry was no different. Dealers were suffering. Customers weren’t buying cars, and we had an unprecedented pile-up of new vehicle inventory that wasn’t selling. At the time, the Cash for Clunkers program correctly zeroed in on the automotive industry’s primary problem—encouraging consumers to buy the unsold new vehicle inventory and correct a supply/demand imbalance.

But that’s not our primary problem today. Right now, our industry is suffering from an unprecedented, and growing, supply of unsold late model used vehicles. Further, thanks to manufacturer efforts to right-size production levels to demand in recent years and disruptions to factory supply chains and production schedules in recent weeks, we will likely have a shortage of new vehicles as the market returns to normal. Meanwhile, the burgeoning supply of unsold late model used vehicles remains on the balance sheets of OEMs, commercial and rental car fleet companies and dealerships like mine.

Second, we must consider the basic economics of how an unprecedented supply of late model used vehicles accompanied by a lack of retail demand affects the values of this unsold inventory. When you have a lot of vehicles no one wants to buy, their values only diminish. We already know, for example, that wholesale values of vehicles have fallen by an average of 12 percent in recent weeks.

This valuation decline means that anyone with an inventory of unsold late model used vehicle now owns them for more than they are worth in the current market. In short, auto retail stakeholders, like me as a dealer, now face a significant financial loss that effectively came out of nowhere. Even worse, the value of these assets on our balance sheets are likely to experience further erosion as time goes on, and we draw ever closer to the new model year introduction.

Third, the size and scale of this valuation loss will translate to lower residual values going forward—a dynamic that will constrain the ability of OEMs and their captive finance companies to offer attractive lease and other incentive programs that will be necessary to sell new vehicles.

Fourth, even prior to the pandemic, my fellow dealers and I have been selling cars to customers with a sizable amount of negative equity in their current vehicles. It’s now common for new vehicle purchases to include carry-over debt from the vehicles customers currently own and want to trade in. If values for late model used vehicles continue to decline, it will make the negative equity position of many consumers a lot worse and may prevent them from purchasing any vehicle, whether new or used.

It is for these reasons that I believe an incentive or stimulus program to help spur retail demand for late model used vehicles offers a far better course of action in the current environment than a program that would drive more new vehicle sales. If our industry had a program that would stimulate demand for factory-certified late model used vehicles or something similar, it would ultimately provide several important benefits for all stakeholders:

The program would spur dealers like me to go to auctions and acquire late model vehicles, an injection of wholesale demand that would cause prices and values for the unsold late model inventory to increase.
As demand for wholesale late model used vehicles and their prices grew, it would mean less financial loss for manufacturers, commercial and rental fleet companies who currently own much of this unsold late model inventory for too much money.
As manufacturers and others suffered less financial loss on their current late model inventory, future residual values would be stronger. In turn, manufacturers would be better positioned to offer and maintain incentive programs that drive retail sales of new and used vehicles.
The improvement in wholesale valuations for late model used vehicles, driven by the stimulated demand, would mean less harmful impact to consumers’ current negative equity positions, making them more able to purchase a new or used vehicle.

Beyond these financial considerations, there’s another reason I do not believe a Cash for Clunkers program that supports new vehicle sales would make sense for our industry or our country at this time. If you think back to 2009, the Cash for Clunkers program certainly helped dealers retail more new vehicles. But the program also spurred an unprecedented level of vehicle scrappage. Collectively, our industry trashed tens of thousands of cars. I’m concerned that a similar effort today would make things more difficult for the millions of people who have recently lost their jobs in the pandemic and may need affordable transportation options in the coming weeks and months.

I appreciate this opportunity to share my perspective that another Cash for Clunkers program, in the current moment, does not appear to be the best approach to helping dealers like me, and the automotive industry itself, get back on its feet. Our industry most certainly needs your help to get the retail market moving again. It’s my hope that this assistance comes in the form of a program that will address the auto industry’s current, most-pressing problem—the vast numbers of unsold, late model used vehicles.

Thank you for your consideration.

Sincerely,

(Your Name)

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A Deeper Dive for Dealers: Current Wholesale, Retail Conditions

Dale Pollak — Thu, 23 Apr 2020 00:28:29 +0000

I had the honor and privilege yesterday to serve as the featured speaker in the first installment of Cox Automotive’s webinar series, Continuity & Recovery Perspectives for Auto Dealers.

We had nearly 2,500 people on the webinar—a showing that suggests a critical need for market and operational insights to help dealers manage the current COVID-19 crisis and the disruption it brings to their businesses.

Perhaps the most impactful elements of the webinar arrived when Ben Flusberg, associate vice president for Manheim M Logic, and Chris Stutsman, senior director of product innovation for vAuto, shared their respective views on current wholesale and retail market conditions.

Flusberg affirmed that, on average, the recent near-shutdown in wholesale and retail sales has caused wholesale valuations to drop about 12 percent. For dealers, this decline in values means you likely own used vehicles for more than they’re worth in the current wholesale market.

Meanwhile, in the retail market, Stutsman shared that while wholesale values have declined, we have yet to see a commensurate change in the retail asking prices of used vehicles currently on the market. He also detailed how some dealers are taking advantage of this current retail pricing inefficiency.

On the webinar, we discussed what these wholesale and retail market conditions mean for dealers as they look to regain their retail footing.

We also highlighted a shared view that, while there are bright spots in the wholesale and retail markets, and the federal stimulus checks should certainly help dealers, the growing ranks of unemployed Americans likely means that the car business’ recovery won’t be as quick as any of us would like.

You can listen to the webinar here.

Looking ahead, I’ll be participating in the next installment of the Cox webinar series at 3:30 p.m. EST on Thursday, April 30. I’ll be joined by Cox Automotive’s Jessica Stafford, Erica Danford and Mo Zohabi to discuss how the current crisis is changing consumer behaviors and expectations as they research and shop for vehicles. You can register for this webinar here.

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A Candid Conversation with Automotive News

Dale Pollak — Fri, 17 Apr 2020 21:29:58 +0000

I had the honor of participating in Automotive News’ Daily Drive podcast with publisher Jason Stein this week.

He was interested in diving deeper into the open letter I published here last Friday. In the episode, Stein asks about the open letter, retail/wholesale market conditions and recommendations for managing inventories in the current environment.

On a related note, I will be taking up these topics in even greater depth at 2 p.m. this Tuesday in a Cox Automotive webinar. I’ll be joined by Manheim M Logic’s Ben Flusberg and vAuto’s Chris Stutsman. We’ll be discussing the open letter, wholesale/retail market highlights and some bright spots in both markets. The webinar is part of a new weekly series Cox Automotive is producing to help dealers in this time of crisis.

You can register for the Tuesday webinar here.

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A Retail Revival? It’s Out There for the Willing

Dale Pollak — Thu, 16 Apr 2020 19:28:12 +0000

Today’s current COVID-19 crisis has triggered an unfortunate situation for many dealers in their used vehicle departments.

As the crisis has caused wholesale and retail sales to dramatically decline across the industry, dealers now own inventory that is worth less than what they paid to own it. That is, if dealers sold their inventory today, they could likely go out and acquire essentially the same cars for less money.

Put another way, the slowdown in the market has created a glut of wholesale supplies and weaker retail demand, which has left dealers with a lot of “water” in their inventories that appeared almost overnight.

As a result of this situation, I’ve been counseling dealers to follow a two-pronged strategy. First, liquidate your inventory in the interest of creating cash flow and, second, look for opportunity once you’ve aligned your inventory levels to retail demand and your prices reflect each vehicle’s true market value in the current moment. My counsel follows a principle that in a crisis, it’s critical that dealers first ensure their financial survival and then pursue opportunities that improve their current situation.

But I’ve been both delighted and surprised to see that dealers who have followed this advice are finding opportunity in the retail market a lot faster than I or any of the dealers would have ever imagined.

At a mid-Atlantic group, a dealer tells me some of his historically weaker stores are now out-selling sister stores that typically retailed more volume in normal market conditions.

It’s a similar story with a two-store operation in the Southeast. The dealer purchased a Nissan store two years ago that has lagged the sales performance at his Toyota’s store—until now.

Meanwhile, in the Southwest, a dealer shares that his two stores are on track to set sales volumes records.

These experiences beg the question: What’s driving the growth in sales that’s causing some stores to perform better in the current crisis than they did in the past?

The answer is that these stores, because they made the decision weeks ago to reduce the prices and liquidate vehicles at retail, are now able to move the market. In effect, the dealers have re-set their inventories with fresher vehicles they were able to acquire at a lower cost. Meanwhile, the competition still carries higher-cost inventory with asking prices that don’t reflect current market realities. In turn, the dealers who have the benefit of stocking lower-cost vehicles can place them on the market in a more price-competitive position and capture an out-size share of retail customers.

“It’s strange that none of the dealers I talk to is seeing the kind of success we’re having here,” says the Southwest dealer, who’s average inventory cost is now about $20,000, down from $25,000 a month or so ago. “The other dealers don’t seem to be doing much of anything.”

“The stores that are seeing success are bending the Cost to Market curve and enjoying the benefits,” says the mid-Atlantic dealer, borrowing a term that’s become ubiquitous in the current pandemic.

In many ways, the current situation reminds me of the earliest days of Velocity nearly 15 years ago, when most dealers had not yet recognized the need to price vehicles competitively as the Internet made the market more price transparent.

At the time, early Velocity adopters had a field day. These dealers experienced immediate, extraordinary success that enabled them to dominate their markets. Their competitive advantage lasted until other dealers in their markets began to recognize that they, too, needed to become more price competitive.

I’m seeing exactly the same situation in the current market with an important difference: Unlike the early days of Velocity, I don’t believe the competitive edge we’re seeing for dealers right now will last very long. That’s because I’m sensing that dealers who thought the market would bounce back quickly, and opted to hold on to their inventory to avoid a loss, are now reconsidering their optimism. I have a hunch that they’ll reckon with the current market realities, and begin to price their vehicles more realistically, sooner rather than later.

In the meantime, though, let’s regard these examples of retail revival for exactly what they are—signs of a resilient market that, in time, will bring opportunity to those who remain to enjoy it.

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A Positive Take on Tough Market Conditions

Dale Pollak — Wed, 15 Apr 2020 16:19:19 +0000

It’s hard to read the stories about the current used vehicle market given the disruption caused by COVID-19.

This week, Bloomberg News published a piece that talked about fears of an impending price collapse in used vehicles as supplies of wholesale inventory have grown at a far faster rate than retail demand.

The article details how factory finance and rental car companies are looking for ways to liquidate inventory without losing too much money. The piece shares Manheim’s calculation that, based on a far smaller-than-normal pool of wholesale transactions in recent days, vehicles are selling about 10 percent below MMR. I was also flattered and surprised to see a couple lines from my open letter to dealers in the article.

To be sure, the piece paints a foreboding picture.

But the article also offers some good news, if only between the lines.

For example, I found it reassuring to know that while every wholesale seller wants to avoid a loss, no one appears to believe a loss is avoidable. The questions are how much the loss will be, and when to take it. The understanding that a loss is inevitable signals an important reckoning in the current market has occurred.

Put another way, we can all see more clearly what’s in front of us.

I also found it encouraging to know that, as painful as the information coming from the wholesale market may be, it’s a sign that the market itself is working.

Let’s remember: In just a couple weeks, we’ve moved from almost pitch-black uncertainty about a vehicle’s actual cash value to having a credible way of putting a number on a car. We wouldn’t have this insight if Manheim hadn’t made the effort to keep the wholesale market moving and provide at least some information to make decisions.

In the coming days, I’m confident we’ll have an even better sense of where things stand in the wholesale market.

My confidence flows from a few signs I’m seeing in the retail market—candles, if you will, that are lighting a way for dealers. I’ll share what I’m seeing in a post here tomorrow.

The post A Positive Take on Tough Market Conditions appeared first on Dale Pollak.

An Open Letter to Dealers: Honest Perspective Amid the COVID-19 Crisis

Dale Pollak — Fri, 10 Apr 2020 17:08:20 +0000

Author’s note: We are in a crisis that challenges everyone in the automotive ecosystem. OEMs. Financial institutions. Dealers. Suppliers. We are all in uncharted waters where there are more questions than answers. In the weeks ahead, I’ll be participating in live webcasts with Cox Automotive leaders to directly address the challenges and opportunities the current crisis brings to all parts of the car business. The Cox team and I will share more on the webcast schedule. In this moment, I wanted to share a perspective specific for franchise and independent dealers who are facing significant business disruption.

My heart goes out to dealers and their families during the current COVID-19 crisis. I cannot imagine the loss, pain and uncertainty that every dealer is feeling at this time.

In my time as a dealer, we saw recessions and other disruptions that caused tough retailing conditions. But none comes even close to what dealers are experiencing right now.

Like many of you, the Cox Automotive leadership team and I have been on the phones virtually non-stop as authorities have implemented shelter-in-place and social-distancing mandates. We are all asking and thinking about what we should do right now to help dealers survive the current crisis and remain viable when the market returns to normal.

That’s the motivation behind this letter.

As a member of the Cox Automotive leadership team, I have the advantage of access to a lot of smart people and perspectives. We are all fully aware of our responsibility as industry leaders to do everything we can to help our dealer clients, and the car business itself, survive the current crisis. We believe that the current crisis will bring opportunity—provided we all do the right things today to ensure we are able to take advantage of the opportunity that will arise when the market normalizes. We also understand our limits. If you think about the most significant dealership investments, they fall into three categories—people, inventory and facilities.

At Cox Automotive, while our solutions touch each of these investment categories, we are most directly linked to a dealer’s inventory investments, and the processes that dealers employ to acquire, manage, price and market their inventories, and serve the customers who ultimately purchase this inventory from dealers. As such, I’d like to share some perspective and guidance to help dealers better manage their inventory investments and related retail processes today to ensure a brighter tomorrow.

It’s Tough Today, But the Future Will Be Better

Cox Automotive data suggest that, across the industry, retail sales and service volume has essentially come to a standstill in recent weeks. Dealers certainly know it.

Across the industry, showroom traffic is down upwards of 80 percent on a year-over-year basis, the number of scheduled service appointments is off more than 50 percent, and the show rate on service appointments has dropped nearly 90 percent.

It’s incredible to think of where dealers were just a few short weeks ago compared to right now. The sheer scale and size of the business lost in recent days is scary to think about. But there are some bright spots. Some dealers’ sales and service departments remain open, and they are selling and servicing cars in the safe and socially distant manner today’s times require. Meanwhile, other dealers can only operate “essential” sales and service functions. Other dealerships are fully shuttered. None of us thought we’d be in this place in the second quarter of 2020. Yet, here we are.

Thousands of dealers are already furloughing or laying off employees. Others are reducing compensation and capacity to reflect the current conditions. It’s a trying, challenging time.

But we must remember: This is the car business, and it’s a cyclical business. Historically, every downturn has been followed by an upturn. We might debate the extent to which the next upturn resembles anything like the business we all seem to have left behind just a few short weeks ago.

But such debates can be an empty exercise.

Right now, it’s important for all of us to know that things will eventually get better and, if we believe this to be true, we must do everything in our power today to take advantage of the opportunity that will arrive when things do get better.

A Persistent Question: What Do I do with My Used Inventory?

Perhaps the most common and persistent question I hear from dealers is this: “What do I do with my used car inventory?”

Dealers arrive at this question as they weigh whether the current situation offers them an opportunity to hang on to inventory, and perhaps even acquire more, in anticipation of the time when the market improves. When this question comes up on dealer calls, I share Cox Automotive’s informed viewpoint: The market isn’t likely to improve significantly in 30, 60 or even 90 days.

Some dealers are more optimistic, but the majority of those I’ve engaged all believe that the market’s return to normal, whatever that looks like, will take some time. To help dealers answer questions about how they should handle their used vehicle inventories, I offer three facts:

Fact 1: In six months, as the 2021 models arrive at dealerships from the factory, every vehicle in your inventory will be one model year older. The model year change-over this year will likely put pressure on one- to three-year-old used vehicles as factories help dealers clear out unsold 2020 new vehicles.

Fact 2: Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market. One of Manheim’s biggest tasks today is determining where and how to park the incoming streams of off-lease, rental fleet and dealer-owned used vehicles. The pace of incoming supply exponentially exceeds the rate of sales. Physical auctions are closed and there are fewer buyers at the select online auctions that remain open. In short, cars are coming in, but they aren’t selling. Today’s huge supply of wholesale inventory suggests supplies will be even larger in the months ahead.

Fact 3: In six months, many of the record numbers of people who have filed for unemployment benefits in recent weeks will still be out of work. Even worse, it seems inevitable that more furloughs, layoffs and pay cuts are likely to come as businesses find it difficult to make payroll, even as they pursue federal and state aid programs. Before the pandemic, industry analysts questioned how much retail demand would soften this year. We still don’t know the answer, but the job losses suggest future retail demand will be weaker than previously thought.

When presented with these facts, many dealers arrive at a clear conclusion of what they should do with their current used vehicle inventory: “Sell it quickly and keep the cash.”

I believe the sell-down strategy should start with the most risk-prone vehicles. Across used vehicle inventories, the late-model (2018, 2019 and 2020) vehicles represent every dealer’s highest-cost, most-risky inventory investments. The value of these vehicles today will more than likely be less tomorrow, and it’ll only get worse over time.

The sell-now strategy also makes sense given another business-in-crisis reality. That is, cash is king.

It’s critical for dealers to recognize what may be an unpleasant truth: It might take all the cash you can gather to sustain your business today and put it in a position to be viable when the market comes back.

A Cautionary Note for Dealers in New Cars

I’m watching OEMs as closely as everyone else in these trying times.

So far, it seems that factories recognize the unprecedented nature of today’s COVID-19 crisis. The factories are already taking steps to help dealers manage the costs of unsold new vehicle inventory.

Dealers also appreciate factory efforts to keep new vehicle sales moving. The rise of 0% financing for 84 months and other incentives seem about as good as they can get. But as we know, factories tend to offer even richer incentives as summer and fall approach.

The good news is that it appears the factory incentive programs are capturing the interest of buyers. At Cox Automotive, we’re seeing strong interest from consumers using Autotrader and Kelley Blue Book to research and shop for new vehicles compared to the traffic in dealer showrooms.

To be sure, the volume of new vehicle sales is smaller than any one of us would like to see, but there are still people interested in new cars—and some dealers who are fortunate (and safe enough) to be able to sell them.

But the problem arrives when dealers appraise a customer’s trade-in as they work a new vehicle deal.

It’s standard for dealers to appraise vehicles using valuation references, like vAuto’s Market Days Supply, the Manheim Market Report (MMR) average, Kelley Blue Book values or some other third-party guide, to determine an appraisal amount or offer for a customer’s trade-in. In more normal circumstances, these references are reliable.

But there’s a critical hitch in today’s COVID-19-disrupted market. Retail and wholesale sales have effectively fallen off a cliff in recent weeks. The sudden shift in sales makes these valuation references less useful. At Manheim, for example, dealers are asking why there’s a large difference between MMR values and real-time auction sales prices.

Dr. Ben Flusberg, associate vice president for Manheim M LOGIC, says the gap owes to three factors:

Wholesale transaction prices have plummeted faster than ever before due to the sudden drop in retail demand.
Auction sales volumes declined, which lightens the weight the MMR gives to recent transaction activity.
The current downturn occurred in the middle of the spring season, which sent mixed trending signals to MMR.

Flusberg notes that MMR is “intentionally designed not to have a knee-jerk reaction to extremely unusual events like we’re experiencing now.” He adds that MMR will normalize as the market stabilizes.

In dealerships, the valuation references can lead appraisers to value vehicles considerably higher than the true actual cash value today—a problem that will only get worse as supplies of wholesale vehicles continue to grow in the weeks and months ahead.

I’ve cautioned dealers that, in today’s turbulent market, they are likely booking a profit on their new car transactions that will “wash out” to a loss when they eventually retail the trade-in vehicle.

To help, Manheim is now publishing a daily index adjustment, which is called MMR Retention. Manheim is encouraging dealers to use this reference in conjunction with MMR itself to appraise vehicles and arrive at values better suited for current market conditions.

vAuto will soon release a system that alerts dealers when vehicle sales rates suddenly change, for better or worse, in the last two weeks. Such shifts indicate that a change to a vehicle’s Market Days Supply is imminent. With these alerts, dealers can know the degree to which a vehicle’s MDS is stable, improving, sliding or in free-fall.

In this environment, the question is whether it’s wise for dealers to be doing everything they can to make a new car deal work. My thinking is that the answer is “no.” Unless you can make the deal with a proper trade-in value, you’re better off passing on the transaction.

My position flows from the fact that factories are and will continue to provide dealers financial assistance on new vehicles in the form of interest credits and ever-more incentive dollars. But, in contrast, dealers will receive no financial assistance from anyone on over-valued used vehicle inventory.

I’m not suggesting dealers should stop selling new vehicles. Rather, I’m offering a cautionary note that’s meant to help dealers institute appropriate appraisal practice and review procedures that will help ensure every trade they take in reflects a realistic expectation of the vehicle’s retail performance.

Today’s new vehicle market conditions also call for continued vigilance on the inventory investment fundamentals dealers should be practicing every day. It’s important that dealers are able, when the factory comes calling, to offer data-informed, rational reasons why their current inventory and the local market may/may not support the introduction of more new vehicles.

Further, dealers should know the exact vehicles, down to color and trim combinations, that make the most sense to add to your inventory and those that should be retailed faster than others—a principle that applies to dealer trades, as well.

A Digital Path to Safe, Socially Distant Vehicle Sales and Service

COVID-19 has challenged one of the fundamental beliefs about the car business—that it’s a people business where in-person engagements are the only way you do business.

If you think of all the processes that underlie variable and fixed operations at dealerships, most are built on what could be called a “people business principle”—that you do business one-on-one, with the customer and the car.

For the past several years, Cox Automotive and other companies have urged dealers to redefine the concept of our people business from being one that is primarily physical and in-person, to one that includes more personalized, digitally driven engagements.

Our position has long been that, in an environment where profitability has reached a tipping point in new and used vehicles, digital technologies and tools offer a way for dealers to achieve operational efficiencies that lead to more profitable vehicle sales and service visits, and a healthier bottom line.

But you could say digital tool adoption has been split. It’s far more profound in the wholesale marketplace than the retail marketplace.

At Manheim, the percentage of online auction purchases has been climbing by double-digit percentages in recent years as dealers look for more cost- and time-efficient methods to acquire inventory. More recently, digital tools are transforming the way consignors and dealers wholesale inventory. Today, you can wholesale cars without paying to send them, and drivers or trucks, to run at auctions.

Meanwhile, on the retail side, digital technologies and tools have seen an understandably slower rate of dealer adoption. The adoption lag owes, in part, to the pace of technology development.

My Cox Automotive colleagues and I would be the first to acknowledge that it takes more time than expected to develop the correct set of digital retailing tools and make sure they work across all the disparate systems that support a dealer’s business.

Market conditions have also slowed dealer adoption of digital retail technology and tools. I’ve had dozens of conversations with dealers about digital retailing. Dealers will often stop me in mid-sentence. “That’s all great, Dale, but we’re selling record numbers of new and used vehicles without them.”

I get it.

But I also know that while dealers have been blessed with the ability to retail record numbers of new and used vehicles in recent years, the additional volume often hasn’t translated into additional profits. In fact, we know that many dealers lose money in their new and used vehicle departments despite selling more cars.

Therein lies what may be a silver lining with COVID-19. The crisis offers dealers an opportunity to take a hard look at their businesses that may be long overdue. The hard look encompasses two phases:

Identifying the retail processes that have always been less efficient than you’d like and probably rub customers the wrong way.
Reinventing those processes with an eye toward using digital retailing technologies and tools to make each process more efficient, customer-friendly and profit-productive.

Some dealers made the change overnight as COVID-19 mandates made it impossible for them to sell or service vehicles in the more traditional, one-on-one manner they’d followed for years.

In the blink of an eye, these dealers took digital retailing more seriously, and continued to sell and service cars and take care of customers in a safe, socially distant manner. Autotrader notes that more than 5,000 dealers signed up for its Dealer Home Services in the first two days of their offering.

Such is the way of the car dealer in America. Put them in a corner, and they’ll find a way to get out.

But it’s also worth noting that digital retailing technologies and tools have come a long way.

Today, as some dealers are quickly learning, the elemental aspects of making new and used car deals can now be done digitally.

Appraising vehicles. Making trade-in offers. Knowing who’s on your website and whether they’re close to buying. Negotiating vehicle purchase prices and payment terms. Offering and selling F&I products and services. Digital contracting.

It’s a similar story in dealer service departments, which largely remain “essential” under current state and local mandates and serve customers who really need help.

With digital tools, dealership service customers can schedule a visit, check in, review/approve work and pay without any direct, person-to-person engagement. Dealers can even use third-party services to handle vehicle pick-up and delivery for customers. (For more information on the digital and home-based services Cox Automotive provides, visit this page.)

In the heat of the COVID-19 crisis, dealers are telling me that digital tools help them manage more sales and service customers with fewer employees, and at safer distances, than they could without them. Such anecdotes lead me to believe the current crisis may be teaching us lessons about new ways to do business that benefit both dealers and their customers.

My colleagues at Cox Automotive share this belief. That’s why our companies are offering dealers access to digital retailing technologies and tools for no charge or at significantly reduced fees. Our goal is to help you chart a better path forward, one that will help you retail and service vehicles in the more profitable, customer-focused manner that will be necessary once the market returns to normal.

A Positive Perspective on the Future

I realize that this letter only touches the surface of the many concerns and questions that keep dealers awake at night as the COVID-19 crisis continues.

But rather than simply losing sleep, I would encourage every dealer to reach out to your Cox Automotive partner, whether it’s a performance manager, account executive or sales representative, to help you map the best next steps for your business.

As a company, we are here to help. Throughout our more than 120-year history, we have always been guided by a principle that if you take care of your customers, they will take care of you. Our mission is no different in the current crisis than it’s been since Cox Enterprises founder James M. Cox bought his first newspaper in 1898.

As you consider the next critical steps for your business, remember what the current COVID-19 crisis has already taught us—that we can and will change the way we do things once we understand the necessity of making a change.

Look around. We are finding ways to be social even when we must remain distant.

We are discovering how digital tools can help our children learn outside of the classroom, find a grocery store that has the staples and supplies we need, and keep in touch with our families. Dealers are learning how to sell and service vehicles with fewer physical customer interactions.

In other words, the current crisis proves that we can make significant changes in our lives and businesses when circumstances demand them. This is no small achievement.

It’s also a reality that gives us great optimism and hope about our ability to face what will ultimately be a much different future.

Take a moment. Recognize how quickly we’ve changed beliefs and behaviors in the current crisis.

Then, let’s remember how far we’ve come, in such a short amount of time, as we face the changes life and business will bring us in the days and weeks ahead.

The post An Open Letter to Dealers: Honest Perspective Amid the COVID-19 Crisis appeared first on Dale Pollak.

A Wholesale Market Experience Brings A Ray of Hope

Dale Pollak — Tue, 07 Apr 2020 16:26:04 +0000

I’m writing to share an encouraging sign for dealers in the current market.

The encouragement comes from Manheim’s Online Vehicle Exchange (OVE).

I’ll get to the encouraging sign in a moment.

But first, it’s important to set the stage for why I find the sign encouraging.

Anyone remember where we were just a few short days ago as the week came to an end?

If you were a car dealer, and you had used vehicle inventory, you were probably biting your nails.

We found ourselves in an unprecedented situation where it was difficult to properly value a used vehicle.

If you were able to work deals, and you had to appraise a trade-in, you probably realized that all the valuation guides were out of whack. It felt almost impossible to put a number on a car that reflected the current market conditions.

If you were unable to work deals, and you were looking for ways to wholesale your inventory, you probably didn’t make a move because it was difficult to determine how much of a loss you might take. You probably opted to wait and see.

If you were looking to buy auction vehicles, you may not have purchased any inventory because of your uncertainty about how much you should pay.

All this uncertainty had another effect: It meant that both the wholesale and retail markets weren’t moving—a stasis that brings even more uncertainty, which feeds on itself, and no one makes a move.

Well, this past weekend, someone made a big move in the wholesale market.

Specifically, Manheim’s OVE, which has remained open through the current crisis, saw an influx of more than 700 vehicles from a large independent retailer.

A vAuto Stockwave Performance Consultant, Scott Sadler, spotted the influx and found it striking: The retailer placed the vehicles on the market asking roughly 50 percent of the MMR as a starting point, and did not require a reserve.

Basically, the retailer was telling the market: “Here are my cars, I’ll take what you give me for them.”

To be sure, the retailer’s move isn’t a new entry in the auction-buying playbook. Smart sellers often start low to generate interest.

But it’s rare to someone put upwards of $15 million in inventory for sale at auction without a reserve on a single car.

When I heard about this, I made a few calls. I knew it would be worth knowing how these vehicles fared in the wholesale market when they ran yesterday on OVE at 2 p.m. EST.

I figured the sales would help dealers get some much-needed information and insight as to how vehicles will perform in the current crisis-affected market.

I thought that these transactions could undo some of the uncertainty that has so far kept many dealers on the sidelines.

I asked Ben Flusberg, associate vice president of Manheim’s M LOGIC, to provide some data about the retailer’s apparent liquidation strategy.

The data tells us that of the 700-plus cars, there were roughly 640 that we considered solid representative examples of the types of vehicles most dealers would purchase if they deemed them right for their inventories and markets. The other 60-plus units either had frame damage or some other problem that we considered too edgy for analysis.

Here are other key take-aways from these vehicle sales:

Nearly every vehicle received a bid and sold.

The buyers represented roughly 260 different dealers (two-thirds were independent, one-third franchised dealers).

Each vehicle had an average of 20 bids and seven unique bidders; 80 percent of the vehicles had proxy bids; 20 percent of the vehicles sold through proxy bids.

The overall average purchase price was 90 percent of MMR—a discount that left some auction buyers that I talked to thinking they should have bid more to get the cars they wanted.

This snapshot of one retailer’s wholesale experience is significant because it suggests a few positive take-aways for dealers and the car business itself:

Manheim’s MMR Retention metric really works. The metric measures the difference between daily wholesale transaction and MMR values for vehicles. For example, if a vehicle transacts at 8 percent lower than its MMR, the transaction would reflect an MMR Retention of 92 percent.

For the past several days, MMR Retention has been running about 90 percent—which is exactly where the retailer’s average vehicle selling price landed at yesterday’s auction.

In my mind, the experience validates Manheim’s recommendation for dealers to use MMR in conjunction with MMR Retention to determine vehicle values that are more in line with today’s actual cash value.

While the retailer got what might be considered a haircut, it wasn’t a buzz cut. I wondered, and even worried, if the retailer’s move would mean a big loss. Given the current circumstances, and the need for liquidity, the retailer’s move seems to have paid off.

As Flusberg notes, “the retailer won some and lost some. But they got exactly what the market thinks their vehicles are worth.”

Markets are gold mines of intelligence when they’re working. It should be noted that today’s wholesale experience would not have occurred but for the decision by Manheim’s executive leaders to keep at least some aspect of the wholesale market in operation. When markets go dark or dim, participants lose visibility, and tend to halt or pause transactions, which restricts liquidity.

To its credit, Manheim has kept the market moving, and we’re now getting some credible visibility into vehicle valuations.

I recognize every dealer may not find much encouragement from this wholesale experience.

But, at the least, it’s a sign that market is moving and not standing still. Any movement, in this moment, is a good thing for everyone.

The post A Wholesale Market Experience Brings A Ray of Hope appeared first on Dale Pollak.

COVID-19 Crisis Causes a Vehicle Valuation Issue

Dale Pollak — Fri, 03 Apr 2020 17:28:06 +0000

Like many of you, I’ve been on the phone and in meetings almost constantly for the past two weeks.

I apologize to dealers who may be still waiting for a return phone call and conversation. You’re on the list, but it’s a very long list.

I’ve been working with my Cox Automotive colleagues to schedule a broader live, online forum where I can help answer some of the most persistent questions dealers are asking amid the COVID-19 crisis.

This effort will include a memo that attempts to provide guidance and perspective to dealers about the best ways to move their businesses forward as vehicle sales and service volumes have either slowed to a trickle, or stalled, in many markets across the country.

I’ll keep everyone posted as we lock in a date and time for the live event.

In the meantime, there’s one issue that merits addressing right now because it has bearing for every dealer, whether you are still able to retail new and used vehicles or not.

The issue: The valuation references many dealers use to appraise auction and trade-in vehicles may not reflect the actual cash value of vehicles today.

Dealers have noticed the problem.

They’re asking why the Manheim Market Report (MMR) average for a vehicle is higher than real-time auction sales prices. Some are also questioning why vAuto’s Market Days Supply (MDS) metric doesn’t seem to match their sense of the market.

The root of the problem is the widespread business disruption everyone seems to be feeling.

The disruption has caused retail and wholesale transactions to fall off a cliff.

The sudden loss of this sales activity, to put it in plain terms, mucks up the measures Manheim, vAuto, Kelley Blue Book and other third-party valuation guides use to gauge vehicle values.

At Manheim, Ben Flusberg, associate vice president for M LOGIC, provides a deeper explanation of the business disruption’s effects on MMR valuations.

He also shares Manheim’s work-around for dealers. The company is publishing a daily index adjustment, which is called MMR Retention. Dealers can use the daily MMR Retention in conjunction with MMR to appraise vehicles and arrive at values better suited for current market conditions.

Meanwhile, vAuto’s team in Austin will soon release a system that alerts dealers when vehicle sales rates suddenly change, for better or worse, in the last two weeks.

When such sudden shifts occur, the system will provide alerts to indicate any imminent change to a vehicle’s MDS. With these alerts, dealers can know the degree to which a vehicle’s MDS is stable, improving, sliding or in free-fall.

Every dealer should know that the valuation guides will normalize as the market stabilizes.

Until then, it’s extremely important that dealers to pay careful attention to vehicle appraisals. Now is not the time to be acquiring trade-ins at values higher than their actual cash value today.

Similarly, dealers should be mindful that while you may be compelled to over-pay for a trade-in vehicle to put a new car deal together, if you do it, you’re raising the risk of booking at profit today that will “wash out” when the trade-in eventually retails.

I’ve been cautioning dealers to think twice about whether it’s wise to do everything you can to sell new cars in the current environment.

Remember, the factories are providing financial assistance in the form of interest credits and ever-more incentive dollars to help you with your new vehicle inventory.

But no one will provide any financial assistance if you over-pay for a used vehicle.

The issue with vehicle valuations is one of several COVID-19 crisis-related topics I’ll be addressing in the upcoming webinar, and in ongoing blog posts here.

Stay tuned for more, and stay safe and healthy.

The post COVID-19 Crisis Causes a Vehicle Valuation Issue appeared first on Dale Pollak.

A Perspective On Change Amid the COVID-19 Pandemic

Dale Pollak — Fri, 20 Mar 2020 16:35:19 +0000

I hope that everyone reading this post is healthy, safe and doing everything in your power to stay that way.

I don’t think any of us would disagree that COVID-19 is causing an unprecedented level of disruption to our daily lives and our businesses.

My heart goes out to the individuals and families who are facing the virus and fighting it. I’m also grateful for those who are heeding today’s call for social responsibility that, ironically, means being less social.

I’m glad to report that, for the moment, my immediate family and I are fine. We are sheltering in place, trying to find sources of beauty and inspiration as we go about our daily lives.

Like many of you, I’ve continued working to the best of my ability.

I’ll admit, though, that there are times when my mind goes to thoughts of how bad the situation might get, and whether we are collectively ready, willing and able to face up to the task.

I don’t dwell on these moments.

Instead, I look to the present for perspective that might apply in business and life once the world is able to slow, contain and hopefully eliminate the virus.

One of the most heartening thoughts I’ve had is this: We are all, willingly or not, learning to do things different.

While it’s true that, in the current moment, we are changing how we live our lives because we must. If we don’t, we are putting our health and safety at risk.

But I’m struck by how quickly we’re making profound changes and getting a taste of what it’s like to do things differently.

That, my friends, is a good thing.

The single-most difficult thing for any human to achieve is a change in behavior and belief. And yet, it’s happening all around us.

A colleague shared today that his wife, an ardent, daily yoga practitioner, is now streaming yoga classes in a basement room next to a heater. She misses the social aspects of sweating with friends but finds the workout itself to be satisfying. She also doesn’t miss the sometimes mad dashes from home or work to get to a yoga studio on time for a class.

It’s happening in the car business.

I’ve talked to more than one dealer who, once they recognized that showroom customers would be few and far between, began engaging them, and making deals, in earnest online. For some, that’s a big step in a business that’s been built on a belief that a controlled, showroom environment is the only way to sell cars and customers.

It’s happening in other retail sectors. Another colleague rarely bought groceries online. Now, she’s not sure she’ll ever go back to the stores she shopped. She’s discovered that it’s much easier to order the stuff online and get it delivered.

Perhaps the biggest question is whether our ability and willingness to change will extend beyond the current crisis.

I certainly don’t have the answer.

But I do know that if we take a moment to recognize how quickly we’ve changed beliefs and behaviors in the current crisis, it’ll serve as a positive, reinforcing reference as we face the changes in life and business the future will most certainly bring.

The post A Perspective On Change Amid the COVID-19 Pandemic appeared first on Dale Pollak.

NADA Dealership Financials: Good News, Bad News in Used Vehicles

Dale Pollak — Tue, 10 Mar 2020 16:30:56 +0000

As regular readers might know, I’ve been anxious to see the 2019 year-end dealership financials from the National Automobile Dealers Association (NADA).

My desire to see the year-end report owes to my ongoing concern that dealers are losing money in their used vehicle departments even as they retail higher numbers of more expensive vehicles. As some may recall, I was floored when NADA reported that the average retail net profit per used vehicle retailed ran -$2 in 2017.

I’m delighted to report that the 2019 year-end Dealership Financial Profile from NADA offers a less bleak picture.

NADA reports that the average retail net profit per used vehicle climbed to $14 in 2019, more than doubling the $6 in average retail net profit per used vehicle retailed that dealers achieved in 2018.

That’s the good news.

Now, let’s take a closer look at the bad news.

First, the $14 in average retail net profit per used vehicle retailed includes F&I income. Hence, it’s not really a true picture of whether dealers are selling cars, and making money, in their used vehicle departments themselves.

Second, if you separate the respective gross profit generated in the F&I and used vehicle departments, it’s like a tale of two cities.

Here’s a quick a look at each, and a take-away:

F&I Gross: In 2019, NADA’s financial data suggests dealers averaged a 75 percent penetration rate in F&I, up nearly 2 percent from 2018. In addition, the average dealer achieved an average of $1,421 in F&I gross on the vehicles that included F&I income—an increase of $55/vehicle from 2018’s total.

The F&I gains are all good. The reflect the fact that dealers are doing a better job presenting financing and insurance products to buyers, whether it’s online or in the showroom. And, better still, more buyers are saying “yes” when given the option to purchase, thanks at least in part to their desire to purchase and protect CPO vehicles.

Used vehicle gross: In 2019, NADA’s financial data says dealers sold an average of 15 more vehicles in 2019 compared to 2018 (735 vs 720, respectively). The average selling price also grew an average of $508/car.

Unfortunately, the front-end gross profit dealers earned from the sale of more expensive vehicles went the other direction. It diminished an average of $35/retail unit, to $952 in 2019 compared to $987 in 2018.

As I consider the tale-of-two-cities trend in F&I and used vehicle front-end gross profit, I have to ask why F&I seems to be doing just fine, while the actual sale of a used vehicle continues to be profit-troubling proposition for many dealers? And, if NADA reported the net profit of the used vehicle department on its own, what would that look like?

Fortunately, I get good answers to these questions every day.

For example, there are dozens of dealers for whom the ongoing decline in front-end gross profit reflected in the NADA numbers has been reversed. These are dealers, like the Honda dealer I wrote about last week, who are seeing front-end gross profits increase rather than decline.

What’s the difference? The dealers are forgoing a calendar- or days-in-inventory-based strategy for managing their used vehicle inventories and, instead, working to maximize each vehicle’s net profit or return on investment.

These dealers are recognizing each vehicle’s investment potential from the moment they own a vehicle, and acting accordingly.

If it’s a poor investment, the car doesn’t get a standard mark-up and X number of days on the lot to perform. Instead, it’s priced to move fast so the dealer can redeploy the investment in a more profit-productive vehicle.

If it’s a good or great investment, the dealers are pricing the vehicle with an understanding that their investment has earned the right to deliver a positive return, and the asking price reflects this reality.

The shift to an investment value-based inventory management strategy also has profound and positive implications for the net profit the dealers achieve in their used vehicle department.

In the past year or two, many of these dealers have moved from either losing, or making less and less, net profit in their used vehicle departments to setting new records for departmental net profitability.

Perhaps a primary take-away for dealers should be this: If your own financials show the same tale of two cities in F&I and used vehicles as NADA, it’s time to take a closer look at the used vehicle side of the house.

Then, ask yourself, “How can I do a better job managing each used vehicle to deliver its net profit or investment return potential?”

The post NADA Dealership Financials: Good News, Bad News in Used Vehicles appeared first on Dale Pollak.

When Pride in CPO Vehicles Hurts Your Profit Potential

Dale Pollak — Fri, 06 Mar 2020 16:42:48 +0000

It’s no secret that certified pre-owned (CPO) vehicles have become a big part of the used vehicle business at franchise dealerships.

Cox Automotive predicts 2020 will be another record-breaking CPO year, with a forecast of 2.75 million retail sales. If dealers achieve this threshold, it will be the ninth-straight year of CPO sales volume gains.

But there’s less appreciated aspect of the CPO business that I’ve been finding in my work with Provision ProfitTime dealers across the country.

The issue is that, by and large, the retail sales of CPO units do not drive the return on investment or net profit potential many dealers believe they should, due to the additional costs required to recondition vehicles to meet factory CPO program specs and market a vehicle as a factory-certified unit.

For example, in my work with ProfitTime dealers, it’s rare to find CPO units that rank above a Bronze or Silver investment value designation. These rankings reflect the fact that CPO vehicles typically have inherently higher Cost to Market percentages compared to other vehicles.

In addition, given the popularity of CPO vehicles among consumers, and the incentives for dealers to participate in CPO programs, most dealers’ CPO units face a fair amount of competition in the market.

The key take-away: In today’s market, like it or not, CPO vehicles often start out in a dealer’s inventory as troubled investments.

But that’s not how dealers typically treat their CPO vehicles.

Rather than recognize a Bronze or Silver CPO unit as a troubled investment, dealers tend to be proud of them—too proud, in fact, given the circumstances noted above.

The thinking often goes like this: “I’ve made a significant investment in this car to make it a CPO vehicle, and I’m going to mark it up to get my money back.”

Such thinking shows up when I see CPO units priced higher than their rightful market positions, given their Bronze and Silver investment grades.

I’ve lost count of how many times I see CPO vehicle pricing that, because it does not reflect a Bronze or Silver investment grade, puts a vehicle in direct price competition with a comparable new vehicle.

I’ll often ask: “If I’m a consumer, would I be more likely to buy the new or used vehicle if the price is essentially the same?”

Given the prevalence of the CPO pricing pitfall, I’ve been recommending two corrective actions to help dealers check their pride and face the truth of CPO vehicles in today’s market:

Accept the fact that a CPO unit, due to its typically higher Cost to Market position, won’t offer the front-end profit you expect. In the current market, CPO vehicles that rank as Bronze or Silver investments are essentially commodity cars. They must be priced correctly to turn quickly and optimize what little front-end gross profit they may generate. The longer it takes dealers to reckon with this truth, the less money they’ll make on their CPO investments.
Understand how CPO units help your business. I encourage dealers to recognize that while CPO units might start as troubled retail investments, they most certainly offer ample opportunity to make gross in your F&I and service departments—two big reasons why it makes sense to turn Bronze- and Silver-ranked CPO vehicles as quickly as possible. When dealers aren’t proactively pushing their CPO sales forward, they’re making a choice that hurts their financial interests.

As I talk CPO vehicles with dealers, the discussion sometimes turns to whether the dealer’s participation in the factory CPO program makes sense.

When this turn occurs, I’ll point out that it’s usually in a dealer’s best interest to play ball with the factory and be a good partner, even if the CPO program costs and sales targets seem out of line.

It also doesn’t seem like good business for dealers to ignore the current CPO opportunity. The record-setting pace of CPO sales suggest today’s buyers want these vehicles. The buyers seem to understand, and be willing to pay for, the additional peace of mind a CPO vehicle offers compared to a non-CPO unit.

Therein lies the opportunity for dealers: While consumers might pay for more for a CPO vehicle, there are limits to what they regard as a fair price to bring one home.

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ProfitTime in Practice: A Dealer Shares Three Profit-Positive Take-Aways

Dale Pollak — Thu, 05 Mar 2020 14:46:34 +0000

It’s not easy to change long-standing beliefs and best practices.

Just ask Tim Nelson, general manager at Beaverton (OR) Honda. He has led the store’s transition from a successful run as a Velocity dealer to even better used vehicle performance using Provision ProfitTime’s investment-based management methodology.

“The hardest thing was to not do what I’ve been doing my whole car life,” Nelson says. “For years, we’ve had a hard 60- or 90-day turn. As a car gets close to that number, you’ve got to get rid of it. You’ve got to sell it or it goes to the auction. You drop the price, and it gets so cheap that it’s a no-brainer that somebody comes in and buys it. That’s hard to let go.”

Indeed, it is.

Nelson aptly describes a common pitfall that occurs as dealers transition to ProfitTime.

It’s difficult to make decisions based on something other than the number of days you’ve held a car in inventory. And, sometimes, it’s hard to believe what ProfitTime is telling you about the net profit and return on investment potential of a used vehicle.

For example, Nelson recalls two Silverados the store recently acquired as customer trades. Both vehicles reached the 45-day mark in inventory, a point at which he would previously have begun cutting their asking prices.

“But, by using ProfitTime and seeing where the car sits in the market and why I shouldn’t lower the price, I didn’t,” says Nelson, who notes both vehicles sold around the 50-day mark, and made $3,000 each in front-end gross profit.

“That would have never happened in the old way of doing things—ever,” he adds. “But I promised to follow ProfitTime to the letter of the law. The proof is in the deals.”

Overall, Nelson is pleased with a $400 lift in average front-end gross profit that’s occurred since transitioning to ProfitTime—an increase that’s even more profound at sister stores in the Lamphere Auto Group. Meanwhile, the store’s retail volume remains a steady 85-plus units a month.

I asked Nelson to share three take-aways from his ProfitTime experience that would be relevant for other dealers. Here’s what he offered:

Inventory age doesn’t matter. With ProfitTime, “we don’t pay attention to age,” Nelson says. Instead, he focuses on managing each vehicle’s investment value, based on the ProfitTime rankings and activity each vehicle produces online.

“If I follow the ProfitTime process, the Bronze cars are the ones that are going to age on you,” Nelson says. “If I price those right from Day 1, I’m finding that I don’t have an aging problem.”

The “age doesn’t matter” perspective does not mean that Nelson isn’t keenly aware of vehicles that, according to the hard 60-day turn policy he followed for years, would be considered aged units.

“I can see the age, because it’s right there,” he says. “Then, my hand shakes and I want to hit the mouse” to change the price.

But ProfitTime helps him resist this long-standing, calendar-driven reflex.

“I’ve got a 68-day-old car right now that’s an $11,000 Honda Accord,” Nelson says. “It’s a Platinum car. I’ve got $3,000 mark-up in it. I’m leaving it because I’m getting tons of activity.”

His buy list is better. Nelson says: “If I was to build a buy list six months ago for this store, and build one today, they would be way different.”

For example, thanks to his profit-positive experiences with full-size trucks, Nelson makes sure his inventory covers the segment.

He also doesn’t keep, or look for, the BMW and Audi vehicles he liked to stock because he believed they would sell. With ProfitTime, he now knows the vehicles typically don’t sell as well, or produce as much profit, as he previously thought.

The same goes for Toyota Camrys. “You’d think that at a Honda store, you’ve got to have Camrys here,” Nelson says. “Well, I wouldn’t go out and buy one, unless it’s an older car.”

ProfitTime shouldn’t drive appraisal offers. In the early days of his ProfitTime adoption, Nelson realized he needed to coach appraisers about the proper purpose of ProfitTime.

“It’s just getting them to know that ProfitTime should not affect your appraisal amount,” he explains. “You need to buy the car first. ProfitTime is going to tell us how to market the car.

“If it takes this much to buy the car, and you make this much, it is what it is,” Nelson says. “If you don’t buy the car, guess how much you make? Zero.”

I have had the privilege of working with Nelson and his team on their ProfitTime implementation.

Much of the success Nelson and other ProfitTime dealers have achieved owes to their individual commitment and discipline to adopt a new way of doing business, even if it means moving outside their individual comfort zones.

As Nelson says, “In 27 years in the business, I’m learning something brand new. It’s kind of fun.”

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A Gross Deception Discussion with WardsAuto

Dale Pollak — Fri, 28 Feb 2020 21:49:11 +0000

A few weeks ago, I saw down with WardsAuto Dealer Business editor Steve Finlay to discuss my latest book, “Gross Deception: A Tale of Shifting Markets, Shrinking Margins and the New Truth of Used Vehicle Profitability.”

This week, the magazine published a Q&A of the conversation.

The Q&A covers several topics, including one that’s especially relevant right now, as many dealers are looking ahead to spring and beefing up their inventories.

You can read the Q&A here.

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Talking Truth in this week’s Automotive News

Dale Pollak — Mon, 24 Feb 2020 22:08:20 +0000

I had the distinct honor and privilege to pen an op-ed piece for Automotive News.

The piece appears in this week’s issue and addresses a new truth of today’s used vehicle market.

This new truth is critically important for dealers to understand as it calls into question what we’ve long considered to be best practices for optimal used vehicle department performance and profitability.

The piece offers two take-aways for dealers to embrace the new truth and restore the money-making potential of their used vehicle operations.

You can read the piece here.

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A Gross Deception: You Don’t Need To Stock More to Sell More

Dale Pollak — Fri, 21 Feb 2020 16:28:00 +0000

A vAuto Performance Manager (PM) made an astute observation about the belief among dealers that you need to stock more vehicles than you typically sell.

“I see it time and time again,” the PM says. “It doesn’t matter how many units a dealer carries in inventory. They’re always selling X number of cars each month.”

For example, the PM says dealers often reduce or increase inventory due to seasonality.

Dealers who might typically carry 100 units in stock to

sell 50 cars, trim their inventories—and still sell 50 cars a month, the PM explains. Or dealers may increase their inventories without seeing an appreciable lift in sales.

“I came to the conclusion that the number of vehicles a dealer sells has nothing to do with how many they have in stock,” the PM says.

Being a thoughtful person, the PM also asked a logical follow-up question: If a dealer’s inventory size has no bearing on their retail sales volumes, why does the stock-more-to-sell-more practice persist?

The PM found the answer by looking back at his own career in the car business, which included stints as sales manager, general sales manager and general manager at different stores.

“I understand why dealers stock 100 cars to sell 50 cars, or 150 cars to sell 100 cars,” the PM says.
“It’s because there was a time when you had to.”

That “time” predates the rise of the Internet. It’s when customers came to a handful or more of individual dealerships to figure out the used vehicle they would purchase.

Back then, customers would say, ‘I’m looking for a mid-sized sedan, what have you got?’

“It was our sales process that put those deals together,” the PM says.

“As dealers, we needed six to eight mid-sized sedans so we could fit them into one of those vehicles,” the PM continues.

“But today, the customer is doing their vehicle selection online. They’re coming in saying I want to look at that LaCrosse or Impala or that SUV that I saw online. They’re not saying, ‘I saw this SUV online, what else do you have?’”

The PM is correct.

While you certainly need vehicles to attract and sell today’s customers online, you don’t need, or can afford, to stock more than you sell to find success.

For months, I’ve been encouraging dealers to strike a better balance between the number of vehicles they carry in inventory and the rolling 30-day total of vehicles they retail.

I’ve been advocating that dealers maintain a 1:1 ratio to counter the rise of margin compression and faster pace of Cost to Market appreciation that causes most used vehicles to lose most, if not all, of their profit margin potential within 30 days on the lot.

I asked the PM how he handles these conversations with dealers.

“I’ll have a discussion with a dealer who has 120 cars in inventory and he’s selling 45,” the PM says. “I’ll show how the Cost to Market exceeds 90 percent after 30 days in inventory. Then, I’ll explain what’s happening to all the inventory the dealer has sitting around in excess of 30 days, and how it’s putting them in a position where making a return on investment is impossible.

“Dealers understand that you can’t make money when the margin’s gone after 30 days and you’ve got 90 days of inventory sitting on the ground.”

The PM adds that when dealers strike a balance between their inventory levels and the rolling 30-day total of retail sales, it’s not necessarily about having the right car, it’s about treating every car right.

“I know people say you have to have the right inventory to make sure customers will find it and buy it,” the PM says. “But I I don’t think there’s a bad car as long as I have some understanding of what the vehicle’s supply and demand is in the marketplace.

“If I know that, then I can know where I need to position the vehicle to sell it in the current market. It’s what you do with a car that is going to make it a good car or a bad car, or a good decision or a bad decision.”

I couldn’t agree more. I’ve come to call this clear-eyed approach to understanding each used vehicle’s investment value as making peace with the truth with every car.

The PM added a final point about the benefit of maintaining a 1:1 ratio between your current inventory and your rolling 30-day total of retail sales: “If you’re stocking 45 cars to sell 45 cars, and you’re not stocking 90 cars to sell 45, guess what? You’ve got half as many vehicles to worry about, which means you can give them all the attention they deserve.”

There you have it—great, share-worthy perspective from a PM.

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NADA Day 3: A Final View from Las Vegas

Dale Pollak — Tue, 18 Feb 2020 18:36:07 +0000

As I was leaving Las Vegas yesterday, it occurred to me that I hadn’t shared much on new vehicle market conditions and what they may mean for dealers.

Of course, everyone knows the industry will likely see fewer new vehicle sales in the coming year than we enjoyed in 2019.

The National Automobile Dealers Association (NADA) puts the expected new vehicle sales total at 16.8 million for 2020—essentially in line with estimates from Cox Automotive and other companies.

Some dealers questioned the viability of their factory partner’s plans for growing sales volumes as the market softens and affordability issues may spin new vehicle buyers into used vehicles.

A few dealers also lamented their ever-growing reliance on “other income” from their factory partners to make money in their dealerships. NADA’s chief economist Patrick Manzi affirmed that other income drives a “significant chunk of dealership profit.”

Some reports indicate that other income drives more than 90 percent of dealership profits, which leads to a key question: Are dealers serving their OEM partners more than retail customers?

At the vAuto booth, the new vehicle conversations tended to focus on three key items:

Aged inventory—identifying and finding ways to reduce the share of inventory that ages past 90 days to minimize interest expense and maximize floorplan income. Sometimes the fix can be as simple as making sure the old units are more accessible and front-of-mind with sales associates as they meet with customers.

Inventory mix—recognizing the vehicles that are at risk of becoming aged units, and tending to them sooner rather than later.

Dead stock—understanding the specific vehicles that no one seems to be selling in your market and making sure you’re not inadvertently asking the factory for more of them.

These areas of focus should help dealers make the most of a new vehicle marketplace where “like Elvis, margin has left the building,” as one analyst shared.

My thanks to all the dealers who stopped by to say hello, catch up and share your perspective at NADA with me. You’re all part of the big blessing that is the car business itself.

As we look ahead to the rest of 2020, let’s remember that when you focus on doing the right things today, tomorrow will take care of itself.

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NADA Day 2: Special Moments on the Show Floor

Dale Pollak — Mon, 17 Feb 2020 20:44:19 +0000

Like many dealers, the annual National Automobile Dealers Association (NADA) convention is a time for seeing long-time friends and making new ones.

This year’s convention was no different, and I found myself moved by a few special moments as I spent my day on the show floor.

One of those moments arrived when dealer Susan Moffitt of Shreveport, LA-based Moffitt Automotive introduced herself.

A day earlier, Moffitt was surprised to hear her name announced as the Time Dealer of the Year at the convention opening. The award goes to dealers who demonstrate a track record of strong sales and customer satisfaction, effective leadership in their stores and dealer associations and significant community involvement—basically all the best things that the best dealers do on their respective roads to success.

Moffitt’s a second-generation dealer who, like many who come up in the car business, worked as a cashier, service advisor and sales associate before taking the reins of the business from her father.

“I just wanted to thank you,” Moffitt told me as she shook my hand and asked for a signed copy of Gross Deception. “I attribute a lot of our success to what we’ve been able to achieve in used vehicles. We would not have won the award without our partnership with vAuto.”

I thanked her and noted that software by itself doesn’t bring success—it’s the people who use it, and the discipline, expertise and leadership they bring to their jobs every day, that drive better results.

It was a special, sweet moment that I’ll cherish.

Here are a couple other notable moments from the floor:

Props for Performance Managers. It’s not uncommon for dealers to share their appreciation for the work vAuto’s Performance Managers do with their teams. I liked how a Utah-based dealer regards his relationship with his Performance Manager.

“Our Performance Manager is our personal trainer,” the dealer said. “Our weekly Friday calls are like going to the gym. It’s our weekly workout to keep us healthy and in shape.”

Opportunity knocking. A 25-year veteran of the car business could barely contain his excitement after meeting with the vAuto sales team. His dealer tapped him to move from a successful F&I department to the store’s not-so-successful used vehicle department. The manager shared that the dealer finally got the memo that an inventory management system might help them sell more used cars more profitably. “Where have you been?” I had to asked. “I know,” the manager replied. “I can’t wait to get back to the store and get started. We’ve got a huge opportunity.”

Recon reinvention. I had a déjà vu-like moment as I headed back to the hotel. I was reflecting on the number of dealers who plan to return to their dealerships and tackle the opportunity of getting their used vehicles reconditioned and frontline-ready faster. The conversations served as a reminder that dealers won’t realize the full profit potential of their used vehicle department unless and until they tackle the self-induced inefficiencies that hold them back.

I’m looking forward to what the convention’s closing day will bring, and I’ll share my take-aways tomorrow.

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NADA Day One: A Clear, Purposeful View of The Road Ahead

Dale Pollak — Sun, 16 Feb 2020 18:08:06 +0000

If my conversations with dealers on the opening day of the exhibit hall at the National Automobile Dealers Association (NADA) convention are any indication, the coming year will be a good one in the car business.

I was struck by how many dealers came to Las Vegas with an agenda to find ways to take advantage of what one industry analyst called a “golden age of opportunity” for dealers, particularly in used vehicles.

An independent dealer in the Upper Midwest came to NADA to put an end to the 20 percent of his inventory that never seems to get online fast enough. The root cause, the dealer explained, was his reliance on vendors to help recondition his cars.

“It’s a never-ending battle, and it’s one that will get fixed,” the dealer told me. His motivation comes from realizing that his plans to open a second store will find greater success if fixes the reconditioning inefficiency rather than replicating it.

Several dealers shared stories of profit trouble, despite selling record volumes of used vehicles last year.

“Every one of our stores set a record for used car sales last year, but half of them lost money. It was a wake-up call, and we’re not going to let it happen again,” the dealer shared.

Such conviction and purpose struck me as a good sign—proof, perhaps, that dealers are ready to do the difficult work of taking their people and processes to a higher level of performance.

Here are a few other take-aways from the first day of the convention:

Is seasonality a thing of the past? An industry analyst noted that wholesale prices for used vehicles didn’t seem to follow the seasonal ups/downs of years past. “We saw prices elevate and stay there through the year,” the analyst said.

The analyst expects a similar trend in the year ahead as dealers focus on driving more sales and profit from their used vehicle department. The analyst cautioned that dealers shouldn’t “count on seasonal patterns to continue.”

Millennials are most definitely in the market. It seems that the industry’s concerns in recent years that millennials aren’t interested in driving and buying vehicles have gone away. In fact, according to NADA, millennials are likely to beat out baby boomers as the largest car-buying cohort in the year ahead.

It turns out that millennials are like the rest of us. They’ve always wanted to drive and own vehicles, and now they’re arriving at the point in their lives where their budgets, careers and families bring them to the market.

ProfitTime is paying off for dealers. I was encouraged to hear from dealers who began using Provision ProfitTime last year, and have begun to enjoy the benefits of applying its investment-based view of vehicles to their inventory management decisions.

As a Honda dealer put it, “I signed up for ProfitTime to see if it could help, and our results were shockingly good.”

Sales productivity remains a problem. A colleague shared a stat he gleaned from NADA’s “Dealership of Tomorrow” workshop. The average sales associate in dealerships sells 10 cars a month—a figure that hasn’t changed since 1985. My colleague also reasoned that the stat seemed to justify the number of workshops that are focused on helping dealers optimize their investment in human capital in variable operations and beyond.

I’m looking forward to what Day 2 at NADA will bring. I’ll share my take-aways here tomorrow.

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NADA 2020: A Pause While Packing For Las Vegas

Dale Pollak — Wed, 12 Feb 2020 18:17:29 +0000

While preparing to head to Las Vegas for the annual National Automobile Dealers Association (NADA) convention, I read an item that gave me pause.

The item arrived in my news feed this morning, in the lead paragraph of an AutoRemarketing story about recent auction activity:

“While it still might be a mixed bag for some dealerships on the retail front as we approach the midpoint of February, Black Book already is seeing managers pad their inventories to be ready when customer activities warm up like the thermometer reading.”

The item underscores a tendency and tradition among dealers to size up their inventories in anticipation of retail sales they believe will occur sometime soon their showrooms.

Such decisions fall in line with what has long been considered a best practice in the used car business: If you want to sell more, you need to stock more.

The piece gave me pause because one of my primary messages for dealers going to this year’s NADA convention is that the “stock more to sell more strategy” doesn’t work in today’s market.

This message is based on a discovery I write about in my latest book, Gross Deception: A Tale of Shifting Markets, Shrinking Margins and the New Truth of Used Vehicle Profitability, which we’re officially releasing at NADA.

The discovery is that, in the spring of 2016, the used vehicle market placed changed. A team of vAuto data scientists and I found that vehicles were losing their net profit and return on investment (ROI) potential a lot faster than they had in the past.

For example, vehicles that once made a positive contribution to the used vehicle department’s bottom line after 60 days in inventory were not resulting in retail net losses. Our work found that, thanks to a confluence of market forces, the viable retail timeline for a vehicle to deliver a positive net profit return had shrunk to 30 days or less for most vehicles.

The book details how this new truth of used vehicle profitability creates a dangerous, net profit-draining situation when dealers stock up today to sell more tomorrow. Think about it: If you bring another 25 to 30 vehicles into your inventory in anticipation of retail sales that may or may not arrive in the next 30 to 60 days, what are the chances those vehicles will deliver a satisfying net profit when you ink a deal with a customer?

The answer, I’m afraid, is slim to none.

I expect it’ll be a difficult message for dealers to hear at NADA, especially when we know that, for a variety of reasons, many are coming to the convention carrying more inventory than their retail sales suggest they should.

But that’s the big opportunity that this year’s NADA convention presents.

The annual convention is always a chance for dealers to think critically about their businesses and find ways to make them better.

I’m excited to meet dealers on the NADA show floor (vAuto booth #2316C) and help them step past tradition-based best used vehicle management practices that have lost their utility and turn the page to a new chapter of more profitable, investment-minded used vehicle retailing.

See you in Las Vegas, and safe travels.

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A Sobering Catalyst for a Strategic Shift in Used Vehicles

Dale Pollak — Wed, 05 Feb 2020 20:15:26 +0000

For the past several months, I’ve been discussing the trend of declining net profitability in used vehicle departments with dealers.

Sometimes the conversation ends like this: “I appreciate the heads-up, Dale, but thank God we aren’t seeing the net profit pain you describe.”

When I hear this, I may poke the dealer’s confidence bubble: “I’m glad to hear that. But, from what I can tell, the effects of margin compression and the New Math in used vehicles, will arrive at every dealer’s door.”

The decision to poke the bubble rests on whether the dealer might be considered a tip-top performer—someone who’s leadership, and team in the trenches, continually exhibit the ongoing operational discipline and desire to always improve that yields better year-over-year results.

If I choose not to poke the bubble, it’s because I have confidence that the dealer will keep an eye on the horizon, and the used vehicle department’s bottom line, to spot the effects of margin compression and the New Math early on, and adjust course to head off any significant net profit trouble.

Unfortunately, as I’ve learned in recent weeks, the real world isn’t so kind.

The decline of net profitability in used vehicles doesn’t resemble slow-rising floodwaters, it’s more like a flash flood. You turn around and, suddenly, you’re up to your knees in water.

Even worse, this sudden change is occurring at dealerships where, not so long ago, the dealers thought they were doing just fine.

Consider this e-mail from the COO of a 15-store dealer group in the Midwest I received a week ago:

“Only about half our used departments are profitable and we did trend downward last year as a group, despite a 7 percent increase in volume and a $3 Million increase in retained finance gross. Total used vehicle gross was down 5 percent and selling expenses up 15 percent.”

Or this note from a Chevrolet store in Michigan:

“For some reason, we never seem to turn a profit in our used department with any consistency. We actually showed a net loss of 2k last year. We are a Chevy dealer in Michigan and our Compass reports show that in Michigan zone we are right in line with profitability – which means we net nothing! We sold an average of 74 used and 112 new a month in 2019.”

The notes are sampling of what I’m hearing from dealers across the country. Taken together, they offer a sobering start to the new year.

On the bright side, each of these dealers is using the disappointing net profit results as a catalyst for a new inventory management strategy—one that serves as an antidote to the New Math by focusing on the investment value each vehicle holds (or doesn’t) from the first day you own it.

I’m sharing this perspective for two reasons.

First, it’s critical that dealers understand the nature of today’s market, and how the New Math can turn what seemed like a great sales month or year into a disappointing net profit picture.

Second, these dealer examples suggest that if you believe your used vehicle department is doing just fine, you may likely find yourself facing a moment where it suddenly isn’t.

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A Gross Deception Discussion With CBT News

Dale Pollak — Thu, 30 Jan 2020 17:25:41 +0000

I had the honor and privilege of discussing my latest book, Gross Deception: A Tale of Shifting Markets, Shrinking Margins and the New Truth of Used Car Profitability with Jim Fitzpatrick of CBT News.

We’ll be officially releasing Gross Deception at the upcoming National Automobile Dealers Association convention in Las Vegas.

In the meantime, click here or watch the CBT segment below:

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A Promising Sign For Used Vehicle Profitability?

Dale Pollak — Tue, 14 Jan 2020 17:33:13 +0000

As any regular reader here might know, I think a lot about the ways dealers can, and should, make money.

I pay close attention to the National Automobile Dealer Association’s monthly Dealership Financial Profiles. In used vehicles, I look first at what NADA tells us about the retail net profit per used vehicle retailed.

Years ago, I might have focused on more traditional used vehicle department take-aways: What’s the average front-end gross and how does it compare to the prior year? Is volume up or down, or holding steady? What’s the typical ratio of new-to-used vehicle sales?

These days, I’m all about net profit.

Why? Because it’s the single-best indicator of whether all the things you do in your used vehicle department make money for your business.

Yes, you can have a sizable average front-end gross. And, if you do, you might be making money.

But you don’t really know if you’re making money unless and until you examine the net profit your retail deals produce. As I write about in my latest book, Gross Deception, this is precisely where the rubber hits the road when it comes to retailing used vehicles.

Yesterday morning, I learned that NADA had just released its Dealership Financial Profile for last November.

I was delighted to see that, for the first time in 2019, the average retail net profit per used vehicle retailed beat the comparable YTD figure from 2018–$45 in November 2019 compared to $36 in 2018, a 25 percent improvement.

This improvement is important because it signals that, at least for the month of November, dealers were making more money in the used vehicle departments.

But I would also caution that this improvement isn’t necessarily cause for celebration.

The improvement would be more significant it came as dealers were retailing more used vehicles than they did the prior year. The November report says that YTD sales through November 2019 and November 2018 were the same.

Similarly, the profile data suggests some of the net profit improvement doesn’t entirely owe to dealers doing a better job of managing their used vehicle investments to maximize net profitability.

The profile’s retail net profit data includes F&I, and the report shows that dealers increased their F&I penetration by 3 percent, to 75 percent by the end of November 2019 compared to 72 percent a year earlier.

In addition, I know I’m not the only one who’s troubled by the fact that dealers are retailing used vehicles at ever-higher average transaction prices ($21,133 by the end of November 2019 compared to $20,507 the prior year) and making less than $50.

Still, better is better.

After all, we are in a market where any improvement in net profitability is a good thing.

I’m going to keep my eye on the NADA data. I’m hopeful the November results may signal the start of a more net-profitable era of used vehicle retailing.

Stay tuned.

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A Look Back and Ahead In Used Vehicles For Dealers

Dale Pollak — Fri, 10 Jan 2020 02:24:09 +0000

I trust that you were able to capitalize on last year’s rising tide of used vehicle sales.

By most accounts, total used vehicle sales increased by more than 200,000 vehicles last year compared to 2018.

Even better, as the overall market grew, dealers grabbed a bigger piece of the pie.

Cox Automotive data forecasts that retail used vehicle sales will increase by 500,000 vehicles last year compared to 2018.

That’s all good news.

But I’d ask a follow-up: Did you make more money as you retailed more used vehicles last year?

Unfortunately, the answer for many dealers isn’t an unequivocal “yes!”

Instead, it’s a mixed bag. Some dealers tell me their net profits stayed flat or improved a bit. Others are now working on ways to stop, if not reverse, another year of declining net profits despite a higher number of retail sales.

This situation underscores what I believe dealers should make as their primary objective in used vehicles for the coming year—making sure your retail sales bring more to your used vehicle department’s bottom line than they have in the past.

Looking ahead, it’s reasonable to expect that dealers will have more retail opportunities to drive a more profit-productive year in used vehicles.

Cox Automotive, for example, forecasts that dealers will see another year of rising retail opportunity in 2020—dealers will collectively add another 300,000 sales to their books, according to Cox projections—even as the overall used vehicle market flattens.

I’ve been offering three pointers for dealers who want to maximize their retail net profit and sales opportunities in the months ahead:

Recognize the retail timeline for most vehicles isn’t what it used to be. I have addressed what I call the “New Math” in used vehicles here previously. I go even deeper on the topic in my new book, Gross Deception (which is available for pre-order on Amazon).Here’s the upshot: Thanks to a confluence of market forces, the Cost to Market percentage on used vehicles in inventory accelerates faster than it used to. The change, which remains a surprise for many dealers, means that most vehicles that are older than 30 days in your inventory will not produce a satisfying front-end gross profit, and may well represent a net profit loss after you account for commissions and departmental expenses.But recognizing that 30 is effectively the new 60 in used vehicles is only the starting point toward improved used vehicle profitability. The recognition must extend to your acquisition, pricing and desking decisions to make a significant difference.
Align your inventory stocking levels to your rolling 30-day total of retail sales. This best practice is intended to help dealers address the New Math by not carrying more vehicles than they sell. If you’re stocking more used vehicles than you sell, you’re effectively allowing some of those investments to rot on the vine, which ultimately hurts your used vehicle department’s profit potential. Dealers who have adopted this best practice often see their aged inventory disappear and their profitability improve.

Make peace with each vehicle’s profit potential. Like most people, dealers do not like to face financial losses. That’s why we continue to see dealers and managers treat bad used vehicle acquisition decisions, such as over-paying for a vehicle or bringing in the wrong car, as if the mistake didn’t happen. The end result is that dealers ask too much for a car that isn’t really worth it, the car doesn’t sell in a timely fashion, and the used vehicle department’s profitability pays the price.The good news is that new technology and tools, like Provision ProfitTime, help dealers accurately predict each used vehicle’s investment value and net profit potential from Day One. From there, it’s up to the dealer to make peace with the truth about a vehicle, or pretend it’s something different and roll the dice.

All in all, 2020 should be a good year for dealers, and an even better year for those who learn how to retail more used vehicles and make more money doing it.

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A New Year and A New Book For Dealers

Dale Pollak — Tue, 31 Dec 2019 19:36:34 +0000

For much of the past year, I kept a secret.

The secret was the fact that I’d begun working on a fifth book.

I kept the wraps on this work until I was satisfied that it was ready for prime time.

Today, on the final day of 2019, I’m happy to make my secret known.

My latest book, Gross Deception: A Tale of Shifting Markets, Shrinking Margins and the New Truth of Used Car Profitability, will be officially released at the upcoming National Automobile Dealers Association convention in Las Vegas.

The book tells the story of a fundamental change that occurred in the used vehicle business in the spring of 2016, and how this change has largely gone unnoticed to the detriment of nearly every dealer.

The book explains why dealers are retailing more used vehicles and making less money. It also details a discovery that can help dealers halt, if not reverse, the trend of declining net profits in used vehicles.

A few weeks ago, while proofing the Gross Deception galley, it occurred to me that the book may be more important for dealers and their businesses than anything I’ve written in the past.

I say this, in part, because the market forces that converged to change the used car business in 2016 haven’t gone away. In fact, they are gaining momentum, even as many dealers expect their used vehicle departments to produce better, more profitable outcomes for their businesses.

It’s my hope that Gross Deception helps dealers understand what lies before them and provides a way forward that will help dealers achieve and surpass the results they expect from their used vehicle operations.

I’m anxious to get Gross Deception in the hands of dealers.

If you are going to NADA, I’d invite you to stop by the vAuto booth (#2316C) for a consultation and a complimentary copy of Gross Deception. Visit this page to learn more.

I’ll also be sharing details of how you can order Gross Deception when they’re available.

Until then, I hope the new year brings you and your loved ones much happiness, good health and even greater success.

Happy New Year!

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A Meaningful Trip to Recap Our First Year With Provision ProfitTime

Dale Pollak — Wed, 11 Dec 2019 22:15:25 +0000

I’m heading to Austin, Texas, to share insights and observations from the first year of vAuto’s Provision ProfitTime journey with the vAuto data scientists and developers who helped us bring this game-changing system to market.

It’s a special trip for reasons that go beyond being accompanied by a ProfitTime dealer who’s excited to share his experience of doubling his used vehicle department’s return on investment performance.

I’ll be meeting with the more than 100-plus people who, in my opinion, make up the greatest automotive development team on the planet. They literally build and move mountains in very short amounts of time. Every time I return to Austin, I am reminded of the quality and depth of talent on this team, and how they apply themselves to our mission and purpose every day.

It’s also a special visit because it brings me together with three people who have been by my side for the nearly two decades I’ve spent traveling between Chicago and Austin for my work with Digital Motorworks and, in more recent years, vAuto.

There’s David Rice, who serves as vice president of research and development and leads our Austin development office. He’s largely responsible for the vision behind our development team and its purpose-minded operational structure.

There’s the other, taller David, David Hawkins, whose relentlessly bright insight and intellect often serves as a valuable cross-check on the direction, nature and substance of our development work.

And, there’s Chris Stutsman, who has spent countless hours creating ProfitTime with me, and has been a driving force behind a host of other vAuto products and enhancements over the years.

As I prep for the meeting, I’m feeling a lot of pride and gratitude for our people in Austin.

Suffice it to say, their home city isn’t the only reason I consider them an A-team for vAuto.

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ProfitTime In Practice: A Question About Bronze and Silver Vehicle Quantities

Dale Pollak — Tue, 10 Dec 2019 14:57:28 +0000

A three-store dealer in the Southwest recently got worried about a drop in the Provision ProfitTime Investment Score for his used vehicle inventory.

He and his team generally liked to see their inventories achieve an Investment Score of 7 (the lowest-rung of ProfitTime’s Gold ranking). Last month, the stores achieved a combined average Investment Score around 6.

The off-target performance rang an alarm bell.

The dealer dug a little deeper.

He noticed two things:

First, the number of Bronze and Silver vehicles in the inventories seemed to be increasing, to 40 percent or more across the stores.

Second, the appraisal Look to Book ratios at the stores were hovering around 35 percent—far behind the group’s 50 percent target. (The appraisal Cost to Market percentages ran lower than the group’s 80 percent target.)

That’s when the dealer called me for a conversation. He wanted my take on the situation.

“I’d say you’re not making peace with the truth when you’re appraising vehicles. You’re losing too many trades, which represent your best opportunities to acquire Gold and Platinum vehicles. And if you’re not getting those vehicles, you’ll end up with higher shares of Bronze and Silver vehicles, and a lower overall inventory Investment Score.

“But let me be absolutely clear—having higher shares of Bronze and Silver vehicles isn’t necessarily a bad thing. If your Look to Book ratios didn’t suggest an opportunity, a higher number of Bronze and Silver vehicles might simply be the way it is in your market.”

The dealer pushed back. “How can the number of Bronze and Silver vehicles we have in stock not make a difference? The more of these vehicles we have the less we make, since we have to price them lower from the get-go, right?”

On one hand, you’re correct, I told the dealer. It’s true that Bronze and Silver vehicles will not generate the front-end gross profit you might get from Gold and Platinum vehicles.

Then, I shared the other hand: “But here’s the truth. You’re hoping for front-end gross profits for Bronze and Silver vehicles that simply don’t exist. By definition, the Bronze and Silver vehicles will never offer the front-end gross potential that you get with Gold and Platinum cars. For whatever reason, your Bronze and Silver units have high supply/low demand in the market, lower levels of Retail Sales Volumes and less-favorable Cost to Market ratios. They’re the bread and butter, volume cars. That’s the truth you need to make peace with—whether you’re appraising a vehicle or pricing it.”

“I got it,” the dealer said. “It looks like I need to take that message to my appraisers.”

Amen, I said.

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A Hat-tip To Ford, McDonald’s Coffee Chaff Initiative

Dale Pollak — Sun, 08 Dec 2019 02:26:32 +0000

As a fan of coffee and smart thinking, I took interest in this week’s news that Ford Motor Company and McDonald’s USA have teamed up to use chaff from the fast-food chain’s coffee-roasting process to make auto parts.

The chaff, which is the skin coffee beans shed when they’re roasted, will go into a composite Ford will use for headlamp housings and other interior and under-hood components.

Ford says the components “will be about 20 percent lighter and require up to 25 percent less energy during the molding process. Heat properties of the chaff component are significantly better than the currently used material. This is the first time Ford has used coffee bean skins to convert into select vehicle parts.”

The Lincoln Continental will be the first vehicle to use the chaff-based headlight assembly. I also learned that Ford produces about 300 auto parts made, in part, from plants, including coconuts, soybeans and tomatoes.

For its part, McDonald’s is happy to re-direct a “significant portion” of the chaff it produces from traditional trash disposal channels to Ford. It’s another notch in McDonald’s sustainability belt.

Ford and McDonald’s are also looking at other sustainability-minded ways to work together—with orange and potato peels under consideration.

Bravo to both companies for finding creative ways to reduce waste, promote sustainability and inspire other business to think green.

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Monday Motivation: An Honor From Automotive News

Dale Pollak — Mon, 25 Nov 2019 22:50:03 +0000

I was surprised to learn this morning that I’ve been named one of Automotive News’ 2019 All Stars for the retail automotive industry.

Talk about a shot in the arm to start a Monday.

I looked over the list of All Stars. It’s an impressive group that includes dealers I admire and respect. I found myself wondering what I was doing in such esteemed company.

I’m told Automotive News team members decide who gets on the All Star list.

I’m honored to be chosen, and I’m looking forward to the awards ceremony.

Now, about that acceptance speech…

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vAuto Performance Management Meeting: A Special Award and Heartfelt Send-Off

Dale Pollak — Sat, 23 Nov 2019 19:20:33 +0000

I had the honor and privilege of attending the annual vAuto Performance Management meeting this week in Chicago.

My primary job at the meeting was to share some perspective on ProfitTime and the experiences we’ve had transitioning dealers to its investment value-based methodology and the benefits it brings.

But perhaps the more important jobs, at least in terms of their emotion and impact, was my participation and support for two important milestones for the PM organization:

The Steve Solmes Spirit Award: At NADA earlier this year, we received some devastating news. One of vAuto’s original Performance Managers, Steve Solmes, had passed away.

He’s been on our minds ever since.

This year’s Performance Management meeting marked the inauguration of the Steve Solmes Spirit Award. The award goes to a Performance Manager who, in the judgement of team leaders, best embodies the commitment, dedication, passion and selfless spirit Steve brought to his dealer clients and fellow members of the PM team.

Cherie, Steve’s wife, joined us at the PM meeting to present the award.

She brought us to laughs and tears as she remembered Steve.

He had more than a dozen ways to prepare SPAM. He knew the Bible from front to back. He could quote a verse that applied to almost every situation, on the spot. He dedicated his life to serving others.

“vAuto was Steve’s second family,” Cherie told us. “He cared most for God, family and cars, and sometimes it wasn’t clear whether cars or family came in second.”

vAuto’s John Griffin, who hired Steve to be one of vAuto’s first two Performance Managers in 2007, shared how Steve always left a positive impression.

“Every time I worked with Steve, I left a better person,” John said. “He showed me how I could be more kind, more caring or more giving.”

This year’s Steve Solmes Spirit Award went to Steve Jacobs, a Performance Manager we hired in 2008. Steve’s tears as he accepted the award underscored the impact Steve Solmes brought to every person and purpose he encountered.

It was a tender, touching moment that speaks to a profound legacy that I’m proud the PM team will continue to honor in the years ahead.

John Griffin’s retirement. A few weeks ago, John announced his plans to retire at the end of the year. John was one of vAuto’s first clients. His integrity as a person, and his skills as a leader and motivator, were eminently clear from the moment I met him. I hired John to help build vAuto’s Performance Management team, which has become a more than 200-person-strong cast of stellar car business professionals. In that time, John’s Performance Management responsibilities also spanned across Cox Automotive.

Fittingly, Dan Winchester, who joined vAuto with Steve Solmes as our first two Performance Managers, took the stage to recognize how important and inspiring John has been for everyone on the Performance Management team.

“John…you brought out the best in me,” Dan shared. “I remember when a 23-store group decided to cancel vAuto. You were there. You told me, ‘it hurts, but here’s what we’ve got to do to fix it.’ I want you to know that we are going to make you proud.”

Each Performance Manager wrote John a letter—a nod to his interest and passion in reading, and the time he’ll soon have on his hands to read and reflect on the impact he had on the team he built.

As John soaked up his standing-ovation moment, holding his box of letters, he shared some final thoughts that struck me as a fitting to close to a truly stellar car business career and reflected his long-standing belief that if you want to keep your team focused, keep ‘em fed.

“It’s been an honor to have the opportunity to work with all of you,” John told the team. “I consider myself lucky to be associated with such a professional, talented group of people. I’ve already had my say on the stage, and I don’t want to get in the way of your lunch. Go get it!”

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ProfitTime in Practice: Your Price May Not Be As “Good” or “Great” As You Think

Dale Pollak — Thu, 07 Nov 2019 17:19:07 +0000

I recently raised a caution flag about pricing used vehicles to earn a price value designation from third-party classified sites.

Since then, I’ve gained a deeper understanding that pricing your used vehicles to “good” or “great” designations can lead to a false sense of comfort.

The take-away emerged this week in a conversation with a Midwest used vehicle manager who retails about 180 vehicles a month.

In ProfitTime, the dealer’s inventory showed an investment inversion problem. That is, the Bronze vehicles were priced too high, and the Platinum vehicles were priced too low. As a result, the Bronze vehicles were selling at a slower pace than the Platinum vehicles.

I asked the manager about the inversion.

The manager explained that he priced his inventory to meet “good” or “great” designations on a third-party site—a principle he applied to all vehicles.

I asked the manager if he believed that aligning his vehicle prices to “good” or “great” designations was enough. That the third-party value badge would sufficiently satisfy customers, and they would come to his dealership to purchase his vehicles.

“Yes,” the manager told me. “That’s what the consumers need to see.”

I said, OK, and asked to take a closer look at some cars and pricing.

We pulled up a 2018 Chevy Cruze, a Bronze vehicle that the manager had priced at a 96 percent Price to Market percentage to earn a “good” value designation.

In Provision, the vehicle’s pricing earned a vRank of 10, which meant it was the #10 value in the vehicle’s competitive set, which totaled about 60 vehicles.

I asked the manager if he thought a vRank of 10 amounted to a good price for a Bronze vehicle that would compel shoppers.

“I think so,” the manager affirmed.

Next, we took a closer look at the vehicles/prices in the Cruze’s competitive set. Here’s what we found:

The vehicle with a vRank of 1 showed an asking price $2,500 less than the manager’s price on the Cruze.

The vehicle a vRank of 2 showed an asking price of $2,300 less than the Cruze’s price.

The vehicle’s with vRanks of 3, 4, 5, 6 and 7 all featured prices that were at least $500 less than the Cruze’s price. The vehicle with a vRank of 8 showed a price $400 less than the Cruze.

I asked the manager if he still thought the Cruze was priced correctly given its Bronze-level investment value.

“Yes,” the manager told me. “There are 50 vehicles priced higher than mine, and my price is $1,500 below the average in the competitive set.”

Hang on, I said. I don’t think you can expect to get credit for the 50 vehicles priced higher than yours, or the fact that your price is $1,500 below the average.

The fact is, I continued, the consumer will see that there are at least seven vehicles with a much lower price than the Cruze, even though your price earned the “good” price designation.

It was at this point that the manager saw the light. He understood that pricing to meet a “good” or “great” value designation might not be enough to ensure the proper competitive positioning of a vehicle and its asking price in a market.

The manager agreed to undertake the following steps to fix the inventory investment inversion and ensure his used vehicle asking prices reflected each vehicle’s investment value:

Cross reference a “good” or “great” price against the vehicle’s competitive set. The manager and I agreed that the Cruze probably should have been priced at a vRank of 1, 2 or 3, given its Bronze status—and that a “good” or “great” designation, in and of itself, could lead to a false sense of security about a vehicle’s true appeal with shoppers.

Take your lump sooner rather than later. In my conversation, the manager admitted that he held onto Bronze and Silver vehicles longer than he should, in part, because of his pay plan. “You’ve got to understand, I have to work with a commission plan,” the manager said.

I told him I understood and offered a counter-point. I explained that the Cruze’s Bronze classification meant that it was a low-margin vehicle from Day 1 and that, over time, its potential return would only get worse.

“This car is going to hit your commission check one way or the other,” I told the manager. “Would you not agree that the sooner it hits it the better?”

The manager agreed.

The next day, the manager sent me note showing that he’d repriced his inventory and corrected the investment inversion.

“Atta boy!” I replied. “Thank you for being so open and self-effacing. Business partners like you inspire me.”

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A Closer Look At Stabilizing Dealership Profitability

Dale Pollak — Thu, 31 Oct 2019 19:00:52 +0000

This week’s Automotive News brings great news: As of the mid-way point this year, dealership profitability appears to be stabilizing, according to the National Automobile Dealers Association’s (NADA) mid-year financial report.

The piece and related report show that dealership net profits have tracked closely with 2018 totals through the first half of this year. In August, the average dealership’s net profits rose to 2.4 percent, up from 2.3 percent from the same time in 2018.

This is good news because the year-to-date performance marks the first time since 2015 that net profits have not declined.

The piece notes that the improvement in net profit owes to dealers cutting expenses, and focusing more intently on their service and used vehicle businesses, where margins and sales activity are more robust than new vehicle departments.

The finding made me wonder just how much used vehicle net profits might be contributing to the increased net profit stability, and slight uptick.

I was disappointed to see that, while used vehicle net profits have improved somewhat from where they were in the beginning of the year, they still lag the net profits dealers achieved through August of 2018.

For example, the NADA data shows that through August of this year, dealers achieved $91 in retail net profit per used vehicle retailed. For this period, dealers retailed an average of 511 vehicles.

For the same period in 2018, the retail net profit per used vehicle retailed ran $104, and dealers retailed an average of 503 vehicles.

In other words, dealers retailed more used vehicles through the first eight months of this year at transaction prices roughly $500 higher than they were a year ago, and made less money.

To be sure, it’s outstanding news that the average retail net profit per used vehicle retailed is a positive number.

But I wonder where the average retail net profit per used vehicle average will land as of December 31 this year.

In 2018, dealers closed the year with $6 in average retail net profit per used vehicle retailed—almost a cause for celebration after it had dropped to -$2 in 2017.

From my work with dealers, I’ve come to recognize that the net profit trends in used vehicles owe partly to two important realities of today’s market that dealers either haven’t noticed or they choose to overlook:

Used vehicles lose their net profit juice faster than ever before. Back in March, I wrote about what I call the New Math of today’s used car business. I shared how a detailed analysis of dealer inventories shows that used vehicles typically reach a 90 percent Cost to Market percentage somewhere between 30 and 45 days in inventory.

Two years ago, used vehicles reached a Cost to Market threshold of 90 percent after 60 days. This faster pace of Cost to Market appreciation means that if dealers are retailing vehicles after 30 days, a sizable share may well amount to net profit losses after you’ve accounted for sales commissions and other expenses.

Stocking more to sell more isn’t as effective as it used to be. Dealers believe that if they stock more used cars, they’ll sell more used cars. It’s a belief that’s proven true for nearly the entire history of the used car business.

But there’s a rub in today’s market.

While dealers can still stock more cars and reasonably count on selling more units, they also need to account for the faster pace of Cost to Market appreciation. If a dealer typically carries about 50 percent of inventory older than 30 or 45 days, you can be assured that, without a concerted effort to move the troubled units among the additional inventory more quickly, the dealer has put an even higher number of vehicles on a path to net profit losses.

Given this reality, I’ve been encouraging dealers to stock their inventories based on their rolling 30-day total of retail sales. The formula’s intended to move dealers to understanding that you can no longer stock vehicles to sell them; you have to sell vehicles to earn the right to stock them.

To be sure, some of the pressure on used vehicle net profits is simply a sign of the times—we’re in an environment where price awareness, transparency and competition have never been higher.

But that’s more reason for dealers to commit themselves to managing their used vehicle investments in a manner that maximizes, rather than undermines, each used vehicle’s net profit and return on investment potential.

This is the two-part question I encourage dealers to answer as the year nears its close: Is my average retail net profit per used vehicle retailed higher than it was a year ago, and what can I do to improve it?

It’s especially important to ask this question if you’re banking on a stronger used vehicle department to drive your total dealership profitability.

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Trader Canada Event

Dale Pollak — Thu, 24 Oct 2019 16:12:10 +0000

On October 10, I had the privilege of presenting ProfitTime to our Canada dealers. Here is the recorded presentation.

A very special thanks to Trader Canada for sponsoring and organizing this event!

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ProfitTime in Practice: The Rise (and Risk?) of Third-Party Price Rankings

Dale Pollak — Tue, 15 Oct 2019 21:48:05 +0000

There’s new concern and conversation about third-party classified sites as dealers begin using Provision ProfitTime.

The dialogue relates to the growing practice among third-party sites to rank or designate a used vehicle’s asking price as great, good, fair or over-priced.

ProfitTime dealers are wondering, if not worrying, about how these practices affect consumer perceptions of their used vehicle pricing, particularly as it relates to Platinum and Gold vehicles.

A quick refresher: As I’ve highlighted previously, once dealers start with ProfitTime, their first order of business is to correct their inventory investment inversion. Using the net profit and ROI insight for each vehicle that ProfitTime provides, dealers will raise the asking prices for Platinum and Gold vehicles, and lower the asking prices for Bronze and Silver vehicles.

Now, ProfitTime dealers worry that, as they raise the asking prices of their Platinum and Gold vehicles, the third-party sites will tell consumers the prices aren’t fair, and the dealer will lose out on a potential deal.

To be sure, I haven’t seen any concrete evidence that dealers are losing deals because of the third-party classified site price rankings and designations.

But I’m disturbed and troubled by how often this topic has been coming up in the closing weeks of 2019. The frequency makes me wonder if dealers are on to something.

Is there a disconnect between the competitive sets and market data dealers use to price their used vehicles, and the competitive sets third-party classified sites use to rank or value the dealer’s asking price for potential buyers?

Unfortunately, I don’t have a good answer.

I would like to believe, however, that the algorithms and formulas the third-party sites use to rank or value a used vehicle’s asking price are based on relevant and valid market data. Further, I would also like to believe that the third-party sites actively seek to balance the interests of the dealers who advertise vehicles on their platforms, and the consumers who use the platforms to find their next vehicle.

But one thing is certain.

I haven’t heard that ProfitTime dealers are having trouble selling their Platinum and Gold vehicles at higher asking prices than these vehicles might have received in the past. In fact, the more common refrain is that dealers are surprised by how much interest their Platinum and Gold vehicles generate in a market at higher asking price points.

I believe this reality owes to a couple factors, which I share with dealers to put their minds at ease about any undue negative influence that may be caused by the rankings and designations third-party classified sites assign to used vehicle prices.

First, I’m not fully convinced that a third party classified site’s price rank or value designation makes or breaks a deal with most used vehicle buyers and shoppers.

To be sure, some buyers and shoppers may see a third-party site’s price rank or value designation and decide, “That’s it. I’m going to buy this car.”

But most consumers, I believe, will take a third-party site’s price rank or value designation as but one reference point on their used vehicle purchase journey.

They will continue to look at other vehicles, and criss-cross the third-party sites and their price rankings and designations, as they affirm for themselves what the right vehicle and right price may be.

I’ll also tell dealers that if they’re worried about the third-party classified site price ranks and designations for their Platinum and Gold vehicles, they should recognize that such indicators can help them as they price their Bronze and Silver vehicles more aggressively to match their respective investment values.

Second, I’ll remind dealers that their Platinum and Gold vehicles don’t need to be sold on price as much as other vehicles. As we’ve discussed in earlier chapters, Platinum and Gold vehicles are “naturals.”

They are vehicles that sales associates have an incentive to sell, because you own the vehicles right and they offer a sizable commissionable gross profit; they have high demand and low supply in the market; and they have strong Retail Sales Volumes.

In other words, your Platinum and Gold vehicles are scarce and sought-after, and their buyers know it. It’s my belief that these buyers are less likely to be influenced by a third-party site’s price rank or value designation, especially if they’ve found the car they really want.

It’s too early to tell whether the practice of third-party classified sites taking it upon themselves to assign a rank or value to a dealer’s used vehicle pricing represents a valid fear and friction point for dealers.

But it’s intriguing to me that this issue has cropped up in earnest as dealers have adopted ProfitTime and become more vehicle-specific and precise in their pricing strategies.

The timing makes me wonder: If ProfitTime didn’t exist, and dealers didn’t have the opportunity to right-size their used vehicle pricing based on each vehicle’s investment value, would the concern about third-party classified site price rankings and designations would have come up at all?

It’s an impossible question to answer, at least for the moment.

That’s why I’m encouraging dealers to pay closer attention to how your third-party classified site partners regard your ProfitTime pricing strategies in the context of their good deal/bad deal designations—and to ask questions if something doesn’t seem fair or right.

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ProfitTime In Practice: Does Turn Matter Any More?

Dale Pollak — Wed, 25 Sep 2019 21:47:08 +0000

For many years, Velocity dealers kept their annualized used vehicle inventory turn rate top of mind.

The focus on inventory turn owed to one of the foundational elements of the Velocity Method of Management—that if you weren’t turning cars, you weren’t earning the money from retail sales.

Some dealers operated their used vehicle department with a specific annualized turn rate goal in mind. If used vehicle managers didn’t achieve the goal, they’d often face questions.

For some dealers, the higher the inventory turn rate, the better. At 20 Group meetings, these dealers would often have smaller front-end gross profits on the group composite, but they’d often lead the pack in terms of volume.

I’d submit that most dealers, over time, found the inventory turn sweet spot for their dealerships. I advocated that, to consider yourself a true-blue Velocity practitioner, you’d need to achieve an annualized turn of at least 12, a figure that, by definition, calls for timely attention to each used vehicle and its days in inventory.

Today, however, ProfitTime is prompting dealers to question whether inventory turn really matters.

It’s a great question, and one I’m happy to address every time it arrives.

The question signals that a dealer has begun to shed the idea that the time they hold a vehicle is not a reflection of its net profit and return on investment (ROI) potential and, consequently, should not be a primary driver of pricing decisions.

For example, dealers who follow a more Calendar-time based approach to making used vehicle decisions tend to regard every “fresh” used vehicle as a ripe banana, full of front-end gross potential.

But, as we’ve learned with the advent of ProfitTime, not every “fresh” used vehicle is a ripe banana, and not every 45-day old vehicle is a bruised or rotten banana that has to go.

As dealers shed their connection to what I call, Calendar Time, dealers often see some fluctuation in the inventory turn rates they’ve long regarded as bellwethers of their performance.

For example, if a Velocity dealer had consistently been achieving an annualized turn rate of 14-15 times, it might dip to 12 or 13 times with ProfitTime, even as sales volumes are stable.

When this occurs, alarm bells sometimes go off. Dealers worry that their used vehicle department is underperforming. Next, they start asking if inventory turn matters any more.

Well, the best answer, is that, yes, your inventory turn rate still matters, but it only matters to the extent that it truly reflects your inventory’s investment value.

For example, if I’m a dealer, and ProfitTime says that my overall inventory investment score is a 10, which suggests I have a sizable share of top-tier Gold and Platinum vehicles in stock, I probably wouldn’t have an annualized turn rate of 14 or 15 times a year.

If I did, I’d be effectively be giving away vehicles that have high demand, low supply and strong sales volume in my market—the cars that, by definition, don’t (and shouldn’t) need to be priced aggressively to retail as quickly as lesser-performing investments.

By contrast, if my overall inventory score is a 3 or 4, I’d know I had a lot of Bronze and Silver vehicles that I’d need to move quickly. In this instance, an annualized inventory turn rate of 14 to 15 times a year might be perfect.

A key point here is that, with ProfitTime, a dealer’s used vehicle inventory turn rate isn’t an objective. It’s an outcome that follows managing each individual used vehicle’s investment value to its fullest potential.

I would also add that, because a dealer’s inventory investment value fluctuates with the market, it’s not uncommon for dealers to see similar flux in their inventory turn rates—a dynamic that can be disturbing for dealers accustomed to seeing more inventory turn stability.

I encourage dealers to ride these changes in turn rates, focusing their attention and energy on ensuring that every used vehicle’s pricing reflects its investment value.

When you do this, you’ve done all you can to index your inventory and pace of retail sales to investment value, and you’ve created the conditions where your inventory turn rate effectively takes care of itself.

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A Call For Balance, Collaboration In New and Used Vehicles

Dale Pollak — Mon, 23 Sep 2019 14:04:22 +0000

I recently did an interview with CBT News where host Jim Fitzpatrick and I discussed three things dealers should do to better manage their new vehicle inventories.

We talked about keeping a sharper eye on new vehicle inventory age, bringing more market data/insights into vehicle ordering decisions and using the same data to politely and properly push back when factory reps are pressing you to take too many vehicles.

The interview focused on things the new vehicle department might do to improve its performance and position in today’s more demand-challenged market.

In hindsight, I should have added a couple other pointers about how the new vehicle department could be a better sibling for the used vehicle department.

I came to this realization the other day, after talking to yet another dealer who’s struggling to make a positive net profit in his used vehicle department despite retailing more vehicles.

A few minutes into the conversation, we started to examine the health of the dealer’s used vehicle investment.

In ProfitTime parlance, the dealer had an awful lot of Bronze vehicles, slightly more than 50 percent of the total inventory. ProfitTime designated the vehicles as Bronze because their individual Cost to Market, Market Days Supply and Retail Sales Volume metrics revealed them to be the dealer’s least productive inventory investments.

A sizable share of these Bronze vehicles had been around a long time, too. The average days in inventory ran north of 70 days—long after, I would submit, the vehicles had already run out of profit potential.

Next, we examined how the dealer had come to acquire these Bronze vehicles and, once again, I saw a sizable share of the vehicles came from the new vehicle department, in the form of off-lease purchases and trade-ins.

But here’s the problem: In many cases, the Cost to Market percentages for these vehicles when they arrived in the used vehicle inventory did not offer much profit-making potential for the used vehicle department.

For example, the off-lease vehicles often had Cost to Market percentages between 92 percent and 94 percent—figures that, in some cases, meant that the dealer paid more to acquire the vehicle than he could expect to get when it retailed (assuming the average vehicle transacts at a Price to Market percentage of 93 percent).

Similarly, we found some Cost to Market creep in the trade-in units. Whereas in the past, the dealership had brought in trades at Cost to Market percentages around/below 85 percent, managers were approving trade-in deals that brought the Cost to Market average to 88 percent and higher.

The dynamics we uncovered at this dealership are, unfortunately, not dissimilar to what I’m seeing at other stores.

To me, they suggest that while there are competing needs between new and used vehicle departments at dealerships, there’s room for more balance and collaboration—particularly if the used department ends up holding the bag, and you’re counting on it to help offset softer sales in new vehicles.

Here are two ways dealers can work to achieve a better balance between the departments:

Take stock of your situation. I recommend that dealers analyze the Cost to Market trends for off-lease and trade-in purchases. Are your Cost to Market percentages for these vehicles growing, staying the same or, best of all, declining over the past six months to a year? If they’re on the rise, you probably should take a closer look at your process. Do your new vehicle managers make decisions in conjunction with your used vehicle managers or operate on their own? Are new vehicle managers trying to work with used vehicle managers, but they’re never around? Whatever the case, the data from your analysis helps make the case that there’s room for improvement and positive change.
Make collaboration and communication a priority. The Chevy dealer saw improvement in the Cost to Market percentages for off-lease and trade-in vehicles after he required that his managers gather for weekly meetings to discuss their respective decisions. These aren’t “gotcha!” conversations. They are constructive exchanges that help everyone understand how a decision can, and usually does, affect someone else. Once the understanding is mutual, dealers tend to find that the communication, and give-and-take, you’d expect between a new and used vehicle department occurs regularly and for the right reasons.

As we look at the months ahead, it seems fair to say that the pressures on new and used vehicle departments to produce profit-positive outcomes for the dealership will only increase.

No one’s expecting that retail sales volumes and demand for new vehicles will return to levels we enjoyed in recent years. At the same time, while experts expect a robust used vehicle market for the foreseeable future, the market forces that are compressing dealer margins are expected to gain strength.

In my view, this is not an environment where a dealer would want his/her new vehicle and used vehicle department to knowingly, or even unwittingly, make things more difficult for each other.

Rather, it’s an opportunity to see how a rising tide of balance and collaboration between the departments can lift all boats.

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ProfitTime Gets Industry Press Time

Dale Pollak — Fri, 09 Aug 2019 20:11:07 +0000

I was grateful and honored to meet recently with Steve Finlay, senior editor for Wards Auto, and talk about Provision ProfitTime.

The conversation led to a piece Wards published this week that provides an overview of how ProfitTime helps dealers contend with the forces of margin compression and price transparency, and helps them manage every used vehicle to its distinct return on investment (ROI) and net profit potential.

The article offers some food for thought on the limitations of Calendar Time, and how some dealers are seeing better results when they adopt a ProfitTime management strategy.

You can read the piece here.

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Velocity Helps Drive Store’s Record-Setting Used Vehicle Results

Dale Pollak — Wed, 31 Jul 2019 20:31:48 +0000

When Phillip Gill took over the used vehicle department about four years ago at Tom Gill Chevrolet, Florence, KY, he had a singular goal—expand the Velocity Method of Management mindset and principles to all parts of the dealership.

“Our used car manager moved to a desking and sales position. He understood Velocity,” Gill says. “But we just weren’t able to get it cranked up.”

Today, “used cars have become something the dealership has started to live and breathe across all departments,” Gill says. “It’s one of those things. Our success is showing but it’s been four years in the making.”

In that time, the store has more than doubled its used vehicle sales to nearly 170 a month. Annualized inventory turns have improved to 12 times or better. The service department’s profitability is expected to grow by double digits for the fourth consecutive year—a success that owes in part to an in-house Advantage program that provides free oil changes and tire rotations for all used vehicle buyers, and a powertrain warranty for eligible vehicles.

“Our retention numbers are pretty significant from a service standpoint,” Gill says. “We’re now starting to see those people cycle back through sales.”

This week’s Automotive News includes a piece that chronicles Gill’s turnaround story. I was delighted to see the coverage, and called Gill to get a bit more detail on some of the foundational drivers of the dealership’s success.

Here are some questions I asked Gill and his answers:

Q: The story mentions your used vehicle strategy starts with a ‘great purchase.’ What appraising and buying parameters do you use to make sure this happens?

A: The main factor is the adjusted percentage Cost to Market. That’s number one. We have a standard for all purchases. No one’s allowed to go above that standard unless you can show me a business reason we can push the Cost to Market percentage a percentage point or so higher.

That’s where we start. More than looking at profit, more than looking at where that car can be priced, we start by looking at our cost.

We’ll look at Market Days Supply but we don’t have a firm standard. If a vehicle has a 120-day Market Days Supply, we know it’s 120 days. We know we’ll need to be more aggressive with the car. But if the buy is still right, it can still be a good car if we buy it. We know then that we just need to sell it.

Q: How does your focus on Cost to Market percentages differ, if at all, between auction and trade-in purchases?

A: Our Cost to Market percentages on purchases are higher than in-store acquisitions—not significantly higher, but higher. That’s the nature of the game. We’re buying those cars, which are often turn and burn vehicles that follow our perspective of viewing each vehicle as a means to generate income for the total dealership.

If we’re looking at a trade, and it’s a car we normally buy from auction, and the price we need to pay is essentially a wholesale price and we need to pay it, so be it.

Q: So you’re striking a balance there when circumstances call for it?

A: Correct. Guess what? If I can get the car on trade, I don’t have to buy it from the auction. It’s here. I don’t have to pay auction fees, transportation or anything else. I don’t have to wait for anything.

Q: That’s a good segue. The article talks about how speed is critical to your used vehicle operation. How do you manage speed as it relates to getting auction vehicles to your dealership, completing the reconditioning and getting them online?

A: It’s been a process. With auction vehicles, we’re a big user of Central Dispatch, which helps a ton. It’s evolved to where I’ve got some really good transportation partners now that, in most locations, I know I’m getting them quick. If the car’s coming from more than 300 miles, we’ll typically have it within three days. If it’s closer, we’ll have it in a day and a half.

If it’s a new auction we haven’t used before, the great thing is that I can get is a basic cost estimate and go from there. If the cost makes sense, I’m bringing it here.

Q: What’s your breakdown of online versus physical auction purchases?

A: The funny note there is that we have now run a used car department the past four or five years without anyone going to a live physical auction. We use tools to evaluate vehicles to know what it’ll cost to buy the car, transport that car, recondition that car based on what we’re running for those types of cars. If the car still makes sense, based on Cost to Market and we need that car, I buy it.

Q: What’s your goal for reconditioning a vehicle and getting it online once the car gets to your dealership?

A: We track our reconditioning times. We’ve been running close to three days for the past year and a half. We put the vehicle information online within a day or so of the purchase. We typically have the vehicles detailed within a day of arriving at the store, and that’s when we get them pictured and posted online.

Q: That’s impressive, and a sign that there’s solid collaboration between your used vehicle and service departments. One last thing: What do you view as the next chapter for your used vehicle operations?

A: We’re starting to play with Provision ProfitTime, and it’s been fun. Over the next year, the Investment Score will play a bigger role, I think, in helping us decide whether we want a car or not, and how we can push the opportunity to turn the car and still make a decent profit. To me, ProfitTime offers more data to help me optimize profit across my inventory.

Q: That’s great to hear, Phillip. Let us know how we can help you, and thank you for taking time to speak with me and share your perspective.

A: Thank you, Dale. I appreciate the opportunity.

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A Rebuilt Blog For a New Era in Retail Automotive

Dale Pollak — Wed, 17 Jul 2019 17:40:45 +0000

I can scratch another to-do off my list—a rebuild of my blog.

It’s been on the docket for some time as I’ve heard from regular readers and visitors that the old blog, while it did the job, wasn’t as up-to-date in terms of features and functions as it should be.

In this way, my blog underwent the same renovation that many dealers are undertaking with their dealership websites—they’re updating them to reflect the wants and needs of today’s buyers, which are becoming ever-more transactional in nature.

Here, you’ll find easier-to-navigate access to:

My blog posts and their respective topical categories

My reading recommendations (which have been a popular, if hidden, component of the blog for some time)

My social media pages, which are increasingly important to stay connected

My journey and mission, which define where I’ve been, and how I hope to help the industry mitigate the costly effects of inefficiency and margin compression.

Welcome to the new site! Have a look around. I’d love to get your feedback.

Thank you.

The post A Rebuilt Blog For a New Era in Retail Automotive appeared first on Dale Pollak.

ProfitTime Perspective From A Time-Free Norwegian Island

Dale Pollak — Mon, 24 Jun 2019 17:41:31 +0000

I caught a segment on National Public Radio the other day that discussed how residents of Sommarøy, Norway, want their island to become a “time-free zone.”

The effort, which includes a petition signed by 300-plus residents and consideration by a member of the Norwegian Parliament, owes to the fact that the way the rest of the world measures time—in terms of hours of day and night—doesn’t really matter on the island.

You see, from mid-May until the end of July, the sun never sets on Sommarøy. Conversely, between November and January, the sun never rises.

To be sure, the islanders still find and make time to eat, sleep and live their lives.

But, to them, the clock is the problem. In fact, the segment notes that the rails on a bridge leading to the island are wrapped with watches to signal the idea that, on the “summer island,” one should leave traditional forms of measuring time behind.

The story brings to mind a central tenet of Provision ProfitTime—that the concept of using days in inventory, or calendar time, as a primary means of measuring a used vehicle’s profit potential or investment value is inherently flawed.

With ProfitTime, dealers can readily see that just because a vehicle is “fresh” doesn’t necessarily mean it’ll deliver a meaningful return on investment. Similarly, dealers also see that some vehicles, even if they’ve been in inventory 30, 45, 60 days or even longer, still offer a significant return on investment opportunity.

ProfitTime provides these mission-critical insights because it goes beyond using calendar-based days or time in inventory to measure each vehicle’s investment value. As I’ve noted here previously, ProfitTime shifts a dealer’s focus from the days they hold a vehicle to the profit potential each vehicle holds.

In this way, Sommarøy residents and ProfitTime dealers share common ground: The value of using time as a measure of life in northern Norway, and the profit potential in used vehicles, has limits.

The post ProfitTime Perspective From A Time-Free Norwegian Island appeared first on Dale Pollak.

ProfitTime is PoodleTime

Dale Pollak — Sat, 15 Jun 2019 18:13:19 +0000

Toodles shares a little ProfitTime perspective…

https://youtu.be/ogqU7dyU7R8

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A Deeper Dive Into Dealer Trade Efficiency

Dale Pollak — Wed, 12 Jun 2019 16:17:08 +0000

As franchised dealers work harder to maximize new vehicle sales in the current market, some are taking a deeper look at dealer trades.

The dealers are recognizing that, in today’s environment of rising floorplan interest expense and softer retail sales of new vehicles, they can’t afford to take in vehicles from dealer trades that that aren’t right for their inventory or market or let go of vehicles they really need.

“I was tired of having duplicate inventory when I wanted to grow the dealership,” says the general manager of a Midwest Honda store that retails about 100 new vehicles a month. “I was getting killed on dealer trades. I heard people saying, ‘Just give me another Civic back, or just give me another Accord back,’ and I’m saying, ‘why do we need five black Accord LS’ in my inventory?’ It doesn’t make any sense whatsoever.”

The operations director for a West Coast dealer group adds: “The amount of inbound dealer locates that we are getting has flip-flopped. We were having to call to get cars every time we had a customer who wanted a car we didn’t have, which happened a lot. Now, the local and not-so-local competition is calling us because we have what they didn’t know to order.”

I’ve kept notes from my dealer trade conversations, and I thought it might be useful to share some of the best practices these and other dealers are following to make dealer trades a more productive part of their new vehicle business:

Determine how often dealer trades occur. A couple years ago, vAuto did a study of new vehicle dealers that asked about dealer trades. Dealers told us that dealer trades were not typically regarded as an important part of their new vehicle stocking strategy. The responses also suggested that dealers weren’t keenly aware of how often dealer trades occurred. In some instances, I’ve since learned, dealer trades can account for as much as 50 percent of a store’s monthly sales—that is, someone’s calling another dealer to make a deal because you don’t have the vehicle in stock.

Track your dealer trade requests. Today, dealers are keeping better track of their dealer trade requests, and accounting for them in their next factory order—a process akin to the “lost sales” reports some dealers employ in their parts departments. The report helps determine if there’s a sufficient number of lost sales to stock the part and potentially sell a future customer. Inevitably, dealers say, their efforts to track dealer trade requests helps break a cycle where they aren’t consistently ordering vehicles their customers want, and the resulting dealer trades hurt their inventories more than they help.

Tie your inventory objectives to dealer trade decisions. When the Midwest Honda dealer grants a dealer trade request, he’ll look first to his own inventory to find holes that need to be filled, and then determine the exact car—based on model, trim, color and Market Days Supply—that he’ll request from the other dealer.

“If I get a call from someone who wants a Honda Civic, I don’t just take a Civic back automatically,” the Midwest Honda dealer says. “I’m looking first to what I need in my inventory and what’s in transit. The cool part is, when someone needs a car from me, I can almost always get back whatever I need, and I’m no longer taking in duplicate inventory I don’t need.”

On the flip side, if he asked another dealer for a trade, he’ll look to give back an older-age unit, or a vehicle with a less-desirable color or higher Market Days Supply. His goal is to use the exchange to improve his inventory’s appeal with potential customers, and only help competitors if he must.

As I’ve talked to dealers about how they handle dealer trades, I’m struck by how much I missed the boat when I was a Cadillac dealer in the 1990s.

I remember dealer trades happened all the time, and I gave them almost zero attention.

To be sure, I didn’t have the technology or tools that are available today that might have helped me easily and quickly understand how a dealer trade decision on one day might help or hurt me in the days and weeks that followed.

But, looking back, I also recognize that my essentially out-of-mind regard for dealer trades probably wasn’t best for my business.

The upshot: If dealers take a deeper dive into their own dealer trade practices, chances seem pretty good that you’ll find an opportunity for improvement.

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ProfitTime in Practice: A Positive Improvement in Inventory Investment Value

Dale Pollak — Fri, 07 Jun 2019 16:14:09 +0000

Since dealers began using Provision ProfitTime in earnest about six months ago, I’ve noticed a positive improvement in the overall investment value of dealer inventories.

To be sure, the improvement is a primary driver of the increases in gross profits and sales volumes that I’ve shared in this space in recent weeks.

But I thought it might be relevant and useful for dealers to go behind, or beneath, the headlines to understand the day to day decision-making that’s helping dealers maximize their inventory investment value and the return they receive from it.

To start, let’s examine the typical inventory investment value when dealers start using ProfitTime.

The top chart at right shows a composite of the investment value of dealer inventories across the country. The composite is derived from applying the ProfitTime algorithm, which combines each vehicle’s adjusted Cost to Market, Market Days Supply and other market factors, to score each vehicle on a 1-12 scale and assign it a corresponding precious metal designation (Bronze, Silver, Gold and Platinum).

You’ll notice that when dealers start using ProfitTime, more than half of their inventories consist of Bronze and Silver vehicles—the least valuable vehicles, in terms of investment quality. Meanwhile, slightly less than half of their inventories represent Gold and Silver vehicles, which represent the most valuable investments.

You can also see signs of investment inefficiency. For example, the average Cost to Market and Price to Market percentages for Bronze vehicles run above 100 percent, and the Market Days Supply percentage is the highest among all types of vehicles.

You can also see that dealers are holding on to their Bronze vehicles significantly longer than any other investment class.

These dynamics indicate that dealers are managing the poorest-performing vehicle investments as if they had much to gain.

Meanwhile, let’s look at the Platinum vehicles. You can see that dealers have a smaller share of these top-performing vehicles—probably because they’re inclined to sell them faster than any other type of inventory. This dynamic occurs despite profit-positive Cost to Market and Market Days Supply percentages that suggest these vehicles do, and should, deserve more time on the market to maximize their investment return.

It’s been fascinating to watch as dealers use ProfitTime, and see how the investment composition of their inventories change.

Check out the second chart at right from a dealer who’s been using ProfitTime since late February/early March. While the dealer’s inventory looked much like the composite above, he’s engineered some positive improvements.

For example, note the Bronze vehicles. The dealer’s got fewer Bronze cars, they’re priced to move and, generally speaking, they’re leaving his inventory as retail sales much faster.

Next, look at the Platinum and Gold vehicles. They now make up more than half of the dealer’s inventory. In addition, while the dealer probably should give these vehicles more time on the market, he is allowing them more time than he might have previously without ProfitTime.

“We’ve still got work to do,” affirms the dealer, whose average front-end gross profit has doubled since launching ProfitTime. “There’s room for even better improvement.”

From my conversations with ProfitTime dealers, I’ve gleaned three key reasons for the then/now investment value improvements.

More consistent, investment value-minded acquisitions. With ProfitTime, dealers can appraise an auction or trade-in vehicle with the benefit of what we call the trifecta—the vehicle’s Stocking Grade (generally, its appeal in the market), its Strategy Action (a +/- designation that shows whether your inventory needs the car) and its ProfitTime score (the numeric value that determines the precious metal designation). With the trifecta, dealers say their buyers and appraisers have a clearer view of the critical factors that determine whether they should buy a vehicle, and what they should pay to acquire it. These insights become particularly valuable in both acquisition settings.With trades, dealers now have a clearer understanding of whether they can and should put more or less into a vehicle to make a deal. At auction, dealers say that while the ProfitTime trifecta may not necessarily help them acquire better investment-grade units, it helps them walk away from cars that don’t make sense financially or otherwise.
Less ego and emotion. This point is a corollary to the one above. With ProfitTime’s investment value clarity, dealers aren’t acquiring cars they shouldn’t or paying more than they should. Similarly, ProfitTime dealers are now pricing vehicles more directly in relation to their respective investment values, not how they think the car should be priced. You can see the difference in the two charts—in the composite, the average Price to Market percentage for Bronze and Platinum vehicles is 101 percent and 96 percent, respectively; in the dealer’s chart, the Price to Market percentage is 98 percent for Bronze vehicles, and 101 percent for Platinum units.This pricing flip-flop essentially means that ProfitTime dealers are making decisions like data-minded investment managers rather than relying solely on what they know or playing hunches.

The positive power of ProfitTime. Mathematically speaking, you’d expect that the share of Bronze and Silver vehicles for ProfitTime dealers would decrease as they retail these cars faster than their more profit-productive Gold and Platinum counterparts. I would add, however, that I’ve been surprised by the growth in the share of Gold and Platinum vehicles in dealer inventories. I’d presumed that the national composite averages simply represented the way things are in today’s market. As it turns out, ProfitTime is helping dealers understand the way things can, and should, be in today’s used vehicle market.

In my next ProfitTime in Practice post, I’ll address the question of whether inventory turn still matters when dealers switch to ProfitTime.

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Desire, Commitment Drive Impressive Used Vehicle Turn-Around

Dale Pollak — Tue, 04 Jun 2019 21:00:16 +0000

A few months after CeCe Brown earned the responsibility of managing used vehicles at Sisbarro Buick GMC in Las Cruces, N.M. last year, he grew frustrated with the results.

The department consistently lost money—a problem that he believed owed to paying too much for the wrong cars, and pricing them as if they were the right cars.

Fast forward to January 2019, after Brown had convinced his dealer that they wouldn’t see any different results unless and until they offered more appealing vehicles at market-competitive prices.

“We signed up for vAuto in January (2019) and our turn was at 3.97 times a year,” Brown says. “We had 79 cars in inventory and our average age was 93 days.”

The next 45 days weren’t pretty as Brown worked to get the department humming.

“The first thing I did is study the market,” Brown says. “I retailed my old age cars. I lost some money because we had to write-down cars. But I knew I was now competitive with the rest of the market.”

He also spent a fair amount of time on the phone with his Performance Manager, Pete Lewandowski.

“I showed CeCe a lot of love,” Lewandowski says. “The one thing is that he was never shy about reaching out. Most Performance Managers are like me. If someone keeps reaching out, we’ll keep giving you what you need. I love the fact that CeCe embraced the Velocity principles and committed himself to learning more. His store has just flourished.”

Indeed, in 60 days, Brown’s department has discovered what might be called its new normal. He’s retailing about 65 cars a month (almost double the average of previous months with essentially the same size inventory), his days in inventory has shrunk from 93 to 23, and he’s increased his turn rate to 15, a nearly four-fold lift. Meanwhile, the department’s front-end gross has doubled to more than $1800, due largely to less frequent, and far smaller, retail losses.

Brown, who was recently promoted to general sales manager and is looking to increase sales velocity in new vehicles, says there’s no “magic” behind the turn-around.

“It’s all about hard work, and believing in the system, and using the system,” he says. “There’s a big difference between having a system, and knowing the system, and actually doing it.

“I would tell any dealer or sales manager that if you listen to what your Performance Managers tell you, and follow it, things will change—as long as you do it.”

I asked Brown to share a few other pointers for dealers and managers who are looking to lift their used vehicle performance and sales:

Redefine your “niche.” Like many dealers, Brown’s inventory skewed more heavily to “core” inventory that reflected the store’s franchise brands. Today, he sells a more balanced mix of makes and models based on what’s selling in the local market.

Get buy-in from service. It’s difficult to increase sales velocity and volume if it takes days, or even weeks, to get cars out of reconditioning and retail-ready. Brown understood the potential problem, having managed used vehicle reconditioning earlier in his career at a different dealership. He made the case that if the service department met the goal of a 72-hour turnaround time for recondition, he would sell more cars and bring more customers to service. To help, Brown also implemented a process that requires sales associates to set each customer’s first service appointment. “It goes a lot smoother when everyone understands the front helps the back and the back helps the front,” he says.

Expand your sourcing network. Previously, Brown’s department preferred to only acquire auction vehicles within 300 miles of the dealership—a policy intended to minimize transportation costs and time. Today, with the help of Stockwave and his Performance Consultant Joe Leszkowicz, Brown is “buying anywhere in the country” to acquire vehicles where the Cost to Market and Market Days Supply metrics are sufficiently favorable to justify the additional distance and cost.

Perhaps the most impressive part of Brown’s turnaround story is the commitment he made to his dealer right up front: He told his dealer that if he gave him 90 days to make a difference, and it didn’t happen, he’d resign.

Even with the promise, I suspect Brown wasn’t really worried that he’d need to find another job.

“I’m just one of those guys,” he says. “I’m driven. I’m structured. If you tell me ‘this is how it’s going to work,’ I’m going to listen and do it. I always knew this store had more potential.”

The post Desire, Commitment Drive Impressive Used Vehicle Turn-Around appeared first on Dale Pollak.

ProfitTime in Practice: From Humble Pie To Stellar Gross Profits

Dale Pollak — Sat, 18 May 2019 17:15:42 +0000

General sales manager Sean Hevener of Dennis Eakin Kia, Killeen, TX, had a hefty slice of humble pie last summer.

It happened at a Velocity 20 Group meeting in August in Chicago. Hevener traveled to the meeting with a sense of anticipation.

“I went into this meeting thinking, ‘I wonder what I’m going to be able to teach these guys,’” he says. “I literally thought I was using vAuto and Velocity the right way.”

But when his turn at the table came around, it didn’t go well.

“To say I was humbled would be an understatement,” Hevener says. “I was turning my inventory 5.9 times a year. I remember the 5.9 number because when I said it out loud, the entire group at the meeting turned white. It was like all the oxygen went out of the room.”

Hat in hand, Hevener went home and went to work.

“I came back, and I took a really deep look at this deal,” Hevener says. “I thought I was committed to it, but I wasn’t. I still had the 1990s used car dealer mentality. I thought I could go to the auction, buy cars, and mark them up $3,000. I saw the profits going down. I saw the cars sitting on the lot. I had more than 50 units that were 60 days old and older out of my 100-car inventory. I blamed everything but myself.”

The soul-searching, and a renewed commitment to Velocity, led to an impressive turnaround.

“I basically became obsessed with Velocity,” Hevener says. “I went from a 5.9 annualized turn to 14 in two months. I went from more than 50 cars that were 60 days or older to just five cars. I got the managing inventory by days in inventory down. I delivered 93 cars in August 2018, and I think we did 52 cars in August 2017. We were cooking.”

But, even as he was enjoying the new-found success, Hevener didn’t like what he saw on the financials—specifically his front-end gross profits.

“Being a 1990s/2000s car guy, I was thinking, ‘I’m loving the volume but this gross profit is just awful,’” he says. “Then I got to thinking…I’m making money in service, and I’m not paying as much floorplan interest, and I’m not having to pay curtailments every month. I convinced myself we were doing it right.

“And we were doing it right,” Hevener continues. “We were turning our inventory. We didn’t have an aging problem. We were buying the right inventory. We were paying attention to Cost to Market, and so on and so forth. But the gross profits? It was hard to take.”

That’s why Provision ProfitTime seemed like a winner when Hevener first saw it.

“The whole time I was on Velocity, I always thought I was leaving money on the table, but I was happy with my turn,” he says. “With ProfitTime, I know I’m not leaving money on the table anymore.”

I asked for an example, and Hevener shared the story of a 70-day-old Kia Forte he’d sold a few days earlier.

“It was just a cookie-cutter Forte,” he says. “But for some reason, it hit all the right buttons, and clicked all the right boxes. It was a Platinum car.

“Before ProfitTime, I would have already sold that car. I would have panicked and sold that car in 30 days and made no money. But with ProfitTime, I held on to it. I made $2,800 on the front, and $1500 on the back. That car would have never been in my inventory had it not been for ProfitTime.”

Since he started with ProfitTime about three months ago, Hevener’s front-end gross profit average has doubled, to about $2,000 per vehicle, and his retail sales volume remains steady at 75 to 85 units a month.

I asked Hevener to distill what he considers the big difference-makers in ProfitTime. Here’s what he offered:

It takes the emotion out of decision-making. Take the Kia Forte example above. Hevener’s itchy trigger finger at 30 days is tied to emotion. But ProfitTime’s precious metal designation, in this case, Platinum, gave him a clear-cut understanding that he could, and probably should, continue to hold onto the vehicle and its asking price.

It affirms what you see, and don’t see. Like many dealers, Hevener takes pride in knowing a good or bad car when he sees it. Not long ago, he took in a white, 2015 Toyota Tundra. To his eye, it wasn’t really a vehicle he’d want to retail.

“It was an ugly truck that you probably wouldn’t want on your lot,” Hevener says. “Without ProfitTime, I would have been happy to make $500 just to get rid of it. But ProfitTime told me otherwise. I made $2,000 on it.”

It helps you buy better. Hevener and his appraisers are tuned into ProfitTime’s trifecta—the Money, Market and Mix metrics that tell you if the car makes sense for your market, whether you need the vehicle or not, and the money you stand to make.

“I just had a conversation with an appraiser yesterday,” Hevener says. “We talked about the trifecta. If ProfitTime says it’s a gold car, and that I need two and it’s a C grade, we know we can easily put more money in it to put a deal together, or buy the car at auction or off the street.

“On the flip side, if my ProfitTime Strategy Action says we need to get rid of four or five cars, and it’s a Silver car, and it’s a D grade, then we know we need to be extra cautious about what we buy or trade for the car.”

It’s a fresh, and fun, approach. Hevener isn’t the first ProfitTime dealer to share the sentiment that the investment value-based management methodology feels like a breath of fresh air for a business that sorely needs it.

“The car business got really, really stagnant for me,” Hevener says. “ProfitTime has made it exciting and fun again. It’s given me a completely different way to manage. And I love it.”

In my next ProfitTime in Practice post, I’ll dig deeper into how dealers like Hevener are using ProfitTime to improve the overall investment value and mix of vehicles in their inventories.

The post ProfitTime in Practice: From Humble Pie To Stellar Gross Profits appeared first on Dale Pollak.

3 Best Practices To Ease The Current New Car Pickle

Dale Pollak — Sun, 05 May 2019 01:11:54 +0000

Franchised dealers are in a bit of pickle these days.

As Automotive News reported this week, new vehicle inventories have risen to their highest level since July 2017. The estimated tally of 4.2 million unsold vehicles is just 114,300 units shy of the industry’s inventory record set in 2004.

The inventory levels are tied to declining demand for new vehicles, a softening that owes, at least in part, to ever-higher new vehicle purchase prices. I’ve heard more than one dealer marvel at the number of 84-month new vehicle loans they’re now writing in their F&I offices.

This supply/demand imbalance has also lit up a floorplan problem. Not so long ago, when sales were growing, dealers were making money from their floorplan programs. Now, most dealers are writing four-, five-, and sometimes six-figure checks every month to cover floorplan interest expenses.

I spend the bulk of my time every day working with dealers to improve their used vehicle performance.

But lately, these conversations have included discussions about new vehicles, and how dealers might work their way out of the current pickle, or at least make it less problematic.

Here are three best practices I’ve gleaned from top-performing dealers who are proactively attacking the performance and profit slow-down in new vehicles:

1. Identify and address your aged inventory. Age management has been a growing discipline for top-performing dealers for some time. Many set performance benchmarks, such as no more than 15 percent or 20 percent of new vehicle inventory older than 90 days. I’m told that when dealers don’t pay close attention to new vehicle inventory age, as much as 40 percent of their vehicles qualify as “aged” or distressed units.

A key principle in new vehicle inventory age management aligns exactly with the way dealers manage age in used vehicles—once vehicles cross a specific time threshold, say 30, 45, 60, 75, 90 days or more, they tweak the vehicle’s price, positioning and promotion to speed its retail sale.

The absence of an age management strategy in new vehicles is at least one reason why, as the Automotive News article indicates, many dealers don’t know they’ve got an inventory and floorplan problem until they run into trouble finding parking spaces for their cars.

2. Stop making your situation worse. Once dealers begin managing their aged inventory, they can start asking why it’s there in the first place. Several dealers noted that force of habit and personal preferences, when ordering cars, approving vehicle allocations and making dealer trades, are primary root causes of aged inventory problems.

A general sales manager at a California Toyota dealership shared that he started paying closee attention to his aged inventory, he’d find multiple copies of the exact vehicle, often in striking colors like salsa red, that suggested someone played a hunch about a hot color/equipment combination that proved to be incorrect. “There’s a lot of ego in ordering that we’ve had to unwind,” the manager says.

Similarly, the vice president of operations at a 13-store group says he found had a “mind-boggling” number of vehicles that were nearly a year old and older when he focused on reducing aged inventory. He traced the problem to managers repeatedly ordering, and trading for, the wrong cars.

“There was no attention to it,” he says. “The managers knew they were cars that were ordered wrong and would never sell. So they’d just park them out back and let them get dusty and that was it. Some of them didn’t even have photos and weren’t online.”

Both of these dealers now take a much more circumspect approach to new vehicle stocking decisions. They’re using data to inform and configure their factory orders and dealer trades to bring in a larger share of vehicles the market deems desirable. And, when they’re forced to take inventory the data reveals as less than desirable, they more immediate steps to retail or trade away the vehicles before they become aged and costly to carry.

3. Push back with proof. When you’re using market data to optimize your new vehicle inventory, you know the cars that sell quickly and those that won’t. Dealers say this data is becoming more valuable when factory reps press them to add less-desirable vehicles to their inventories.

I liked how the 13-store group vice president puts it: “Documentation is negotiation on the OEM side, just like it is in retail sales,” he says. “If I want to keep my great relationships, I can’t just say, ‘no, I won’t take those cars.’ All my conversations are data-driven so I can say no, or not so many, and they can love me when they leave the room.”

If you take a step back, and view these best practices from a broader lens, they all amount to the same thing—dealers working harder and smarter to control what they can in their new car departments, and getting past the current new car pickle.

The post 3 Best Practices To Ease The Current New Car Pickle appeared first on Dale Pollak.

ProfitTime in Practice: ‘The Gambler’ Gives A Lesson

Dale Pollak — Fri, 26 Apr 2019 15:56:58 +0000

“You’re saying the same thing Kenny Rogers did in that song, ‘The Gambler.’”

A used vehicle manager made this observation after I finished talking about how Provision ProfitTime offers a better, new way forward for dealers to manage the investment value of their used vehicles in today’s margin-compressed market.

I asked the manager what he meant, particularly since I’ve long made the case that dealers shouldn’t be speculators, but retailers.

The song talks about knowing when to hold ‘em, and knowing when to fold ‘em, the manager said. He viewed ProfitTime’s investment score and Bronze to Platinum precious metal designations as a better way to know exactly what to do with every car, from the moment you acquire it to the price(s) you set for its retail sale.

That’s interesting, I told him. I added that while I remembered the tune, it’d been years since I heard it.

On the way home, I played the tune on Spotify and found myself singing along to the chorus:

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

Indeed, I thought, the manager made an astute point. ProfitTime does tell you the very thing that you’d never really know without it—the cars that hold sufficient investment value and allow you to hold for gross, and the cars you should sell fast because they lack a meaningful gross opportunity.

The listen and lyrics also made me think the song offers another relevant take-away for dealers in today’s market: Perhaps the best time to count the money is when all the dealin’—from the trade-in appraisal value, to the payment and purchase price, to the F&I and the reconditioning RO—is done.

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Cox Automotive Buyer Journey Study: The Rise of Sharper Customers

Dale Pollak — Fri, 19 Apr 2019 17:36:48 +0000

A read-through of the findings in Cox Automotive’s just-released 2019 Car Buyer Journey study made me think of a conversation with a dealer about two years ago.

The dealer wasn’t doing well in used vehicles, and I was there to help him, and his team, discuss a better way forward.

A fundamental problem, it seemed to me, was the dealer’s desire to price every used vehicle to make an $1,800 front-end gross profit. As a result, the dealer had a lot of aged units and an overall Price to Market average for his inventory near 100 percent.

I suggested that more market-transparent pricing might help get customers interested in his cars.

The dealer responded that he didn’t think shoppers in his market really used the Internet all that much and, if they did, they weren’t all that savvy and sophisticated as they sussed out vehicles and potential purchase prices.

I specifically remember a comment the dealer shared: “There just aren’t that many sharpshooters out there to worry about.”

I begged to differ back then, and the Cox Automotive survey data suggests the comment’s even more off base today.

Consider the following take-aways from the Car Buyer Journey study:

Consumers spend significantly less total time researching and shopping for their next vehicle (about 14 hours today versus 14.5 in 2017). The report notes car buyers are now in the market for an average of 96 days, a drop of more than 20 days from two years ago. Between used- and new-vehicle buyers, used buyers spend more time in the hunt than new buyers (about 14 hours compared to 13 hours, respectively). Overall, the portion of research/shopping time spent online has slightly increased over the past two years.

Car buyers visit fewer dealerships in total (2.3 today compared to 2.7 in 2017). The report notes a slight difference between new- and used-vehicle buyers. The former will visit 2.5 stores, the latter, 2.2. Both figures, though, are down from two years ago.

Car buyers consider the specifics of a vehicle as a final purchase influencer more so than other factors, such as the make of the vehicle, the deal, or the dealership experience. This point affirms the axiom that, when all is said and done, the car is usually the star.

None of these data points offers a “wow” factor if you’ve been paying attention to changing consumer buying expectations and habits.

But, together, they do paint a portrait of online vehicle buyers who are getting better, and smarter, at finding exactly what they want in their next new- or used-vehicle purchase—and bypassing dealers who don’t fulfill their needs and wants.

In hindsight, I should have asked the dealer who made the sharpshooter comment to better define what he meant. In my book, if more buyers are coming to your dealership with a specific vehicle and price in mind, which I believe to be true, they’re shooting a lot sharper than in the past.

The Car Buyer Journey study also notes that, despite the best efforts of many dealers who are working hard to provide a more satisfying car-buying experience, 61 percent of vehicle shoppers say their most recent purchase experience was the same or worse than the last one.

This last finding suggests dealers have a significant opportunity—if they choose to do the work of meeting buyer expectations and providing the experience they expect, even as both continue to evolve.

I can suggest two ways dealers can get started.

First, dealers probably still need to give more consideration to what new- and used-vehicle buyers really want to know as they research and shop online, and more credit to how much they already know when they contact you about a car.

Second, instead of focusing most on how many new/used cars you sell every month, dealers should give equal, if not more, attention to whether those deals truly represent the acquisition of a new customer you can call your own, and not just another transaction.

The post Cox Automotive Buyer Journey Study: The Rise of Sharper Customers appeared first on Dale Pollak.

Changing Times: A Call For A Money-Making Operational Mindset

Dale Pollak — Tue, 16 Apr 2019 21:08:21 +0000

If anyone needs evidence that car dealers can no longer simply sell cars to make money, I’d offer the following nuggets from the recently released, NADA Data 2018: Annual Financial Profile of America’s New-Car Franchised Dealerships.

Nugget 1: In 2018, NADA reports the total operating profit for dealers, on average, dropped to -$13,338 in 2018—a figure that’s $105,112 less than the tally dealers achieved in 2017.

Nugget 2: Total expenses as a percentage of gross profit ran 100.2 percent in 2018, up from 98.7 percent in 2017.

Nugget 3: While dealers retailed slightly fewer new vehicles in 2018 (902/store on average, compared to 922/store in 2017), the average retail transaction price climbed $938 in the same period. Yet, dealers didn’t really take home any profit from the transactions. NADA reports the average retail net profit per new vehicle retailed sunk to -$570 in 2018; it was -$421 in 2017.

Nugget 4: While dealers retailed more used vehicles in 2018 (720/store compared to 706/store in 2017), there wasn’t much left over on the bottom line. The NADA stats show the average retail net profit per used vehicle retailed grew to $6 in 2018, a return to black from the -$2 in average retail net profit per used vehicle retailed in 2017.

To be sure, dealers still made money in 2018. NADA’s report shows that dealers’ average net profit ran $1,358,240 last year, off about $38,000 from the total in 2017 (and down more than $108,500 from the net profit dealers achieved in 2016).

Much of the profit, as dealers know all too well, owes to the factory checks dealers receive for meeting performance and sales objectives. It’s no surprise that some dealers are pushing back against what’s become an over-reliance on factory financial support for survival.

It’s also no surprise that dealers are keenly focused on expense reduction. They understand you can’t spend more than you make and expect to stay in business.

But I believe there’s a bigger opportunity for dealers to improve the financial performance of their dealerships.

The opportunity starts with a firm and unfettered understanding that selling cars is no longer enough to make money in today’s car business. Instead, you must believe that your primary purpose as an auto retailer in the current market is to make more money from your investments in new and used vehicles.

This shift to a money-making mentality may seem semantic or simple, but it’s much more impactful and significant than you might think.

Consider, for example, the investment fundamentals in today’s used vehicle market.

Two or three years ago, dealers could reasonably expect that they’d acquire auction and trade-in vehicles with an average Cost to Market percentage around 80 percent. Dealers would also know that, by day 60 or so, the Cost to Market percentage would reach 90 percent—a warning sign, for those paying attention, that their investment was running out of return potential.

Today, the Cost to Market average for “fresh” cars runs about 88 percent, a figure that typically climbs to 90 percent after 30 days in inventory.

Unfortunately, I don’t believe most dealers have reckoned with this fundamental change in the shelf life of used vehicle investments in today’s more-efficient market.

I see the evidence in dealers’ pricing strategies. In many cases, they haven’t changed at all in the past several years. They still appear to presume that you can sell a car after 60 days and make money. The trouble is, the money’s mostly, if not all, gone after 30 days with many vehicles.

Dealers who account for what I call this “new math in used vehicles” tend to see far better profits, and sales volumes, than those who haven’t yet woken up to the new money-making reality.

Let’s also consider how dealers manage and regard their new vehicle inventory investments.

When I talk new cars with dealers, I’m struck by what can only be described as a sense of resignation—the factories have taken the fun, and the money, out of the business, and there’s little that can be done to change the current outcomes.

Now, I would ask dealers to consider if they heard a similar explanation from their financial advisor: “Well, geez, yeah…I know. Your portfolio’s not really doing that well, but there’s nothing we can do.”

Here again, I believe there’s opportunity for improvement that starts with a money-making mentality.

For example, if you know your investment starts costing you real money after it’s been idle for 90 days, doesn’t it make sense to reduce this risk—perhaps by retailing these units before the fresh ones off the truck?

Similarly, if the percentage of your vehicles older than 90 days runs more than 20 percent, doesn’t it make sense to examine, and perhaps try to change, how and why those cars became your investments in the first place?

These are the types of questions making money-minded dealers proactively ask themselves, and their teams, every day.

I also believe there’s opportunity in fixed operations when dealers apply a money-making lens to their current efforts.

The NADA data shows the average dealership wrote fewer Repair Orders (ROs) in total in 2018 than in 2016. This downward trajectory unquestionably reflects the fact that today’s vehicles require fewer maintenance intervals. Still, given that retail sales of new and used vehicles effectively increased during the same period, I would expect the trendlines to be heading up, not down.

When I talk to dealers about the need to shift to a money-making mindset, I suggest the following first step:

At your next managers meeting, don’t start by asking individual managers how they plan to sell more. First, ask them how they plan to help you make more money.

The post Changing Times: A Call For A Money-Making Operational Mindset appeared first on Dale Pollak.

ProfitTime in Practice: Pricing Used Cars Without a Calendar

Dale Pollak — Fri, 05 Apr 2019 18:49:05 +0000

It’s long been a best practice of Velocity dealers to review the prices of their used vehicles every day to ensure the prices fall within the top three value rankings within a competitive set.

The approach is intended to reflect how today’s online vehicle shoppers look for their next used vehicle purchase: After perusing vehicles on classified and dealership websites, they tend to narrow their wish list to two or three vehicles that, to them, represent the best value.

This best practice has served dealers well over the years except for a couple shortcomings.

First, pricing and re-pricing vehicles often isn’t a daily exercise. Instead, dealers may only revisit used vehicle prices once or twice a week, or even less frequently. The intervals are often tied to an age-based pricing strategy, which typically calls for assigning specific adjusted Price to Market percentages when vehicles hit seven, 10 or 15-day milestones.

Second, dealers often don’t truly consider competitive sets as they make pricing adjustments. Instead, they tend to price vehicles based on their age-based pricing strategy. For example, if a vehicle is 15 days old, a dealer might set a vehicle’s adjusted Price to Market percentage between 97 percent and 98 percent. After 30 days, the adjusted Price to Market percentages might range between 94 percent and 96 percent.

The pricing shortcomings are understandable. Dealers and used vehicle managers are super-busy, and it can be difficult to find time to find the time for a daily review of each vehicle’s pricing and its competitive set.

I’m highlighting these shortcomings because they surface, front and center, when dealers begin using Provision ProfitTime to manage their used vehicle inventories.

With ProfitTime, the age-based pricing strategy goes away. Instead, dealers base their pricing decisions on a vehicle’s investment value, as expressed by a score and Platinum, Gold, Silver and Bronze designations.

The absence of the age-based pricing strategy can be unsettling for dealers—particularly if they have grown accustomed to relying on age-based intervals to drive when they review vehicles, and determine the adjusted Price to Market percentage that best fits the vehicle at that time.

Time and again, when I’m talking to dealers and managers about how to price vehicles with ProfitTime, they’ll want to know the adjusted Price to Market percentages I’d recommend for Platinum, Gold, Silver or Bronze vehicles.

The question owes, I believe, to dealers being accustomed to using a range of adjusted Price to Market percentages that correspond to a vehicle’s age to make pricing decisions, and their desire to apply similar Price to Market ranges to ProfitTime’s precious metal designations.

I’ll then suggest two best practices to help dealers use ProfitTime to price used vehicles based on their investment value:

First, with ProfitTime, it’s even more critical that dealers review their used vehicle prices every day, without exception. That’s because you’re now managing the vehicle’s investment value, not its age. Second, with ProfitTime, the only way to truly determine if a vehicle’s adjusted Price to Market percentage and market position make sense, is to analyze the vehicle’s competitive set in conjunction with its investment value.

For example, if I have a Bronze vehicle, I know the vehicle’s investment value is challenged. It’s a car that, by all rights, I should retail quickly to get what I can and reinvest the capital into another vehicle that might offer a better return. With this understanding, if there’s a competitive set of 13 vehicles, I would probably choose to price the vehicle to be among the top three value rankings in the competitive set.

By contrast, if I have a Platinum car, and its competitive set includes 13 vehicles, I’d likely price the vehicle to rank 11^th or 12^th in the competitive set, because the vehicle’s investment value merits a competitive position that allows me to maximize its investment or gross profit potential.

The key take-away for dealers accustomed to age-based pricing decisions is that investment value-based management requires more diligent stewardship of competitive sets and vehicle prices.

I would add, however, that I have seen some dealers develop formulas for investment value-based pricing that, by design, are meant to offer a less time-intensive approach to pricing.

For example, a Northeast Toyota dealer created a formula to facilitate ProfitTime-based pricing. The dealer built the formula after determining the average adjusted Price to Market percentage at which his vehicles sold. He used that figure as a baseline to determine how to set prices within each ProfitTime precious metal designation.

“I was trying to not raise or lower the overall price of my inventory,” the dealer says. “I wanted the overall Price to Market average to come out the same.”

The dealer tinkered with the numbers, and came up with this formula: Each vehicle starts at an adjusted Price to Market percentage of 92 percent. From there, the dealer adds the vehicle’s ProfitTime investment score from the system’s 1-12 scale to determine the vehicle’s specific adjusted Price to Market percentage.

Hence, if it’s a Bronze vehicle with an investment score of three, the dealer would initially price the vehicle at an adjusted Price to Market percentage of 95 percent. If it’s a Gold vehicle, with an investment score of 9, the vehicle’s initial adjusted Price to Market percentage would be 101 percent.

“I wanted to give my managers a simple formula,” the dealer says. “We’re happy with how it’s working so far.”

I’m not necessarily advocating the dealer’s strategy.

But I understand the dealer’s thinking—for him, the formula is really the next-best thing to studying each vehicle’s competitive set and price position every day.

Further, I appreciate the dealer’s effort to find a way to base pricing decisions on each vehicle’s actual investment value, not arbitrary days on the calendar.

The post ProfitTime in Practice: Pricing Used Cars Without a Calendar appeared first on Dale Pollak.

Understanding The New Math of Today’s Used Car Business

Dale Pollak — Thu, 28 Mar 2019 23:36:52 +0000

There was a time not long ago when selling used vehicles and making money were synonymous.

Those were the days when you could take a used vehicle into inventory, price it to achieve your gross profit objective and reasonably expect to make your money, or at least a decent portion of it, even if it took 60 days or more to find a retail buyer.

That’s why, if you asked dealers and used vehicle managers whether they were in the business of selling cars or making money, most would answer, “Selling cars”—since that’s all it really took to make money.

But I’d argue that we’re in a different era today, and that the dealer-favorable conditions that assured we might retail a used vehicle and make money have significantly deteriorated. In short, the time has arrived for dealers to focus on making money, not just selling cars.

Consider, for example, how quickly used vehicles run out of margin today compared to just two years ago.

The table at right shows a breakdown of Cost to Market ratios for dealer inventories between 2017 and 2019.

You can see that, in 2017, used vehicles hit a 90 percent Cost to Market ratio around day 60. You could sell the vehicle then, and still make some money even if it wasn’t all you wanted.

But hang on. This year, we’re seeing vehicles consistently hit the 90 percent Cost to Market ratio around day 30!

To make matters worse, if dealers retail vehicles after the 30-day mark today, chances are better than good that the sale won’t generate a net profit contribution.

How can that be, you might ask? Well, consider that the average used vehicle retails at a Price to Market ratio of 93 percent.

If a vehicle has a 90 percent Cost to Market ratio, and sells at a 93 percent Price to Market ratio, you’re left with a 3 percent gross profit. On a $20,000 car, that’s $600.

Now, let’s go a step further, and subtract sales commissions and your department’s expense allocation. I think we can all agree that the $600 disappears pretty quickly and, in most cases, you’re looking at a net loss on the vehicle.

You might call these dynamics the dark underbelly of today’s used car business. They are the reason many dealers finished 2018 scratching their heads: “How is it possible that we sold a record number of used cars and actually lost money?”

My response to these dealers is that they must embrace what I call the “new math of today’s used car business.”

This embrace begins with earnest efforts to balance the new math equation at your dealership, which should be guided by three principles:

First, dealers should maintain inventory levels at no more than a 30-day rolling total of their retail sales. If your rolling 30-day total is 75 vehicles, you should stock 75 vehicles. This benchmark effectively forces acquisition and pricing discipline that’s necessary to retail a larger share of vehicles before they hit the 30-day mark in your inventory. It also dramatically reduces the drag on your operational performance and profitability that owes to retailing older-age vehicles.

Second, dealers need to monitor their performance against the benchmark every day. It’s probably OK if, on any given day or the next, your inventory exceeds the 30-day rolling total of retail sales by a handful of units or less—provided you’re aware of the imbalance and you’re working to fix it.

But if the imbalance grows to 10 or more cars, you can pretty much guarantee you’re setting up sales that won’t produce a meaningful net profit contribution, and probably amount to net losses.

Third, when inventory levels are out of whack against the 30-day rolling total of retail sales benchmark, dealers shouldn’t be out buying cars. Yes, you should take in every trade-in you can that makes sense.

But it doesn’t make sense to buy auction units when you effectively have the cars you need. If you do, the extra vehicles will ultimately throw your inventory further out of balance and make your net losses even worse.

I should add that adopting the new math of the used car business isn’t for the faint-hearted.

It requires discipline, fortitude and will—essentially the same characteristics that anyone who’s in the business of making money would tell you they bring to the job every day.

The post Understanding The New Math of Today’s Used Car Business appeared first on Dale Pollak.

ProfitTime in Practice: The Right Time To Engineer Investment Value

Dale Pollak — Tue, 19 Mar 2019 15:49:06 +0000

One of the key benefits Provision ProfitTime offers dealers is the ability to appraise an auction or trade-in vehicle, enter a potential purchase price and see, instantly, what kind of investment potential the vehicle offers as a retail unit.

ProfitTime reveals the investment value by serving up investment scores and precious metal designations (1-3, Bronze; 4-6, Silver; 7-9, Gold; and 10-12, Platinum). The scores and designations are derived from combining each vehicle’s like-mine Market Days Supply, Cost to Market, recent sales volumes and other market factors.

In addition, ProfitTime shows the score in the context of your inventory needs (e.g., the Strategy Action) and the unit’s potential appeal in your market (e.g., the Stocking Letter Grade (A-F).

As we discussed in my previous post, these metrics offer a powerful trifecta that helps dealers sharpen their appraisals and related processes to bring in auction and trade-in vehicles for the right money.

But the trifecta also creates a temptation. I’m seeing some instances where dealers are using the ProfitTime metrics to engineer profit-positive outcomes on vehicles. The efforts can skew the vehicle’s true investment value and hurt your retail objectives.

The temptation, and the problems it can create, are most profound with trade-in vehicles.

For example, an appraiser may enter a potential purchase price on a trade-in vehicle—say, $7,500. The appraiser would then see the vehicle gets a ProfitTime score of 3 and a Bronze designation. The appraiser might also note that the vehicle’s market appeal is OK (a C grade) and the used vehicle department needs three more of the same/similar units (a +3 Strategy Action).

The appraiser might then think: “What if I put less money in the car, to make it a Silver or Gold investment?”

In my view this is a dangerous consideration for two key reasons:

First, the appraiser’s interest in improving the vehicle’s investment value may result in not acquiring a trade-in, which can hurt the retail objectives for both the new and used vehicle departments. After all, a better investment score doesn’t do you much good if you don’t get the vehicle.

Second, the appraiser would seem to be side-stepping the dealership’s approved valuation process. Theoretically, the dealership has developed a standardized way to put a number on vehicles to achieve some level of valuation consistency among appraisers. When an appraiser decides to self-engineer a vehicle’s investment value, it undermines valuation consistency and opens the door for justifications that often don’t stand in light of the vehicle’s true market position and your retail objectives.

Now, to be clear, I do believe appraisers should have some latitude to improve a vehicle’s investment value.

But I think appraisers should limit this discretion to auction purchases. With these vehicles, it’s truly in your best interests to achieve the lowest purchase price and best investment value possible, given the typically higher costs of auction acquisitions.

In addition, if you lose an auction vehicle because you were trying to pay less and make it a better investment, you aren’t risking a retail deal—you’re just honing the blade for the next profit-smart auction purchase.

The post ProfitTime in Practice: The Right Time To Engineer Investment Value appeared first on Dale Pollak.

ProfitTime in Practice: Clarity Drives More Investment Value-Based Appraisals

Dale Pollak — Mon, 11 Mar 2019 13:44:11 +0000

Since the dawn of the used car business, it’s always been true that the retail fate and fortune of every used vehicle starts with the appraisal.

This is the moment, whether it’s an auction or trade-in unit, that gives dealers their sole opportunity to size up a vehicle, determine whether it’s a good fit for your inventory and market, and establish the vehicle’s money-making potential, based on its purchase price.

It’s also true that, over the years, appraisals have shifted from an art, to a blend of art and science.

At one time, appraisals were all about art. Appraisers got a sense for the car, and came up with an acceptable number, sometimes after consulting book values, sometimes not.

In more recent years, science has entered the appraisal process. Appraisers have tools that help them consider real-time market metrics, such as Market Days Supply, Cost to Market and Price to Market metrics, and competitive sets, as they value a vehicle.

But even with the additional data and tools, there’s a wild card at work with auction and trade-in appraisals. It’s the emotion, and personal preferences, of the appraisers themselves.

The emotion may come from really liking a car, responding to pressure from the desk to make a deal or getting angry at being outbid at auction. Whatever the case, the emotion isn’t good for business.

Too often, the emotion results in appraisers making mistakes. They put too much in the wrong car, and too little into the right cars. They tweak appraisals to fit the deal at hand, not the car that’s in front of them. Worst of all, the mistakes often live on, as managers try to make up for the appraising shortcomings by pricing the vehicles higher than they should be, given the market.

These are the scenarios that dealers are uncovering as they use Provision ProfitTime to help guide their appraisal process for auction and trade-in vehicles.

ProfitTime tells dealers three important things about every vehicle at appraisal—its market appeal as expressed by an A-F letter grade, a Strategy Action that indicates whether you need the vehicle or don’t, and the vehicle’s investment value based on ProfitTime’s 1-12 scale (1-3, Bronze; 4-6, Silver; 7-9, Gold; 10-12, Platinum).

Dealers say this trifecta of information is helping appraisers make more objective and on-the-money decisions.

“We found who shouldn’t be appraising cars,” says Steve Jackson, used vehicle director for Lansing, Mich.-based Shaheen Chevrolet, which retails around 190 used vehicles a month.

“We determined that maybe we should just have appraisers go in with facts, not emotion,” Jackson continues. “ProfitTime takes the emotion right out of it.”

Jackson says the ProfitTime appraisal application has led to deeper, and more frequent discussions about how they’re appraising vehicles, and why they miss some units. The effort’s paying off.

“The cars I take in, now, we’re at least taking them in right,” he says. “The best thing for me is that on Day 1, right away, I know what I’m going to do with that car and how to price it. It works, and the proof’s in the pudding. Since we’ve been using ProfitTime, our turn on our Bronze vehicles has gone up dramatically.”

Trent Waybright, vice president of pre-owned operations for the six-store Kelley Automotive Group, Fort Wayne, Ind., says ProfitTime is helping his appraisers see vehicles as they are, not what they might want them to be.

“The natural tendency of a manager at the store level, when they’re looking at an appraisal, is to stay away from anything that looks negative,” Waybright says. “Understandably, they want to make the deal. We’re learning that with some vehicles, it just is what it is.”

Waybright adds that more investment-astute appraisals have helped improve the percentages of Silver and Gold vehicles in their inventories. “To me, that’s a result of people in the showrooms buying in. They are putting the right money into the cars,” he says.

I’ve long stated that today’s car business is a game of inches, and success goes to dealers who look for, and pursue, opportunities for incremental advantage.

Based on what I’m hearing from ProfitTime dealers, it seems that there’s at least some incremental advantage waiting, untapped, in the way they appraise auction and trade-in units.

Perhaps best of all, this incremental advantage is now easier to find and address.

Note: In my next ProfitTime in Practice post, we’ll examine why appraisals on auction vehicles, not trade-ins, offer the best opportunity to engineer your inventory’s investment value.

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ProfitTime In Practice: Turning Two Initial Pricing Hurdles Into Opportunities

Dale Pollak — Fri, 01 Mar 2019 19:27:04 +0000

Note: The following is the first in what I intend to be an ongoing series that details best practices, key insights, lessons learned and retail results of dealers who are putting ProfitTime into practice at their stores.

There are typically two pricing hurdles dealers face right away when they implement Provision ProfitTime.

The hurdles aren’t easy to overcome. But, once dealers get past them, the pain they may endure quickly turns to opportunity.

Hurdle 1: Pricing the disproportionate share of distressed, often aged, vehicles in their inventories appropriately to the market and an individual unit’s investment value.

Hurdle 2: Pricing their best investments less aggressively to take advantage of the fact that they can afford to give these vehicles more time on the market.

Some quick background: In ProfitTime parlance, the first hurdle addresses Bronze vehicles that typically make up about 45 percent or more of a dealer’s inventory. The ProfitTime system measures these vehicles’ individual investment values by combining the Cost to Market ratio, like-mine Market Days Supply and recent sales volume to determine a score. In ProfitTime, Bronze vehicles are the lowest investment class. They earn scores of 1 to 3 on the system’s 12-point scale.

The second hurdle pertains to inventory ProfitTime determines to be Platinum. These vehicles typically make up between 5 percent and 10 percent of a dealer’s inventory. Platinum vehicles earn scores between 10 to 12, and represent the units that offer the highest appeal and profit potential for dealers.

Dealers become aware of these hurdles quickly as they view their inventories through ProfitTime’s investment value lens.

They immediately spot what I’ve come to call an “investment value inversion”—wherein dealers have priced their Platinum vehicles, or their best investments, most aggressively, and priced their Bronze vehicles, their worst investments, most proudly.

Let’s address the hurdles, and the opportunities they represent, respectively:

“I thought, ‘Boy, I’ve got an awful lot of Bronze vehicles,’” says dealer Jim Blickle of Performance Toyota, Sinking Spring, PA, when he first turned on ProfitTime at his store, which retails about 100 used vehicles a month.

Blickle’s inventory looked like many other dealers—nearly half of his roughly 125 vehicles were Bronze units. They represented a mix of fresh and distressed units.

Pre-owned sales manager Mark McQuaid at RBM of Alpharetta, a Mercedes Benz store that averages 100 used vehicle sales/month, found a similar situation. Bronze vehicles represented the largest share of his inventory. These vehicles were often, but not always, his oldest vehicles.

“We were caught up in that inversion a little bit, too,” McQuaid says. “We might have had a 2 percent spread in the Price to Market averages of our Platinum and Bronze cars, but our Price to Market average was higher for Bronze vehicles than any other category.”

Both dealers then began the difficult work of pricing their Bronze vehicles more appropriately to the market to improve the overall investment health of their inventories—and taking the pain this necessary step creates.

For example, if a dealer has a Bronze vehicle priced at a Price to Market ratio of 98 percent, and it should be priced, based on its investment value, at a Price to Market ratio of 92 percent, the difference represents a 6 percent reduction on the unit’s front-end gross profit potential.

If the vehicle has an asking price of $10,000, the 6 percent haircut represents $600. If the vehicle’s asking price was $20,000, the 6 percent reduction amounts to $1,200.

These adjustments, spread out across 40, 50 or more vehicles, add up quickly—and dealers and managers know it.

“It’s hard take that aged Bronze inventory right off the bat and slash our prices,” says Lisa Groleau, sales manager for Bill Marsh Automotive Group, Traverse City, MI. “Why? Because we know what we own it for. Every time you look at what you own the vehicle for, it makes it hard to price it right the first time. It’s our own egos.”

I call this “taking the medicine” when I speak to dealers interested in ProfitTime, and those who’ve begun using it.

In some ways, the initial price-reckoning with Bronze vehicles is like going on a diet or breaking a bad habit. You’ll typically feel a little worse before you start to feel better.

But here’s the best part—the pain passes in fairly short order, and the pay-off comes pretty quickly.

“We learned that it’s really about the entire model,” Groleau says. “Until you do it for 30 days, you’re not going to see success. But when you hit the 30-day mark, it’s almost instantaneous. It’s like, this is incredible. I’m on to something.”

Blickle reports that after making the price adjustments to his Bronze vehicles, they are turning more quickly than other inventory segments, and producing better front-end gross profits than they would have under his previous pricing strategy. McQuaid sees a similar dynamic at his dealership.

Now, let’s turn to the Platinum vehicle pricing hurdle.

Across the country, I’ve seen the average Price to Market ratio for Platinum vehicles run close to 95 percent. But these vehicles, because of their strong investment value and market appeal, should be priced closer to 100 percent, if not higher, depending on each unit’s competitive set and market conditions.

On some level, you think it’d be super-easy for dealers to mark up vehicles to maximize their front-end gross profits.

But it’s not as easy as you think, and some believe it’s just as difficult as taking the medicine on your Bronze vehicles.

“It’s equally difficult for Velocity dealers, since we’ve been trained to not worry as much about front-end gross, to mark up your Platinum cars,” Groleau says. “You have it in your head that you only need to make so much, so you set your price and move on to the next car to free up that floorplan.”

Blickle faced a similar issue. As a Velocity dealer, he cared about how he owned a car, but it wasn’t a driving force in his pricing strategy. With ProfitTime, his thinking has changed.

“It’s not really that the market is different for the car,” Blickle says. “It’s just that if I own it for less, time is on my side. I can afford to ask all the money. Whereas, if I own it for too much, time is not on my side. If that car becomes 60 days old, I’m going to lose money.”

When dealers overcome the Bronze and Platinum pricing hurdles, they begin to see how ProfitTime is helping them improve front-end gross profits and increase sales volumes—something many hadn’t considered possible in today’s margin-compressed market.

“When we started with ProfitTime, I thought maybe we’ll turn cars a little quicker and maybe we’ll pick up some gross profit,” Blickle says. “The one thing I was not expecting was a dramatic improvement in my front-end profit. If you would have told me I could raise my grosses by $300 to $500, I probably would have bet against you. We’re thrilled.”

In my next post, we’ll examine how ProfitTime is helping dealers transform vehicle appraisals and set a better stage to sell more used cars and make more money.

The post ProfitTime In Practice: Turning Two Initial Pricing Hurdles Into Opportunities appeared first on Dale Pollak.

A Sobering, Softer Start To 2019

Dale Pollak — Fri, 22 Feb 2019 17:57:49 +0000

I haven’t talked to a single dealer who’s happy about how they finished January at their stores.

In some cases, February is looking a little better, particularly in used vehicles in areas of the country where weather conditions have been tough the past several weeks.

But the feedback about January is sobering:

“It’s like someone turned off the faucet.”

“It’s the worst start to a new year that we’ve had in seven years.”

“Sixty-three percent of my dealers lost money in January, which means the number of dealers that lost money is more than any month for over 10 years.”

That last comment came from a respected dealer CPA who added, “I do not ever remember seeing such poor results.”

The CPA also struck a note of optimism, pointing out that March is usually a pretty good month for most dealers. “Let’s hope the profit/loss trend returns to normal in March 2019,” he wrote.

Indeed.

But I question whether the current market forces that are in play will, in fact, allow for a return to normal.

Consider, for example, how profit/loss trends have shaken out over the course of the past couple years. In both new and used vehicles, dealers are seeing ever smaller profits, despite retailing more expensive vehicles.

You see this disturbing trend in dealership financial profile data from the National Automobile Dealers Association (NADA).

For 2018, dealers saw retail net profit per new vehicle retailed drop to -$570, a 35 percent decline from 2017’s figure, according to NADA.

In used vehicles, dealers fared a little better in 2018 compared to the prior year; NADA reports retail net profit per used vehicle retail climbed back to black, to $6 up from -$2 in 2017.

Meanwhile, the expenses required to operate a dealership keep growing. NADA data shows total expenses for dealers went up 3 percent in 2018, and now account for 100.2 percent of the average dealership’s total gross. NADA also reports that dealership net profit dropped 3 percent in 2018.

Zowie.

These financial dynamics beg a critical question: If, as analysts predict, we can’t count on any innate growth in retail sales of new and used vehicles, how can dealers offset these disturbing margin pressures, particularly when factory partners don’t seem interested in helping?

The answer, I believe, lies in each dealer’s ability to find advantage and gain efficiency within the four walls of your dealership, and the market beyond.

I know, for example, that many dealerships currently carry a larger share of distressed, often aged, new and used vehicles than they should. It’s a problem that ultimately owes to inherent inefficiencies in the way dealers manage their inventories in the context of their market and factory pressure.

I also know that while many dealers fundamentally understand that technology and tools can help them become more operationally efficient and profitable, there’s some distance between this understanding and its actual application/investment in day to day operations and oversight. You might call this an inefficiency of will.

I could go on.

My point is to underscore that while January typically isn’t the strongest or most influential month on dealership financial statements, its softer results gave me pause.

Perhaps we, as an industry, are quickly approaching the junction where the cost of doing the same in your dealership operations will be far greater than the cost of changing them for the better.

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Why Calendar Time and ProfitTime Don’t Mix

Dale Pollak — Thu, 21 Feb 2019 20:12:13 +0000

You’ve undoubtedly heard the phrase that oil and water don’t mix.

If you try to mix them, the oil floats on the water. Each liquid stays separate from the other, even if they’re in the same container or glass.

I’ve been thinking about oil and water, and other things that don’t go well together (like black shoes and brown belts) the past couple weeks. The musings owe to a scenario that I’ve seen repeat, multiple times, as I’ve met with dealers to discuss Provision ProfitTime.

The scenario goes something like this:

I’ll ask the dealer to go through two evaluations of used vehicle inventory. First, we’ll look at the dealer’s Bronze vehicles, which are units that ProfitTime has determined to possess the least investment value of all units in the dealer’s inventory. Next, we’ll look at the Platinum vehicles, or the units that offer the most investment value and gross profit potential.

With the Bronze vehicles, I’ll inevitably find a sizable share of vehicles that have been in inventory for 30 days or longer. As we examine the cars, I’ll see that the Price to Market ratios are often too high, which means the vehicles aren’t as competitively priced as they should be to sell quickly.

When I ask about the pricing decisions, and the market’s apparent lack of interest in the vehicle, the dealers will often point to the vehicle’s age. In one instance, a dealer and I were looking at a 33-day-old vehicle. “We’ll start discounting it aggressively next week, when it hits the 40-day mark,” the dealer says.

That’s when I’ll point to the vehicle’s Bronze designation. “This car, based on its investment value, has no business being in your inventory longer than 10, maybe 15 days,” I’ll say. “The longer you wait to price it competitively, the more likely you’ll end up losing, or making less, money than you should.”

An almost-opposite scenario occurs with Platinum vehicles. Despite the high investment and gross profit potential these vehicles represent, I’ll find that dealers began marking down their asking prices within a few days of their arrival in inventory.

In these cases, I’ll also ask dealers and managers why they’re discounting vehicles so quickly. Inevitably, they’ll note that they’re dutifully fulfilling the steps of their age-based pricing strategy, under which every vehicle gets a mark down when it hits a specific interval, like three, five, seven or 10 days in inventory.

“I get it,” I’ll say. “But these vehicles, because of their strong investment position and market appeal, don’t need any help. You can afford to give these vehicles more time on the market before you start eating away their gross profit potential by reducing their prices.”

Both of these scenarios underscore why I’ve come to believe that, like oil and water, calendar time and ProfitTime simply don’t mix.

If you’re managing used vehicles strictly based on the calendar, you’ll inevitably let some cars remain in your inventory longer than they should, and you’ll effectively give away vehicles you shouldn’t.

That’s the beauty of ProfitTime’s investment value-based management methodology.

With ProfitTime, each vehicle’s investment value, not the days on the calendar, serves as the primary driver to determine whether you need the car, how you should acquire it and where you should price it competitively.

I like the way used vehicle manager Jim Mason of Steven Toyota, Harrisonburg, Va., describes how ProfitTime’s investment scores have changed his approach to pricing used vehicles:

“ProfitTime actually reinforced in many ways a lot of speculation I had about where some cars, like Bronze or Silver cars, should be priced out of the gate. With ProfitTime, we’re a little more patient with Gold and Platinum cars, and far less patient with Bronze or Silver cars. With Bronze cars, in particular, our new mantra is that I would rather sell it in two weeks and make $100 rather than lose $800 in 40 days.”

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A Cloud Covering This Year’s Tax Season Lift in Used Vehicles?

Dale Pollak — Wed, 13 Feb 2019 17:03:41 +0000

Around this time every year, I hear dealers and used vehicle managers acquiring additional inventory in anticipation of buyers with tax refunds looking to purchase used vehicles.

Every year, I caution against this practice for two reasons:

First, the stock-ups often result in pile-ups of aged vehicles. The retail sales dealers believe will arrive often don’t and, if they do, they’re less plentiful than you anticipated. Inevitably, used vehicle managers end up making drastic price cuts to find buyers, and the whole gamble doesn’t quite pay off.

Second, the stock-ups effectively amount to speculation. In most instances, there isn’t any clear-cut market data that would suggest imminent, incoming demand. Dealers and used vehicle managers are playing a hunch that isn’t justified by the facts at hand. In fact, I’ll often find the decision to stock up on inventory owes almost entirely to a memory of past tax seasons where the gamble paid off (even if, after working through the pile-up of aged or distressed vehicles, it really didn’t).

This year’s not much different, it seems.

Earlier this week, I spoke with a Midwestern used vehicle manager who’s worried about the 30-plus off-lease pick-up trucks his dealer decided to purchase to get ready for tax season. The manager seems to know something the dealer doesn’t—the Cost to Market ratios required to acquire the units will leave little, if any, front-end gross if/when the units sell.

But there’s a new wrinkle this year that I don’t remember hearing about in recent years past. That is, the tax refunds that are supposed to drive used vehicle purchases aren’t what many taxpayers expect.

This week, articles in the Chicago Tribune and New York Times highlight how the average tax refund for 2018, so far, is smaller than the amounts taxpayers received in the past. The stories also discuss how some taxpayers, who previously received refunds every year, now owe sometimes significant sums to the Internal Revenue Service.

The disparity between what taxpayers expected to receive, and what they’ll get or need to pay, this year seems to owe to a lack of understanding of how the tax law changes in 2017 would play out—despite coverage back than that suggested taxpayers should at least revisit their deductions and withholding levels to avoid future surprises.

Whatever the case, it seems to me this year’s tax season carries a cloud that may rain on dealers and used vehicle managers who stocked up in anticipation of buyers flush with refunds looking to buy their vehicles.

The post A Cloud Covering This Year’s Tax Season Lift in Used Vehicles? appeared first on Dale Pollak.

Pricing Primer Follow-Up: A Deeper Dive Into Competitive Sets

Dale Pollak — Fri, 08 Feb 2019 19:36:58 +0000

In my previous post, I shared how Provision ProfitTime helps dealers price used vehicles to match their investment values.

I also promised that I would take a deeper dive into competitive sets, and how dealers should consider them as they determine the optimal price position for a used vehicle.

Let’s start the deeper dive with a quick definition and context-setting: For those who don’t know, a “competitive set” represents current vehicles in a market that will compete, in the eyes of vehicle buyers, with the vehicle you, as a dealer or manager, have in your inventory.

Competitive sets for most cars run between eight and 20 units. vAuto’s Provision system automatically determines a vehicle’s competitive set based, generally speaking, on the degree to which other vehicles possess the same/similar characteristics (e.g., year, make, model, mileage, color and meaningful equipment), and show up together when online shoppers search in a specific market.

As you might expect, it’s important that your inventory management system continually assess and refine the variables that determine and drive competitive sets. This refinement process ensures competitive sets always account for and reflect any relevant change or nuance in the search manner/terms online buyers use to find a vehicle.

It’s also important for dealers to trust the competitive sets. In my discussions with dealers and managers about distressed or aged inventory, we’ll often go back to the competitive set for clues that might indicate why a vehicle hasn’t sold.

Many times, we’ll find that someone customized a vehicle’s competitive set because he/she felt the unit had a specific characteristic (such as a color or piece of equipment) that made the vehicle significantly different and more valuable than the other vehicles in the set.

When I see these competitive set adjustments, I’ll wave a yellow flag.

In fact, this exact scenario occurred just last week. I was meeting with a Midwestern dealer group. We were examining a vehicle that hadn’t sold. It was priced about $2,000 above the same/similar units available in the market.

A little investigation revealed that a manager had adjusted the competitive set to justify the higher asking price.

The reason? “Mine’s black,” the manager says. Yes, it is, I agreed. But I pointed to a silver version of the vehicle. It had essentially the same condition, equipment and mileage.

I then asked the manager: “Do you think the typical Internet shopper would pay $2,000 more to get the black car? Is it possible you like black cars more than your buyers?”

Upon a bit of reflection, the manager agreed to adjust the price to more closely reflect its true competitive set.

Here are three best practices I recommend dealers keep in mind as they use competitive sets to make market position and pricing decisions:

1. Revisit them daily. Today’s competitive set may not be the same tomorrow in the ever-changing retail market. Units come and go all the time. If I were a dealer, I’d staff my used vehicle team to ensure someone revisited each vehicle’s competitive set and market price position every day. Yes, it can be time-consuming.

But I can’t think of any other used vehicle administrative task that’s more rational and sales-focused than monitoring each vehicle’s competitive standing in the market. If you don’t have the resources to make this an everyday exercise, then it should happen at least every other day, and no less than every third day.

2. Put on your “Buyer’s Cap.” Ultimately, your competitive set functions as your primary reference point for where you should position and price your vehicle for retail sale. As we discussed in my last post, the optimal competitive position depends on the vehicle’s appeal in your inventory and market, and its overall value to you as an investment.

It’s also important to remember that your ultimate goal is to end up on a buyer’s short list, which typically consists of three to four vehicles.

More and more, I’m seeing dealers and managers use hourly employees (who generally get paid $12-$18/hour, depending on the market) to manage their competitive sets and pricing. The move makes sense when you consider the other tasks used vehicle directors/managers are expected to handle, and their propensity to view vehicles as “car guys,” a perspective that’s often different than typical buyers.

3. Minimize customization. This point’s worth repeating. To be sure, there are times when a vehicle may be more special and unique than others out there. There may also be instances where you simply must rule out the cars from a dealer you consider disreputable down the street.

But I’d suggest the following rule of thumb when you’re tempted to tweak a vehicle’s competitive set: If you’re doing it more than 10 percent to 15 percent of the time, you’re probably kidding yourself and trying to justify outcomes that won’t happen.

I’ll close this deeper dive with an observation: If you aren’t paying close attention to each vehicle’s competitive set, chances are pretty good buyers aren’t paying attention to your vehicles.

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A Provision ProfitTime Pricing Primer

Dale Pollak — Fri, 01 Feb 2019 16:03:33 +0000

For much of the past decade, dealers have determined how to price used vehicles based on a unit’s inventory age.

That is, dealers would set less-competitive prices on fresh vehicles, and get more price-aggressive as a vehicle met/passed days-in-inventory milestones. For example, a vehicle might start at a 98 percent to 100 percent Price to Market ratio for the first seven days and then, at specific calendar intervals, the Price to Market ratio would drop as dealers reduced their asking prices.

This pricing practice has served dealers well over the years—except for the fact that it doesn’t necessarily account for whether you own the car right, or whether it really makes sense to apply the same Price to Market range or ratio to different vehicles, just because they happen to have been in your inventory for the same number of days.

Thankfully, Provision ProfitTime addresses these age- or calendar-based pricing shortcomings by focusing on each vehicle’s unique investment value, in terms of your market, your profit objectives and other vehicles in your inventory.

With ProfitTIme, you know right away if a vehicle merits an initial asking price of a 100 percent Price to Market ratio or better. The system’s investment score for individual vehicles, and the precious metal designations from Platinum to Bronze, give you more insight into how to properly price a vehicle in the context of its competitive set and your profit/retail objectives.

But I’ve come to understand that ProfitTime-driven pricing raises a lot of questions about exactly how to properly price vehicles based on investment value, and not just days in inventory. You might even say there’s some confusion on this topic, which seems particularly strong among dealers and managers for whom age- or calendar-based pricing is now first nature.

I thought I would use this post to help clarify how investment value-based pricing seems to work best for dealers who adopt it.

First, it’s important to understand that a vehicle’s investment score is one of three key metrics ProfitTime renders for every vehicle. In addition to the score, ProfitTime offers a read on the vehicle’s appeal in the market, assigning a letter grade (A-F). In addition, ProfitTime assesses the degree to which you need a particular vehicle, identifying if you’re long/short with a particular unit in your inventory.

Second, it’s crucial to understand that these three metrics—the ProfitTime investment score, the letter grade and the plus/minus designation that informs how much you may need a particular unit—represent what might be called a trifecta, or trinity, that brings greater certainty and clarity to each pricing decision. Together, these metrics help answer an age-old question—“how competitively priced do I need to be with this particular car?”

Third, I think that as dealers consider the trifecta of metrics for each vehicle, they should probably give greater weight to the investment score. After all, the score, whether good or bad, is the single-best indicator of whether the vehicle is a good candidate as a gross profit- or volume-generating unit, or something in between.

To illustrate what I mean, let’s work through a few examples with vehicles we’ll presume we’ve just acquired. We’ll also assume each vehicle has a competitive set of 15 vehicles:

Example 1: Let’s say you have a vehicle with an investment score of 3 (a Bronze unit), a C- grade, and you already have 11 of them in your inventory. In this case, the vehicle’s not the greatest investment, and you don’t really need it, but you own it. In my view, this vehicle should be priced to retail quickly, which means it should rank first or second out of the competitive set of 15 vehicles to generate immediate buyer attention and interest.

Example 2: Let’s say you have a vehicle with an investment score of 3, it’s a B-minus, and you need four in your inventory. In this instance, the vehicle isn’t the best investment, but it’s a pretty good car and, since you and your market needs it, you probably don’t need to be as price competitive. It seems appropriate to price this vehicle third, fourth or fifth in the competitive set.

Example 3: Let’s say you have a vehicle with an investment score of 7 (Gold), it’s a C-minus, and you have three similar units in your inventory. In this case, the car’s investment value would seem to merit a stronger price position, perhaps ranked seventh or eighth in the competitive set of 15 vehicles.

Example 4: Let’s say you have a vehicle with an investment score of 10 (Platinum), a B-plus and I need eight more. In this instance, the vehicle’s a great investment, it’s a solid car and the market wants it. If I were a dealer, I’d price this vehicle to rank 12^th or 13^th in the competitive set.

Example 5: Let’s say you have a vehicle with an investment score of 10 (Platinum), a C-minus and you have three more in your inventory. In this case, I might price the vehicle to rank ninth or 10th in the competitive set of 15 vehicles—a slightly more aggressive position than the vehicle in Example 4, due to this vehicle’s lower letter grade.

You’ll notice that in each of these examples, the vehicles were all “fresh” cars. Yet, because of their individual investment values, and the respective assessments of the metrics in the trifecta, each vehicle ends up in its own competitive price position on Day 1. There’s no standard application of a Price to Market range or ratio just because each vehicle is “fresh.”

In my view, this ProfitTime-driven approach to pricing will ultimately drive better results for dealers. Each car can truly stand on its own investment value, irrespective of the date on a calendar.

I should note that, when dealers execute an investment value-based pricing strategy, they must be honest and realistic about what constitutes a “competitive set.” The strategy may also require re-thinking how frequently today’s market requires revisiting your competitive sets and adjusting used vehicle prices.

I’ll take up both topics in my next post.

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NADA Day 3: Final Day Reflections

Dale Pollak — Mon, 28 Jan 2019 22:29:21 +0000

All eyes were on the weather on the final day of NADA.

Not the weather in San Francisco, but elsewhere across the country. Forecasts of snow and sub-zero temps made some wonder whether they’d get out of town as planned.

Lighter foot traffic on the show floor gave me the opportunity to ponder a few broader themes I picked up at the convention:

A different kind of competition: Through multiple conversations, it’s become crystal-clear that today’s competition is different. It’s no longer just the other dealers in your market you have to worry about. It’s brick and mortar dealers outside your market, as well as disruption- and online-minded retailers who are targeting your customers, and their cars.

Today’s competitive playing field also isn’t just about who’s got the right car and the right price. More and more, in the minds of consumers, it’s who’s got the right car/price, and how do they sell it. Is it easy? Fast? Maybe fun? These experience-rooted considerations are the seeds for the differentiation dealers will need to earn sales and service business.

Two-way partnerships: For a very long time, dealers have experienced (or endured) what could be described as one-sided partnerships with some factories and solutions providers. If the partnerships were a stick, dealers typically held the short end.

With factories, it seems to me they will face palpable push-back against factory facility investments and mandates that don’t make sense for dealers when you consider where customer preferences, and the retail market, is headed.

With solutions providers, dealers are in the driver’s seat in ways they may not have been before. As evidenced by the offerings at NADA this year, dealers have more choices and options. It’s an environment where dealers can, and should, go with providers who offer true partnerships, where the respective hands hold the stick in balance, and the cost to value ratio is clear.

A bullish view: There was some discussion about Zotye USA naming nearly 20 dealers at NADA to represent the Chinese manufacturer and retail its vehicles. The company’s plans reportedly call for stores in 80 markets, with sales beginning late next year.

Meanwhile, outgoing NADA Chairman Wes Lutz says dealers are “writing the future” with an eye for new opportunities and a thirst for/willingness to change.

You have to appreciate the bullish nature of Lutz’s comment, and Zotye’s retail plans. Together, they affirm something I’ve said for a long time—as you consider the future of retail automotive, it would be unwise to bet against dealers.

ProfitTime progress: I made a commitment as I left San Francisco, where we officially launched vAuto’s Provision ProfitTime methodology and metric, to chronicle its progress in this space and beyond. I look forward to sharing the stories of dealers using ProfitTime to regain their gross profits in today’s era of margin compression.

My thanks to all who stopped by the vAuto and Stockwave booths, and a special shout-out to Cox Automotive, vAuto and NADA for helping me honor my 50th year of attending NADA conventions. This one felt special, and I’ll be riding its positive energy all the way home.

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NADA Day 2: Pricing Efficiency, Recon and Digital Retailing

Dale Pollak — Sun, 27 Jan 2019 18:00:02 +0000

A curious question came up more than once on day two of the NADA convention: Will we see automated vehicle pricing sometime soon?

When dealers asked the questioned, I took time to better understand the reasons that prompted it.

In each instance, the dealers shared that they weren’t sure that the individuals who currently handle vehicle pricing are doing the job as correctly and optimally as they could—despite efforts to coach and train them. On some level, the dealers were also looking for ways to use technology to potentially cut the people costs associated with managing their new and used vehicle inventories.

I think it’s also true that the automated pricing question owed, at least in part, to dealers seeing the full effects of their current used vehicle pricing strategy through the lens of Provision ProfitTime, which often reveals that dealers’ least-valuable investments are priced as if they were their most-valuable investments.

I told the dealers that, yes, over time, we would likely arrive at a day when at least used vehicle pricing could be automated, as market data science and pricing tools evolve.

But I also underscored that, until this day arrives, they would need to redouble their efforts to manage their pricing strategies with greater accountability and oversight and attune them to each vehicle’s investment value.

As I noted in yesterday’s post, today’s market requires making hard decisions about some vehicles faster, and vehicle pricing often serves as the focal point or front line where you may need to face up to the fact that some vehicles can’t command the mark-up we may think they deserve.

My conversations at the vAuto booth touched on a few other topics I thought I’d share here:

The role of VDPs: With all the focus on digital retailing, dealers asked if their efforts to drive Vehicle Details Page (VDPs) views was a tactic from yesterday’s online merchandising playbook. I shared that, even as digital retailing helps dealers complete more portions of a vehicle purchase online and market specific vehicles to targeted customers, VDPs still matter. They remain one of the key indicators of buyer interest in a vehicle. I also shared that how we think of VDPs will shift from offering details on vehicles to including deal-making capabilities.

Reconditioning efficiency: vAuto’s new iRecon solution drove a lot of attention and interest from dealers here at the show. Dealers shared with me that they have simply grown frustrated and tired with amount of cost and time they spend getting used vehicles reconditioned and retail-ready. I did an informal poll when the conversation turned to reconditioning. Despite NADA’s recommendation that dealers should recondition vehicles in 72 hours or less, the turnaround time at many dealers often runs twice as long or longer.

Trade-in pressure: I heard frequent concerns about the high costs of acquiring auction inventory, and outfits like CarMax siphoning trade-in opportunities from some markets as they advertise “we’ll buy your car” programs. The trends are rightfully leading dealers to re-examine and improve their appraisal and trade-in processes. It should be noted that the concerns are less profound for dealers who meet or beat the goal of achieving at least a 50 percent look-to-book ratio as trade-in opportunities arrive online, or in their service lanes and showrooms.

My feet are telling me we’re nearing the end of another NADA convention. I’m looking forward to the final day on the floor.

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A Sad, Somber Time for vAuto

Dale Pollak — Sat, 26 Jan 2019 21:09:37 +0000

We received some sad news—vAuto lost one of our own, Performance Manager Steve Solmes, who passed away yesterday.

Steve started with us in 2007. He was part of our first group of Performance Managers. The “group” was actually two people, Steve, and Dan Winchester, who I know is feeling the loss of Steve as much as, if not more than, me.

For me, Steve was everything you’d want from a vAuto Performance Manager and employee. Steve was caring. He was kind. He was responsible. And, most of all, he was always accountable. He was also a hell of a car guy…from his time as a GM and used car manager to his time with us.

I especially remember Steve’s humility and presence. You could just feel it when he was around you and you talked to him, a combination of calmness and strength that, in some ways, seemed to bring peace to every moment.

Steve wasn’t what you’d consider a typical car guy—with a brash or bullish nature. He was the ultimate gentleman. A soft-spoken guy with the biggest heart you could imagine.

When I heard about Steve’s passing, I called dealer Gary Duncan, who was one of our first vAuto dealers and worked closely with Steve in the early days of vAuto.

“Steve cared beyond being a vendor,” Duncan says. “He was beyond being a Performance Manager. He cared about you, and your family. He was here when we lost my Dad. He was as humble and gracious as anyone could ever be. With Steve, I was always more than just a customer. Steve was a friend, a colleague and a good Christian man.”

Steve was truly a special guy, who did his part to make vAuto, the car business and the world a little bit better.

We will all miss him. We will always remember the positive example he set every day.

RIP, Steve.

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NADA Day 1: A Hunger To Build, Improve Business

Dale Pollak — Sat, 26 Jan 2019 16:44:32 +0000

Maybe it’s just me, but it seems like dealers at this year’s National Automobile Dealers Association (NADA) convention in San Francisco are especially hungry for ways to build and, in some cases, preserve and protect their businesses.

I’m told many of the workshops were full, and dealers got turned away for lack of seats. Part of the reason owed to fewer workshop options on the schedule. But I’d submit the packed rooms, and the number of dealers who arrived early to get seats, suggests keen interest in better ways to retail vehicles and make more money.

I had the privilege of being a Distinguished Speaker this year, along with Alan Haig, president of Haig Partners. We addressed how the rise of the future of retail automotive may change as autonomous vehicles and ride-sharing arrive in earnest, and how dealers can prepare today to thrive in what will undoubtedly be a changed car business.

Our presentation touched on topics that came up again and again as I talked with dealers about their goals for attending NADA this year:

Margin compression: Early this morning, I had a conversation with a dealer who asked for an in-store visit to help his team address a big problem: Last year, the dealership set sales volume records in new and used vehicles. But, despite all the effort and cars put over the curb, they lost money. Unfortunately, the dealer’s experience reflects a market in which simply selling more cars won’t make up for ever-smaller margins.

I’ve been telling dealers you have to sell them more efficiently and smarter, which means making hard decisions about a vehicle’s retail fate much faster to mitigate margin compression. I think the strong interest we saw in the vAuto booth for Provision ProfitTime and our new vehicle solution, Conquest, suggest some dealers are taking this opportunity to heart.

Retaining employees: A growing number of dealers recognize that if they can’t consistently field a passionate, productive team in their stores every day, they won’t achieve the level of operational efficiency and excellence that today’s vehicle buyers and service customers expect. It’s also clear that a day of reckoning may be on the horizon for some dealers as they look to take their businesses to the next level, and realize the long-time, loyal employees they currently field may not be fully up to the task. A dealer shared that he attended a hiring/retention workshop with Hireology’s Adam Robinson and came away thinking, “We not only can do a better job finding and keeping people, we have to.”

Inventory efficiency: Dealers are making the connection that, in both new and used vehicles, the share of their inventories that amount to “dead stock” owes in part to the nature of the vehicles they chose to retail in the first place. In used vehicles, this recognition is leading more dealers to examine the inefficiencies in their appraisal and trade-in processes to minimize the number of vehicles they need to purchase from auctions. I liked how one dealer summed up the problem at his store: “We’ll step up more to buy auction vehicles than we will with customers. We’re missing too many good cars.”

Technology efficiency: In his presentation, Alan Haig shared that, for many dealers, “technology is not treated as an ally to help profitability and efficiency.” Put another way, he’s suggesting that dealers often view technology as an expense, rather than a tool that can elevate performance. The mindset has troubling consequences that amount to sometimes significant investments in solutions that aren’t used to their fullest potential and, in some cases, get dumped as dealers look for ways to reduce expenses. Haig suggested that these dealers change their thinking and regard technology as a “frenemy” that can help them achieve their profit and sales objectives.

Merchandising/sales efficiency: For the past couple years, there’s been talk about how dealers can use new technology and tools to market specific vehicles to specific customers who, through data science, are actually interested in purchasing the vehicle, and provide an online experience that minimizes the vehicle purchase pain points that continue to confound customers. This year, it seems like dealers are more keenly interested in transforming how they market, merchandise and sell vehicles to meet customer expectations—a positive sign, I think, that digitally driven retailing has arrived, and it’s ready to make a difference for dealers who embrace.

I am looking forward to what tomorrow’s NADA experience will bring. I’ll share my thoughts here.

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NADA Day 1: A Surprising Start To Opening Day

Dale Pollak — Fri, 25 Jan 2019 22:21:23 +0000

I started the day with an odd request from Cox Automotive president Sandy Schwartz. He wanted to meet first thing at the vAuto booth at 8:30 a.m., just as the exhibit hall opened.

Turns out, Sandy was playing coy, along with a few other members of the vAuto team.

Their secret: They’d arranged for a special stop-by from NADA president Peter Welch, incoming NADA dealer chairman Charlie Gilchrist and outgoing chairman Wes Lutz to present an award to commemorate my attendance at 50 consecutive NADA conventions.

I was flattered and truly surprised when a big group of people gathered around me to present the award.

The moment made me reflect on how fortunate, grateful and proud I am to be a supporter of NADA, its mission, and the dealers they represent.

I attended my first NADA convention in 1969 in Houston. It was a big moment for me. It meant that I would be at the convention with my Dad and brothers, rather than on the receiving end of payphone calls when my brothers would tease me about all the swag and trinkets they’d collected at vendor exhibits.

In 1969, dealers were worried about the strength of their franchise agreements, as factories were changing warranty reimbursement rates, and dissident groups affecting local businesses. While I was only 10, I knew that Vietnam war and other protests were in the news all the time, and had a lot of people worried.

This year’s NADA convention theme, Focus on Innovation, is fitting for the current time. Dealers are entering an era of automotive retail where it will be more difficult to become and remain successful. To succeed, dealers will need NADA. They will also need to innovate—a topic I’ll be addressing in upcoming dispatches from San Francisco.

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A Promising Premiere For Provision ProfitTime At NADA

Dale Pollak — Wed, 23 Jan 2019 18:55:18 +0000

I received some very encouraging news about our new Provision ProfitTime product, which we’ll be officially launching at the National Automobile Dealers Association (NADA) convention this week in San Francisco.

The upshot: ProfitTime appears to be living up to its promise as a metric and methodology that can help dealers push back against margin compression, while increasing their sales volumes and gross profits.

The take-away follows a survey we sent to dealers who’ve been using ProfitTime for the past several weeks. We asked dealers if they’d recommend ProfitTime to other, non-competing dealers and what observations they’d offer about their early ProfitTime experiences.

On the first point, we found that dealers, overall, would recommend ProfitTime to other dealers. On a 1 -10 scale, with 10 representing the highest likelihood to make a recommendation, ProfitTime dealers offered an average score of eight, which suggests some satisfaction with their ProfitTime experience so far.

On the second point, dealers offered what I consider to be promising evidence that ProfitTime is making an important difference in their used vehicle operations. Here are some of their comments from the survey:

“I think ProfitTime is a great ‘next chapter’ for vAuto dealers who want to continue to be proficient with their inventory management strategies.”

“ProfitTime has completely changed the way we appraise and buy cars. We use it on every appraisal. ProfitTime works. Period. Our average gross in just three weeks has gone up. We hold firm on our Platinum and Gold units. Even on our Silver cars. Our management team has bought in 100 percent. It’s great to have a plan for each unit from the minute we take it in.”

“Loving it. Unbelievable results right off the bat.”

The survey comments also revealed some of the inevitable adjustment/uncertainty that arrives when dealers adapt to change:

“We are still evaluating how vehicles are scored (with ProfitTime) and what impacts the score.”

“Working through getting comfortable with it.”

“Our profit did go lower at first, but I can see it coming up now that I stick to the model.”

To be sure, the feedback comes from early adopter dealers. They are typically more receptive and willing to make changes to their dealership operations than their peers.

Still, I’m encouraged by the early reviews. They suggest that ProfitTime’s reception will be positive at NADA.

I’m off to the airport, and look forward to meeting dealers and friends at the vAuto booth (#1620S). Safe travels if you’re going to NADA, and I hope to see you there.

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A ProfitTime Insight: Your Worst Used Cars Represent Your Best Opportunity

Dale Pollak — Fri, 11 Jan 2019 21:39:43 +0000

It’s been a busy, gratifying start to the new year as I’ve been sharing vAuto’s new Provision ProfitTime methodology and metric with dealers.

I’m encouraged by the fact that many dealers are asking about ProfitTime because they recognize that margin compression is a serious problem. They aren’t happy with the gross profits they’re getting in used vehicles, and they’re hungry for a better way.

The ProfitTime conversations and meetings have led me to an insight that, in some ways, seems a bit ironic—that the worst vehicles on dealers’ lots today represent the biggest opportunity for tomorrow.

Let me explain what I mean.

When I share ProfitTime, I’ll use the system to evaluate a dealer’s inventory based on the investment value, or profit potential, of each vehicle.

For dealer after dealer, and from one store to another, the ProfitTime analysis reveals a similar outcome: Roughly half of the vehicles in inventory (about 46 percent, on average) are classified as Bronze or distressed vehicles. (For those who don’t know, ProfitTime assigns an investment value score to each vehicle, and classifies them with precious metal designations, Platinum, Gold, Silver and Bronze.)

The Bronze vehicles are units that represent little, if any, meaningful return on your investment. Some of these vehicles have been in inventory nearly 60 days or longer; others entered your inventory in an investment-troubled position.

The ProfitTime analysis also exposes two unfortunate conditions that Bronze vehicles typically possess:

The Cost to Market ratio is too high. Generally, I see Cost to Market ratios running close to, and sometimes above, 100 percent with Bronze vehicles. This ratio means the costs to own, and keep, these vehicles is almost as much as the retail sales price dealers will get for the vehicle. In other words, there’s little, if any, margin for gross profit. Yet, the vehicles remain in inventory, available for retail sale, day after day.
The Price to Market ratio is too high. The Bronze vehicles, despite their distressed investment position, are often priced at or above a 100 percent Price to Market ratio. In effect, this means dealers are attempting to retail these vehicles for all the money, even though buyers seem to be saying they’re asking too much.

The widespread nature of these conditions leads me to believe that dealers need to change the way they think about and manage their Bronze vehicles.

Instead of regarding them as problem cars you hope will go away, I think dealers should consider Bronze vehicles as a blessing—an opportunity-in-waiting, if you will, to drive additional retail volume and improve used vehicle profitability.

I’ve come to this belief based on five factors:

First, if dealers retailed Bronze vehicles more quickly, they’d naturally add momentum to monthly volumes. The key is to recognize how to retail these vehicles in a more timely manner. Hint: The fix often starts with far more market-realistic prices.

Second, if dealers retailed Bronze vehicles more quickly, front-end gross profit averages may take a dip as dealers clear out the initial batch of the most-aged and -distressed units. But over time, and with more consistently diligent Bronze vehicle management, front-end gross profits will grow as you retail these vehicles before they become break-even or money-losing deals.

Third, if dealers retailed Bronze vehicles more quickly, they’d see incremental lifts in their F&I and service departments—a positive “total gross” outcome that naturally follows additional monthly retail sales volumes.

Fourth, if dealers retailed Bronze vehicles more quickly, they’d be less shy about getting the gross profit they deserve on the Platinum and Gold vehicles that merit this expectation. This benefit, when coupled with better grosses on Bronze vehicles, creates a path for you to push back against margin compression and avoid making it worse at your dealership.

Fifth, and perhaps best of all, if dealers retailed Bronze vehicles more quickly, they would seize an opportunity to grow used vehicle sales and profits without investing additional capital. The money you’d need to invest in this opportunity is already on the ground; it’s just not moving as quickly to produce the return it should today.

As I’ve talked to dealers about this ProfitTime-driven shift in thinking and operational management, it’s become clear that it doesn’t appeal to every dealer, and the adjustment may prove difficult, even for those who are fully committed to the change.

This observation occurred to me after the third or fourth time I heard this comment, “But, Dale, some of these Bronze cars just take longer to sell.”

When I hear this, I’ll say, “Of course your Bronze vehicles take longer to sell. That’s what happens when you’re not willing to face the music.”

P.S. Going to NADA? I’d welcome the chance to discuss how your Bronze vehicles represent a great opportunity. I’ll be at the vAuto booth (#1620S). I look forward to seeing you there.

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A 2019 Priority: Managing Your Inventory Investment Value

Dale Pollak — Fri, 04 Jan 2019 21:56:16 +0000

We have a tendency as dealers to think of our new and used vehicle inventories as large, singular investments.

Together, the new and used vehicle inventory investment at many dealerships ranges between $7 million and $10 million—a sum that represents a significant amount of skin in the game for a typical dealer.

But while many dealers are readily aware of how much they’ve invested in their inventories, it’s become clear that we need a higher level of attention and focus on the overall health of each vehicle as an investment and its ability to drive a meaningful return.

I’ve come to this conclusion after spending much of the past year trying to figure out why as much as 50 percent of used vehicle inventories, and 30 percent of new vehicle inventories, at dealerships across the country represent distressed investments.

By distressed, I mean investments that have lingered too long, failing to find a retail buyer and, over time, losing their ability to deliver a profit-positive return.

The ubiquity of this inventory investment inefficiency leaves me troubled.

Dealers are entering a year where virtually all signs suggest that it will be more difficult and challenging for you to achieve the new and used vehicle sales volumes goals you expect for your businesses.

I haven’t talked to any dealers who say, “We’re planning to do worse in 2019.” Most, in fact, aim to grow retail sales volumes, particularly in used vehicles, and strive to bring more customers back to their service departments.

These growth-minded goals are well and good.

But I would submit that the retail sales goals, and the meaningful returns they should represent, won’t arrive unless and until dealers address their current inventory investment inefficiencies.

After all, the share of effectively “dead stock” in dealers’ new and used vehicle inventories drags down your ability to grow sales volumes and, in many cases, makes margin compression even worse.

For all these reasons, I’ve been encouraging dealers to apply a more investment-minded approach to their inventory management. This approach requires at least three fundamental shifts in thinking:

1. A sharper focus on the investment value of each vehicle. There’s a long-standing saying, “The car is the star.” The saying generally holds true, except when it doesn’t. Consider the stars in a clear night sky. Some shine brighter than others. The same is true for new and used vehicles. The star quality, or investment value, of each vehicle varies. The variation owes to the realities of your market. Some cars have an innately higher investment value, or level of brightness, than others.

The key is to know, from the moment you appraise a used vehicle or configure a factory order, whether a specific vehicle will offer a meaningful investment return or not. Thankfully, today’s technologies and tools provide this critical insight.

2. Managing each vehicle to achieve its unique investment potential. Once dealers and managers understand each vehicle’s investment value, it’s critical to make decisions that reflect its investment return potential as a retail unit.

It’s easy to tell when dealers and managers don’t think this way. You see the evidence in standard mark-ups and price points applied to every vehicle, irrespective of the unit’s individual standing in the market or inventory.

Unfortunately, today’s market is too efficient, too margin-compressed and too transparent to support anything less than precise, car-specific decisions that align with a vehicle’s investment value. If the reality were different, we wouldn’t see such an out-size share of distressed vehicles in dealer inventories today.

I should note that managing each vehicle’s investment value isn’t always pretty. Some vehicles are troubled investments from Day 1, and may not hold any retail profit potential or even represent a loss. I encourage dealers who struggle with these scenarios to consider the parallels between auto retailing and marriage—if you’re in it for a successful long haul, you learn to accept what comes, for better or worse.

3. Avoid hoping for a better investment outcome. When I ask dealers why they’re still carrying their most investment-distressed inventory, the answers typically boil down to something like, “we were hoping it would sell and we’d make some money.”

We all know that hope isn’t a strategy, and it’s also a hard habit to break. But breaking the habit is easier when you have a clear-eyed view of each vehicle’s investment potential, and use it to avoid letting yourself believe you can engineer a more profit-positive outcome than either the vehicle, or your market, will allow.

The results I’ve seen from dealers who have applied an investment value management mindset to their new and used vehicle inventories are encouraging. In most cases, they’ve reduced the share of distressed inventory, turning these units faster to increase volume and total gross. At the same time, the dealers are more effectively managing their best investments, and maximizing the gross profit these units should rightfully bring.

These are all positive outcomes that lead me to believe that managing investment value-based inventory management offers a better way forward for dealers to both mitigate margin compression and meet their 2019 profit and sales volume objectives.

P.S. I will be attending the upcoming NADA convention in San Francisco, spending the bulk of my time at the vAuto booth (#1620S). I’d welcome the opportunity to discuss how investment value-based inventory management can help you achieve your goals for the coming year.

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5 Key Provision ProfitTime Questions and Answers

Dale Pollak — Tue, 11 Dec 2018 22:28:33 +0000

I’ve spent the past three weeks traveling across the country to talk to dealers about Provision ProfitTime, a new metric and methodology we’ve introduced to help dealers better manage the effects of margin compression in used vehicles.

The discussions and meetings have been eye-opening, for both the dealers and me.

For dealers, ProfitTime initially stirs the emotions. The most profound reaction is disbelief, particularly from dealers who have invested their hearts and souls in Velocity principles. There’ve been some “Oh, sxxt” and “WTF?” moments, followed by a palpable sense of relief as dealers see the benefits of understanding, and managing to, each used vehicle’s investment value.

For me, the ProfitTime discussions and travels have brought me back to the earliest days of vAuto, when I was the only guy suggesting a different way forward for managing used vehicles. In some ways, ProfitTime feels like we’ve discovered a hole in the used vehicle universe, and figured out a way to fix it. I’ve also come to the realization that I’ll be a busy guy in the months ahead as ProfitTime goes to market.

I’ve met with enough dealers to understand the common, most-pressing questions ProfitTime presents. I thought I would share five of them here, with answers:

1. Does ProfitTime invalidate Velocity? The answer is an emphatic, “No.” ProfitTime is a path beyond Velocity, where your retailing strategy is based not on the number of days you hold a vehicle, but rather the investment value or profit potential each vehicle holds. Velocity metrics and principles help you discern a vehicle’s investment value, but they don’t precisely measure it for you like ProfitTime. I would also add that ProfitTime and Velocity are both rooted in my belief that while used vehicle management is, and probably always will be, a blend of art and science, the science itself is getting better all the time.

2. Will the transition to ProfitTime be as painful as the switch to Velocity? I wish I had a crystal ball to know the answer for certain. On one hand, dealers typically had a larger share of aged/distressed inventory when they adopted Velocity compared to today. At the same time, while the share of investment-distressed inventory in dealerships today might be smaller, the average cost per car is significantly higher. Ultimately, the correct adoption of ProfitTime will require that dealers reckon with their worst used vehicle investments first. This reckoning represents the short-term financial pain that will precede the long-term gain. I would also say that the degree of any associated pain will ultimately depend on how well dealers have aligned and calibrated their used vehicle age management and market pricing strategies to date.

3. Why do I have so many Bronze vehicles in my inventory? A quick point of context: In my discussions with dealers, I’ll show them their inventories through the ProfitTime lens. Invariably, we’ll find that almost half of their vehicles carry the Bronze designation in ProfitTime, which means these vehicles are the most distressed from an investment perspective. These vehicles also tend to have asking prices, or Price to Market ratios, higher than the individual vehicle’s investment value suggest they should command. These dynamics are nearly universal, which suggests two important take-aways:

First, the share of Bronze vehicles is a market condition. It’s perhaps the most compelling sign of how much margin compression and a more efficient, transparent market have combined to fundamentally alter the financial foundations of the used vehicle business. Front-end margins on some vehicles, particularly the bread-and-butter volume cars, are simply smaller today than they used to be.

Second, if these vehicles have less investment potential from the get-go, there’s less margin for error when it comes to buying and pricing them correctly. As I examine Bronze vehicles more closely with dealers, we typically see where some of the art of used vehicle management could be sharpened.

4. How does ProfitTime calculate each vehicle’s investment value? ProfitTime is built on an algorithm that draws from three principal data sets for each vehicle—the Like-Mine Market Days Supply, adjusted Cost to Market and recent sales volume. The resulting calculation then scores vehicles on a 1-12 scale, and assigns a Platinum, Gold, Silver or Bronze precious metal category to each vehicle. We’ve tested and re-tested the algorithm across millions of vehicles in dealer inventories to know, with utmost accuracy and confidence, that the ProfitTime valuation is sound.

5. Where will ProfitTime have the most profound impact in my used vehicle department? I believe ProfitTime will bring the most profound clarity and impact to used vehicle appraising and pricing decisions. When you examine a dealer’s inventory with ProfitTime, you’ll see what I call a pricing “inversion,” wherein the Platinum vehicles, or best investments, are priced lower than all the other vehicles. Meanwhile, Bronze vehicles, which represent the worst investments, are priced the most proudly. This condition is the direct result, I believe, of a lack of true investment value insight when appraising and pricing decisions are made. If we knew, for example, that a vehicle was a low-scoring Bronze vehicle at the time of an initial appraisal, I believe dealers and managers would be less inclined to price the vehicle, even though it’s “fresh,” at a 100 percent or greater Price to Market ratio.

As I discuss ProfitTime with dealers, many begin to see how the metric and methodology will help them improve sales volume, inventory turn and total gross profit in ways that weren’t possible before. The dealers also recognize that they’ve got some work to do with rethinking their management processes and retraining their teams.

I’ll be keeping close tabs on their ProfitTime progress, and relaying what I learn here. Stay tuned!

The post 5 Key Provision ProfitTime Questions and Answers appeared first on Dale Pollak.

Webinar Alert: A Deeper Look At Provision ProfitTime And Its Potential

Dale Pollak — Mon, 03 Dec 2018 19:15:29 +0000

I’m excited to take part in an Automotive News webinar at 1 p.m. CST tomorrow to share vAuto’s latest innovation, our Provision ProfitTime metric and methodology.

I’ll be joined by my ProfitTime co-creator, Chris Stutsman, who serves as vAuto’s director of innovation.

Our goal will be to help dealers gain a better understanding of how/why we developed ProfitTime, and why we believe ProfitTime represents a game-changing opportunity for dealers who want to more consistently and effectively manage their used vehicles and inventories as investments, and more actively mitigate margin compression.

You learn more about the webinar and register here.

The post Webinar Alert: A Deeper Look At Provision ProfitTime And Its Potential appeared first on Dale Pollak.

Access: Velocity: Post-Show Potpourri

Dale Pollak — Tue, 23 Oct 2018 01:45:52 +0000

I suspect everyone who attended Access: Velocity had the same feeling as we left the Peninsula Hotel on Friday—my brain needs a little break.

We had a busy day-and-a-half of general sessions and workshops. I took a bit of time to mull the dealer conversations and session take-aways. Here’s a rundown of things I thought I’d share:

Age Management Shortcomings. We spent a fair amount of time at Access: Velocity discussing what I consider to be a critical finding—that our reliance on the calendar as a measurement of a used vehicle’s profitability is fundamentally flawed.

To be sure, time still matters in used vehicles. Depreciation happens every day, and inventory turns are still important. Selling cars remains the single-best way to drive a dealership’s intra-departmental “wheel of fortune.”

But our research shows that, as margin compression continues to erode profitability, there needs to be a better way than simply checking off days on a calendar to manage each vehicle to its maximum investment value and return.

We discussed two primary reasons why the calendar doesn’t really work as a measurement of each vehicle’s investment value.

First, the calendar doesn’t recognize on Day 1 that some vehicles represent a better investment value than others. From the calendar perspective, every car’s a “fresh” car. But, as we’ve come to understand, some cars are really “fresher” than others on Day 1. The calendar simply can’t, and doesn’t, know if you over-paid for a vehicle, or it’s the wrong car.

Our research also found that this “fresh car” perspective often results in merchandising and pricing decisions that diminish returns from vehicles with high investment values, and expects unrealistic returns from vehicles with low investment values.

Second, the calendar assumes that every passing day exerts the same downward pressure on profitability for every vehicle. But we now know that, in fact, the investment value of some vehicles is more resistant to the advance of time than others.

At Access: Velocity, we talked at length about how dealers will need to shift their thinking from the number of days they hold a vehicle to the profit potential each vehicle holds.

It was exciting to see how these investment value insights played out at Access: Velocity, and how they represent a path beyond Velocity that will help dealers mitigate margin compression.

These investment-focused conversations reaffirmed my sense that, when NADA 2019 arrives, vAuto will be leading the way to a better way of used vehicle inventory management.

Inventory Investment Accountability. We had a rich discussion about how dealers can and should maintain more discipline over the amount of money they invest in their used vehicle inventories.

Today, it’s not uncommon for dealers and managers to “buy more cars” without regard for the investment return they’re getting from the current inventory. This mindset often contributes to distressed inventory—the cars that often should have been addressed before buying more inventory.

I liked one dealer’s solution to this problem. He maintains a strict $3 million cap on his inventory/reconditioning investment, and requires managers to deliver at least $300,000 in gross profit (a 10 percent return) every month. Managers face a penalty if they don’t meet the requirements, which help maintain a collective focus on minimizing distressed inventory.

“Predictive” and “Private” Inventory Sourcing: As we discussed how new technology and tools can help dealers reliably predict the investment value of used vehicles, several dealers asked about what I’d call predictive vehicle sourcing, as well as ways to mine private seller acquisition opportunities.

On predictive sourcing: Dealers asked if there’s a way, when a vehicle in inventory gets a sufficient level buyer attention (e.g., VDPs, calls, e-mails, etc.), that they could know it. Through an alert or some other notice, their sourcing team would know, in advance, about an imminent retail sale and begin working to find a replacement unit. The concept makes good sense, and merits attention.

On private sellers: Some dealers shared how they mine private seller listings on Autotrader and other third-party sites to find, and pursue, vehicles that match their inventory needs. The effort follows frustration with the seemingly ever-rising costs of acquiring auction vehicles. The dealers suggested that these listings might be integrated into inventory sourcing tools to drive greater efficiencies and time savings.

Private, Public Dealer Advantages: Access: Velocity special guest speaker Alan Haig, president of Haig Partners, noted how today’s dealership buy/sell activity is primarily driven by private dealers looking to grow and scale their operations. He also noted that while public dealer groups have grown through acquisitions, they haven’t “figured out how to acquire share from competing stores” when they enter a market. At the same time, Haig suggested that public groups may have a long-term advantage if/when vehicle buyers seek out brands, and the experiences they offer, more than specific dealerships.

Quotable Quotes: I’ve always had an ear for what Reader’s Digest once dubbed, “Quotable Quotes.” I picked up a couple at Access: Velocity:

On change management in a dealership: “You have to be stronger about your vision than people are about their resistance. If you are, you’ll outlast them. But your vision has to be right.”

On discounts to customers who insist they should get one: “Make it symbolic, not significant” and “Don’t be confused by the opportunity to negotiate and getting a good deal.”

On today’s competitive marketplace: “Every morning you wake up, you better be running.”

A Higher Purpose: In addition to providing a unique forum for Velocity dealers, our Access: Velocity event serves a higher purpose—we donate 100 percent of attendee registration fees to charity. This year’s event raised $252,500 for the Juvenile Diabetes Research Foundation—an impressive sum that speaks to the generosity of dealers and their desire to help those less fortunate.

My sincere thanks to all the dealers who attended Access: Velocity and shared your insights, perspective and time with me, the vAuto team and your peers.

I have a feeling that this year’s event will be remembered as a first step toward positive, profit-focused change that will pay dividends for dealers in the years to come.

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Access Velocity Day 1: A Game of Inches and Investments

Dale Pollak — Fri, 19 Oct 2018 20:19:38 +0000

I heard the same thing time and time again from dealers at Access: Velocity.

After all the effort, energy, money and time invested in retailing new and used vehicles, there just isn’t as much profit left on the monthly income statement as there used to be.

The proceeds from all the activity and sales amount to “profit dust” these days compared to the returns dealers once derived from their dealerships.

This reality emerged in our Access: Velocity workshops that addressed how dealers could sharpen their operational processes to reduce inefficiencies and drive more sales, and profitability, from their new/used vehicle departments and wholesale acquisition efforts.

But here’s the thing: When you take a collective look at the best practices and ideas shared in the workshops, they amount to a lot of small, incremental steps on the road to performance and profit improvement.

That’s because today’s car business is really a game of inches, where it’s imperative that dealers pay greater attention to the data and details of their businesses to be successful. The business calls for a higher level of operational discipline that, quite frankly, puts the very nature of many dealers, particularly those who came up through sales departments, to the test.

The good news is that most dealers here realize, or at least recognize, the need for seeking out every advantage they can. They understand that technology and tools will play a role. They know, or at least sense, that what guest speaker Jason Stein, publisher of Automotive News described as the “digitization” of dealerships is quickly gaining steam.

This backdrop probably accounted for a lot of the enthusiasm from dealers around vAuto’s latest innovation, which we discussed in the opening general session.

Beta test dealers shared how the innovation helps them instantly identify a vehicle’s investment value and use the insight to drive appraising and pricing decisions.

One dealer reported a $300 lift in front-end gross profit as managers worked to maximize gross on vehicles that deserve it, and minimize time in inventory for their more troubled investments. This is good news at a time of unprecedented margin compression.

We closed the day at a Chicago icon, Lou Malnati’s, where some of the conversations were deeper than the pizza.

It was a fitting end to a nearly perfect, and highly productive day at Access: Velocity.

More to come from Day 2….

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Another Access: Velocity Begins

Dale Pollak — Thu, 18 Oct 2018 10:30:01 +0000

I really am blessed.

For most of the day and evening yesterday, my Facebook and Twitter feeds were dancing from all the dealers traveling to Chicago for vAuto’s fourth, Access: Velocity event.

It’s a little like old home week here at the Peninsula Hotel. I’m hugging and shaking hands with dealers from across the country, some of whom were on the ropes nearly a decade ago, and now they’re worried about how to bring a newly acquired store up to speed.

The kids are here, too. I said hello to the sons of dealers who, not so long ago, were wearing jumpers and Velcro-strap shoes, and making it hard to hold a conversation.

Today, the kids are standing a whole lot taller and listening close. It’s pretty special to see the car business bug biting the next generation of dealers.

Ah, the memories.

Beyond re-connecting with friends, there’s also a palpable sense of anticipation here at Access: Velocity.

To be sure, some of the anticipation owes to what we’ve promised attendees will get: Today, we’ll unveil a new way to manage used vehicles that goes beyond Velocity.

It’s a moment that feels eerily like the earliest days of vAuto—when dealers’ need for a better way of doing business, and the ability of a company like vAuto to offer it, came together.

Speaking of coming together, I couldn’t help but suggest that I grab a photo of three vAuto team members who are here for Access: Velocity. They work in separate offices and get together less frequently than the probably should.

But each of these guys—Randy Kobat, vAuto’s vice president and general manager, Chris Stutsman, senior director of product innovation and Lance Helgeson, director of industry analysis—plays drums.

It was a unique moment for any company. We took the photo.

Even though we couldn’t come up with a clever caption, the moment didn’t pass without recognizing that if vAuto was a band, we wouldn’t have trouble filling the drum chair like Spinal Tap, and we’d need more space on stage than the Grateful Dead.

I’m excited for Day 1 of Access: Velocity.

More to come…

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Independent Dealer Realizes His Car Business Dream

Dale Pollak — Mon, 01 Oct 2018 16:02:33 +0000

It’s been a bit of a dream come true for independent dealer Dan Oakes in Kansas City.

In 2010, Oakes acted on his curiosity and interest in the car business. His job as an energy trader provided the capital and time to open a small independent dealership, Oakes Auto.

The business grew by baby steps—a few cars sold each month, then a few more, and then some more.

By 2013, Oakes was selling about 60 units a month from a 100-car inventory.

“That’s when I quit my trading job,” Oakes says. “And I haven’t looked back.”

Today, Oakes’ business retails about 200 vehicles a month. It’s been recognized as one of the Kansas City area’s fastest-growing operations. The growth has also helped Oakes turn another dream into reality—to become a franchise dealer.

About two years ago, Oakes acquired a shuttered Toyota store to expand his sales operation and launch his own reconditioning/service department. The expansion drove additional sales and profit growth that gave Oakes the ability to apply for, and get awarded, a Mitsubishi franchise.

“I knew we could probably get Mitsubishi,” he says. “We started working on that right after purchasing the property.”

Oakes, who’s now looking to take over a second franchise dealership, credits vAuto Provision and the Velocity Method of Management as key factors behind his budding car business success story.

Initially, Oakes signed up for Provision to bring more market data-based, rather than gut-based, decision-making to his pricing decisions.

“Back then, I would notice that I could drop the price of a car that got old on me by $500,” Oakes says. “Then, two or three leads would come in. I thought, ‘that’s strange. Why didn’t they come in before I took the $500 off?’ That’s when I started understanding the market’s sensitivity to pricing.”

With a sharper, more market data-driven approach to pricing, Oakes sold more cars.

The data also shed light on other areas of Oakes’ business that were crimping his sales and profit potential:

Age management: Like a lot of independent dealers, Oakes struggled with inventory age. He’d look at a vehicle every couple of weeks and think it’s OK. After a few more weeks, he had a troubled, 50- to 60-day-old unit.

“With Provision, you can see if cars are sick or blind to the market,” he says. “If they’re not getting any VDP conversions, or the leads aren’t coming to the CRM, you can see in about two weeks if the car’s in trouble. You don’t have to wait 60 days, and the car’s full-blown sick, to realize it needs some attention.”

Buying inventory: As an independent dealer, Oakes knew his niche—cars that were a bit rare, and wouldn’t run up against the certified pre-owned and off-lease units available at franchise dealers. “I was a decent buyer, but it was still a little bit of a guessing game,” he says.

The gambles and guesses have largely gone away. “With Provision, we have all the data right in front of us to make better buying decisions,” Oakes says.

There’s another element to Oakes’ story that he considers essential for any dealer to be successful in today’s retail used vehicle environment—trusting that market data helps you make better decisions and consistently using the data when you make them.

“If you’re an independent dealer, used cars are the only way you’re making money,” Oakes says. “You have to be selling used cars. We designed and focused our entire operation around Provision and Velocity—move them fast and reload.”

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3 Keys To More Efficient New Vehicle Inventory Management

Dale Pollak — Fri, 14 Sep 2018 17:10:45 +0000

Perhaps it’s telling that, as of today, no one has commented on the Automotive News piece that discusses how dealers will face a “tough slog” in the months ahead in new cars.

The reason, I suspect, is the fact that dealers, and pretty much everyone else in the industry who’s paying attention, has long understood that sagging new vehicle sales are inevitable, given the record numbers dealers have sold in recent years.

You can count me among those who’ve been impressed by the resiliency of the new car market this year, despite the headwinds.

But the Automotive News article included a quote that gave me pause, and suggests dealers had better recognize that if their new car inventories were hospital patients, they’ve moved from the waiting room to the operating table.

The quote comes from Jeremy Acevedo, manager of industry analysis at Edmunds.com, who discusses how OEMs are more selective in their incentive spending to help dealers sell cars:

“Manufacturers seem to be comfortable with a longer sell down period that leverages targeted incentives instead of an aggressive ‘everything must go now’ mentality.”

This statement seems accurate and it reflects yet another fresh reality in new vehicles—more and more, dealers will be on their own to move the inventory that isn’t selling.

The older inventory has become costly. NADA’s Dealership Financial Profile for July suggests that the average dealer is on pace to pay $60,000-plus in interest expense for the calendar year. Not long ago, many dealers counted floorplan credits as a profit center.

These circumstances call for greater attention to new vehicle inventory age management, and your local market itself. Just as in used vehicles, the fundamentals matter. Here are three to consider:

Sell the old stuff first. I had the same opportunity when I was a dealer in the high-interest days of the ‘80s. Every month, a sizable share of our sales included our freshest cars—even though we had copies of the units we’d just sold parked out back. The same problem exists today. Across many dealer inventories, I often see 50 percent of dealers’ new vehicle investments tied up in vehicles older than 120 days. This ratio suggests an imbalance that’s now up to you to fix. From here on out, these cars need to be prioritized in your sales and marketing efforts, and parked where sales associates can easily find them.

Mind your dealership/market days supply balance. The most investment-healthy new vehicle inventories reflect a balance between dealership days supply and market days supply across model lines and trim configurations. If you assess and tweak this balance as you order inventory, or trade with other dealers, you’re taking a step to minimize the risk of age and interest expense from the get-go. A rule of thumb: The larger the gap between these two metrics, the less likely you’ll be able to capitalize on market opportunities.

Price based on vehicle’s market appeal and value. To do this effectively, you need a clear view of where your competition’s vehicles are priced, and the fair market range today’s buyers expect. The good news: Today’s technology and tools can help you execute a pricing strategy that reflects the value of each new vehicle for potential buyers, your competitive market and your inventory investment objectives.

Even as dealers contend with the “slog” ahead, it’s worth remembering that while the new vehicle market softens, no one’s projecting that it will fall off a cliff. This outlook means that every step taken today to improve inventory management efficiency will help your new vehicle sales and profitability in the more difficult months ahead.

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A Proud, Promising Moment for Cox Automotive and Auto Retailing’s Future

Dale Pollak — Fri, 31 Aug 2018 14:43:00 +0000

This week brought a significant milestone for Cox Automotive, the car business and me.

On Wednesday, I was part of a group that cut the ribbon to officially open the new Cox Automotive Solutions Lab at Northwood University in Midland, MI.

This lab is pretty special.

First, it reflects the commitment of the Cox family, and Cox Automotive, to the future of the car business. Cox leaders recognize that we have a responsibility to help prepare the next generation of dealership owners and managers for what will be a fast-changing, ever-more complex retail environment in the years ahead.

Second, the lab will be a proving ground that gives students the opportunity to put theory—like Velocity Method of Management principles—into practice. In the lab, students will sharpen their understanding of what it takes to run a dealership, and make money, in today’s margin-compressed market. They will gain important skills, like how to use technology and tools to mine insights about the market and their businesses to maximize efficiencies and profitability.

In short, the lab will help students hit the ground running as they work in their dealerships, and carry the responsibility of effectively managing their family/organizational fortunes.

I’m proud to be part of an organization like Cox Automotive that gives back to the industry that feeds it. My hat’s off to the people at Cox Automotive and Northwood University who came up with the idea of the solutions lab, and applied themselves to bringing it to life.

While at Northwood, I had the honor and privilege to give an academic year kick-off speech to students. I’ll be honest. I worried about what I’d say. Among the 800 faculty and students at the convocation, only some aspire to retail automotive careers.

I landed on three principles that I’ve come to view as key ingredients for a meaningful, productive life. A few folks suggested I publicly share a video of the speech. Here it is:

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Where Can I Buy Cars?

Dale Pollak — Thu, 23 Aug 2018 17:41:01 +0000

The below is a post taken from my good friend and industry training expert, Tommy Gibbs’ Zinger.

Where Can I Buy Cars?

Posted on August 21, 2018 by Tommy Gibbs

If I get asked this question once a week, I get asked this question 100 times a week. It’s generally phrased as, “We can’t find inventory, do you have any suggestions?”

These are smart, intelligent dealers and managers asking the question. These are people who are true “car guys and gals.” They are not new to the game and they know what end is up, yet they still ask the question.

They know the answer. But they hold out for a miracle that I have a secret tunnel that I can connect them to that has some gold at the end.

To quote my good friend and mentor Dale Pollak:

“The reality is that there are plenty of cars available in the wholesale market, but the margin opportunity for most is very, very small.”

So there you have it. Dale has spoken and I shall interpret. There’s inventory out there, but you can’t or won’t pay the price.

You won’t pay the price because:

You haven’t accepted the fact that units you purchase aren’t going to have much of a profit margin.

You haven’t accepted the fact that you will need to turn and burn those units.

You haven’t accepted the fact that total gross is more important acceptedverage gross.

You haven’t accept the fact that packs and high recon costs are adding to your woes of paying the price.

You haven’t accepted the fact that paying on gross profit further complicates the retail selling process.

You haven’t accepted the fact that you need to create a greater awareness on look-to-book.

You haven’t accepted the fact that mining your customer base for potential sellers is worth more than a 60-day trial run.

You haven’t accepted the fact that the number one issue of low grosses is you sell too many units late in the life-cycle.

You haven’t accepted the fact that many good things come to the table when you find a retail buyer at some number.

These are just a few of the things you haven’t accepted, that are causing you not to be able to find the inventory you need.

It’s important to know where to buy cars. It’s even more important to know why you aren’t. That’s all I’m gonna say, Tommy Gibbs

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Musing on Major League Baseball and Used Cars Metrics

Dale Pollak — Fri, 17 Aug 2018 14:38:25 +0000

A New York Times piece this week highlighted a couple trends in Major League Baseball that some find disturbing.

This year, for the first time in league history, there may be more strikeouts than hits through the course of a season. And, of the hits, home runs will account for a sizable share, perhaps more than ever before.

The problem for some fans is that these trends mean more waiting time between hits, and less overall action on the field. The game is less exciting, which may be a reason behind declining ticket sales at ballparks.

This state of affairs, the article suggests, owes to a greater reliance in clubhouses across the country on analytics and data to determine the players to put on the field, and how they play the game.

For pitchers, the data indicates the most efficient way to get an out, and avoid a run, is to strike out batters. In today’s game, this goal requires putting harder-throwing arms on the mound as starters and relievers. The piece quotes veteran players saying it’s harder to get a hit today than in years past.

For hitters, the most efficient way to score a run—no surprise—is to send the ball out of the park. Hence, more teams groom, and go after, players that possess what the current Oakland A’s manager calls “the patience and power profile.”

The article notes how Michael Lewis’ 2003 book, Moneyball, and its story of the Oakland A’s using data to find competitive advantage, has influenced the direction and course of the game. For example, beyond hitting and pitching, the prevalence of dramatic defensive position shifts owes to a data-based understanding of the precise spots where specific players are statistically most likely to hit the ball.

All this got me thinking about the car business. After all, Moneyball inspired the foundation of vAuto and the Velocity Method of Management.

I started to mull how data- and metrics-driven inventory management may have changed the game of retailing used vehicles.

My take-away: The outcome in used vehicles is almost exactly the opposite of big league baseball.

For one thing, you almost never see home run vehicles anymore. That’s the nature of today’s efficient market. Instead, the game is much, much more about scoring off a larger share of singles and doubles, and some triples—the kind of offense that’s less prevalent in baseball.

To be sure, there are still plenty of strike-outs in today’s used car game. But I don’t see much evidence that they’re on the way up. In fact, I suspect there are even fewer than ever before. Instead, I think it’s far more common for dealers to hit singles, or fly out, when they could have done better.

The article ends on an optimistic note, suggesting that, like always, the game of baseball, and those who coach and play it, will evolve. They’ll mine the data for more insights. They’ll find new ways to gain competitive advantage that may well make the games more exciting.

In this way, the used car business and baseball are exactly alike. There’s an equal desire to gain competitive advantage, and a keen understanding that your job, and livelihood, depends on it. There are also earnest efforts underway to mine data for greater understanding about the used car game, and how to play it better.

It makes me wonder. If baseball uses data to produce more hits, and more exciting games, will we see a day when dealers can hit more home runs?

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A YouTube Video Prompts A Stroll Down Memory Lane

Dale Pollak — Tue, 14 Aug 2018 20:35:11 +0000

My Facebook feed brought a pleasant, if random, surprise the other day.

A childhood friend, Jim Ballard, shared a YouTube video (below) from a guy who apparently explores, and films, scenes in and around Gary, IN, where I grew up. In fact, Ballard and I were next door neighbors.

For whatever reason, the videographer chose to document what remains of the former Len Pollak Buick and Opel dealership (7301 East U.S. 20), which my father built and opened in 1969.

I remember how excited we were to see the construction started in 1968. I also remember my parents’ disappointment (and resolve) when a tornado wiped out the initial work.

I remember working on the construction site with my older brother, Mitch. We were clean-up guys, who dutifully picked up wood scraps and pieces of metal, and stacked enough bricks to last a lifetime.

I remember how the facility’s final $1 million price tag (nearly $7 million in today’s dollars, I’m told) seemed astronomical.

I remember playing hide and seek with my brothers and friends just about anywhere we could get away with it. I remember sitting at desks, waiting for my Dad after hours, pretending we were making car deals.

In the video, the videographer asks viewers to share any background or history they might know about the facility. I figured, I’m the guy. So here goes:

A focus on efficiency: Until I watched the video, I hadn’t thought much about how my own emphasis on operational efficiency links to my Dad’s days as a dealer. He designed the dealership to optimize efficiency. You can see it in the video. Every service bay has its own door, to ensure efficient movement of cars on and off lifts. Our service dispatcher worked in a tower, to keep an eye on work and allocate jobs the most efficiently. We had separate make-ready areas for new and used vehicles to keep the service department focused on customer pay/warranty work, and to optimize this experience for customers.

A standalone used car department: The video shows a smaller building, which my Dad built for our used car department. At the time, most dealers housed their new and used vehicle operations in the same building. My Dad thought used vehicles deserved its own space. This building is where I learned how to sell cars, and made my first deal on a 1972 Chevy Vega. The building also had an air conditioned, cork-lined room that housed a mainframe computer—another nod to my Dad’s progressive take on the business.

My tie trick. After college, I started out at the dealership as a customer relations manager, and later earned a promotion to after-sale manager. I had four protection products to sell– rust proofing, undercoating, paint shield and fabric guard. At least six times a day, I’d congratulate a customer on their purchase and start my spiel. Inevitably, I’d dip my tie in a cup of black coffee to demonstrate how fabric guard would help customers keep stains off their car seats.

A legacy that lives on. The video made me think of key people from my early days in the car business. My first hire was Jerry Cleek, who helped me build our AMC Jeep business in the early ‘80s. When we sold the dealership, it was the No. 2 Buick store in Indiana. The buyers were my Dad’s longtime partners, Jack Kerr and Bob Nielsen. Their families remain in the car business with other stores in Northwest Indiana.

The video was also a little heart-breaking to watch. The dealership buildings where I’d played as a kid and worked as a young adult, are largely abandoned. The magic of the place seems long gone.

In some ways, the current state of the dealership is like much of the Gary area today—a mere shadow of its former glory as a progressive, vibrant place to do business and provide for a family.

My hat’s off to the videographer for choosing to explore my family’s former dealership, and the opportunity to stroll down memory lane and share a little history.

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How To Fix The Collapsing Ceiling In Used Cars

Dale Pollak — Wed, 25 Jul 2018 01:05:55 +0000

If you had the unfortunate experience of living in a house where the ceiling was slowly collapsing, you’d face one of two corrective choices.

First, you could prop up the ceiling. I imagine this would involve using 4’ by 4’ posts, or maybe a metal beam, in the spots that sag the most.

Second, you could lower the floor. I’m not an architect or a contractor, but I suspect both would think that, while doable, a lower floor is only a costly, temporary fix.

I share this analogy because it represents the situation facing dealers in their used vehicle departments. There’s just not as much room between the ceiling (or prevailing retail prices) and the floor (the cost to acquire a vehicle) as there used to be.

Velocity dealers see this reality first hand. They know that the Price to Market ratios where many vehicles retailed in years past are lower today. They also know that this top-down pricing pressure makes it more difficult to consistently acquire vehicles at the Cost to Market benchmarks they previously achieved.

The reasons for the ceiling collapse in used cars shouldn’t be any surprise. Today, we face a much more efficient, fast-moving and transparent market. These market forces may not be colluding, but they are most certainly colliding, which puts unprecedented pressure on retail prices.

Some dealers point to the rising cost of used vehicles, particularly those they acquire at auctions, as a primary cause of ever-smaller front-end margins.

The observation is fair. But it misses the fact that the rising cost of vehicles wouldn’t be a problem if retail prices rose accordingly.

Unfortunately, that’s not the situation we face. Just because you spent $15,000 to acquire a vehicle doesn’t automatically mean it’ll retail for $17,000 or better. In today’s market, chances are better than good that the $15,000 unit will require a retail asking price around $16,000 if you expect it to sell in a timely manner.

The good news is that when dealers understand that margin compression is like a collapsing ceiling, they can take steps to mitigate its harmful effects on their used vehicle performance and profitability.

I typically recommend three operational fixes for the ceiling collapse problem:

1. Focus on investment quality. To use the house analogy, this strategic emphasis is like assessing the strength of each vehicle’s retail ceiling before you acquire the car.

For example, if you’ve got vehicle with sufficiently low Market Days Supply and Cost to Market ratios, you probably have a vehicle that’ll stand tall in the market for a longer period of time.

Conversely, if a vehicle has high Market Days Supply and Cost to Market ratios, you’ve got a unit that’s already weighed down by retail market pressures. By definition, it’s a less-sturdy car that represents an investment return that’ll sag more, the longer you own it.

2. Price to maximize your return. Stock investors should know the price point at which they will either make or lose money on an investment, before they choose to invest.

In today’s market, dealers should similarly align their pricing strategies to the investment outcomes each vehicle represents. If it’s a high-, middle- or low-gross unit from Day 1, your pricing should reflect this time-sensitive reality.

This approach is akin to accepting the fact that, in a house with a collapsing ceiling, there are some spots where you can stand, and others where it might be difficult to sit, or even crawl.

3. Fix your floor. Some dealers have gone too far in trying to lower the floor, or Cost to Market, in their used vehicle departments. They’ve pushed ever harder to acquire auction and trade-in vehicles with lower Cost to Market ratios than they targeted in the past.

On the surface, this approach makes financial sense. Who wouldn’t want to do all they can to increase the space between the retail ceiling and acquisition floor, and make more money?

But it’s a problematic practice, particularly if applied in a one-size-fits-all fashion. That’s when appraisers and buyers miss or overlook vehicles that would be perfectly good retail units except for the less-than-favorable (and often arbitrarily set) Cost to Market ratios.

The best-performing Velocity dealers recognize that while Cost to Market matters on every used vehicle, today’s margin-compressed market requires more flexibility.

Just like baseball, the dealers know that you can score runs without hitting homers every time you’re up to bat.

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A Metric That Merits More Attention—Your Used/New Sales Ratio

Dale Pollak — Wed, 06 Jun 2018 21:25:20 +0000

When I was a dealer, we thought we were doing a pretty good job if we managed a .5:1 used-to-new-vehicle sales ratio.

If we retailed 50 new Cadillacs a month, I expected that we would also sell 25 used units, which were almost always Cadillacs.

A recent Automotive News piece suggests that, since I was a dealer 20 years ago, the used-to-new vehicle sales ratio for many dealers hasn’t significantly changed—despite my sense that most dealers express a clear desire to retail more used vehicles to offset growing margin compression in their variable operations.

So what gives? Why haven’t dealers been able to make more significant gains in used vehicles? What known/unknown factors might be holding them back?

These are the questions that came to mind reading the Automotive News article. It focused on the used-to-new-vehicle ratios among its top 100 dealership groups. Less than 20 groups—18, to be exact—achieved a 1:1 used-to-new ratio and, among those, only nine achieved a 1.25:1 ratio.

My Cox Automotive colleague Les Abrams shares my view that, for today’s dealers and margin compressed market, a 1:1 ratio suggests you’re doing a “good” job, and a 1.25:1 (or better) ratio indicates a “great” job.

Such performance levels help you light up what I’ve long called the “wheel of fortune” in your dealership—the gross profit opportunity every retail used vehicle sale represents for your service/parts department, your F&I office, your used car department and, yes, for your new vehicle department.

But these higher levels of performance appear elusive. National Automobile Dealers Association (NADA) data shows that while the used-to-new-vehicle ratio has nudged forward in recent years, it seems to stubbornly hover around .75:1.

For the past 10-plus years, I’ve been blessed with the opportunity to help dealers improve their used vehicle performance, in part by encouraging them to make the 1:1 ratio a primary objective. My work has also allowed me to see and understand why some dealers struggle to make the wheel of fortune spin faster at their stores.

Here are three common factors that diminish used vehicle performance:

A front-end vs. “total gross” mentality. I’ve long made the case that today’s market is too efficient and transparent for dealers to get the front-end gross profits they believe their used vehicles should deliver. They get frustrated, and they double down on the “let’s get gross” strategy. Unfortunately, today’s market isn’t likely to reward traditional gross-building tactics like waiting for the right buyer, or setting your asking prices above the market. Both tactics result in older-age units, deeper “get ‘em out of here” spiffs and discounts and less overall profitability. These tactics also slow the wheel of fortune.

The better way, I believe, is that dealers should adopt a more investment-minded, total gross mentality. With it, dealers learn to take losses and low-gross deals in stride. Their average front-end gross is important. But it’s even more important that they turn used vehicle inventory to generate consistently higher returns across every dealership department.

Too-picky vehicle preferences. Some dealers are pretty picky about the used vehicles they’ll retail. They’ll pass on units their market wants in favor of those they prefer to sell. To some degree, this thinking makes sense, given dealer desires for differentiation and specialization. But top-performing used vehicle retailers have long ago shed their preferences in favor of market and financial particulars that affirm they can quickly retail a vehicle, and make money, if they acquire it.

A related point: I understand some dealers face factory pressure to meet certified pre-owned volume targets, which can tie up capital and management attention that might be better deployed on different inventory. To be sure, dealers need to play ball with the factory. But let’s remember: It’s your ball, and your playing field.

Process inefficiencies. Every used vehicle department has a lot of moving parts and processes, each of which affects the other. Whenever I hear a dealer share his/her struggle to improve their inventory sales velocity and turn, we’ll often uncover unnecessary inefficiencies with appraisals, reconditioning, merchandising and pricing. Dealers must recognize that in today’s more efficient market, time to market and time on market, must be compressed to maximize performance and profitability.

I hope this discussion helps you assess where your current used-to-new-vehicle ratio stands, and craft next steps to improve your used vehicle performance through the remaining months of this year.

After all, in today’s unforgiving market, if you’re not getting better, you’re getting worse.

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3 Pillars Of A Stellar Used-to-New Vehicle Sales Ratio

Dale Pollak — Mon, 07 May 2018 16:41:39 +0000

A recent Automotive News article discussed how, even among top dealer groups, it’s difficult for some dealers to achieve a 1:1 used-to-new-vehicle sales ratio.

The article noted that among the top 100 dealership groups ranked by used vehicle sales, less than 20 groups achieved a 1:1 used-to-new ratio and, among those, only nine achieved a 1.25:1 ratio. The findings mirror National Automobile Dealers Association (NADA) data that says the average dealer achieves a roughly .75:1 used-to-new sales ratio.

I’ve long advocated that dealers should strive to achieve at least a 1:1 ratio for three reasons.

First, dealers have more direct control of their used vehicle business. They can typically choose the vehicles they want to sell, and price them the way they prefer, without too much factory intrusion.

Second, used vehicles typically generate more gross profit on a per-car basis than new vehicles, particularly when dealers make cost and time efficiencies top priorities.

Third, the used vehicle department is the hub of what I call the “wheel of fortune”—every used vehicle represents an opportunity to generate gross in parts/service, F&I and the used vehicle department itself. Best of all, the wheel spins faster as you sell more used vehicles more quickly.

I was curious to better understand how these and other factors may fit the operational strategy of the Delavan, WI-based Kunes Country Auto Group, which ranked as the top performer on the Automotive News list. The Kunes group achieves an impressive 1.7:1 used-to-new-vehicle sales ratio, according to the article.

My conversation with Jennifer Myers, the Kunes group’s director of marketing, touched on three pillars of the 15-store group’s used vehicle success that I thought would be useful to share more broadly.

Pillar 1: A “used car”-minded dealer principal. Dealer Gregg Kunes makes used vehicles a higher operational priority than new vehicles. “Gregg’s philosophy is that if we have a Ford store, everybody knows we have Fords. So we highlight used cars. On our front lines, you’re always going to see used cars, not new Fords or Chevys or the franchise brand,” Myers says.

She shared a story about the group’s acquisition of a Honda store a year ago. It typically sold used Hondas, and a few Toyotas. Today, you’ll see almost any brand in the dealership’s used vehicle inventory. “We kind of shocked the team there by putting used Fords and whatever else in the inventory,” Myers says. “They’ve been doing really well.

Pillar 2: A “serve your customers first” philosophy. This philosophy manifests in an offer the Kunes group advertises in each store and beyond: If a customer can’t find the exact used vehicle they want in inventory, Kunes will get it in 72 hours. “We want to be our customer’s dealer,” Myers says. “We don’t want to lose them for silly things like we don’t have the exact red Ford Focus they want today. If that’s the case, we’ll go get it.”

The philosophy also extends to credit-challenged customers, who make up about half of the group’s used vehicle buyers. “Gregg imparts to the whole team that we take a different approach with subprime. He’s always looking for the next sale in the relationship. Can we do a good enough job today to get a brother, sister or neighbor in here? For us, the subprime market is an opportunity to really take care of people when they’re down. They’re usually not treated well by other dealers and used car lots. Our philosophy is that we’re helping people out of a bad situation that sometimes isn’t their fault. They have credit problems because Mom got sick and they had to quit their job, or they’ve got a lot of medical bills.”

(A quick side note: Kunes’ customer-first philosophy has an interesting history—perhaps owing to dealer Gregg Kunes’ very first car deal, which he discusses in a Q&A here.)

Pillar 3: Highly efficient sourcing. In addition to capturing as many trade-ins as they can, the group’s used vehicle managers have taken advantage of technology and tools in recent years to efficiently acquire a larger share of their inventory online. The group will go to physical auctions in Chicago and Milwaukee because they’re close. But the group recognizes that more efficient sourcing allows managers to be in stores, working with customers and their teams. “Our stores are in more rural, smaller markets,” Myers says. “You can’t take that person away from the store for that long.”

My hat’s off to dealer Gregg Kunes and his team for their stellar achievement—and for demonstrating that with the right approach and philosophy, a dealer’s used vehicle department can be an effective engine for significant growth and success.

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A Dealer in Distress

Dale Pollak — Fri, 04 May 2018 21:10:48 +0000

I received the below note from a dealer experiencing a very stressful Spring selling season, but probably not for the reason you think.

Note from dealer:

Hey Mr. Pollak, hope all is well and you are having a blast doing what you do.

Wanted to say hi and give you an update from your biggest supporters from Pinconning. Life is good for us as we keep plugging along, after 5 years of growth and records by applying the “Velocity philosophy” we rolled into 2018 hopeful but understood that these increases would not last. For us to maintain our 2017 sales level would be a big win for us. We kept analyzing and looking for ways to improve to keep pace with the ever-changing market.

2018 has been a struggle to say the least, we have run out of facility and man power! We have delivered 853 used cars in the first four months of 2018 by applying the Velocity philosophy, setting all-time records in both sales and net. I called Russell early this month and told him we need to back it down…can you believe that? I should also let you know we have sold 40 new Chevys which equates to 150% sales effective by Chevy standards.

We will keep struggling in Pinconning until we get this all figured out. Thanks for all that you have done and continue to do.

Brad Gross, Schafer Chevrolet

My reply:

Hey pal, keep your chin up. I’m so sorry to learn of your struggles operating a Chevy dealership and used car operation in Pinconning, Michigan, population of 1307. Retailing 853 used vehicles in 4 months, or an average of 213 per month is a marginal performance at best when you consider the potential addressable market of 300 million Americans. You obviously have much more upside potential, and with just a little more effort and resources of human capital and facility you might claw your way to a respectable level of performance. Stay focused, keep your head down and pass my best regards on to Russell and Darlene. ?

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Automotive News Addresses Used Vehicle Margin Compression

Dale Pollak — Thu, 03 May 2018 17:26:21 +0000

This week’s Automotive News includes an article that addresses the very real problem of ongoing margin compression in used vehicles.

The piece quotes my colleague, Cox Automotive economist Jonathan Smoke, and me sharing our views on the factors behind the -$2 average net profit per used vehicle retailed that dealers achieved in 2017, a figure recently reported by the National Automobile Dealers Association (NADA).

As the article says, the downward trend in used vehicles profitability is scary.

But it also points out that top-performing dealers mitigate this troubling trend, and the moves by some manufacturers that make it worse, by achieving greater cost, process and time efficiencies in their used vehicle operations.

You can read the full article here.

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Three Pointers To Maximize Purchased Unit Profitability

Dale Pollak — Wed, 02 May 2018 20:13:55 +0000

I’ve heard more complaints lately from dealers that it seems impossible to acquire wholesale inventory and make the front-end gross profit they expect.

Indeed, if you compare the typical Cost to Market metrics for purchased and trade-in units, you can see why some dealers are complaining.

The typical Cost to Market range for auction-purchased units tends to run between 85 percent and 90 percent (a ratio that includes the cost to acquire the vehicle, buy/transportation fees and reconditioning estimates).

Meanwhile, dealers who acquire a higher percentage of trade-in units (based on their look-to-book ratios) tend to bring in these vehicles at a Cost to Market range between 80 percent and 85 percent, or even less.

This Cost to Market disparity between purchased and trade-in units can mean as much, and sometimes more, than a 10 percent difference in the potential margin, or spread, between the cost to acquire the units and their prevailing retail asking prices.

When dealers ask me for advice on how best to deal with this disparity, I’ll share three pointers:

1. Recognize the reality. The Cost to Market differences shouldn’t surprise anyone. Since the dawn of the used vehicle business, dealers are more likely to acquire the most cost- and profit-favorable inventory at the curb, rather than the auction. But auction vehicles are a necessity for most dealers if they want to maintain their retail sales volumes. You can’t sell the cars if you don’t have them, and it’s unlikely that most dealers will be able to acquire all the inventory they need from trade-ins.

Once dealers recognize this reality, they are better able to understand that it’s imperative to efficiently find the most profit-favorable vehicles at auction, and apply an appropriate amount of cost discipline to acquire the most profit-favorable units. The dealers also know that, sometimes, it makes more sense to simply acquire the vehicle, rather than walk away.

In such circumstances, even if a vehicle’s Cost to Market parameters aren’t as favorable as you’d like, the opportunity to retail the unit, and generate additional gross profit in service/F&I and potentially secure another trade-in vehicle, can outweigh the inherently higher acquisition cost.

2. Avoid the “pride trap.” It’s not uncommon for used vehicle managers and buyers to come back from an auction, feeling pretty proud of what they purchased. Such is the psychological nature of the auction-buying format. Your bid is the winner! But, on the other hand, your winning bid might also mean you simply paid more than anyone else to acquire the vehicle.

To test this dynamic, I’ll sometimes compare the Cost to Market ratios for essentially identical vehicles a dealer acquired via auctions and trade-ins. The comparison typically reveals the Cost to Market disparity noted above—the cost of the purchased unit runs about 10 percent higher than the trade-in. I’ll note that this finding doesn’t necessarily suggest cause for pride. Rather, it’s a reflection of the wholesale market’s efficiency, and the inherent advantage trade-in opportunities offer dealers.

3. Focus on faster sales velocity. Ideally, there shouldn’t really be any difference in the number of days it takes to sell purchased or trade-in units. Time is money with every used vehicle and, given the Cost to Market disparity between purchased and trade-in units, it’s even more important that you retail auction vehicles as efficiently and fast as you can.

But here’s the reality in inventories across America: Purchased units typically take longer to retail, and they often make up 70 percent to 80 percent of a dealer’s aged vehicles.

You can usually trace this problem back to the “pride trap” noted above. When used vehicle managers are too proud of a purchased unit, they’ll set an initial asking price higher than it should be, given competing units in the market and the unit’s initial Cost to Market ratio. Such decisions make the vehicle less appealing to price-smart buyers, and slow its eventual retail sale.

Top-performing dealers mitigate this temptation by striving to maintain at least 55 percent of their inventories under 30 days of age. These dealers will also strive to keep their days to sale average consistent across their purchased and trade-in units. Both types of oversight tend to drive more market-realistic pricing decisions that maximize every unit’s front-end gross profit potential and sales velocity.

Dealers who make these pointers part of their wholesale acquisition process tend to complain less about the high cost of purchased units. Instead, they focus on the age-old principle that “you make your money when you acquire a vehicle” and manage each investment, regardless of its source, to preserve and produce the maximum profit possible.

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4 Corollaries From the Facebook, Dealer Data Fronts

Dale Pollak — Mon, 16 Apr 2018 21:16:37 +0000

I’ve been following the controversy involving Facebook and its user data.

The debate and discussion remind me of an issue that’s very familiar to dealers—how dealership data is handled and monetized by some technology partners.

To be sure, the particulars of the issues facing Facebook and dealers are different. But there are four apparent corollaries I find intriguing:

Data management clarity. The recent Congressional hearings affirmed a key similarity between Facebook users and dealers: End users didn’t fully understand how a technology system provider might use the data they added about themselves and their customers to the system itself. On one hand, it’s completely understandable. No one reads the fine print anymore, even if we should. But on the other hand, many of us simply trust our technology partners to do the right thing. When this initial trust erodes, there’s usually trouble.

Ownership/control. It seems clear from the Facebook case that, while end users may have OK’d the company’s data gathering/sharing practices, there’s a sense that their data has been compromised, if not misused. The ownership/control question is similar for dealers. For their part, dealers share the sentiment that the data moving through their in-store technologies is their data, and they ought to have a greater say in how it’s managed and monetized.

Probability of oversight. I suspect we’ll see at least some effort by federal lawmakers to enact a more in-depth level of oversight, and understanding, to the regulations that guide the relationship between social media stewards like Facebook and their end-users. Perhaps the biggest take-away is that the feds, and Facebook users, are now paying more attention. The same is true with dealership data. Federal regulators and dealers are paying more attention. Will the regulatory landscape change on either front? Only time will tell.

Lack of alternatives. As a Facebook user, I’m not happy to learn what’s come to light in the past few weeks. But I’m not like some of my friends, who’ve said “no more” and deleted their Facebook accounts. Why? For me, the answer is that there isn’t really another alternative. I really do like the way Facebook keeps me in touch with family and friends. I’m like everyone else…Facebook is part of my daily routine. The situation’s similar for dealers. Many feel that they can’t part ways with their partners because their technology and tools play a key role in their day-to-day business operations.

In the end, I am optimistic that the debate and discussion about Facebook and dealership data will land in a good place.

Ultimately, both situations suggest we’ve arrived at a critical juncture—where the fast-moving pace of today’s technology-disrupted world has paused. It’s an arguably one-time opportunity to take stock of what’s happened and apply the lessons to shape a digital data-sharing environment that’s more equitable, fair and just for all parties.

With so much at stake, it seems the right thing should be the only thing to do.

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3 Opportunity Costs You Should Consider Trimming

Dale Pollak — Tue, 10 Apr 2018 20:54:56 +0000

As more dealers think of ways to adjust to today’s margin-compressed environment, cutting costs becomes a primary topic of conversation, if not decisions.

It’s a good exercise. It points your attention to how you’re spending money. It prompts you to examine whether these investments deliver the return on investment (ROI) they should.

But I caution dealers that this review ought to a bit more all-encompassing and thorough. It should go beyond the checks you sign every month. It should look closely at the way you do things, and whether your people and processes, wittingly or not, create and contribute to opportunity costs that hurt your business.

You can Google a lot of definitions for “opportunity costs.” I like to think of them this way: They amount to the benefit, profit or value that you give up when you choose to make decisions, or complete tasks, in a certain way, one that may be less efficient than an alternative.

When dealers tell me they’re cutting expenses to help boost dealership profitability, I’ll suggest they take examine three areas of opportunity costs that are often ripe for reduction:

1. Pricing Vehicles: vAuto recently took a close look at how dealers price their new and used vehicles. It was a snapshot view that captured a week’s worth of price changes (increases and decreases) across new and used vehicle inventories. The analysis isn’t scientific, but it’s telling. The following take-aways suggest that dealers could reduce opportunity costs by reconsidering how they price vehicles.

Price adjustment frequency: For the most part, the data show dealers are reviewing and repricing used vehicle inventory at least three times a week. I found it curious that the vast majority of dealers did not make any new vehicle price changes in the mid-month week we examined.

Price adjustment direction: For most dealers, the overwhelming majority of pricing decisions resulted in reductions. On one hand, this take-away isn’t surprising, particularly given that dealers’ pricing primarily pertained to used vehicles in the analysis. But we noticed a notable number of dealers who struck more of balance; their price adjustments included increases and decreases (in both new and used vehicles). It’s hard to draw a firm conclusion, but I suspect the data indicate that dealers may be reflexively reducing prices, and not identifying the vehicles, and market conditions, that merit price increases.

Price adjustment size: If there’s a headline from the analysis, it might be “Dealers Who Price Their Vehicles More Frequently Make Smaller Adjustments.” The data showed a clear pattern among dealers who reviewed and adjusted vehicle prices more frequently—on the whole, their price adjustments were more incremental, and the impact on gross profits less profound. I couldn’t help but think that dealers who only touched their prices once or twice a week, and cut six-figure sums from their gross profits, might see better results if they priced in a more market-efficient, and proactive manner.

2. Sourcing Vehicles: There’s a dichotomy at many dealerships between their new and used vehicle departments. In new vehicles, I think you could make the case that dealers and managers would have a better mix of market-desirable vehicles if they put more insight and time into their factory ordering decisions. vAuto’s Brian Finkelmeyer, who helps dealers improve their new vehicle performance, says it’s not uncommon for factory orders to occur in a hurried, last-minute rush to meet the factory’s deadline.

“The opportunity cost comes when the scramble results in ordering copies of cars that you’ve had in inventory for the past four months,” he says.

In used vehicles, we’re seeing a shift toward making inventory sourcing less time-intensive. With today’s technology and tools, dealers and managers aren’t spending as much time researching and traveling the country, for three to four days a week, to acquire inventory. The shift helps them address the opportunity costs that come when key players are off looking for cars, and unavailable to do things like close deals, manage teams and move vehicles more efficiently through reconditioning.

3. Merchandising Inventory: I was a dealer back in the days when the Internet first arrived. It was a pretty clunky and time-consuming process to get vehicles, descriptions and photos online. At the time, I understood that time was money. The longer it took me to get my cars online, the less opportunity I had to sell them while they were fresh. That’s why I missed a lot of bedtime stories with my kids. I was still at the dealership, writing descriptions and uploading files.

We’ve come a long way since then. But even so, it’s still far too common for five, seven or even 10 days to pass before many dealers get their new and used vehicles properly merchandised and posted online.

The best I can tell, these delays are all due to process inefficiencies. Perhaps the inefficiency relates to your service department, or your detailing team, or perhaps the outside vendors who work with you on their schedules. Whatever the case, there’s room, I believe, for most dealers to minimize the opportunity costs associated with less-than-optimal (and time-urgent) merchandising.

I’ve shared these three areas of opportunity costs because I believe they represent some of the lower-hanging fruit that dealers can harvest to mitigate margin compression and improve their operational efficiency and profitability.

I also hope this post serves a broader purpose—to help dealers and their teams recognize that minimizing opportunity costs will ultimately provide more long-term benefit to your operation than simply cutting your monthly expenses.

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Margin Compression Takes A Bite—How Will You Bite Back?

Dale Pollak — Mon, 02 Apr 2018 18:03:53 +0000

For many dealers, margin compression in used vehicles has been a bit like a leaky water line.

The truth is, the line’s been slowly dripping for years. But no one really noticed it until now—after a ceiling or wall has started to bubble, crack or crumble.

Dealers’ awareness of margin compression seems to have taken hold this year, following the realization that despite a fairly strong year of used vehicle sales in 2017, they actually made less money.

You can see this picture in end of year financial data from the National Automobile Dealers Association. Their December 2017 financial profile shows two disturbing year-end stats:

Average net profit per used vehicle retailed in 2017: -$2. I can’t remember ever seeing used vehicle net profit as a negative number. But it’s been dropping for the past few years. It was $164 in 2014, $132 in 2015 and $65 in 2016. Can you hear the sound? Drip. Drip. Drip.

Front-end gross profit declined. NADA reports the average retail gross profit dropped $78 to $2,337 last year, down from $2,415 in 2016. The average was $2,444 in 2015. Drip. Drip. Drip. (Note: NADA’s numbers include F&I income, which means the margin decline would be more pronounced, given many dealers’ efforts to increase F&I sales in recent years.)

The numbers wouldn’t be so disturbing if they were just a temporary blip. But like the leaky water line, the problem’s more chronic than coincidental.

The key question on the minds of dealers in my conversations is, now that they’ve recognized the problem, what steps can and should they take to fix it?

I’ll answer the question with some bad news. Unfortunately, there isn’t really a “fix” for margin compression. It’s now the nature of our ever-more competitive, efficient and transparent used vehicle marketplace.

But there are ways to mitigate the problem and stop leaks that often erode used vehicle profitability. Here are four recommendations:

Measure/manage efficiency of acquisitions. At many dealerships, there are at least a handful of individuals, if not more, who have the authority to appraise vehicles. From my observations, there’s a fairly wide degree of variance among the appraisers, when you judge their decisions based on their Cost to Market ratios.

Cost to Market measures your cost to acquire the vehicle against the prevailing retail asking prices for the unit, a calculation that yields your potential profit margin spread. If you acquire a vehicle for $8,500, and the retail asking price is $10,000, the Cost to Market is 85 percent.

There’s margin to be gained by managing and measuring the consistency of your appraisals, as weighed against your Cost to Market targets. I recognize there are real-life pressures to allow a little more for trade-ins. But I would submit those pressures will fade as you use the current market to establish the fair value of your acquisitions.

Trim reconditioning costs. I’ll put aside the question of how much you can rightfully charge for labor and parts for your internal reconditioning work. But when’s the last time someone asked your third-party vendors for a little haircut, perhaps a 5 percent to 10 percent reduction? Chances are, those invoices get paid without too much question—an area of oversight that offers some margin opportunity. It’s worth remembering that part of the NADA-reported net loss on used vehicles amounts to someone else’s gain.

Minimize discounting. Just as some appraisers seem to acquire cars for the right money than others, some sales associates are better at avoiding discounts than others. When you price your used vehicles to the market, there’s simply less room for negotiation, and your average showroom/other discount should reflect this reality. The key, of course, is to manage and measure your discounts. Everyone who puts their initials on a deal should be held accountable for the discounts they approve—and properly trained to know how to maintain your margin.

Reduce inventory age. In today’s margin-compressed market, retail speed is the only way to take advantage of the age-old truth that fresh cars deliver the best gross. Dealers who sell a larger share of fresh vehicles would maximize each unit’s gross profit potential. It’s really a black and white proposition. No doubt, that’s why top-performing dealers maintain at least 55 percent of their inventories under 30 days. Their gross profits tend to look better than dealers who carry a larger share of older vehicles.

As I mentioned, these recommendations won’t completely eliminate margin compression. But they can help slow its harmful effects and help you avoid profitability leaks that make the problem even worse.

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NADA Day 3: Final Thoughts On A Great Convention

Dale Pollak — Mon, 26 Mar 2018 17:19:40 +0000

I heard that there were more than 100 new products offered and promoted through press releases at this year’s NADA—almost double the number from last year.

Among them, there were multiple companies offering a variety of solutions you could categorize as part of “digital retailing,” which is intended to help dealers engage and transact more effectively and efficiently online with sales and service customers.

On this front, I asked dealers two questions. How many customers have asked you to offer more digital retailing tools? And, how many deals have you lost because you haven’t offered them?

I mostly got goose eggs for answers.

For their part, dealers don’t appear to be hearing a palpable hue and cry from customers for digital retailing. The absence begs another question: Why are there so many of these tools on the market?

The answer, I believe, rests in the reality of today’s retailing environment. Dealer margins are more compressed than ever and there’s a growing need for them to find ways to conduct their businesses in a more cost- and time-efficient manner to make money.

Further, there’s proof from dealers who are making digital retailing a priority that it actually works once their customers know about it.

From my vantage point, these dynamics suggest we’re in the early stages of an evolution that will gain momentum, for consumers and dealers, in the months ahead. It’s a little like the early days of Amazon and Google, where consumers weren’t demanding a different way to purchase products or use the Internet.

But there was an understanding that these businesses, and the technologies employed, offered something consumers would appreciate and eventually expect.

At NADA, the sheer volume of new technology offerings left some dealers feeling a bit overwhelmed by the variety of choices, and concerned that even if they made the investment, they’d have trouble getting their managers and teams to buy in.

These are important and legitimate concerns that I view as a call for solutions providers, including Cox Automotive, to deliver the implementation guidance and help that will be necessary for mutual, sustained success. In many ways, I think we’ve entered an era where if vendors aren’t giving more, they’ll be getting less.

I think it’s also worth noting here that as the digital retailing evolution occurs, OEMs will also need to re-think their relationships with their dealer partners. Several dealers shared concerns that OEM mandates for specific tools and processes are making it more complicated and difficult to fashion a digital retailing strategy that they believe is the right fit for their customers and stores.

As the pace of change and need for new technologies continues, it seems wise that all the retail automotive stakeholders to remember that when you strive to do the right thing, good things happen.

It was great to see so many friends, and make new ones, at NADA this year. My feet are telling me it’s time to head home.

The post NADA Day 3: Final Thoughts On A Great Convention appeared first on Dale Pollak.

NADA Day 2: A Telling Conversation and Other Nuggets

Dale Pollak — Sun, 25 Mar 2018 16:12:45 +0000

I had the honor and privilege of spending time this week with Thomas “Mack” McLarty, a highly successful third-generation dealer from Arkansas who has also had a remarkable political career, including his service as chief of staff for former President Bill Clinton.

I was curious to get McLarty’s perspective on the differences between running a dealership and the White House.

In business, McLarty says decision-making might be considered easier because it’s often focused on issues and topics that fall in your realm of expertise—your business. If you can, your decisions follow your own timeline, giving you opportunity for careful, deliberate consideration of the factors at hand.

Government’s different. You face a wide-range of issues and topics on which your own expertise may be thin. Plus, you often need to make decisions quickly, or you risk allowing the media to set the narrative, and influence the scope of the decision itself. In this environment, McLarty says, input from knowledgeable advisors is not only critical, it’s essential to ensure sound decision-making.

It was a telling observation that struck me as extremely relevant for dealers in the current era of imminent disruption and uncertainty about the future of the car business. Change is coming fast, and dealers would be well-served, I think, to look beyond automotive retailing and their own expertise to map their future relevance and viability.

The conversation reminded me of a wise saying: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

I also gleaned a few nuggets from conversations on exhibit floor. Here they are:

“The future is frictionless.” Brian Benstock, vice president of Paragon Honda, New York, offered this take-away from his NADA workshop. It highlighted how he’s making every customer engagement, whether in sales or service, easier and more convenient. The strategy combines technology and tools to help Benstock and his team serve their customers in the more digitally enabled manner they now prefer. He attributes the two-year effort to helping him double retail sales.

Buy or sell? It’s a question on the minds of many dealers as they ponder the pace of technology-driven disruption and ongoing margin compression. I tend to agree with some of the buy/sell experts I talked to: It’s probably time for every dealer to determine whether they want to grow their business or be among those who sell their stores. If you look ahead at sales and profit projections, two things seem clear today. First, those who achieve greater operational efficiency and scale will likely have the greatest competitive advantage as margins continue to decline. Second, franchise valuations aren’t likely to get much better in the years ahead than they are today.

Service inefficiency. vAuto’s booth on the NADA exhibit floor sits next to the Xtime booth. The traffic there has been indicative of an understanding among some dealers that the time has arrived to do a better job providing a service experience that helps them retain a larger share of customers for a longer stretch of their vehicle ownership cycle. As the headline on Automotive News editor Jim Treece’s NADA Daily column puts it, “Sales are sexy but service is key to profits.”

I’m excited to see what the final day of this year’s NADA convention will bring. I’ll share more here tomorrow.

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NADA Day 1: Four Themes To Consider

Dale Pollak — Sat, 24 Mar 2018 18:30:55 +0000

I took a fair amount of notes during the American Financial Services Association’s annual conference, and Automotive News Retail Forum events here in Las Vegas.

Then, I compared the notes with take-aways from my conversations with dealers on the opening day of the NADA convention.

I was curious if the comparison might yield any big disconnects—particularly between what the speakers are saying about the near-term future of the car business, and what dealers have on their minds as they’re attending NADA.

There was a lot of consistency, and four themes emerged from the exercise that I thought I should share here:

1. Imminent disruption: From the Waymo vehicle parked outside the NADA exhibit hall entrance, to the dealers who report success offering ride-sharing services to their customers, it’s pretty apparent that advances in technology are transforming the way consumers want to experience and own vehicles, and the role dealers play in putting people into their next vehicle. The consensus view seems to be that the viability of traditional dealership business practices have a somewhat limited shelf-life. The clarion call for dealers seems to be, “if you don’t disrupt yourself, someone else will.”

2. Under-performance problems: Dealers are feeling the pain of compressed profitability, which is serving as a catalyst to address how they can become more operationally efficient to maximize their returns on investment. I heard a lot of statistics about dealership profitability that revealed a stark and unsurprising contrast—the top 25 percent of dealers are still making good money in new and used vehicles, while the rest aren’t getting the returns they should. I spoke with a dealer consultant who’s using NADA to help a five-store group crack the top 25 percent mark. A key initiative: Re-thinking the group’s expense structure, across personnel, process and vendor partners, to maximize profitability and ROI. “It’s a seven-figure opportunity,” he says.

I was also impressed by the way John Malishenko, COO for the Ohio-based Germain Motor Company, is working to improve performance by reinventing the roles, responsibilities and tasks of managers. “We’ve redefined what the work is, and what gets done,” Malishenko says. “The ‘how’ is as important as the ‘what,’ and ultimately more important. You don’t want to innovate beyond your ability to execute.”

3. Uncertainty: I spoke with a young, first-time dealer who recently opened a luxury import store—taking over a point that the OEM reactivated. He’s worried about the long-term viability of his investment, and wondering how to best position his operation for future relevance—should service be his ultimate focus rather than retailing vehicles? Is ride-sharing the way to go? “I’m fine thinking outside the box and going in a completely different direction,” he says. I offered that while it’s difficult to determine the correct course today, his adaptability and openness to change would be the best guides to map his gameplan for the years ahead.

4. Market headwinds: In recent years, dealers have been blessed by robust demand and relatively easy credit availability, which has made new and used vehicles more affordable. These tailwinds are shifting to headwinds as interest rates rise and credit tightens. Some analysts suggest the headwinds will crimp used vehicle sales. At the moment, however, it doesn’t appear that the analysts are down-sizing their retail sales projections—offering a caveat that future interest rate increases may soften the outlook.

As always, I’m looking forward to another day on the NADA floor.

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An Emphasis On Efficiency, Innovation at NADA

Dale Pollak — Tue, 20 Mar 2018 20:50:14 +0000

I’m ready for NADA. Are you?

I’ve been asking that question, along with a follow-up—what are you ready for?

The answers I’ve gleaned from dealers all boil down to essentially the same thing: Dealers are hungry for ways they can become better, more efficient, and more profitable.

It’s the right answer, particularly as you consider new and used vehicle sales volumes in the early months of 2018, and the profit these transactions deliver.

I can’t get past a couple recent stats from NADA. On average, dealers reported a -$2 net profit per used vehicle retailed in 2017, and -$421 net profit per new vehicle retailed.

To be sure, the averages don’t apply to every dealer. In particular, the net profit average for used vehicles seems to owe more to factory influence and intervention on import dealers than true-blue market forces.

Nonetheless, you can’t deny that we’re in an era of margin compressed profitability, which is why some dealers are making NADA a stepping stone to get better, be more efficient and make more money.

At vAuto, we’re answering this important call by bringing two key product innovations, and an enhancement, to NADA this year.

Nexi: We began this product development with a simple goal: Let’s find a way to help dealers manage their businesses without having to bury themselves in a software application. Say hello to Nexi, the automotive industry’s first digital assistant for dealers. It’s built to proactively provide the operational and inventory insights you need to do your job more efficiently. Nexi notifies you through Alexa Echo devices, as well as email, in-application alerts and text messages.

Stockwave Offers: It made the most sense to apply Nexi’s artificial intelligence (AI) architecture to one of the most energy- and time-intensive tasks that happens at every dealership, every day—finding and acquiring wholesale inventory. Enter Stockwave Offers, which tells you when the units that meet your profit and acquisition criteria can be purchased.

Provision Enterprise: It’s become ever-more important for dealer groups to maximize the innate advantages their scale and size offers. There’s growing recognition that you can’t achieve these advantages without a more cohesive, comprehensive and efficient approach to managing your rooftops. Enter Provision Enterprise, which features a tell-all dashboard, centralized appraising and inventory transfer options.

For each of these efficiency-focused innovations, I’ve insisted that they cannot carry an additional cost for dealers. It’s my view that now is simply not the time to be asking dealers, who are operating in an unprecedented era of margin compression, for more money.

Thankfully, the leadership at vAuto and Cox Automotive agreed. As a result, we will be offering all of these products at no additional cost at NADA—an outcome that makes me proud.

I’m off to pack my bags. As usual, I will be spending the majority of my NADA time at the vAuto and Stockwave booths (3016C and 3038C, respectively).

I look forward to seeing many of you there. Safe travels!

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Part 2: 4 Ways To Mitigate Margin Compression

Dale Pollak — Fri, 02 Mar 2018 18:00:55 +0000

If today’s used vehicle market was a house, it’d have a serious structural problem.

Let’s say the house had eight-foot ceilings 10 years ago. Today, the ceiling height is probably closer to seven feet, or even less, depending on location.

I know the shrinking ceiling analogy is slightly abstract, but it’s an apt way to describe how margin compression is changing the used vehicle business.

Consider, for example, that used vehicle prices are essentially the “ceiling” in the used vehicle market.

For a long time, dealers could effectively set the prices, or the ceiling, on a vehicle. They had great discretion and latitude.

Buyers, meanwhile, might have chipped away at the asking price, but dealers countered, and fortified their ceiling, with negotiation-savvy desk managers.

Today, things are much different. The market sets the ceiling for used vehicle pricing. And, in recent years, the rising weight of Internet-driven market efficiency and transparency put more pressure on the ceiling. As the load grows, the ceiling sags–narrowing the gross profit margin between a dealer’s cost to own a vehicle and its eventual selling price.

One might ask: “Dale, the average used vehicle transaction prices are higher, so how can the ceiling be closing in?”

It’s a valid question, but it overlooks the fact that many dealers are retailing more expensive vehicles and the margin between their cost and selling prices has been shrinking. The latest stats from NADA show that retail gross profits as a percentage of used vehicle sales prices dropped another 3 percent between 2016 and 2017—part of a downward trend that’s been occurring for several years.

In my last post, I tried to underscore why the dynamics of margin compression and market conditions make it difficult, if not impossible, for dealers to take the traditional tack of raising used vehicle prices to offset gross profit declines.

The post wasn’t intended to suggest that dealers can never raise used vehicle prices. There are instances when a vehicle’s Market Days Supply, and your retail objectives, warrant a price increase. This scenario, however, is a more calculated and market-justified move than simply increasing prices to gain more gross.

My previous post also promised four ways dealers can combat margin compression that go beyond rational, market-based pricing. Here they are:

1. Reduce inventory age. In today’s margin-compressed market, retail speed is the only way to take advantage of the age-old truth that fresh cars deliver the best gross. Dealers who sell a larger share of fresh vehicles would maximize each unit’s gross profit potential.

This is why more dealers are aiming to maintain—and retail—a larger share of their inventories under 30 days of age. I encourage dealers to maintain a minimum of 55 percent of their inventory under this threshold. I know of several dealers who actually go further, and retail 60 percent or more of their vehicles in less than 30 days.

Of course, your used vehicle pricing strategy needs to go hand in hand with your efforts to reduce inventory age and retail more vehicles while they are fresh. I encourage dealers to examine when their retail sales occur, and assess how well their age-related Price to Market adjustments and targets help them achieve a faster pace of sales.

2. Address your acquisition efficiency. At many dealerships, there are at least a handful of individuals, if not more, who have the authority to appraise vehicles. From my observations, there’s a fairly wide degree of variance among the appraisers, when you judge their decisions based on their Cost to Market ratios.

There’s margin to be gained by managing and measuring the consistency of your appraisals, as weighed against your Cost to Market targets. I recognize there are real-life pressures to allow a little more for trade-ins. But I would submit those pressures will fade as the current market guides the way you establish the fair value of your acquisitions.

3. Trim reconditioning time and costs. It’s not uncommon for dealers to lose several days of prime retailing time as a fresh used vehicle investment awaits reconditioning. Top-performing dealers get vehicles out of the shop in 24 hours or less, and some even market them online before the recon work, detailing and full set of photos/videos are complete. Industry studies suggest it takes an average of seven to 10 days for vehicles to be retail-ready—a timeframe that saps your margin potential.

Dealers also have an opportunity to increase their front-end gross margins by more proactively controlling their outsourced reconditioning costs. In many dealerships, used vehicle departments pay third-party vendors for upholstery, windows and other repairs without paying much attention to the invoices. That was certainly the case when I was a dealer. Given today’s margin-compressed environment, it seems reasonable to ask these partners to find ways to reduce their costs by 5 percent to 10 percent to help you preserve your profitability.

4. Manage discounting. Just as some appraisers seem to acquire cars for the right money while others don’t, some sales associates are better at avoiding discounts than their peers. When you price your used vehicles to the market, there’s simply less room for negotiation, and your average showroom/other discounts should reflect this reality.

The key, of course, is to manage and measure your discounts. Everyone who puts their initials on a deal should be held accountable for the discounts they approve—and properly trained to know how to maintain your margin in today’s more transparent market.

Dealers who adopt these recommendations, and make them operational priorities, see front-end gross profit improvement fairly quickly. As you might expect, the degree of improvement correlates directly to the level of commitment and discipline dealers put to the task.

These dealers also gain a longer-term advantage. They’ve braced and bracketed their operations to keep margin compression from doing unnecessary damage.

By contrast, their competitors are complaining that used vehicle gross profits aren’t what they used to be, while letting the ceiling shrink even more.

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Part One: A Troubling Tradition-Minded Trend To Avoid

Dale Pollak — Tue, 27 Feb 2018 17:35:32 +0000

In the past few weeks, I’ve noticed a troubling trend in dealers’ used vehicle inventories.

The inventory turn rates at these dealers is slowing down. Last year, the dealers consistently maintained an annualized turn rate of 12 times or better. Today, I’m seeing the same dealers post turn rates closer to 10 or even less.

Time and again, after I ask the dealers about their slower sales pace, I get essentially the same answer: “Yeah, I know. We’re trying to get more gross on these cars.”

I’ll dig a little deeper to see what methods the dealers are using to get more gross.

Time and again, they’re taking the same play from the traditional used vehicle retailing playbook. They are raising asking prices, and making price adjustments less frequently, with the hope of gaining better front-end grosses.

These findings lead to two important points:

Hope is not a strategy in today’s used vehicle market. The market’s too efficient and transparent. Customers know if your prices seem too high compared to everyone else. Some might investigate further. Maybe they’re missing something. Maybe there’s a good reason you’re asking more for essentially the same vehicle as the dealer across town. Inevitably, these customers will all end up in the same place. They’ll be interested in your vehicles unless and until your pricing makes more sense to them, compared to what they see in the market.
Slower-turning inventory brings future trouble. Dealers sometimes justify the decision to allow a slower inventory turn rate by noting that their retail sales volumes haven’t suffered, and they may even be making slightly better grosses. But I’ll counter by showing how the slower turn is causing a harmful undertow. It often pulls a higher percentage of vehicles past 30 days of age, and sets up a higher likelihood of retail or wholesale losses in the not-too-distant future. In my experience, these losses often erase any front-end gross gains that may have come allowing your inventory turn to slow down.

Ultimately, I tell dealers that while the instinct to raise prices to improve your front-end gross profit may have worked in the past, it’s out of step with today’s more efficient and transparent market.

In my next post, I’ll dig into ways dealers can mitigate margin compression beyond pricing that won’t compromise the need for the inventory turn speed today’s market requires.

And for dealers who are contemplating additional price increases to get more gross, I’d submit that it’s a little like driving a vehicle with one foot on the accelerator, and the other on the brake.

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Temptation Abounds. Will You Bite?

Dale Pollak — Tue, 30 Jan 2018 20:29:07 +0000

‘Tis the season for temptation in used vehicles.

It’s that time when some dealers stock up on used vehicle inventory in advance of the annual rite of spring-fed retail sales.

I got a note today, in fact, from a dealer who’s contemplating bulking up his inventory even earlier this year, given recent softening of wholesale prices.

I had to ask the question: “How did that work out for you last time?”

The answer wasn’t surprising. Last year, the dealer began acquiring more inventory late January to ensure he had enough vehicles to meet anticipated demand in early March. But, “by the end of February, the wholesale market had increased and we were selling aged units for less than it cost us to acquire inventory,” he says.

The dealer’s experience is not unlike those I’ve gleaned in conversations from other dealers. To an individual, they all admit that previous attempts to speculate on an expected uptick in retail sales often don’t pan out the way they thought they would.

Take this experience from a Texas dealer, who bulked up his inventory in anticipation of selling more used vehicles to replace those lost in Hurricane Harvey.

Indeed, the dealer sold more retail units, but he also suffered a hangover effect—a preponderance of 70-day and older vehicles he was forced to list at “fire sale” prices at the end of the year to get out of them. The upshot: The losses on the aged units effectively wiped out any gains the dealership realized from succumbing to the temptation to speculate.

“We thought the buying frenzy was going to last longer than it did,” the dealer says. “The projections of 750,000 to 1 million totaled cars wasn’t. Right now, we have 30 units on fire sale to get out of them. We just projected wrong.”

Such experiences have led me to conclude that dealers simply aren’t as good at gambling or speculating on future retail sales as they think. In fact, I’d assert that these attempts to play the market only pay off about 50 percent of the time.

Unfortunately, dealers often don’t remember the 50 percent of the times their speculative efforts don’t work, especially when they’re facing a fresh temptation to repeat the cycle.

On some level, the inability to resist this temptation is understandable. Dealers and used vehicle managers are typically individuals who like to gamble and take risks—witness the shoulder-to-shoulder blackjack tables after hours at any NADA convention in Las Vegas.

But I would suggest that dealers should strive to resist the temptation to speculate for the following reasons:

Your past success. Like the two dealers mentioned above, it’s a useful, albeit sobering, exercise to honestly evaluate whether bulking up their inventory or holding on to vehicles really paid off in the past. How many of those vehicles sold quickly when the appointed time for their retail sale arrived? How many aged past the point where they delivered a sufficient return on investment? What was the average front-end gross for all of these vehicles (including any retail or wholesale losses)? In my experience, dealers find that their attempts to speculate panned out worse than they remember.
Your holding costs. In many cases, the decision to stock up on inventory comes 45 to 60 days in advance of anticipated retail demand. This means if you acquire a vehicle for $15,000, you’re automatically saddling it with holding costs (assuming a $30/day average) that range from $1,350 to $1,800. This cost burden, which I recognize many dealers and used vehicle managers don’t regard as “real money,” makes it extremely difficult in today’s highly competitive market to realize a sufficient return on investment when the vehicles finally retail.
Your crystal ball. In all my years, I still haven’t met anyone, in the car business or elsewhere, who can consistently and accurately predict the future, especially in an environment as competitive and volatile as today’s used vehicle market. We’ve all seen sure-fire winner vehicles turn out to be losers, which is a lesson worth remembering when the temptation to speculate strikes.

The bottom line is that the best dealers today are used vehicle retailers, not speculators. They don’t consider hope as a viable strategy for success. Rather, they focus their efforts on retailing everything they can in the current market. This strategy puts them ahead of competitors who can’t resist the temptation to speculate and too often get bogged down with the bad results.

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Four Key Resolutions To Improve Used Vehicle Performance

Dale Pollak — Fri, 26 Jan 2018 19:33:43 +0000

A new year brings much discussion about goals, resolutions and to-dos.

That’s certainly the case with a lot of dealers, judging from conversations and e-mails the past few weeks.

Collectively, the dealers are perhaps more clear-eyed about the year ahead in used vehicles than they have been in previous years. First and foremost, margin compression is no longer an abstract concept. Many dealers closed 2017 retailing more vehicles than they have in the past. Yet, the return on the effort and investment proved far from satisfying.

This recognition is important as many dealers are placing a higher priority on their used vehicle operations this year. They understand new vehicle sales volumes are likely to soften, while used vehicles will be good, if not better. They know that rising interest rates and credit challenges will probably put new vehicles out of reach for some buyers.

Some dealers are doubling down on used vehicles. They sense more opportunity and plan to follow the path of some public groups and open standalone used vehicle stores to further their growth and profitability goals.

Across this spectrum, I gleaned four resolutions that dealers believe will drive more productive and profitable used vehicle operations:

Reduce acquisition costs. There are three elements to this imperative. First, dealers are aiming to press down the average cost of their inventory—a nod to the recognition that, for many buyers, affordability will be critical to making a sale. In recent years, the average inventory investment has crept closer to $20,000, a reflection of an emphasis on late-model units. Second, dealers will be focused on Cost to Market, working with more discipline and diligence to maintain an average 85 percent Cost to Market ratio for their inventories. Finally, dealers are also aiming to reduce acquisition costs through increased efficiency. I’ve heard more dealers say they will more aggressively and intently on online auctions, rather than physical sales, to acquire the wholesale inventory they need. They are looking for cost and time efficiency through technology, while sending managers and buyers across the country less frequently, if at all.
Book more trades. The thinking here goes beyond the time-honored reality that dealers can generally acquire trade-ins more cost-favorably than they can from other sources. It’s also about inventory diversity and affordability. As one dealer put it the other day, “The trades are often older, and may need more work than we’d like, but they’re selling well.” To be successful, this effort often requires a greater level of oversight and training (or re-training) to ensure appraisers consistently meet your look to book and Cost to Market objectives, and recognize you might retail vehicles you didn’t take in the past.
Reduce aged inventory. Data-minded dealers and used vehicle managers have noticed a disturbing trend—their vehicles are often running out of retail juice by the time they hit 30 days in inventory. The realization has led some dealers to move the goal posts. If they allowed vehicles to stay on their lots for 60 days, the new threshold is 45. A few dealers are even more aggressive, setting 30 days as their viable retail window. These adjustments typically require fine-tuning of your merchandising and pricing strategies to spur a faster pace of retail sales. Even I now offer a more time-sensitive recommendation: I now urge dealers to maintain at least 55 percent of their inventory under 30 days to mitigate margin compression and market volatility. My prior recommendation was 50 percent.
Minimize speculation. In my conversations, I asked dealers where they went wrong last year. In many cases, the “big misses” owed to speculative bets that involved loading up on inventory in anticipation of future demand. These bets occurred when you might expect—in advance of the spring selling season, or in the wake of a natural disaster. The problem: Dealers, like anyone else, can’t reliably predict the future. They often find their bets play out right about half the time. Unfortunately, the losses on the other half of their bets often wipe out whatever gains they thought they realized. I like how a used vehicle manager in Phoenix plays his hunches. If he’s buying 10 vehicles at auction, eight or nine of will be dead-ringer acquisitions based on market data. The remaining units reflect the manager’s desire to take an occasional shot at playing his best guess.

I applaud the dealers for recognizing that margin compression is a very real and troubling risk to their used vehicle business. They deserve credit for resolving to do something about making the bottom line better.

But I also remind them of reality: Resolutions aren’t really worth anything until you bring them to life in your dealership.

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Velocity

Dale Pollak — Wed, 24 Jan 2018 21:09:24 +0000

It’s not complicated.

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Two Questions That Matter Together—Why? and How?

Dale Pollak — Fri, 29 Dec 2017 19:53:28 +0000

A Marketplace segment on a local National Public Radio station caught my ear yesterday.

The segment featured an interview with Steve Sasson, the former engineer for Eastman Kodak Company who invented the first digital camera in 1975.

Sasson discusses how his work began as a “filler job” handed to him by a supervisor. He details how he stole parts from different departments to build his first prototype and, months later, managed to successfully capture the world’s first digitized images.

Three years later, with a fresh patent in hand, Sasson took the invention to Kodak executives.

“I thought they’d spend all their time asking me how did I get this to work,” he says in the segment. “They didn’t ask me any of the hows, they asked me, ‘Why? Why would anyone want to do this?’”

We all know how the story unfolds from there. Kodak executives shelved the idea, and focused their attention on their highly profitable film business. Many years later, the company is a shell of its former self.

I write about this “Kodak Moment” in my latest book, Like I See It. The chapter highlights how the car business is facing a fast-closing convergence of new technologies that could significantly disrupt the way dealers do business and make money. I included the chapter as a kind of warning that dealers and other industry stakeholders who dismiss, or disregard, this technology-driven evolution do so at their own peril.

The Marketplace segment offers a useful take-away, I think, as we all face the future: If you only ask ‘why?’ as you evaluate a new challenge, change or opportunity, you stand a greater chance of missing how it will actually affect your business.

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Three Ways To Work Around And Through The Used Vehicle Donut Hole

Dale Pollak — Thu, 07 Dec 2017 18:22:56 +0000

I’ve been struck by three trends in the current used vehicle market.

First, late-model (three years and younger) vehicles account for almost 60 percent of retail sales, a fact affirmed in the latest Used Car Market Report from Edmunds. You can trace this development to the rise of off-lease supply, which many analysts expect to continue, albeit at a slower clip than recent years.

Second, the prevalence of late-model inventory is a bit tricky. Lower-mileage, near-new used vehicles are facing competition with heavily incentivized new vehicles. As a result, the near-new vehicles aren’t selling nearly as fast as similarly aged units with higher miles (e.g., > 50,000 miles).

The Edmunds report affirms this trend, too. It notes, “high levels of lease returns coupled with increasingly stringent mileage limits will feed an expanding pool of low-mileage used vehicle inventories that have proven to have a limited buying audience.”

Third, there’s strong demand and interest for older, higher-mileage vehicles, but they aren’t nearly as plentiful as the later model year inventory. The consumer demand for these vehicles isn’t surprising. There’s always strong demand for cheap, reliable transportation. Indeed, Edmunds notes that these vehicles are turning faster than most other used vehicle inventory.

In many ways, these trends force dealers to work around and through what might be described as a “donut hole” in today’s market. Here are three recommendations I’ve been sharing to help dealers to address these market conditions:

Re-assess your inventory strategy. The best Velocity dealers have been evaluating whether their inventory allocations for vehicle types (e.g., compact cars, mid-size SUVs, trucks, etc.) and cost segments (e.g., <$5,000, $5,000-$10,000, $10,000-$15,000, etc.) are truly correct and sufficiently precise for the current market. In some cases, dealers realize they’ve effectively given up on lower-cost vehicles (and their buyers) as they’ve placed a greater priority on higher-cost, late-model inventory. Inevitably, as dealers examine their allocations they find corrective opportunities to right-size segments they’ve overlooked, overstocked and understocked.

Examine your inventory age/days to sale by segment. This analysis can affirm and illuminate inventory strategy assessment take-aways. Which vehicle segments are moving faster or slower than they used to and why? How do the Market Days Supply and Price to Market metrics compare to those of your fastest sellers? Dealers who conduct this analysis often find one of two factors (and sometimes both) account for slower-movers—either the vehicle itself, or its merchandising/pricing, isn’t “right” for the market. Both suggest process change opportunities. Dealers who apply these lessons learned are more likely to achieve the goal of retailing at least 55 percent of your inventory in less than 30 days.

Address Cost to Market creep. I written before about the rise of inventory-level Cost to Market metrics climbing close to 90 percent, leaving only a maximum 10 percent spread for front-end gross profit. Dealers often know they should strive to maintain an inventory level Cost to Market ratio of 85 percent, but the creep occurs nonetheless. It’s true that the prevalence of near-new inventory contributes to the Cost to Market increase. But it’s also true that these vehicles are the easy pickings and perhaps reflect a lack of desire, discipline or interest in finding vehicles with more favorable Cost to Market ratios. I also recommend that dealers revisit their reconditioning costs, particularly those associated with outside vendors, to find additional savings to help reduce Cost to Market ratios.

The good news is that most forecasts call for a relatively robust used vehicle market in the months ahead—a suitable environment to make the inventory management adjustments that help you work more effectively around and through the donut hole in used vehicles.

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Webinar: A Four-Part Plan To Minimize Margin Compression

Dale Pollak — Fri, 01 Dec 2017 18:50:07 +0000

It seems margin compression is on the minds of a lot of dealers, judging from recent calls and conversations.

Given the interest, I thought it would be useful to share a recent webinar I conducted with the American International Automobile Dealers Association (AIADA). In the webinar, I highlight four areas of longstanding operational inefficiency that, if addressed, can help dealers minimize margin compression and improve their performance and profitability.

You can check out the webinar here.

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A Waymo Visit Brings Way More Future Mobility Insight

Dale Pollak — Sat, 18 Nov 2017 15:02:35 +0000

I did a little recon work prior to my visit this week to Google’s autonomous vehicle division, Waymo.

I wanted to get a sense of how driverless vehicle technologies might be underway and visible in California’s high-tech corridors.

Jay Seirmarco, an assistant general counsel for Cox Automotive who lives in San Francisco and works at Xtime’s offices in Redwood City, relayed that driverless vehicles are already common during typical commute times in his Noe Valley neighborhood.

“There are numerous autonomous vehicles coming into my neighborhood every morning,” he says. “The rumor mill in the neighborhood is that Apple workers are taking some of these to work. This happened recently and the volume is amazing. For me, it’s been an epiphany—this is the real deal and some people are commuting in these things.”

Lucy Smith, a Cox Automotive corporate counsel who lives in Redwood City, affirms that driverless vehicles are common during her daily commute. It’s also pretty common to see Teslas with drivers whose hands aren’t on the steering wheel.

“These vehicles are fantastic at handling traffic,” she says. “They actually drive better than some human drivers. They change lanes much more expertly.”

Those on-the-ground observations helped inform my meeting with Waymo CEO John Krafcik and COO Shaun Stewart. I had a rough sense that driverless vehicle adoption and use was gaining ground, and a hunch that it might be more profound than what I’ve read in industry and mainstream press.

The following are some of the big take-aways from my meeting with the Waymo executives and a drive in one of their vehicles—what I’ve come to call “My Trip to the Mountain”:

The technology is intense. Our vehicle arrived precisely at 9:30 a.m., exactly when it was supposed to. The vehicle, a Chrysler Pacifica, had two engineers in the front seat with laptops. They weren’t driving the vehicle as much as monitoring its performance and answering our questions. Between them, the dashboard featured a monitor showing a grid with images of color-coded objects ahead—other vehicles, street lights/signs, pedestrians, cyclists, etc.

The image colors changed to denote whether a specific vehicle sensor, a camera or laser radar, captured the object. The colors also changed based on movement and proximity to our vehicle.

At one point during the ride, a cyclist rode up beside our vehicle and passed us. I asked the engineers how the vehicle knew it was a cyclist and where he was going. “We calculate the probability of what the cyclist will do,” I was told. I asked the obvious follow-up—“how do you do that?”

The explanation was pretty incredible. The sensors track the cyclist’s position on the road, the angle of the rider/bike frame, and other factors to predict where it’s headed.

My mind spun as I thought about all of the data-crunching and programming necessary to produce such predictions.

Seirmarco shared a similar experience: He recently watched a driverless vehicle at a four-way intersection assess a cyclist, who was rolling backwards and forwards for balance while waiting for a vehicle to pass. The autonomous car appeared to stop and start in sync with the cyclist, and then proceed.

“The car figured it out,” Seirmarco says. “It blew my mind that the car knew what to do.”

Driverless vehicle critical mass will take about 10 years. Krafcik and Stewart helped me understand that some predictions, like one that says 100 percent of vehicles will have Level 5 autonomous technology by 2021, are a bit far-fetched. They also thought other predictions, like one that views 2030 as the point when autonomous vehicles will achieve critical mass, as about right. I came away thinking “10 years” is probably a viable timeframe when driverless vehicles will show up more commonly in places outside of California’s tech-heavy communities.

“Taxi” will mean something different to all of us. We discussed Waymo’s plans to commercialize its driverless vehicles with a “taxi” offering in Phoenix. The conversation helped me better understand Waymo’s intentions to operate fleets of autonomous vehicles, and offer them in a model that enables one vehicle to serve many different customers, sometimes at the same time. We didn’t dig into how consumers might pay for this type of transportation. But it’s likely the model will blend pay-per-use or pay-per-term principles. It seems like the idea of “calling a cab” may mean something entirely different in the not-too-distant future, and the Phoenix experiment bears watching.

OEMs will compete and partner with Waymo. We spent some time discussing the seeming arms race among OEMs around driverless vehicle technology. The dialogue helped me understand that Waymo and others will probably go head-to-head with larger OEMs, and partner with smaller OEMs that may find it difficult to develop driverless technologies on their own. The partnerships might take several forms, ranging from efforts to integrate the sensors and related technologies into vehicle designs and supply the vehicles Waymo and others will need.

Waymo shares our values. Both executives impressed me with their keen, shared sense of personal and social responsibility. They care about their people and their broader communities—just as we do at Cox Automotive. I also liked the way the company’s committed to innovation. Their mission talks about making “moonshots” (see image) and we are focused on “transforming the way the world buys, sells and owns cars.”

I would be remiss to not share how the discussion of shared purpose and values offered a positive outlook for Cox Automotive. The executives were sincere in saying they believed Cox Automotive would play an important role in the future of mobility and Waymo’s efforts to shape it.

I left the meeting thinking: “They know us. They understand what we do. They get why we do it. This is good.”

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3 Must-Dos To Combat Dealer Margin Declines

Dale Pollak — Wed, 15 Nov 2017 14:31:38 +0000

How many dealers figured they’d make up for ever-smaller margins in new and used vehicles by selling more cars in 2017?

If you asked the question in a room full of dealers, I suspect most, if not all, hands would be in the air.

“You make up your gross in volume” is the age-old rule of thumb in the car business.

But what if the thumb is broken, and the rule doesn’t fit anymore?

That’s the situation in today’s retail automotive market.

Through June of this year, the National Automobile Dealers Association (NADA) reports that dealers are seeing declines in two important places—on the gross and net profits they realize when they retail new and used vehicles, and in the overall number of vehicles they actually retail.

Gross/net profits: NADA reports that gross profit as a percentage of new vehicle selling prices dropped below 6 percent, to 5.9 percent, in the first half of 2017 compared to the same period in 2016. In used vehicles, the gross as a percentage of the sales price dropped to 12 percent.

Meanwhile, the net profit per new vehicle retailed fell 74 percent to -$396, and the net profit for each used vehicle retailed fell nearly 50 percent to $112.

Retail sales: In the first half of 2017, dealers averaged 449 new vehicle retail sales, up just two vehicles from the same period a year ago. In used vehicles, dealers saw a slight drop, as they averaged 358 retail sales, down from 362 a year ago.

These dealership data points suggest that dealers who believe they can retail their way to improved profits are probably kidding themselves in the current market. If the strategy worked, shouldn’t we see decidedly different numbers from NADA?

To me, the data amounts to a call to action. Dealers need a better way forward that doesn’t rely simply on selling more cars to make more money. Similarly, I don’t think cutting expenses will provide dealers sufficient relief from the combined pressures of margin compression and a softer sales environment.

I believe the best way forward rests with increased operational efficiencies. Dealers simply have to find a way to sell and service customers with greater efficiency and lower costs.

The good news here is that most dealers have three areas of long-standing inefficiency that, if addressed, can help them achieve the higher levels of operational efficiency, productivity and profitability they need to thrive in the years ahead:

Human capital: Dealers continue to suffer from an average annual turn-over of 67 percent in sales, and 40 percent across their operations. These figures suggest a high level of dissatisfaction. You can only wonder how many deals are lost or bad decisions made, on any given day, because the hearts and minds of dealership employees aren’t in the game. Dealers who have tackled this inefficiency have formalized their hiring processes around key personality traits and cultural fits, and moved away from the traditional practices of commission-based pay and uncertain work hours.

Inventory: I see signs of inventory inefficiency every day. If I had to summarize the problem, I think it’s fair to say that up to a third of dealers’ new and used vehicle inventories is effectively dead capital. These are over-age vehicles that haven’t sold, and they’re preventing dealers from reinvesting the capital in more profit-productive units. Of course, there are a multitude of reasons behind such inventory inefficiencies but they all point to the same underlying need for more investment-minded inventory decisions. In both new and used vehicles, dealers need to do a better job of assessing each vehicle’s retail prospects before they own it, and then working more diligently to retail every unit more quickly before its ROI, and front-end gross, effectively disappear.

Technology: Dealers have invested sizable sums in technologies that should help their sales associates and service technicians work more productively and profitably. Yet, sales associates still average about 10 retail sales per month, and technicians about 40 hours per week—averages that haven’t changed in nearly 40 years. The statistics suggests to me that solutions providers can and should do a better job of helping dealers achieve greater utilization of their tools, which would help dealers realize the promise of increased efficiency and profitability the technology and tools are intended to produce.

These three areas of opportunity don’t represent an end-all, be-all list. But they do offer starting points for dealers to push back against margin compression and a softer market, and gain back some of the profitability that seems to dissipate with each passing year.

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A New Way To Think About “Water” In Your Inventory

Dale Pollak — Fri, 10 Nov 2017 20:38:38 +0000

Dealers have long understood that having water in their inventory is a bad thing.

The conventional view holds that you determine the level of water in your inventory by comparing your costs to own the vehicle against the amount you could get if you wholesaled it right away.

Hence, if you own a used vehicle for $10,500, and current valuations suggest you’d only get $9,500 for the car on the wholesale market, you’ve got $1,000 in water for the unit. The same math holds for a dealer’s entire inventory.

Dealers pay varying degrees of attention to their inventory water. For some, it doesn’t really matter at all. If the vehicle’s a fairly fresh piece, dealers will hold out hope that a retail sale will make any water a moot point. Others reckon with water when they’ve given up on the vehicle as a retail unit, and take their lumps as they wholesale the car.

But I’ve begun to believe that this traditional view of inventory water isn’t as useful for dealers as it has been in the past.

For starters, the wholesale market, despite a headwind of high supplies of late-model vehicles, has remained relatively strong. Both demand and valuations are surprisingly resilient. On a day to day basis, dealers may still take baths as they wholesale vehicles, but the water’s not as deep or as cold as it could have been.

Second, the traditional view of water doesn’t really measure the most significant challenge dealers face in today’s used vehicle market—the continuing grind-down of front-end gross profits.

In our current margin-compressed environment, even a vehicle that isn’t weighed down by water often doesn’t produce a sufficient level of return on the dealer’s investment.

This condition shows up every day in my work with dealers. More and more, it’s increasingly common for dealers to have a large number of vehicles with Cost to Market ratios at 90 percent or higher. The ratio suggests the dealers might make a 10 percent front-end gross profit, given the spread between the vehicle’s costs and retail asking prices. But, in reality, the vehicles will likely transact at less than their asking prices—which means the front-end margin for dealers will be significantly less than 10 percent.

I often tell dealers that “30 is the new 45 or 60 in used vehicles”—a saying that captures how margin compression has shortened the viable retail shelf-life of most vehicles.

I also share an analogy: Suppose your inventory was like a block of ice, sitting in the middle of a room that’s 100 degrees and getting hotter. The longer the ice sits, the more it turns to water, runs down the block, spreads across the floor and loses its original purpose.

This is the water that dealers should really be worrying about. Here are two best practices that I recommend dealers follow to mitigate the water’s ongoing erosion of their front-end gross profits in used vehicles:

Maintain at least a minimum of 55 percent of your used vehicle inventory under 30 days of age. If you want to keep a block of ice from melting, you need to insulate or protect it from heat. For dealers, your best protection is a faster pace of retail sales. If the cars sell faster, you minimize the profit loss that occurs as vehicles age in inventory. I tell dealers, “30 is the new 45 or 60 in used vehicles” to underscore how inventory age has a direct bearing on a used vehicle’s investment quality—the longer it sits, the less you get.
Mind your Cost to Market metrics. The Cost to Market metric is useful to dealers in two ways. First, the metric tells you, from the moment you acquire a vehicle, what your likely retail gross profit margin will be. Second, it helps you monitor, on an individual vehicle basis, how much potential profit resides in a vehicle. I recommend that dealers strive to maintain an overall inventory Cost to Market average of 85 percent. This benchmark allows for the realities of today’s market. Some vehicles, with a low Market Days Supply and other unique characteristics, may be perfectly fine to acquire at a Cost to Market ratio higher than 85 percent. They may cost more, but they’ll sell fast. Meanwhile, other vehicles, such as rental car purchases, should have Cost to Market ratios considerably lower than 85 percent, even below 80 percent, given they are less special, and more abundant, in the market.

I’m not suggesting that dealers ditch the conventional view of inventory water. But I do think dealers will need to more vigilant about managing their inventory investments in an era of margin compression.

As the old song goes, “you don’t miss your water, ‘til your well runs dry.”

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AutoNation Makes A Play For Future Relevance

Dale Pollak — Fri, 03 Nov 2017 17:56:51 +0000

I can’t help but regard AutoNation’s multi-year deal to service Waymo vehicles as a smart move for the company, and perhaps a telling sign for the rest of us.

My job has me traveling the country, speaking at dealer groups and other events and, more and more of late, talking about the future of the car business.

Inevitably, the conversations land on two factors—that the very nature of vehicle ownership is changing fast, and that fleets of self-driving cars don’t necessarily mesh well with the franchised dealer network’s current ways of doing business and making money. The term disintermediation comes up, time and time again.

But I try to make the point that if the car business evolves into the transportation business, dealers would do well to figure out, and pursue, how their roles may change and how they should adapt. I also make the point that pioneers tend to get the greenest fields in new lands of opportunity.

That’s what makes the AutoNation/Waymo partnership noteworthy.

AutoNation isn’t waiting to see how the evolution and impact of self-driving vehicles might play out. They want a seat at the table, and the Waymo partnership provides it.

Similarly, the partnership starts to answer a big question about self-driving vehicles: Who’s going to fix them? The manufacturers? Dealers? An off-shoot of already-centralized service facilities in operation by rental car companies and others?

I see a couple potential advantages for AutoNation:

They’ll be among the first to understand how to fix self-driving cars. AutoNation now has an incentive to build the know-how to maintain and repair what are probably the most sophisticated, technology-centric vehicles on the road. The decision to sign up first for this learning curve underscores executive understanding that first mover advantage really matters.
It validates AutoNation’s size and scale. Waymo recognizes it’ll need a means to keep its vehicles on the road, and AutoNation happens to have the largest owned network of dealerships where the maintenance and other repair work can occur. A dealer with two, three or even 10 stores would be unlikely to offer Waymo a cost- and process-efficient platform to achieve its goals.
It creates a new, diversifying line of business. The Waymo partnership offers potential fixed operations profit for AutoNation’s dealerships from a fresh source. If done right, the profitability that comes from this work could mean more to AutoNation’s bottom line than many of the new vehicles it retails. What’s more, the partnership may provide sufficient return that enables AutoNation to capture a larger share of new/used vehicle sales, which would often even greater operational efficiency gains.

As I talk to industry media and observers about the future of the business, and the seeming rise of disintermediating threats from as-yet unknown players and technologies, I am always sure to make the point that “I wouldn’t bet against a dealer’s ability to adapt and thrive.”

That’s exactly what AutoNation appears to be doing with its Waymo partnership.

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Three Take-Aways From A One-Day Tour In Detroit

Dale Pollak — Fri, 20 Oct 2017 16:16:45 +0000

My new book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive had me on the road this week in Detroit.

The visit sparked a lot of stimulating conversation as we met with editors from Automotive News, Ward’s Dealer Business, Reuters and Autoline.

Like me, the automotive media is thinking hard about the future of the car business, and what tectonic shifts in vehicle ownership and technology will mean for dealers, OEMs and everyone else in the ecosystem.

I did my best to make three broad points during these discussions that I thought I’d share here:

Big change is coming. You can’t help but view the coming convergence of ride-sharing, the changing interest in, and nature of, vehicle ownership, and the rise of autonomous vehicles as disruptive forces for retail automotive. Our conversations in Detroit highlighted how some dealers are hedging their bets today by offering vehicle subscriptions and experimenting with new ways to retail vehicles. I think we all agreed that it isn’t really a question of if retail automotive will look and operate differently than it does today, but when.

Efficiency offers a way forward. Several times during the day, I made the point that while the future may have some dark clouds, we have a strong, vibrant car business today. Dealers are likely to retail 17 million or so new vehicles this year, and 40 million-ish used vehicles. This business simply won’t go away overnight. I also shared my view that while the business is strong, we face significant issues—margin compression, factory control, the prospect of diminished demand—that dealers will need to more proactively address if they want a seat at the table in the not-too-distant future. I outlined how dealers who confront long-standing inefficiencies in the way they manage their people, processes and promotional efforts stand a greater chance of long-term relevance than those who don’t.

Dealer resilience: We shared some laughs with the media folks when I noted that, like Mark Twain’s death, the demise of the dealer has been frequently and greatly exaggerated. At one time, the Internet was supposed to bring an end to auto retailing as we know it—a prediction that, while partially true, did not fully come to fruition. Looking further back, pressure on state franchise laws brought similar predictions. In every media meeting, I underscored how unwise it would be, even in the face of a somewhat uncertain future, to bet against dealers’ collective ability to adapt, reinvent and thrive.

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My First-Ever Op-Ed in Automotive News

Dale Pollak — Mon, 16 Oct 2017 19:17:24 +0000

I dialed up the digital edition of this week’s Automotive News a bit earlier this morning than usual.

I was excited to see my first-ever op-ed piece, an excerpted chapter from my new book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive.

The chapter focuses on the idea of dealers applying greater investment discipline as they manage their used vehicle inventories. It offers two specific prescriptions: Focus on inventory investment quality, not age, and set a hard-cap on the total dollars invested in used inventory.

You can read the op-ed piece here. I’d welcome your comments and thoughts.

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A Sneak Peek At My Fourth Book—Like I See It

Dale Pollak — Tue, 10 Oct 2017 20:10:50 +0000

I don’t normally use this blog for promotional purposes.

But I hope you’ll forgive this one-time policy suspension to plug the upcoming publication of my fourth book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive.

Like any author, I’m awaiting the official release date of next Tuesday, Oct. 17, with a mix of anticipation, excitement and fear. You just never know how your work will hold up, particularly when your intended readers are dealers, OEMs and other sharp-minded retail automotive professionals.

I recently sat down with David Pyle of Cox Automotive to talk about Like I See It. The video below captures our conversation and offers a sneak peek at some of the ideas and topics I address in the book, which I undertook to help our industry face a challenged and somewhat uncertain future.

I hope that you’ll watch the video, and that you’ll add Like I See It to your reading list.

Thank you.

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3 Lessons From The Impending Sale of Rolling Stone

Dale Pollak — Tue, 19 Sep 2017 14:08:49 +0000

When I was a teenage kid, if you wanted to keep up on music and politics, you read Rolling Stone.

I credit my older brothers for introducing me to the magazine. Once I’d read it the first time, I was hooked.

I especially remember the writing. For me, Rolling Stone was a way to be in the front row at concerts, or behind the scenes of a political campaign, without actually being there.

It didn’t hurt that the magazine had an edgy reputation—just the sort of thing that made a teenage kid from the Midwest want to get his hands on the latest copy.

These memories come to mind as I read the news that, on the eve of its 50^th anniversary, Rolling Stone is up for sale.

The news didn’t surprise me. It’s been years since I’ve read a copy, and it’s tough, in general, for magazines to be successful in today’s digital age.

But I was struck by some of the reasons that apparently led to the sale, and the lessons they offer for dealers:

Resistance to change hurts. Rolling Stone’s founder and publisher, Jann Wenner, reportedly didn’t think a print magazine would ever fall out of favor, even as subscribers declined and shifted online in recent years. There’s a lesson here, I think, in the way many dealers regard (and often resist) the purchase preferences of today’s car buyers. I suspect Rolling Stone would be better off today if it had opted to reinvent its business and distribution model a lot earlier. The same seems to be increasingly true for dealers and the rise of online retailing. In the end, there may not be much “it” to get around to if you wait too long.

Reputation and relevance are related. I can’t recall a specific reason I stopped reading Rolling Stone. I do remember the articles and stories seemed less compelling to me in college and beyond. Perhaps the last time I sought out Rolling Stone followed the controversy over its story of an alleged gang rape at the University of Virginia. I read the piece for myself and thought, “this won’t turn out well.” Subsequent investigations found serious breaches of journalistic fundamentals, all of which damaged the magazine’s reputation. Dealers would do well to remember that your reputation is only as good as the worst online review or your last miffed customer. Likewise, today’s consumers have long memories, and social media outlets to vent, when you break their trust.

Talent sets the tone. You could make the case that Rolling Stone thrived the most when it consistently fielded top-notch writers and photographers—some of whom Wenner had the foresight and guts to give their work its first significant chance. The same is true for dealers. When your people really shine, so does your dealership. As their leader, it’s your job to create the environment where they have a real chance to reach their potential, and continue to grow, as individuals. By definition, this outcome means dealers have to do way more than simply provide an attractive paycheck.

The New York Times article reports that Wenner, in the late ‘90s, turned down an offer of $500 million for Rolling Stone. Last year, Wenner sold a 49 percent stake in his company for $40 million.

Perhaps those figures represent the biggest lesson of all.

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A Post-Harvey Call For Rational Retailing

Dale Pollak — Wed, 06 Sep 2017 13:23:00 +0000

My phone’s been buzzing this past week with dealers and others asking for my take on how Hurricane Harvey will affect the used vehicle market.

For one thing, I suspect dealers everywhere will feel or see some of Harvey’s after-effects. After all, the storm claimed an estimated half-million new and used vehicles, and more dealers purchase vehicles well outside their local markets.

The sheer size of the loss will spike demand for replacement vehicles, and cause a commensurate rise in wholesale values, as dealers scour the country to replace and replenish inventory.

But perhaps the bigger concern is how current conditions also give rise to an age-old temptation—where dealers become speculators rather than rational retailers.

The speculator dealers are those who step outside the bounds of their otherwise rational retailing. They tend to ditch metrics like Market Days Supply, Cost to Market and Price to Market as they acquire inventory.

Instead, they play hunches and hope. They’ll head out and load up on additional inventory based solely on the fact that they believe there will be a future opportunity.

In such instances, the end results aren’t typically that good. The opportunistic hunches about imminent retail demand don’t emerge, or the demand is less robust than anticipated. The great deals they thought they acquired at auction become, instead, problematic, low-profit aged inventory.

This isn’t to say there isn’t opportunity. There are people who need used vehicles in very short order to get on with their lives.

But I tell dealers it’s wise to recognize the opportunity for exactly what it is—a short-term bubble that will go away fairly quickly. With such a tight window, you have to ask if it’s reasonable for a dealer to expect they can acquire additional inventory and retail it while it’s still profitable.

Put another way, if you’re not consistently maintaining at least 55 percent of your inventory under 30 days, and turning your inventory at least 12 times a year, chances are pretty good any speculative bet will end badly.

The better approach, I think, is to carefully heed the current market.

Mind the metrics, particularly Market Days Supply, on every vehicle, and your inventory as a whole. These key indicators will give you a clearer picture of retail opportunities and risks than you’d see looking through a speculator’s rose-colored glasses.

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4 Misunderstandings About Price In Today’s Auto Retail Market

Dale Pollak — Thu, 17 Aug 2017 16:54:28 +0000

Old beliefs and habits definitely die hard.

Take the way many dealers still think about their new and used vehicle prices:

Dealers control vehicle prices. I’m not talking about the obvious point that dealers do, in fact, largely set the asking prices for their vehicles. My point relates to the ever-more powerful influence the market has on a dealer’s latitude to price vehicles the way they really want to. Some dealers have let this one go entirely. They’ll price their vehicles based on what the market data tells them—no more, no less. They recognize they can’t control or make the market for a vehicle. They understand the market dictates if the car’s a winner or loser, or lies somewhere in between, and they should price accordingly.

A higher price is a better price. Some dealers still believe that higher prices lead to higher front-end gross profits. This belief used to be true, before the Internet and pricing transparency gave the market more influence on vehicle prices. Back then, dealers could set their retail asking price as high as they wanted, and negotiate to keep every last bit of gross profit from a customer. Unfortunately, it doesn’t work that way as much or as well today. Vehicle buyers hunt hard for a fair price, and don’t respond well to dealers with new and used vehicles priced 10 percent to 20 percent higher (or more) than the same/similar cars in their markets for no apparent reason.

Price and age aren’t related. This thinking isn’t as prevalent as it used to be in used vehicles. Generally, dealers recognize that the longer a used vehicle sits in inventory, the less money it makes, due to depreciation, competing units and opportunity costs. As a result, many dealers make the effort to adjust prices as vehicles age to facilitate a timely retail exit. But these same dealers often do not apply the time-is-money principle in new vehicles. The prices these dealers place on new vehicles on Day 1 often don’t change for months. Other dealers, however, have recognized that age- and market-related adjustments result in faster retail sales, which affords them the right to earn additional inventory from their factory partners.

When you re-price, you lower your price. Dealers affirm that the vast majority of re-pricing decisions result in a lower price. But the most market-astute dealers know this isn’t always true. That’s why they assess each vehicle’s online performance. They ask these and other questions: Is the vehicle’s online listing getting a sufficient number of Vehicle Details Page (VDP) views? Is the online activity increasing or on the wane? Are there more or fewer competing cars in the current market? How do the prices and Market Days Supply metrics on these cars compare with mine? Most of the time, the answers lead to price reductions. But there are times, in both new and used vehicles, where dealers are well-justified to raise a vehicle price, or hold off on a price reduction, because their vehicle stands taller in the market than others.

I’m sharing these misunderstandings because I’ve seen, time and time again, how they impede a dealer’s ability to fully maximize new and used vehicle sales velocity and profitability.

In today’s market, margins are too thin, and time is too precious, to allow these common misunderstandings about new and used vehicle prices to get in the way of tomorrow’s retail sales.

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A Sign of New Vehicle Inventory Imbalances

Dale Pollak — Mon, 24 Jul 2017 16:06:40 +0000

I had an old rule of thumb when I was a dealer: You could get a bead on new vehicle inventory imbalances by the number of full-page ads in the Chicago Tribune on Sundays..

If the paper’s automotive section was chock-full of full-pagers, you could reasonably bet that dealers were sitting on, and therefore more desperate to sell, more vehicles than the local market apparently wanted or needed.

The converse was also true: If the section was relatively light on full-page ads, you could reasonably believe that dealer inventories, and local market demand, seemed in balance.

I thought of this old rule after a colleague says he’s noticed the Tribune’s published larger automotive sections the past few weekends than he’s seen in a long time. He says the ads came mostly from General Motors and Chrysler Dodge Jeep dealers.

The advertising affirms what many of us know: Dealers have a lot of new cars on their hands. An Automotive News story last week notes that the currently nearly 4.2 million new vehicles in dealer inventories is the highest it’s been in 13 years, despite record-setting incentives. The article says dealers currently have a 74-day supply of new vehicles—a tally that might be even higher if not for the proliferation of factory-encouraged rental car programs.

None of this is news to many dealers, particularly those who are renting space to house the additional inventory or doubling-down on their full-page newspaper advertising.

But here’s what is new: The problem’s not universal. Some dealers are blessed to have OEM partners who do a better job of aligning supply and demand. Their inventories aren’t nearly as heavy as their less-efficient competitors. Meanwhile, there are sharp inventory size disparities among dealers who share less market-efficient factory partners—differences that indicate some dealers are doing a better job managing current inventory conditions.

These dealers tend to do the following things to minimize the profitability drag that results when you’re sitting on too many vehicles:

Align prices to market conditions. Today, you have the option to apply competitive Market Days Supply, Days in Inventory and online effectiveness metrics to price your new vehicles. Dealers who attune their prices to local market conditions—rather than their own standardized pricing scheme—tend to attract more online and showroom shoppers.

Set and stick to a new vehicle age policy. Some dealers care about the age of their new vehicle inventory; others don’t. I’ve seen age policies might limit the number of 90-day and older new vehicles to 10 percent of a dealer’s inventory. Typically, dealers who manage new vehicle age stand the best chance of consistently earning floorplan credits and accompanying profits.

Don’t make the problem worse. As my colleague, Brian Finkelmeyer, director of business development for vAuto’s Conquest system, says: “If you or your market don’t need the car, you’re not doing yourself any favors by trading for it.” The same is true with your factory orders. The key here, of course, is knowing the cars and combinations that sell the best for you, and your competitors, in your market as you make stocking decisions.

Perhaps the best news about the growth in new vehicle inventories is that it doesn’t have to continue unabated. The key question is whether factories will do the right thing and trim production, or carry on the current path and make an increasingly difficult situation for their dealers even worse.

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How The Little Things Determine Your Car Business Success

Dale Pollak — Mon, 26 Jun 2017 15:50:50 +0000

“It’s life by a thousand little things, or death by a thousand cuts.”

A dealer recently shared this line as we were discussing how the car business has changed in the last 25 years. The dealer’s observation strikes me as a perfect, clear-eyed summation of how efficiency, technology and transparency have made retail automotive a much different environment for dealers.

Consider the following common, everyday tasks and how much the little things matter more than ever before:

Stocking vehicles: For years, many dealers have followed a fairly reasonable strategy as they order factory vehicles: We’ll stock as many of the cars that we know we can sell, based on what we’ve sold. If we get stuck with some cars, it’s OK. We know that, eventually, the factory will offer the incentives that will help us get our inventories back into shape.

But here’s the problem with this strategy today: It’s too passive. It relies too much on past history, and your factory partner. It can ignore, and miss, faster-moving retail trends that help you maintain, if not gain, sales and market share. It’s also imprecise. The task often falls to a single individual, who’s probably relying on guesses, gut and instinct more than competitive market data to determine the best vehicles to order and stock.

“Within a model line, there’s usually one or two specific things that makes one particular combination stand out more than another,” says the general sales manager at a Southeast Volkswagen dealership. “We’ve made it our business to know these specific things, and configure our inventory accordingly. Our goal is to turn and earn cars. We can’t do it if we’re not ordering the best sellers from the manufacturer in the first place.”

The situation is very much the same in used vehicles. Variances in vehicle color, condition, mileage and specific equipment make the difference in determining a vehicle’s wholesale or retail value, and its likely appeal among potential buyers, given competing vehicles in the market. It’s easy for an appraiser or buyer to make costly mistakes if they’re relying solely on what they know, rather than augmenting their intelligence with market data.

Pricing vehicles. It wasn’t all that long ago that pricing new and used vehicles was fairly easy. In new vehicles, you pretty much only needed the MSRP or “Call For A Great Price!” In used vehicles, your retail price was just a standard mark-up away from the cost of the unit. Pricing cars didn’t require much critical thinking and, if you made a mistake, buyers forgave you, and they were none the wiser.

Today, it’s so very different. Many consumers know almost exactly how much they should pay to buy a new or used vehicle, and get a fair deal. They know if your vehicle’s price is in, on or off the market, given the car’s color, condition, equipment and other particulars. They won’t bother if your prices don’t fit their perception of fair purchase parameters for that vehicle.

The environment means that if your prices fit in the context of a consumers’ competitive set, you’re in the game. If not, you’re out. Likewise, if you’re too deeply in the game, you stand a good chance of giving up gross. On top of all this, you’ve got the constant tick-tick-tick of inventory age undermining your gross profit potential. Simply put, it’s impossible to price effectively without some kind of technology or tool to help you optimize each vehicle’s market price position.

Engaging buyers. It’s easier than ever for consumers today to find the vehicle(s) they want to purchase, and the price they think they should pay. It’s also fairly easy for them to find at least one dealer, in virtually every market, who claims to offer a different, hassle-free car-buying experience. We also know that most consumers will only visit one, possibly two, dealers before buying a vehicle.

As a result, some dealers take every customer engagement very seriously. To them, every customer conversation, e-mail, instant chat or text message could be the last.

“We truly believe that it’s almost as if the customer is looking for a reason not to do business with us,” says the COO for a West Coast dealer group. “We work very, very hard to make sure they don’t find that reason.”

Today’s car business may be different, and arguably more difficult, than it used to be. But it’s still a healthy, viable business where success awaits those who properly apply themselves to its pursuit.

My dealer friend is correct. The little things matter more than ever. To paraphrase an old saying, “the devil is in the details, and so is your next deal.”

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A Manager’s View Of A Volatile Used Vehicle Market

Dale Pollak — Mon, 19 Jun 2017 21:51:59 +0000

I had an eye-opening conversation the other day with used vehicle manager Jim Mason of Steven Toyota, Harrisonburg, VA.

We were discussing how the dealership’s average front-end gross profit was lagging its target by about $300 for the current month.

Mason knew exactly why: The store’s average days in inventory had crept up about four to five days, and the average price to market at the time of retail sale had dropped to 90 percent.

“There’s a combination of factors at work,” Mason says. “But the biggest hurdle is the incentives being offered on new cars. The incentives are huge, and they’re across the board in terms of manufacturers. It means that the ’16 and ‘17 model year cars become ‘new car bait,’ for lack of a better term.”

In this scenario, Mason explains, customers ultimately end up purchasing a new vehicle because there isn’t enough difference between the payment and price of the used vehicle—a problem that’s most profound on the certified pre-owned vehicles that make up about 30 percent of Mason’s monthly retail sales.

“Our grosses on certified cars are anemic,” he says. “We have to be a lot more aggressive on these cars than what we have been, and that has a direct impact on gross profit.”

I asked Mason how he’s tackling the problem. He offered three tips that seem relevant to share with other dealers:

1. Source more near-new inventory from trade-ins. “There’s about a $2,000 spread between MMR and retail asking prices on 2016 and 2017 used Toyotas,” he says. “By the time you get it here, by the time you pay to certify, and by the time you pay the other costs, there’s nothing left. These are not cars I should be acquiring from auction unless I absolutely have to fill a hole in my inventory.”

2. Price the vehicles more aggressively. Mason notes that the current market doesn’t allow you to initially price near-new vehicles at or near a Price to Market ratio of 100 percent. “You have to start at 90 percent because that’s where you can sell it,” he says. The danger, Mason adds, is “getting it in your head that you’ve got to make $1,200 or $1,500 a copy. That’s not going to happen.”

There is a silver lining, though. Mason correctly notes that while you won’t make as much in front-end gross profit as you might like on these vehicles, they are available and in-demand, which offers the opportunity for a repeatable, quick-turn retail cycle.

3. Diversify your inventory mix. Like many dealers, Mason is looking to auctions to source slightly older, higher-mileage vehicles to diversify his inventory. “Those cars are expensive today, relatively speaking,” he says. “It’s like the expensive cars are cheap and the cheap cars are expensive right now.”

Mason shares my sense that there will be more market volatility in the months ahead, particularly as rental companies unload their fleets and wholesale prices adjust.

The good news is Mason and other managers will be ready. They’ll know that time isn’t on their side. They’ll make the necessary adjustments to fare the best and suffer the least.

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A Longer-Term View Of Digital Retailing For Dealers

Dale Pollak — Tue, 06 Jun 2017 14:10:52 +0000

Dealers often have an “all or nothing” view of digital retailing.

That is, to them, digital retailing represents the full monte of selling a new or used vehicle online. You’d have a “buy it now” button on every vehicle details page (VDP) for every vehicle, customers would work their deals, and dealers would deliver “sold” cars to customers at their homes.

These dealers also often dismiss this concept of digital retailing as unrealistic-as something too few customers are willing to do today. In turn, the dealers then make a critical mistake: They put the whole idea of digital retailing on the shelf until the time comes when they’re fully convinced more customers would actually “buy it now” for their next vehicle.

This viewpoint isn’t necessarily wrong. In fact, the dealers are absolutely correct that a majority of new/used vehicle buyers today wouldn’t want to buy their next vehicle completely online. Studies show that maybe 10 to 15 out of every hundred people might be ready for this kind of vehicle purchase experience. It does seem a bit ill-advised to invest in an end-to-end digital retailing experience when the vast majority of buyers wouldn’t use it.

But here’s the big miss for dealers who shelve digital retailing on these grounds: The “all or nothing” view is a bit short-sighted. It undercuts your ability to serve the remaining 85 percent to 90 percent of customers who are, in fact, receptive right now to taking part in at least a piece or two of a digital retailing experience.

These are customers who want more convenience, and a greater sense of control as they purchase a new or used vehicle. They don’t want to spend hours in a dealership to complete a purchase transaction. They might even pay more for the privilege of completing some part of a deal-whether it’s negotiating a payment or purchase price or trade-in value-from the comfort of their own homes.

“I’m getting an additional eight to 10 deals a month because I offer the option of working out deal terms online,” says the general manager of a Southeast Volkswagen store. “We do things differently than other dealers and we’re getting better at telling the world about it.”

I hear similar stories from other dealers. Even if they aren’t adding a “buy it now” option to their website, they are fostering a different type of engagement that speaks to the needs of today’s increasingly me-focused and time-addled buyers. In other words, they’re working deals while “all or nothing” dealers aren’t getting any of the action.

The general manager for a Midwest Lexus store notes that his dealership continues to see a growing number of customers take advantage of his digital retailing offerings. He adds that every one of the customers who negotiates a payment or trade-in value online still wants to “come in and take delivery in person.”

Such is the nature of digital retailing today. The vast majority of vehicle buyers aren’t really looking for a “buy it now”-based, end-to-end digital car deal. They simply want to carve out the parts of buying a car that they perceive as potentially problematic and time-consuming, and complete them in a way that’s more convenient and easier for them.

The take-away here for dealers is that digital retailing shouldn’t be viewed as an “all or nothing” proposition. Rather, it’s more of a “have it your way” approach, wherein dealers provide the digital retailing tools, and customers use as much, or as little, of them as they prefer.

I understand how and why some dealers have landed on an “all or nothing” view of digital retailing. I would simply encourage them to consider the business they’re probably missing as they hold out for a complete, end-to-end digital retailing solution that the majority of buyers may never want, and might never arrive.

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Dispatches From Down Under: A Great Trip Comes Full Circle

Dale Pollak — Thu, 01 Jun 2017 22:54:32 +0000

The other evening I had “a parma and pot.”

To explain, I was in a pub to take in a most quintessentially Australian experience. I was there to watch the first match of the annual best-of-three State of Origin series between the Queensland and New South Wales rugby teams. The Series tradition calls for eating chicken parmesan (a parma) and drinking brew, that they call “pot.”

The pub was a sea of light blue and maroon jerseys, and full of what must be called tribe-like passion for each team. I felt like I was witnessing a once-in-a-lifetime-type experience-a far more fierce, and ultimately friendly, rivalry than any I’ve seen at college campuses in the United States.

My travels the past couple days have included quality time with a fellow former dealer-turned-entrepreneur, Greg Duncan. He’s a well-known and highly respected retailer, who helped build the 23-store Trivett Group and founded Carsguide.com.au, which Cox Automotive has acquired. Duncan has also earned one of Australia’s highest honors, the Medal of the Order of Australia.

These days, Duncan provides strategic insight and counsel to Cox Automotive Australia, and serves as a principal dealer investor and chairman of its board of management. It was an honor and privilege to discuss the car business with Duncan, and to know that he’s helping steer the company forward.

Speaking of Cox Automotive Australia, I owe a special thanks to Matthew McAuley, the company’s communications director. In the past week, we’ve been to three airports, three cities, and in/out of countless cars and multiple meetings. It all went off without a hitch, thanks to McAuley’s advance planning and in-the-moment improvisation.

Through much of my trip, I’ve been asking people to repeat themselves. The reason: There’s something about Australian slang that’s like music to my ears. Here are a few words I gleaned from my discussions with dealers:

Reconditioning: The Aussies call it “rectification.”

Packs: The Aussies call them “loads.”

Larry Doyle: The Aussies call this type of customer a “wood duck.”

Used car lot: The Aussies call it “the yard.”

Some of these words came up in a lunch conversation with four very smart, and young, dealers. The group was led by Jonathan Hardwick, managing director of HFH Automotive Group.

I was struck by the group’s smarts and passion for the business and, among other things, their keen understanding of the necessity of Velocity principles in today’s margin-compressed market.

It turns out, I was basically talking to a table of ringers. Hardwick is a close friend of Sean Del Grande of the Del Grande Dealer Group, one of the brightest, progressive and up-and-coming dealers in the US today.

The same day, I presented a $50,000 check to David Blackhall, CEO of the Australian Automotive Dealer Association, the beneficiary of all proceeds from my speaking engagements here. The check presentation was a bit ironic. Nearly 20 years ago, Blackhall gave me checks as a Detroit-based executive at Ford Motor Company, one of the key clients for my former company, Digital Motorworks, Inc.

The interactions with Hardwick and Blackhall made me realize that my trip had essentially come full circle. I’d connected my current trip to my career back home.

Next up: A trip back to Sydney, where I’ll be joined by my family for more fun and exploration of the Outback.

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Dispatches From Down Under: Dealers Hungry For Insights

Dale Pollak — Wed, 31 May 2017 19:12:19 +0000

It’s easy to teach when your students want to learn.

That’s a primary take-away from my meetings with dealers in Sydney and Brisbane—the first two stops on my three-city tour here in Australia.

In many ways, the car business in Australia is much like it was in the United States nearly a decade ago. The Internet is heralding unprecedented levels of market efficiency and transparency, both of which combine to put the squeeze on dealer margins. Several dealers mentioned that their average front-end gross profit in used vehicles now runs about $2,000/car, compared to $2,500 to $2,700 a few years ago.

I remember the early days of sharing the Velocity Method of Management with dealers in the United States. Some dealers were all ears. They listened intently as I shared how today’s more efficient and margin-compressed market requires dealers to do things differently in used vehicles—to make their money by selling more vehicles faster, which enables them to drive more “total gross” in all departments.

Many dealers, however, initially dismissed what I was saying. They believed they knew better, or they simply didn’t want to consider doing business any differently than they’d done for years.

That’s the opposite of the vibe I’m getting here. The dealers I’ve met in Australia seem to sense they are confronting significant, game-changing market forces. They are hungry for ideas and insights that might help them be more successful.

Based on the conversations I’ve had so far, I suspect several dealers will go back to their stores and look to implement a “retail-back” approach to appraising and acquiring vehicles, and pay greater attention to metrics like Market Days Supply as they make key used vehicle lifecycle and pricing decisions.

Of course, when you’re engaging with bright and forward-thinking dealers, it’s also impossible not to pick up a few nuggets.

I was impressed by a dealer whose sales associates are essentially independent contractors, and whose pay plans are geared to help them secure a higher percentage of trade-ins (in a market where most vehicle owners sell to private parties rather than dealers). I also wondered if we might see dealer groups in the United States giving away mechanical and collision insurance coverage to used vehicle customers, which a public dealer group does here.

All in all, it’s been an eye-opening and gratifying trip. I can’t help but think that part of the energy and spirit I sense among Australian dealers owes to the beauty and vibrancy of place. Everyone seems to be fully aware that they are blessed to be living here.

I owe a heartfelt thanks to John Bailey, President of Cox Automotive, International, Gary Martin, CEO of Cox Automotive Australia, and their teams for bringing me here and being such superb hosts. It’s clear we’ve assembled a just-right group of people, products and perspectives to help our dealer clients become more successful. I share their view that the future for Cox Automotive Australia offers a lot of bright, positive potential.

My time so far hasn’t all been work. During a bit of downtime over the weekend, we took a ferry to Manly, a northern suburb of Sydney that sits right on the ocean. The number of people carrying surfboards on/off the ferry seemed odd—until we walked to Manly Beach, where the boards (and smiling faces) were as ubiquitous as people.

The next stop on my itinerary is Melbourne, which has earned the distinction as the world’s most livable city for several years running. I can’t wait to get there.

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Dissecting The Elements Of Velocity Down Under

Dale Pollak — Thu, 25 May 2017 20:21:30 +0000

I’m excited to embark tomorrow on a very unique trip.

I’ll be spending two weeks in Australia, helping dealers there better understand the Velocity Method of Management, and how they can use it to increase their used vehicle sales and performance.

Interestingly, the challenges and opportunities that margin compression brings to the car business are not unique to dealers in the United States. Technology-driven efficiency and transparency know no bounds, and Australian dealers are hungry for perspectives on how to thrive in a market that is highly competitive, less forgiving and more volatile than ever.

We are expecting more than 500 dealers at engagements in Brisbane, Melbourne and Sydney. Each dealer is paying $100 to attend, and the collected fees will go to a local charity.

At each event, I’ll be joined and supported by representatives from Cox Automotive’s Australian businesses, CarsGuide.com.au, Dealer Solutions, Manheim and SellMyCar.

I’ve never been to Australia. I’ve always been curious about its culture and people—thanks largely to the positive experiences I’ve had meeting Aussies here over the years.

I look forward to gaining a deeper understanding of the car business from Down Under dealers, and I’ll be sure to share my take-aways from the trip here.

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What’s Your Course Correction In New Cars?

Dale Pollak — Fri, 05 May 2017 16:57:13 +0000

I imagine there have been a lot of long faces on dealers as they reviewed their financial statements from last month.

Not only did many dealers see fewer deals in their new car departments compared to a year earlier, they also earned a little bit less on those deals than they would like. On top of that, floorplan expense is growing commensurate with the increasing size of new car inventories.

You could make a fairly strong case that winds are shifting in the new car market. We’ve been riding a nice tailwind for quite a few years. If current conditions continue, we’ll face a bona fide headwind that could further erode sales volumes and profitability.

Airplane pilots face these shifting conditions all the time, often multiple times during the same flight. In most instances, a shifty wind isn’t a big deal. The pilots simply adjust the altitude or the course of the plane (sometimes both) to maintain the smoothest flight path.

Pilots are pretty calm when they make these adjustments. They don’t freak out. They do what has to be done to meet the moment, while focusing on signs that suggest another course correction just ahead.

Dealers would be well-served to ask themselves and their managers—what’s our course correction in new vehicles?

Some dealers have already begun making their adjustments. They have tightened up their factory orders and dealer trades, avoiding the cars and combinations that are most abundant right now in their inventories. They are working to retail out of these vehicles first, to minimize floorplan and other inventory expenses. They are aggressively targeting acquisitions of in-demand units, the vehicles they know will sell most quickly and pose the least investment risk from Day 1.

More broadly, these dealers are emphasizing a greater level of efficiency and transparency in their new vehicle operations. They tout shorter transaction times as a differentiator that appeals to, and attracts, today’s customers. They advertise transparent and true payment and purchase prices in their vehicle listings. They find that earnest engagements with potential buyers, on their preferred, often digital, terms, delivers surprising results.

The dealers also have few illusions. They know margin compression isn’t going away. They recognize that the emerging headwinds will probably grow stronger. They also correctly believe that their calculated, and consistently applied, emphasis on efficiency and transparency will bring reward.

On some level, they think and act like pilots. They make the course corrections as the need arrives. They aim for the smoothest, most profitable, path forward.

In the current environment, it would be wise for all of us to revisit this gem from Henry Ford:

“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”

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3 Keys To Increase Your New/Used Vehicle Throughput and Profitability

Dale Pollak — Thu, 04 May 2017 17:37:55 +0000

We’ve arrived at an interesting time for retail sales of new and used vehicles.

Both sides of the business face a market supply/demand imbalance, which raises risk for dealers.

In new vehicles, there’s almost an inventory pile-up on some dealers’ lots. Dealership days supply is running well north of the norm. Some dealers don’t even have the kind of vehicles (e.g., SUVs and trucks) that today’s buyers really want. Factories have pledged to adjust their production mix and pace, but I’m told they could, and should, do more. Meanwhile, retail sales appear to be driven by ever-higher incentives, which ultimately crimps the contribution each car makes to the dealer’s bottom line.

In used vehicles, the big headline is the rising supplies of off-lease, or near-new vehicles, in the market. We’ve begun to see the effects of this supply surge; Market Days Supply metrics are up across several segments in most markets. Wholesale prices are also more volatile due largely to the supply surge. On top of all this, the incentive-driven new vehicle market is eroding the “value gap” between new and used vehicles—adding further risk to front-end margins and retail sales.

Most industry observers expect buyer demand for new and used vehicles to remain relatively stable in the coming months. But a “relatively stable” degree of buyer demand is no guarantee that you’ll be able to sell more new/used vehicles and make more money than you did last year or the year before—particularly if you aren’t doing things any better or different to offset competitive threats and ongoing margin compression.

In light of these conditions, I encourage dealers to be more diligent and focused on three strategic priorities for their new and used vehicle departments:

Pursue the fast sellers. This priority helps dealers mitigate the drag on operational performance and profitability that comes as vehicles sit (and sit) in your new/used vehicle inventories. In new vehicles, it’s becoming ever-more critical for dealers to align their factory orders and dealer trades to competitive conditions—to acquire more of the faster-selling combinations that customers want to buy, and avoid the dogs the factory wants you to take. Currently, it’s not uncommon to find 40 percent or more of a dealer’s new vehicle inventory to be older than 90 days, which suggests ample room for improvement.

The story’s similar in used vehicles. If you make it a top priority to acquire vehicles based on favorable Market Days Supply and Cost to Market metrics, you’ve set the stage to attract buyers, drive a faster pace of sales and achieve the gross profits you expect.

Manage your return on investment. A sometimes under-appreciated reality of today’s retail market is that age matters in both new and used vehicles. Over time, the return on your capital investment in any vehicle diminishes, whether this depreciation comes from changed market conditions, floorplan/holding costs or some other factor. These are the variables dealers must track as they manage each vehicle’s lifecycle and strive to maximize ROI. By focusing more keenly on each vehicle’s ROI, dealers are less likely to overprice vehicles and allow any car to remain in inventory past the point that it delivers a sufficient return. This emphasis on ROI naturally leads to a more efficient and more profitable pace of new/used retail sales.

Reduce your discounts. For some dealers, this priority might be considered a “last frontier” for additional profitability in new and used vehicles. Here’s a common situation: Dealers have accepted the reality that they must price their new and used vehicles to the market. In sum, they are offering a reasonably fair offer on their vehicles. But, at the desk during negotiation, there’s little or no recognition of the pricing strategy. Managers and sales associates don’t explain to customers how your fair market pricing is purposeful—it’s intended to eliminate much, if not all, of the need to haggle over a purchase price. The absence of this discussion opens the door for buyers, some of whom are already satisfied with the price you posted online, to ask to pay even less for a new or used vehicle.

Dealers who have made discount reduction a priority typically pick up $200 to $500 in front-end gross per vehicle that they were effectively giving away without thinking about it. Their first step: Track the discounts on every deal to identify who contributes most to the problem.

Each of these strategic priorities, if executed correctly, can help dealers gain operational efficiencies that lead to competitive advantage.

But it’s the trifecta, working in tandem together, that truly provides the ability to achieve your goals of selling more cars and making more money in today’s “relatively stable” market.

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Pope Francis Calls For ‘Revolution Of Tenderness’ In Surprise TED Talk

Dale Pollak — Wed, 26 Apr 2017 13:43:53 +0000

“A single individual is enough for hope to exist, and that individual can be you.”

In a surprise appearance via video at the TED 2017 conference in Vancouver, Canada, on Tuesday evening, the pontiff said that tenderness is “the path of choice for the strongest, most courageous men and women.”

“Tenderness is not weakness; it is fortitude. It is the path of solidarity, the path of humility. Please, allow me to say it loud and clear: the more powerful you are, the more your actions will have an impact on people, the more responsible you are to act humbly. If you don’t, your power will ruin you, and you will ruin the other.”

The Washington Post reports that Bruno Giussani, TED’s international curator, spent a year trying to snag the pope for a talk. The newspaper reports that when the pontiff appeared on screen, “the room erupted in applause.”

He spoke in Italian, with the comments translated in subtitles, from Vatican City.

Francis spoke of being from a family of migrants, urged more “equality and social inclusion” in science, decried the “culture of waste” and called on people to listen to the “silent cry of our common home, of our sick and polluted earth.”

He also said we all have the capacity to “react against evil.”

“Through the darkness of today’s conflicts, each and every one of us can become a bright candle, a reminder that light will overcome darkness, and never the other way around.”

But the pope’s unifying message for a conference themed “The Future You” was one of a revolution of tenderness … a revolution, he said, that begins with hope.

“A single individual is enough for hope to exist, and that individual can be you. And then there will be another ‘you,’ and another ‘you,’ and it turns into an ‘us.’ And so, does hope begin when we have an ‘us’? No. Hope began with one ‘you.’ When there is an ‘us,’ there begins a revolution.”

The above article was originally posted in the Huffington Post.

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A Thoughtful Note from NCM Associates

Dale Pollak — Tue, 25 Apr 2017 15:49:05 +0000

I received the following thoughtful note from Terry Wichmann, a retail solutions consultant at NCM Associates.

Dale,

Thanks for your continuing help when I ask you to send your books to current vAuto clients and vAuto prospects.

When discussing “velocity” (in general) and vAuto (specifically) during NCM Associates “Profit Improvement Meetings” at dealerships, I always indicate to Dealer Principals / General Managers and Used Vehicle Managers that they will not “deeply” understand the “principles” of velocity unless they read your books.

Concerning your comments about the “Ross” speech… “Has snap judgments outlived their usefulness?”…an economist, with whom I had lunch yesterday and who sells analyses of new/used vehicle registrations to dealerships, indicated that Dealer Principals are generally “too instinctive” and not as analytical as they should be; he feels this approach “holds back” the retail car/truck business from some of the respect our industry deserves. His thoughts somewhat endorse your insights to the Used Vehicle business.

Also, I was very moved by your message to Pope Francis; some Jesuit-educated “guys” (in my case, Cleveland St. Ignatius High School and John Carroll University) understand that Pope Francis was a Jesuit “first” and, then, our Pope. I believe Pope Francis is guided daily by St. Ignatius’s “Spiritual Exercises” which encourages all us to “seek God in all things”. The Catholic Church could use a few more Jesuit Popes “post-Francis”, which, I hope, will not occur for many years.

Best regards and God Bless,

Terry Wichmann | Retail Solutions Consultant | NCM Associates, Inc.

Thank you Terry, I appreciate your kind words. As always, I’m here to help you and your dealers in any manner possible.

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3 Best Practices To Beat Back Used Vehicle Margin Compression

Dale Pollak — Tue, 04 Apr 2017 18:37:13 +0000

It’s like a leaky faucet.

Drip by drip, the retail profit you make on used vehicles goes down the drain.

But unlike a leaky faucet, the fix for margin compression in used vehicles isn’t as easy as calling a plumber.

That’s because, more and more, ongoing margin compression in used vehicles is the nature of the business.

According to the National Automobile Dealers Association (NADA), used vehicle gross profits as a percentage of transaction prices has been shrinking, bit by bit, for nearly the past decade.

NADA data shows that in 2009, used vehicle gross profits ran 14.3 percent of average vehicle transaction prices, compared to 12.1 percent in 2016. This diminished return may not seem like much, but it’s a significant difference when you consider the average used vehicle transaction price has grown by nearly $4,700 (from $15,210 in 2009 to $19,886 in 2016, a 31 percent increase).

The challenge, and opportunity, for dealers rests in how you contend with margin compression.

The fix isn’t as simple as selling more used vehicles. In a margin-compressed environment, you have to sell more used vehicles more efficiently to maximize an ever-smaller return on an ever-larger investment.

To achieve a higher level of operational efficiency and sales, I recommend the following best practices for dealers:

A consistent sourcing pipeline. You can’t retail vehicles you don’t have in stock. More and more, dealers are employing full-time, technology-enabled sourcing specialists to maintain a steady supply of incoming auction inventory. The specialists free up managers who previously found themselves lacking sufficient attention and time to selectively acquire the right auction vehicles, with specific Cost to Market and Market Days Supply metrics, to fill inventory needs. It’s not uncommon for these time-addled managers to just buy cars because their inefficient sourcing methods lead to frustration and less-than-optimal decisions. Similarly, the specialists give managers more time to oversee appraisals and maximize every trade-in opportunity.

Faster retail-ready turnaround. It’s still fairly common for used vehicles to spend five, seven or even 10 days in service before they are reconditioned, detailed, photographed and posted online. A Midwest Chevrolet dealer found that by trimming three days off his dealership’s eight-day retail-ready average, he realized an additional $300,000 in front-end gross profits. The dealer is now working to consistently meet a 36-hour turnaround, and anticipates the improvement will generate an additional $200,000 in front-end gross.

The example highlights the “time is money” axiom of retailing vehicles in today’s margin-compressed market. I would also note that top-performing dealers set aggressive benchmarks of 24 hours or less to complete detail and reconditioning work—a goal that typically requires automotive RO approvals when repair estimates fall within expected ranges, and dedicated recon teams in service.

Reduced inventory age. I currently recommend that dealers strive to retail at least 55 percent of their used vehicle inventory in less than 30 days. Dealers who achieve this objective, which requires a Velocity-oriented pricing strategy, are doing all they can to minimize margin compression and take advantage of retailing vehicles when they are fresh and stand to deliver maximum gross profit. To understand why reducing the days to sale of used vehicles is so important, I encourage dealers to do a quick study of the gross profits they achieve on vehicles retailed in less than 30 days compared to vehicles retailed after 30 days.

In most cases, the results show the average front-end gross profit declines by at least 50 percent once vehicles cross the 30-day line. If you segment vehicles retailed after 45 days, it’s not uncommon to see a roughly 50/50 split between vehicles that make a little money and those that lose a lot more.

This analysis often leads dealers to agree with my assessment that any vehicle that you don’t retail within 45 days represents a failure of management. For some reason, right or wrong, someone turned their back on these units, when they should have been working harder to sell them.

It should be noted that none of these best practices represents an easy fix. Each requires dealers, managers and team members to think and do things differently, sometimes in a manner that’s contrary to what they’ve been taught.

But dealers who get past these hurdles find their reward. It comes in the form of improved used vehicle performance and profitability in an era where neither can be taken for granted.

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Hal? Where Are The Used Cars You Purchased?

Dale Pollak — Wed, 29 Mar 2017 18:33:24 +0000

One of the first movies that opened my mind to the power of technology was 2001: A Space Odyssey, the 1968 film from Stanley Kubrick.

The movie was a cautionary tale about the danger of computers and technology becoming more human-like, creating dire consequences for actual humans. The central character was Hal, a computer that controlled the spacecraft and interacted with its crew.

Of course, the movie purposely over-dramatized the risks of a technology-driven overthrow of our society, but its point about the ever-growing power of algorithm-driven machines is even more relevant today.

I was reminded of Kubrick’s film while reading a New York Times piece about the decision by the large investment fund company, BlackRock, to eliminate managers of its mutual fund in favor of machines.

This development is a big deal. It’s another step in technology-driven disruption of the investment world, where companies like BlackRock have believed that a “human touch” offers a competitive and financial advantage for individual investors.

Except that the data suggests otherwise. The story notes that algorithm- and technology-driven investment companies like Vanguard have actually out-performed their people-powered competitors—while charging less to their clients.

BlackRock’s decision, and the technology-driven trends it represents, is especially relevant for dealers. In some ways, our business is like the investment business years ago. Day-to-day decisions were largely made by people who, to varying degrees, relied on technology and tools to make their decisions, and track results.

In the ensuing years, the roles reversed. The technology and tools took over the decision-making, and the former decision-makers shifted to more of an advisory- and oversight-type role. All the while, this role reversal lowered the cost of doing business, providing more efficiency and decision-making precision that combined to increase overall profitability.

The story quotes Mark Wiseman, a BlackRock executive who will oversee the company’s new approach to investment management: “The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy — that does not work anymore.”

You could apply this statement to the current state of new/used vehicle inventory management in dealerships. The “old way” is still largely the only way decisions get made. You still have people choosing inventory, deciding what to pay and how to price/promote individual vehicles. To a person, these individuals believe they have “eyes” and instincts that are better than the competition down the street.

Perhaps the biggest take-away from the story is this: BlackRock is essentially playing catch-up ball. They appear to have resisted the advance of technology until it became painfully obvious the time had come to do things differently.

In this way, I find the BlackRock story to be an early indicator. It illustrates technology-driven change that is likely imminent for the car business. Similarly, it indicates an opportunity for dealers who get in front of the emerging trends.

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A Key Problem-Solving Lesson From A Respected Diplomat

Dale Pollak — Thu, 23 Mar 2017 20:40:51 +0000

I had the opportunity to take in a speech this week from former Ambassador Dennis Ross.

Ross is a unique person. He’s served as a diplomat under three presidential administrations. He was a key player in Middle East peace talks for Presidents George W. Bush and Bill Clinton. He also served under President Barack Obama’s administration on the National Security Council as a special assistant and senior director for the Central Region, which includes the Middle East, the Persian Gulf region and Southeast Asia.

Ross spoke to offer his perspective on the challenges President Donald Trump will face in foreign policy, specifically related to countries in the Central Region, and promote his latest book, “Doomed to Succeed: The U.S.-Israel Relationship from Truman to Obama.”

Ross said President Trump will “confront the greatest set of challenges (in the region) than any of his predecessors.” He went through the list of currently unstable states—Syria, Iraq, Yemen, Egypt, Libya and others. He highlighted the complexity of the competing interests and players involved in each.

But Ross’ perspective on how President Trump, or anyone, should approach these problems struck me as the most compelling take-away from the presentation.

His central point boiled down to this: Today’s solutions can easily become tomorrow’s problems—a scenario that’s more likely to prove true if you don’t at least consider and try to think through the unanticipated and unintended consequences before today’s decision becomes final.

For example, in Syria, Ross believes the extremist group ISIS will eventually be defeated, and the conflict over current President Bashar al-Assad’s rule ultimately resolved. But those developments are only the first steps. The real work, and “victory” as Ross put it, comes when you’ve rebuilt a stable society with proper government, laws, resources and security that ensure the safety and welfare of the people. If any one of those rebuilding efforts fails, conditions are once again ripe for instability and unrest.

I found Ross’ point highly relevant, both for myself and dealers at large. As a group, we pride ourselves on our instincts and abilities to make quick decisions. We thrive in the moment, and don’t often consider consequences until they arrive at our desks.

But we’re working in an increasingly complex, fast-changing and inter-connected business. To be sure, it’s less volatile and consequential than any of the situations Ross described in the Middle East.

Still, as I left the auditorium, I found myself thinking: Have snap judgments outlived their usefulness?

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Chevy Bolt Pricing: A Sign Of The Times

Dale Pollak — Tue, 21 Mar 2017 17:48:42 +0000

I was intrigued by an Automotive News article this week that highlights pricing disparities among dealers as the new Chevrolet Bolt EV arrives in showrooms in select markets.

The story notes a mix of price discounts and mark-ups across the seven states where General Motors is introducing the vehicle. Some dealers are discounting by as much as $4,000 or more, while others are asking $5,000 above the sticker price.

The article suggests the pricing dynamic is “what happens when a new kind of vehicle meets a sprawling, old-line retail network that’s only beginning to feel out the market for it.”

But I’d take a different view.

To me, the pricing dynamic with the Chevy Bolt isn’t all that different than what you see in most markets, with most new vehicles, on any given day of the year. It’s rare to find a local market, and a specific set of similarly equipped new vehicle models, where the prevailing prices are not all over the board.

In my experience, these pricing disparities are a direct reflection of how dealers choose to price their vehicles, whether it’s a brand new model or not. In the end, most dealers do not account for competitive supply and demand insights as they decide their asking prices. These decisions typically reflect a dealer’s or manager’s instinct more than an assessment of competitive market insights and intelligence.

The end result is often the same as we’re apparently seeing with the Chevy Bolt. Some dealers ask too much, others ask too little, and those in the market “sweet spot” will consistently sell more vehicles and make more money.

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Two Perspectives On Sourcing Auction Vehicles

Dale Pollak — Tue, 07 Mar 2017 19:52:52 +0000

Let’s imagine there are two dealers in the auction lane, bidding for the same car.

The first dealer wants the car because he’s sold a few of the same units recently, and did pretty well in terms of front-end gross. The three-year-old car has about 40,000 miles, and looks/smells pretty good. The CARFAX notes the car is “clean,” with “one owner.” The dealer’s checked NADA and MRR values, and thinks he can bid up to $17,300 for the vehicle, essentially the mid-point between the wholesale benchmarks, and make an estimated $2,000 front-end gross profit.

The second dealer has similar past experience with the vehicle, and also thinks it’s a decent car. Like the first dealer, he knows the vehicle’s retailing for roughly $19,500 in his market. But he also knows something else about the car the other dealer doesn’t. The vehicle has a respectable Market Days Supply of 55—a semi-fast seller if he prices it right.

The bidding starts at $16,500. It quickly climbs to $17,500. The first dealer bails out when the auctioneer asks for $17,700. The second dealer raises his hand and owns the car.

While this scenario is fictional, it represents three important facets of sourcing auction vehicles in today’s market:

Cars are won/lost by fairly narrow margins. You could credit the first dealer with a decent degree of bidding discipline. He stayed in the hunt, and even went past his original bid maximum, to try and get the car. But the extra $400 was too rich for his blood. He probably looked at the other dealer and thought, “That guy’s crazy. He over-paid and he’s not going to make any gross when he tries to retail it.”
Market insights make a key difference. To be sure, the second dealer would have loved to acquire the car for less than $17,700. But for him, it made all the sense in the world, even with a likely retail selling point of $19,500. Why? First, the dealer knows all the math. His auction-buying tool calculates roughly $800 in fees, reconditioning and other costs—leaving roughly $1,000 in potential gross. While not ideal, the dealer also knows that the vehicle’s Market Days Supply of 55 means he can likely make the $1,000 in the next 10-15 days and, in two to three weeks, he’ll redeploy the same capital on another unit.
The rise of a “total gross” perspective. The second dealer’s decision reflects an understanding that in today’s margin-compressed environment, it’s just as, if not more, important to acquire and retail vehicles that help you achieve a faster through-put of retail sales than focus solely on front-end gross profit. By doing so, dealers effectively ring the cash register more frequently—in used vehicles, parts, service and F&I. Indeed, the success of the second dealer’s decision to purchase the vehicle for $17,700 will fully depend on his ability to properly merchandise and price the vehicle for a fast retail exit. But chances are good he’ll get the job done, and make twice as much money in the time it takes the first dealer to find, acquire and retail a vehicle that passes his test for a front-end gross objectives.

In the months ahead, dealers will likely see even more competition in the lanes and online. The reason: As new vehicle sales decline, and draw even fewer trade-ins, dealers will turn their attention to auctions for the inventory they need to achieve their goals for increased sales and profitability in used vehicles and beyond.

This outlook begs a question for every dealer: What new insights, perspective and tools will you use to ensure you know the exact auction vehicles to pursue and make your money every time you acquire one?

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4 Reasons To Rethink How You Source Auction Vehicles

Dale Pollak — Thu, 02 Mar 2017 15:49:45 +0000

“How has your auction-sourcing process changed in the past 12 to 18 months?”

I’ve been asking dealers and used vehicle managers this question a lot lately. It’s interesting to note the four most-common responses:

“Not much has changed.” About a third of dealers say things are pretty much the same when it comes to sourcing auction vehicles. In many instances, dealers believe their used vehicle managers and buyers could do a better job, but they don’t feel a compelling need to make any dramatic changes.

“We’re going to more physical auctions than we used to.” These are dealers who’ve expanded their wholesale acquisition net beyond local sources. Their focus is at least regional if not multi-state. Managers and buyers are traveling further to find the right auction inventory for their dealerships.

“We’re buying more online than we used to.” These dealers fall into two categories: those who are learning the ropes of acquiring auction vehicles through online channels, and those who want online purchases to make up a majority share of their wholesale acquisitions. In both cases, the dealers say they see online auctions as more cost-effective and efficient than sending managers to auctions to acquire wholesale inventory.

“We’re only buying online.” I’d estimate about 20 percent of dealers have made this transition. Typically, the shift involves the hiring and/or training of acquisition specialists — computer- and tech-savvy individuals who spend the majority of their time researching vehicles, and managing live and proxy bids to acquire cars. Here again, dealers say the change resulted from a desire to make auction-sourcing less costly and more efficient.

I worry the most about dealers who fall in the first two groups.

If auctions were like fishing, these dealers would be the guys who are basically bringing the same bait and tackle to the same fishing holes, hoping to bring home the best fish. They see enough occasional success to maintain the same routine, even as the law of diminishing returns erodes their potential for success. They may even justify less-than-optimal results with a purist-type position — the guys with the fancy baits, high-tech fish finders and tackle aren’t really “fishing,” at least not in the traditional sense.

But I would submit that today’s wholesale market is anything but traditional. Consider the following factors:

Increased Supply

Not long ago, dealers bemoaned what they considered a dearth of decent cars available at auctions. Today, we have the opposite problem — an unprecedented, and growing, level of wholesale supplies that will bring a commiserate rise in vehicle value volatility and risk.

Increased Competition

In the months ahead, analysts say dealers will see fewer trade-in opportunities from new vehicle customers — a by-product of rising levels of leasing in recent years. Edmunds reports that fewer than half of new vehicle deals involved a trade-in. This market dynamic means more dealers will look to auctions to acquire the inventory they need to drive their retail sales and profit objectives.

Increased Market Insight

New technologies and tools are helping dealers efficiently pinpoint the auction vehicles that offer best retail potential for their dealerships, based on both the front-end gross profit the vehicle might generate, as well as how fast it will sell, given the number of competing units available in the market. For these dealers, there’s little, if any, guesswork involved when they make a decision to acquire an auction vehicle.

Increased Margin Compression

Unfortunately, the trend of the past several years will continue in the months ahead— pricing transparency and rising costs will continue to erode used vehicle profit margins. Add in the aforementioned volatility due to increased wholesale supply, and it is becoming an ever-greater imperative to consistently buy the auction right car on the money.

To me, these factors indicate a wholesale market where change is ever-present, and tomorrow’s opportunities will likely look different than they do today.

That’s why I’m more confident about the future success of dealers who’ve actively been changing the way they source auction inventory. In the months ahead, they’ll be better positioned to adapt to market shifts and gain advantage. Their competitors, meanwhile, will still be arguing over whether something needs to change.

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3 Troubling Auction Sourcing Inefficiencies

Dale Pollak — Mon, 27 Feb 2017 15:23:19 +0000

I’ve recently gained a deeper appreciation for the tireless efforts of used vehicle managers and buyers charged with acquiring inventory from auctions.

Many spend half their time at work, plus uncounted hours at home, away from their families, to find and vet auction vehicles for an upcoming sale.

This reality has given to a belief that such all-out efforts to acquire auction inventory is what it takes to succeed. Up until the past year or so, I would have agreed, 100 percent.

My view has changed as I’ve seen how dealers have changed this auction-sourcing paradigm, with the help of technology and tools. These dealers are spending less time to find and acquire the auction inventory they need and, in doing so, they’re eliminating the inefficiencies that, often unintentionally, have been sapping their used vehicle performance and profitability.

Here’s a closer look at these inefficiencies and their unintended consequences:

Missed cars. I spoke with a general sales manager who previously spent 20-plus hours a week, researching and purchasing auction vehicles. He did this work in between working deals, answering questions from his sales team, and appraising trade-ins. He wouldn’t even hazard a guess at how many auction vehicles he researched, and then missed the opportunity to buy online, because he got pulled in another direction. “You’d get ticked off, and shut down the computer,” he says. “Or, you just start buying cars because you had no choice.” Now, he’s using a sourcing tool that reduces his research time to minutes, allowing a greater focus on buying the right auction vehicles.

Missed deals. Some used vehicle managers designate specific days and afternoons when they’re buying cars, either online or outside the dealership at physical auctions. I’m aware of at least one dealership where a “Do Not Disturb” tag hangs on the manager’s door during buying time. The approach ensures fewer distractions but it also means missed opportunities to take care of customers in the moment. After all, buyers today only visit your store once. If you’re not available to serve them, they’ll find another dealer who is.

Missed management. With all the time spent trying to find and buy auction vehicles, managers often miss, or put off, other important inventory management tasks, such as setting vehicle prices and keeping vehicles moving through the service department. It’s like a never-ending case of one step forward, two steps back, which is never a good thing in today’s margin-compressed, time-is-money retail environment.

Some might argue that these inefficiencies are simply the nature of the beast. Some might also suggest that dealers and used vehicle managers do pretty well, in spite of these inefficiencies.

But I would ask you to imagine what your used vehicle performance and profitability might look if you were able to reinvent how you source auction vehicles and do away with the inefficiencies altogether. As more and more dealers are coming to understand, there is a better way forward.

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Advancing The “No Barriers” Approach To Life

Dale Pollak — Fri, 17 Feb 2017 15:59:08 +0000

I can still remember tearing up at the 2014 Access: Velocity event as Erik Weihenmayer shared his “No Barriers” approach to life and perspective at the meeting.

Since that special time in Chicago, Erik’s been busy. He’s just released a new book, No Barriers: A Blind Man’s Journey to Kayak the Grand Canyon.

As always, Erik does a great job showing how we can move forward in our lives with growth and purpose. Here are a couple reviews:

“In this highly inspirational tale, the Grand Canyon, like Everest and other summits, becomes a metaphor for life: physical, mental, and psychological . . . A wonderful tribute to the greatness of the human spirit.” — Kirkus Reviews

“More than a story about a blind man converting the improbable to the possible, this volume provides a powerful testament to the human spirit… Guaranteed to inspire.” — Booklist

I would encourage you to get your copy, and advance your own “No Barriers” approach to life here.

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An Afterglow That Shines Strong

Dale Pollak — Sun, 12 Feb 2017 18:19:03 +0000

It’s hard to pinpoint the proper word.

Moved. Uplifted. Changed. Inspired.

The reality is I’m feeling a combination of all of these as I bask in the afterglow of meeting Pope Francis last week.

To be sure, I’m very touched by all the kind words, love and support from all of you who followed my once-in-a-lifetime experience in Rome. The messages on Facebook, the Cox Automotive Fuel page, and in my e-mail inbox give me hope and strength. Many of you share my desire for more civility, compassion and humility among each other, and those we don’t even know.

Perhaps most striking is the realization, and an increasingly unshakable belief, that all of this positive energy emanates from those few moments I shared with Pope Francis.

I’ve met a lot of people in my life that all of us would consider famous or important. None of those encounters comes anywhere close to matching the experience of feeling the Pope’s personal touch, and knowing, while not even understanding, that the words he shared with me carried deep significance.

I’m now convinced that he imparted to me a special lesson—that every moment with someone else, however fleeting, connects to a larger current, shared by everyone. It’s our choice to give this current greater strength, or divert its momentum. Our choice is evidenced by the way we engage and treat others, and whether we choose to open our hearts and minds in a manner that reflects our shared humanity.

I’ll be forever grateful to Pope Francis for offering this life lesson to me, and for the opportunity to learn it and share it with all of you.

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Day 3 in Rome: A Truly Magical Moment

Dale Pollak — Fri, 10 Feb 2017 00:48:54 +0000

Moving. Inspiring. Mystical. Powerful. Spiritual.

Those were the words running through my mind after speaking one-on-one with Pope Francis earlier today.

Thankfully, I woke up this morning with a clear idea of what I would say to the leader of the world’s largest faith.

“Your Holiness. I want to thank you for the light that you bring to our world. I want you to know that I’m an American citizen and I’m very concerned. As an American, I’m very concerned about the hate, and the speech of hate, in our country today. Your Holy Father, what I would ask you to do, is to use your voice to speak out against the hate in America.”

Pope Francis then took my arm with both hands and held it firm. He leaned his head into my chest. He said a prayer, his head moving up and down.

“He’s praying for me and my country, and he’s praying directly into my heart,” I thought.

I felt a sense of awakening. A connection. I understood in an instant that Pope Francis has a special gift—knowing how to reach, and touch, people in the most meaningful way.

Several members of our group asked me what I’d said. They had seen the Pope’s reaction. I didn’t really know what to say, as I couldn’t really say anything. The most magical moment of my life was still sinking in.

As we left the room, I said my own prayer of thanks—for the opportunity, for the compassion and grace Pope Francis shared with me, and for the knowledge that I’d been heard and for the peace I hope will come.

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Day 2 in Rome: Two-Way Diplomacy, Pasta and Nerves

Dale Pollak — Thu, 09 Feb 2017 11:26:15 +0000

I’ve gained a far deeper appreciation of the day-to-day work of diplomats during my time here.

Prior to this visit, my experience with diplomacy and foreign affairs largely came from books. I’ve wondered what it was like, in older days, to be an ambassador to another country, entrusted to look after the interests of your homeland while nurturing key relationships with foreign peers.

In today’s era of e-mail and text messages, which carry the expectation of immediate response, I wonder what it must have been like to finish a confidential dispatch, seal it in wax, send it by courier and wait (and wonder) whether your message made it home.

These were the things going through my mind during our visit today to the Embassy of the Holy See.

After a series of four separate security checkpoints, our group had the privilege of meeting Louis L. Bono, the Chargé d’ Affairs at the embassy. He’s serving in the position until a new United States Ambassador is selected to lead the embassy team.

Bono had the air and grace of a very distinguished gentleman—the perfect type of person to fulfill the embassy’s mission of working in tandem with the Vatican on issues like conflict prevention, human rights, peace, poverty eradication and inter-religious understanding.

Until this meeting, I had understood embassy diplomacy to be essentially a one-way street, wherein you’d largely represent your own country’s best interests. But Bono described his embassy’s work in two-way terms—a balancing act, really, between the interests of the United States, and the Vatican. I’m paraphrasing, but Bono aptly described the embassy as managing between the “world’s hardest power and the world’s softest power.”

More than one member of our group questioned if the embassy’s role might change under President Donald Trump and his “America First” agenda. Bono answered the question with the ease and deftness you’d expect of a seasoned diplomat. The upshot: Only time will tell.

Nancy and I opted out of a group dinner for the evening. We took the recommendation of dealer Jake Sodikoff of Steven Toyota, Harrisonburg, VA, and went to Flavio Al Velavevodetto.

I questioned Jake’s recommendation as soon as we arrived. The place was empty. We ordered a variety of pasta dishes. After the first taste, I knew what Jake had raved about. Each bite was better than the one before it. By the time we finished, the place was jam-packed—a nod to the later dinner hour for everyone who lives here. Thank you, Jake, for the tip!

I also spent much of my day thinking about the trip’s most important moment, which arrives late tomorrow morning. After we meet as a group with Pope Francis, I’m told we’ll each have about two minutes, individually, to meet with him.

I’d like to report I’m ready. But I’m more like a bundle of raw nerves.

The Pope is, after all, the most holy and wisest man on earth. He’s as close to God as any one of us might ever get. Our hosts have told us we can discuss or say anything we like in our one-on-ones. The Pope encourages and welcomes free and open engagements with strangers. I almost wish they’d have set some clear parameters.

Should I ask for a miracle? Continued blessings for my family and friends? The meaning of life? World peace?

I’m hoping (and praying) that sleep tonight will bring clarity and purpose in the morning.

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Day 1 in Rome: Hope, Concern, History—And Gelato

Dale Pollak — Tue, 07 Feb 2017 20:10:15 +0000

My first full day of planned group activities in Rome got off to an extremely inspiring start.

We met with the Sisters of Sion, a group of nuns who are committed to fostering unity among peoples of different religions, and celebrating diversity of thought. The Sisters have outposts around the world. They work tirelessly as educators and teachers to spread their message of community, compassion, justice and peace.

It may sound weird to say it, but I felt a strong sense of calm and hope during the meeting. Ours is a big world, seemingly filled with trials and tribulations in every corner. Yet, the Sisters carry on, committed to a mission that transcends all of us.

As we said our goodbyes, I made a personal commitment: Knowing that there are people like the Sisters committed to a greater good, I should spend less energy and time sweating the small stuff.

Our second stop of the day brought us together with members of the Italian parliament. Our speakers were chosen to discuss the growing migrant problem in Europe, and to offer an example of the diversity of views on both sides of the parliamentary aisle.

As you might expect from meeting with politicians, no clear answers emerged to the question of how best to handle migrants fleeing terror- and war-torn countries.

But there was a strong consensus of concern from the speakers about the United States. Each talked about the United States as a beacon of Western civilization and values. They expressed concern that our beacon is flickering and, if it fades, they worry about a Domino effect of harmful economic and human consequences across Europe.

I found myself worrying a bit, too. I said a quick prayer, asking that our leaders recognize the ever-more inter-connected nature of our country and the rest of the world. It was striking to see, up close and personal, how much the eyes of the world are really focused on us.

As the morning moved to afternoon, Nancy and I got out for some sight-seeing.

Like so many other visitors to Rome, we were awe-struck by the beauty and vibrancy of the Spanish Steps and surrounding area. We sat on the steps to soak it in. I found that you don’t have to see the area to know it’s a special place. If I were an artist or painter, I’d probably come here for inspiration, too.

As we walked, Nancy gave me a nudge. “Hey, that’s the Pantheon.” Sure enough, we were standing near the steps of an extremely well-preserved, 2,000-year-old example of iconic Roman architecture. How they built the concrete dome without any reinforcement is beyond me. I also couldn’t help but marvel at how much history resides on every street corner here.

On our way back to the hotel, Nancy convinced me to take part in a dietary indiscretion. As someone with a strong sweet tooth, I typically avoid sweets. But Nancy spotted a shop jammed with people eating gelato. “When in Rome…” I said. We laughed. It was the best gelato I’ve ever had.

Both of us are looking forward to our meeting with Pope Francis on Thursday. Our hosts have told us it’s important to be prepared, as we’ll each have a few moments alone with him.

All I can say is I’m glad I’ve got another day to get ready.

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A Once-In-A-Lifetime Honor And Opportunity

Dale Pollak — Mon, 06 Feb 2017 00:56:40 +0000

I make it a personal priority to give back.

I consider myself blessed and fortunate. I know that whatever personal and professional success I’ve achieved owes an awful lot to others. I simply wouldn’t be the person I am today, or at my current station in life, without the gifts of guidance, help and support I’ve received along the way from others.

My wife, Nancy, and I are active in our local community. We volunteer our financial support and time to our local schools. We support a variety of charities, including the Foundation Fighting Blindness, a cause that is especially dear to me.

For many years, I’ve also worked with an international non-governmental organization, the Anti-Defamation League. This group is dedicated to confronting bigotry, and defending democratic ideals and protecting civil rights for everyone.

My affiliation with this group has presented me with a once-in-a-lifetime honor and opportunity. This evening, I am joining a small group of delegates from the United States who are traveling to meet with Pope Francis in Rome.

Everything I’ve read about Pope Francis suggests he’s the kind of leader any one of us could aspire to be.

He knows something about adversity, having faced a life-threatening illness in his early 20s. He knows about personal reinvention, having worked as a bouncer, chemical technician and janitor before entering the priesthood. He’s known for compassion, having emphasized outreach to the poor and less fortunate during his service in Argentina. He’s highly regarded for his humility, choosing more simple and Spartan living quarters and vestments than his predecessors. He’s also a music fan, known for his love of traditional Argentinian music and tango dancing.

I’m excited for the meeting and the experience. I’ll share more with you here.

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NADA Dispatch 3: Final Reflections On A First-Rate Show

Dale Pollak — Mon, 30 Jan 2017 21:39:20 +0000

A colleague asked me this morning to share my single-biggest take-away from this year’s NADA convention in New Orleans.

My response: Dealers are sharpening their game. Compared to past NADAs, there were more dealers who noted the “e-word”—efficiency—as they described their plans for the coming year. The dealers correctly understand that improved performance, proficiency and profitability of their operations will require more than simply selling more new/used vehicles. Rather, they plan to achieve their goals by increasing efficiencies as they sell and serve customers.

We saw this mindset at the vAuto and Stockwave booths, as well as other Cox Automotive business units. Dealers came to vAuto to find solutions to help them fix ongoing struggles with aged inventory, less-than-satisfactory profitability on new/used vehicle sales, and less-than-optimal auction purchases.

Similarly, dealers came to VinSolutions and Xtime to find tools to drive more efficient customer connections and engagements. Dealertrack also saw its share of dealers who want to eliminate duplicate data entry and gain greater accountability and deeper insights on the effectiveness and efficiency of their business processes.

I was also struck by the number of dealers who weren’t looking for a technology solution as a magical fix for a problem. They had a more holistic view. They understood that adopting new technology and tools would also require rethinking the roles and responsibilities of key members of their dealership teams.

For example, a dealer signed up for vAuto’s Provision system to help him achieve three goals—a higher velocity of used vehicle sales, more efficient decision-making, and more in-store time for managers to focus on coaching new sales associates to increase their productivity and minimize persistent turnover.

“It’s all tied together,” the dealer says. “We’ve got a lot of work in front of us, but I’m looking forward to where we’ll be in six months.”

The dealer’s comments helped cement my impression that 2017 will be a good year for dealers—and an even better year for those who are committed to making it so.

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NADA Dispatch 2: It Ain’t So Easy In The Big Easy

Dale Pollak — Sun, 29 Jan 2017 15:06:01 +0000

There’s a good vibe here in New Orleans.

If it were Las Vegas, you might say dealers are doubling down on their technology investments.

There are two kinds of dealers who visit the vAuto and Stockwave booths. Those who are looking for a better way, and current customers asking us to help them sharpen their game plans.

You might say there’s a thirst for more here in the Big Easy. And I’m struck by the number of dealers who are really thirsty.

I’m not one for predictions. But I have a sense that in the next decade, the car business won’t be regarded as an employment option of last resort. I lost count of the number of dealers who are making their people a higher priority.

Of course, the people-first dealers are taking a long view. It’s better to address this sticky, in-store culture stuff now, while times are relatively good, than before it’s too late to make a difference.

There’s also a marked number of dealers who say they’ve had enough. More than one dealer surprised me by saying they’re done. Their reasons for exiting the business all make perfect sense, particularly given the investments their factory partners have put in front of them. Still, I suspect a few wouldn’t be bailing out if the road ahead didn’t seem so complex or expensive.

Meanwhile, several dealers relayed that they’ll be opening stores as part of factory plans to add more dealerships to garner market share. The dealers are buoyant about their new opportunities, even amid signs that it’ll be a tougher new vehicle market in the months ahead. I recognize that factory decisions to add or take away dealerships are often years in the making. I have to wonder, though, how well the market will meet planning projections for sales and the dealers’ returns on investment.

I’m also finding myself in agreement with dealers who think 2017 is the year for digital retailing to become a transactional reality. The dealers are ready. They’re signing contracts to get it done at their dealerships. It’s exciting to see dealers evolving to deliver the experiences customers increasingly want when they purchase a vehicle—particularly as companies like Lynk & CO and Wal-Mart believe they offer a better way.

All in all, it was a good day on the NADA floor. I’m excited to see what the final day will bring.

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NADA Dispatch 1: Inventories, Efficiencies and the Future

Dale Pollak — Sat, 28 Jan 2017 14:13:11 +0000

Dealers are pretty clear-eyed about the coming months in the car business, judging from my conversations on the opening day of the exhibit hall at the National Automobile Dealers Association (NADA) convention here in New Orleans.

Overall, dealers are generally optimistic that we’ll have another relatively strong year in terms of new and used vehicle sales. But there’s concern that rising new vehicle inventory levels, as well as increased supplies of used vehicles and valuation volatility, will make it more difficult to match prior profit levels on dealers retail.

“I’m tired of celebrating birthdays for some of my new vehicles,” a Hyundai dealer told me.

“I’m confident we’ll sell more used cars, but it’ll be tougher to keep our gross averages where we want them,” added the used vehicle director for a Midwest dealer group.

I was impressed by the number of dealers who shared goals to improve dealership performance by optimizing their current operations. “We’ve already got the processes and tools we need,” a New York dealer shared. “But we’re not executing as consistently as we could and should.”

I suspect dealers will be leaning more on their vendor partners to help them maximize the value of their current solutions to achieve better results. A Southeast dealer says he’s shopping for a new dealer management system partner after getting frustrated that he can’t easily get the information he needs to run his business from his current DMS.

“I shouldn’t need a college degree to use the system,” he says. “It’s pretty frustrating.”

Several dealers also mentioned that they weren’t able to get a seat at a workshop that offered highlights from NADA’s study on the dealership of tomorrow. The strong interest in the session suggests that the old adage—“the future for a dealer is the next six months”—may not be as relevant as it used to be.

I’m looking forward to Day 2 on the exhibit floor at the vAuto (#1719) and Stockwave (#1737) booths.

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NADA 2017: A Milestone Moment For Our Industry

Dale Pollak — Mon, 23 Jan 2017 22:51:31 +0000

It’s fitting that this year’s National Automobile Dealers Association convention will occur in New Orleans.

What better place to celebrate NADA’s 100^th anniversary than the city where “laissez les bons temps rouler!” is the order of any day?

The anniversary is an important milestone for our industry. If it weren’t for NADA, the enduring strength of the franchised dealer network would be nowhere
near where it is today.

For me, this year’s event will mark my 48^th NADA convention. I’m a little humbled to realize that I’ve been around the car business nearly half as long as NADA has been in existence.

But I also confess that I’m just as excited about this year’s convention as I was when I made my first trip as a 10-year-old.

For me, NADA is the single-most important dealer event on the calendar. It’s the one time where you can connect, and reconnect, with long-time dealer friends and their families. Everyone’s focused on the year ahead, and looking for ideas and insights to help them get ahead.

I especially relish my conversations with dealers at NADA. It’s like a four-day immersion school on automotive retail.

I suspect much of the discussion will center on whether 2017 will bring yet another record-setting pace of new vehicle sales. I think we’ll get there, or at least come fairly close, in terms of volume.

I am concerned, however, that the vehicle volume gains will come at the expense of dealer margins, in both new and used vehicles. I sense other dealers understand this emerging reality, too, judging from pre-NADA interest we’re seeing from dealers to demo Stockwave, and vAuto’s Conquest and Provision systems. These dealers recognize it’s ever-more important to have the right new/used vehicle inventory, priced and promoted properly, on their lots to achieve their goals for profitability and sales volumes.

I’m also curious and excited to see what new technology and tools will be available to help dealers connect their sales and service teams more effectively and efficiently with today’s customers, as well as each other.

All in all, I’m sure the good times will roll in New Orleans. I suppose the key question will be whether they keep on rolling through the remainder of the year.

I’ll be spending my time at the Stockwave and vAuto booths (#1737 and #1719, respectively). Please stop by and say hello if you have the opportunity at NADA.

Safe travels to everyone headed to New Orleans. I look forward to seeing you there!

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Dealers Aren’t Alone In Facing Hiring, Retention Pressures

Dale Pollak — Wed, 18 Jan 2017 19:33:32 +0000

I was struck by several parallels in a Chicago Tribune story this week that highlighted how hiring and retention is a big concern for the nation’s top retailers.

The article highlights sentiments from top executives attending the National Retail Federation’s annual convention are grappling with the convergence of sales processes that occur both online and in brick and mortar stores, sometimes simultaneously. The piece also noted how these executives are coming to terms with the idea that persistent turnover is really a problem, and better, more personalized training is part of the solution.

Sound familiar?

On one hand, the article should give dealers a sense of solidarity. You are not alone in the struggle to hire and keep good employees, particularly as the role of sales associates is undergoing an evolution, thanks to the Internet.

On the other hand, the article exposes a risk for dealers. You will be competing for the same employees against companies who are increasingly committed to offering more compelling career paths and compensation packages. Such efforts effectively raise the bar in terms of what it takes to attract and keep qualified people.

The good news, of course, is that the car business, and the entrepreneurial nature of dealers themselves, gives us the ability to offer compelling career, employment and lifestyle options that the larger retailers can’t match.

Therein lies the opportunity for dealers with the conviction and courage to seize it.

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Pop Quiz Answer: Packs Are The Root Cause Of The Used Vehicle Problem

Dale Pollak — Tue, 10 Jan 2017 22:28:51 +0000

It’s pretty cool to imagine dealers donning white lab coats and analyzing the inventory metrics I shared in my last Pop Quiz post.

Five dealers took the time to diagnose why Group 1, the dealership group with the undeniably poorer used vehicle metrics in the quiz, is suffering compared to Group 2.

With Market Days Supply, the dealers correctly noted that Group 1 appears to be stocking less-desirable vehicles. As one commenter noted, Group 2 is “paying more attention to market demand” as they stock their inventory.

With Cost to Market, the dealers also astutely spotted a striking disparity. “Group 1 for some reason acquires their vehicles on the high side,” a commenter notes. Another writes, “Group 1 pays more and stocks slower moving units.”

With Price to Market, all the dealers sensed Group 1’s problem—a pricing strategy that probably combines wishful thinking with too-little/too-late adjustments to bring their inventory in line to the market.

With Inventory Age and Inventory Turns, the commenters correctly correlated Group 1’s performance as reflective of other factors—less desirable inventory, improper pricing, a less-than-strict aging policy and suspected problems with descriptions, photos and related merchandising. One adds, “a higher (turn) number is the result of doing all of the above correctly.”

All in all, the dealers offered sound, Velocity-based diagnoses of Group 1’s performance. Their assessments are a gratifying testimony to their skills and smarts as Velocity students and retailers.

I’m absolutely certain that with a little more background and time, the dealers would have sniffed out the principal, root-cause reason for Group 1’s poor performance—a $1,000 pack applied to every used vehicle they retail.

The issue isn’t necessarily the presence of the pack, it’s the size of the pack that’s the problem.

In effect, the $1,000 pack sets off a chain of less-than-desirable decisions:

Appraisers and buyers choose not to acquire more desirable, in-demand inventory because the cars, when saddled with a $1,000 pack, don’t offer the front-end gross profit the dealer expects. The end result: Higher Market Days Supply and Cost to Market metrics than Group 2, which charges a $250 pack/car.

The $1,000 pack effectively forces Group 1 managers to initially (and subsequently) over-price their less-desirable vehicles, given their market appeal, to achieve the front-end gross profit the dealer expects.

Group 1’s inventory age and annualized turn metrics are direct, symptomatic summaries of how the $1,000 pack slows the pace of sales and the overall performance and profitability of the used vehicle department.

I’ve long argued that today’s market is too efficient and too transparent for dealers to continue charging vehicles packs the way they have in the past. Packs, by definition, amount to a tax on every used vehicle. They do not add or enhance the value of the vehicle. They are a surcharge that costs dealers, like Group 1 in this quiz, a lot more than they think.

My sincere thanks to the dealers who took time to answer the quiz question.

Looking ahead, I have a hunch that packs will become a more frequent (and heated) topic of conversation as dealers struggle to understand how competitors, like Group 2, can pay more for used vehicles, price them higher, sell more cars and make more money.

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Used Vehicle Pop Quiz: Why Is One Dealer Doing So Much Worse?

Dale Pollak — Fri, 06 Jan 2017 20:36:29 +0000

Take a moment to review the following used vehicle inventory-level metrics from two similarly sized and geographically located dealer groups. Then, I’d welcome your answer to the quiz question below.

Inventory Market Days Supply

Dealer group 1: 85
Dealer group 2: 73

Cost To Market

Dealer group 1: 90 percent
Dealer group 2: 84 percent

Price To Market

Dealer group 1: 94 percent
Dealer group 2: 95 percent

Inventory Age

Dealer group 1: 40 percent under 30 days; 33 percent over 60 days
Dealer group 2: 65 percent under 30 days; 7 percent over 60 days

Annualized Inventory Turn

Dealer group 1: 7x
Dealer group 2: 14x

It should be clear from these metrics that Dealer Group 2 is doing a better job selling more cars and making more money on a per-car basis.

The question: Given the information here, what would you suspect as the root cause of Dealer Group’s 1 less-than-optimal performance?

Please share your answer in the comments below. I look forward to a lively discussion and sharing the right answer in an upcoming post. Thank you for your participation!

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4 Ways To Increase Profitability In 2017

Dale Pollak — Tue, 03 Jan 2017 17:39:31 +0000

It’s not a very pretty picture when you open the hood on dealer financials in new and used vehicles.

Consider the following data from the National Automobile Dealers Association (NADA):

New Vehicles: At the end of 2013, dealers had averaged 818 new vehicle retail sales, with an average gross profit of $1,174/car (3.7 percent of the selling price). At the end of 2015, dealers averaged 916 new vehicle retail sales, with an average gross profit of $1,088 (3.3 percent of the selling price). At the end of August of this year, dealers averaged 615 new vehicle retail sales, with an average gross profit of $993 (2.9 percent of the selling price). Between the end of 2013, and the end of August, the average new vehicle selling price grew from $32,035 to $34,193 (a 7 percent increase).

Used Vehicles: At the end of 2013, dealers had averaged 663 used vehicle retail sales, with an average gross profit of $1,584 (8.8 percent of the selling price). At the end of 2015, dealers averaged 677 used vehicle retail sales, with an average gross profit of $1,534 (7.9 percent of the selling price). At the end of August of this year, dealers averaged 486 used vehicle retail sales, with an average gross profit of $1,493 (7.5 percent of the selling price). Between the end of 2013, and the end of August, the average used vehicle selling price grew from $18,081 to $19,886 (a nearly 10 percent increase).

Total expenses: At the end of 2013, dealers had an average of $5.46 million in total expenses, which translated to 11.1 percent of total sales, and 92.6 percent of total gross. At the end of 2015, dealers averaged $6.1 million in total expenses, which translated to 10.8 percent of total sales, and 92.8 percent of total gross. At the end of August, total expenses were averaging $4.3 million, which translated to 10.8 percent of total sales and 93.8 percent of total gross.

I know. That’s an awful lot of numbers. I apologize for the financial minutiae.

But I think anyone who carefully absorbs these numbers can only come to one conclusion—dealers are investing more in the new/used vehicles they sell, spending more to operate their stores, and reaping ever-smaller rewards for the privilege of being an auto retailer.

As I look ahead to 2017, I don’t think anyone believes these financial realities will get any better, particularly as predictions for a softer new car market, and a more challenging used vehicle market, increasingly appear likely to prove true.

So what can dealers do to increase profitability?

I don’t think the answer lies in cost-cutting. Yes, the rise in total expenses may reflect some ill-advised spending by dealers. But, as a whole, I believe the expense increases reflect the ongoing costs of being a dealer in the 21^st century. As a result, it’s difficult for me to see how even Draconian expense reductions would provide significant margin relief for dealers.

To me, the answer to the profitability question lies in dealers achieving increased efficiencies in four key areas:

Inventory management: In the coming year, it appears less likely that dealers will be blessed by ever-growing demand for new/used vehicles. This reality means dealers must find a way to increase sales velocity on their own accord—by knowing what the “right car” means for new and used vehicle buyers in their market, obtaining these vehicles as cost- and time-efficiently as possible, and getting them on the front line and online in less time than it takes today, with merchandising, pricing and promotion that reflects the need for a faster pace of retail sales.

Customer experience: If you haven’t begun to shrink the time you require of customers to purchase a new or used vehicle, the time has come to make this a priority. Progressive dealers use a combination of the right cars, transaction-transparent pricing and online e-retailing tools that give buyers a sense of confidence and control. By design, these measures minimize the time required to complete deals in the showroom and yields more profitable transactions.

Marketing: Between the end of 2013 and 2015, the NADA data shows that dealers still pay an average of $607/car in advertising expense. To me, this is a head-scratcher. With less costly (and ostensibly more effective) digital advertising at their disposal, shouldn’t this per-car cost be trending downward? To me, the same-same nature of this expense cries of inefficiency: Dealers are investing in the wrong advertising channels and/or rendering the right investments less effective through ineffective execution.

People: Turnover remains a persistent problem for most dealers, particularly in variable operations. If you ask the experts, the problem owes to poor hiring decisions/process, a dearth of clearly defined career paths, income uncertainty, and unrealistic work schedules. Dealers who successfully reduce turnover typically address each of these areas, and end up with happier, more productive and profitable employees, as well as improved customer retention and satisfaction.

The good news here is that all of these efficiency opportunities exist, in some form or another, for virtually every dealer. Better still, these opportunities fall directly under a dealer’s control and discretion—making increased profitability in the coming year a matter of choice and priority.

Happy holidays to all. See you in the New Year!

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3 Areas Of New Vehicle Performance Improvement For 2017

Dale Pollak — Fri, 16 Dec 2016 21:32:38 +0000

When the temps hit single digits in Chicago, I start thinking about places where it’s a whole lot warmer and more pleasant.

This daydreaming led me to think about sunny beaches, and the big wave of success dealers have been riding in new vehicles in recent years. Actually, it’s more like a consistent swell, with successive sets of waves, and everybody enjoying the ride.

You have to go back 100 years to find the kind of consecutive, year-over-year increases in new vehicle sales that our industry has enjoyed the past eight years.

But as I look ahead to 2017, it appears highly unlikely that the wave will get any bigger.

It’s taking seemingly super-size incentives and fleet units to keep the pace of new vehicle sales this year on par with sales a year ago. Dealer inventories are growing. Factories know they need to (or at least should) better align production mixes and levels to current demand. On top of all that, the Federal Reserve this week nudged up its benchmark interest rate, and news reports suggest they’ll do so again more than once in the coming year. Oh, and, of course, new car margins continue to shrink.

The bottom line is that I suspect we’ll be in for a year where it won’t be as easy for dealers to achieve year-over-year growth in new vehicle sales and profits.

But here’s the good news. There is opportunity for dealers who choose to work smarter, and to work more diligently to make their new vehicle operations reflect current market conditions and run more efficiently. The opportunity rests in three key areas:

Factory orders: It’s safe to say most dealers are less than scientific when they order vehicles from the factory. They aren’t using tools to assess the Market Days Supply of specific models and trim configurations, and compare these insights to current units in stock. They order based on what they think will work best for their market and, to an increasing degree, to get factory reps off their backs. The end result is a consistently less-than-optimal product mix, and sizable percentages of aged units.
Pricing: In used vehicles, dealers have become extremely vigilant about ensuring that each car online includes a price, and making price adjustments that reflect current market conditions and a vehicle’s time in inventory. In new vehicles, there’s a lot of room for improvement. It’s not uncommon to see 15 percent to 20 percent of a dealer’s new vehicles posted online without a price, and a significant share of the same models all priced exactly the same, irrespective of specific trim-level features or the day they arrived from the factory. When today’s transparency-minded buyers can’t find a price, or these see a same-same pricing standard, it diminishes rather than enhances their interest.
Inventory investment velocity: When you combine optimized factory orders with age-/market-based pricing, you set the stage for selling more vehicles faster, and increasing the “total” return on investment you make in each new vehicle. Today, it’s not uncommon to see as much as 40 percent of a dealer’s new vehicle inventory older than 90 days—a level of investment inefficiency that will become increasingly painful and problematic as demand softens in the coming year.

I’ve talked to several dealers recently who plan to make improved new vehicle performance a priority as they attend next month’s National Automobile Dealers Association (NADA) convention in New Orleans.

They understand the big wave of new vehicle sales is breaking, and they’re looking for ways to ride out the remainder with more efficiency, grace and speed than their competition.

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4 Used Vehicle Fundamentals To Help You Stay Strong As Fall Unfolds

Dale Pollak — Thu, 15 Dec 2016 16:48:15 +0000

There appears to be good news and bad news on the horizon in used vehicles.

The good news first: The healthy pace of used vehicle sales, particularly in near-new segments with good-credit buyers, that many dealers have enjoyed for much of this year may continue this fall, according to analysts. If true, the used vehicle market may well defy the slowdown that typically occurs during the harvest season and affirm what some analysts call the market’s “ongoing resilience.”

Now, the bad news: Analysts expect new vehicle sales volume to taper off in the waning months of the year—a dynamic that will put pressure on factories to step up incentives to drive new vehicle sales and, in turn, create a more challenging used vehicle retail environment.

In light of this potential future market volatility, I’ve been recommending that dealers revisit four used vehicle inventory management fundamentals:

Mind the Market Days Supply. The best mind this metric in two ways—on a per-car basis as they make appraising, acquisition and pricing decisions, and on a total inventory basis as they gauge the overall desirability of their units in stock. In either case, dealers strive to find vehicles, and maintain their inventories, with a low Market Days Supply, which signals fewer competing units and a greater likelihood of a fast retail sale. Among top-performing used vehicle retailers, the overall inventory Market Days Supply average runs just shy of 75 days. I’ve noticed what I’d call “upward creep” in the Market Days Supply inventory averages at dealers across the country, a potential sign of an imbalance in supply and demand.
Manage your Cost to Market. I typically advise dealers to shoot for an average Cost to Market ratio of 84 percent for their used vehicles—a benchmark that provides a 16 percent spread between their cost to own/recondition a vehicle and its current retail asking price. Lately, I’ve seen dealer inventories with Cost to Market averages hovering closer to 90 percent. When questioned, the dealers attribute the rise to increased competition and costs to acquire and recondition inventory. I’ll caution that while the higher Cost to Market averages aren’t necessarily cause for alarm, they should not become the “new normal.” Today’s compressed retail margins don’t need any help from appraisers or buyers who fail to recognize that you make your margin, and your money, in used cars when you acquire them.
Price your cars to market conditions. Most dealers understand that it’s important to price their used vehicles to the market—a best practice that’s gained credence as dealers recognize today’s buyers are more price-smart than ever. The real question is when do you get serious about pricing cars to the market? From Day 1? Day 7? Day 20? Day 30? Top-performing dealers apply Price to Market strategies that balance a vehicle’s age, current market demand and their own desire for front-end gross profit and sales velocity. “For us, Price to Market is like a throttle,” a dealer recently told me. “You can definitely price some cars above the market, what I call the ‘idle,’ position. But these days, you’ve got to put most cars out there at half-throttle or more, right out the gate, if you want them sell quickly.”
Minimize your average days in inventory. It wasn’t all that long ago that you could ask a dealer about their average inventory age in used vehicles and you’d get a blank stare for an answer. Today, more dealers are aware of the time-is-money nature of used vehicle retailing. They understand that front-end gross profits on vehicles retailed after 30 days average as much as 60 percent less than those retailed in less than 30 days. As a result, the best dealers strive to maintain at least 55 percent of their used vehicle inventories under 30 days of age, a benchmark that by definition reduces your number of aged units and encourages you to retail a greater share of vehicles when they’re fresh and full of gross. For many dealers, delays in reconditioning often prove the most problematic as they work to minimize their average days in inventory.

Of course, some dealers don’t need to revisit these fundamentals. That’s because they serve as foundational principles that guide astute, market-focused used vehicle inventory management decisions every day. For these dealers, the prospect of a more challenging seasonal sales environment won’t come as a surprise. Rather, they’ll see the signs of changing market early, and make the necessary adjustments to ensure a strong finish for the year.

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A Market-Minded Path To Improved New Vehicle Inventory Profitability

Dale Pollak — Thu, 17 Nov 2016 15:05:02 +0000

It’s here—the slowdown in new vehicle sales that many dealers and industry observers have expected to arrive for some time.

As one analyst puts it, “the new car market is no longer growing, which means automakers now have to measure success in terms of market share, transaction prices, incentive levels and profitability.”

This no-growth environment isn’t all bad news, however. Dealers are still retailing a healthy number of new vehicles. Analysts predict we’ll end the year at or slightly below total new car sales for 2015. Inventory levels are up, but not off the charts, thanks to more aggressive incentive spending by OEMS.

The big problem for dealers is making money in new cars, which a slowing market will only make more difficult for dealers to achieve.

The National Automobile Dealers Association reports that through the first half of 2016, new vehicle gross profit as a percentage of the selling price declined .5 percent. This dip translated to a 10.6 percent decline in front-end gross—from $1,164 in the first half of 2015, to $1,040 in 2016.

This margin compression will likely only get worse, as the margin-toxic combination of pricing transparency, factory incentives and stair-step programs, and the competitive nature of dealers advance the erosion of front-end gross profit.

As I’ve talked to dealers about these conditions, I’ve observed three responses.

The first group of dealers are doubling down on their efforts to improve, or at least maintain, their front-end gross profit objectives. They are trading off volume, and factory below-the-line rewards, in exchange for gross. The dealers can’t stomach effectively giving away new vehicles to meet factory targets. They also reason that higher inventory levels—a consequence of smaller sales volumes—are OK given historically low floorplan interest expense.

The second group of dealers are doubling down on their efforts to meet the factory targets and collect the bonus money. They accept an ever-larger share of little or no-gross new vehicle deals as a consequence of staying in good standing with the factory.

The third group of dealers are adopting what might be considered a more market-minded, Velocity-style approach to retailing new vehicles.

By using inventory management and pricing tools, they become students of their markets and inventories. They are acutely aware of the fastest-selling, highest-grossing vehicle combinations and colors for their markets. Conversely, they also determine the slower-selling, lower-grossing new vehicle combinations and colors. They apply both sets of competitive, car-specific insights to their new vehicle stocking, pricing and desking decisions.

The end result? They typically improve their front-end gross profits, improve inventory turns and meet their factory-set sales objectives.

I believe the third group of dealers is on to something, particularly as the new vehicle market seems destined to enter more troubled waters. Here’s one dealer’s take on how this third approach has helped improve his new vehicle operations:

“We were hurting ourselves with a sizable chunk of our new vehicle inventory,” says a Southwest dealer. “More than a third of our inventory was older than 90 days. I took a closer look, and all I saw was room for improvement—cars we shouldn’t have traded for, and others we ordered with the wrong color or equipment. Our pricing needed work, too. We had 100-day-old cars priced the same as fresh ones, and variables like color and trim didn’t matter as much as I now know they should.”

The dealer’s experience illustrates two realities that become painfully obvious to dealers who adopt a more market-based, Velocity-style approach to managing their new vehicle inventories:

There are too many older-age vehicles. It’s not uncommon for dealers to have nearly 40 percent of their new vehicles older than 90 days—which can mean $2 million to $3 million of a dealer’s new car investment essentially tied up in “dead stock.” Once understood, dealers set a new benchmark, working to minimize 90-day-plus units to less than 20 percent of their new vehicle inventories.
New vehicle pricing lacks sufficient science and sophistication. Like the Southwest dealer, many dealers tend to price new vehicles at the model/trim level, without accounting for an individual vehicle’s Market Days Supply, color, equipment, age and other factors. Not surprisingly, dealers who apply a more car- and market-precise approach to new vehicle pricing find opportunities to rightfully raise prices and earn gross, and instances where prices reflect an expectation for gross profit the car will never command.

In the coming months, I suspect we’ll see some debate over whether the new vehicle market is simply plateauing or fully headed south.

But for dealers, the debate won’t matter.

You’ll still face a more challenging market, ever-smaller margins and ever-greater factory expectations—three reasons why dealers who become better students of the market and stewards of their new vehicle inventories today, will fare better tomorrow.

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Front Line Inspiration From vAuto’s Performance Management Team

Dale Pollak — Tue, 08 Nov 2016 22:50:53 +0000

Committed. Loyal. Driven. Persistent. Scrappy. Family. Aggressive. Blessed. Humble. Competitive. Grateful. Energetic. Integrity. Passion.

These words came from individual members of vAuto’s Performance Management team as they introduced themselves to open their annual meeting today near our Chicago-area headquarters.

The introductions required each of the nearly 150 team members to describe themselves with a single word—a pretty cool and powerful way to kick off a meeting.

As I listened to the words and voices from around the room, I felt tears well up.

First, the words summarized exactly the characteristics and qualities that anyone in business, especially the car business, would aspire to live every day.

Second, the voices were unequivocally honest and sincere—a testimony, I believe, to the comfort and trust that comes when a group of people share a common goal of helping dealer clients, and relish their collective success.

Third, the descriptors perfectly matched the people and personalities that vAuto’s Performance Management leaders, John Griffin and Michelle Drinnan, work very diligently and hard to find and hire. They stick to their time-tested profile, saying “no” far more often than “yes” to potential applicants, even if it means more short-term strain and stress.

Six years ago, I worried that my decision to sell vAuto to Cox Automotive would make life more difficult and disruptive for everyone at vAuto, but particularly Performance Managers. They really are the front line fighters for vAuto, coaching and coaxing dealers to adopt new ways of thinking and operating their businesses to sell more new/used vehicles and make more money.

Today’s meeting affirms that my worries, while unavoidable, were unfounded. vAuto’s Performance Management team continues to be a shining, successful star for Cox Automotive and our industry. Day after day, they selflessly prove that when you give your best to dealers, they give back.

I feel grateful, honored, inspired and full of respect for this special, talented and uniquely gifted group of people.

vAuto’s Performance Management team deserves a public shout-out and thank-you for all they do for our dealer clients, our company and for me.

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3 Reflections On The Car Business and the Chicago Cubs

Dale Pollak — Fri, 28 Oct 2016 14:03:01 +0000

Like most other Chicagoans, I’ve been paying close attention to the Chicago Cubs this year.

After a record-setting season, the team made it to the World Series, raising the hopes of many that 2016 could be the year that ends a 108-year title drought.

As I’ve tuned into the World Series games, I’ve been struck by three similarities between the way big league managers like the Cubs’ Joe Maddon and the Cleveland Indians’ Terry Francona lead their teams, and astute dealers tackle the challenges of retailing new/used vehicles in today’s more-volatile market.

1. Strategy matters. This year’s Cubs team follows a strategy that blends top-tier pitching with strong bats and sticky defense. The strategy for the Indians seems similar, though they appear to lean more on their bullpen for pitching prowess than starters. Each strategic pillar is equally important, and bad things tend to happen when one or more pillars falls short. Still, both teams have stuck to, and fine-tuned, their basic strategies all season. The best dealers follow a similar path. Their strategies encompass the types of new/used vehicles that work best for their markets, and they execute merchandising/pricing plans for each vehicle to achieve their gross profit and inventory turn objectives. Both big league managers and dealers study data that details insights about the competition, and their player/vehicle performance, to make tactical adjustments and decisions that they believe will yield a positive outcome.

2. Strong starts drive success. The first two World Series games highlight how strong starts affect the outcome of a game. In Game 1, Cleveland scored in the first inning; in Game 2, the Cubs scored first. Both teams went on to win the games. So it goes in the car business. If your vehicles don’t start strong, and sell early/fast, you face an uphill battle to earn the gross profit and return on investment you expect.

3. You win some, you lose some. The Cubs and the Indians have proven they know how to win. But, more importantly, they also understand that even the best teams will encounter, and endure, some losses. The same is true in the car business. You play the game with the cars you’ve got on hand, and the field, or market, that’s in front of you. The goal is to win more often than you lose—and to use the lessons from each loss to post more “Ws” on your books.

As I look ahead to tonight’s Game 3 and the rest of the Series, I also think of the prophetic lines the late/great folk singer and lifelong Cubs fan Steve Goodman penned in 1984:

“Well this is the year
And the Cubs are real
So come on down to Wrigley Field
(We’re singing, now)
Go, Cubs, Go!
Go, Cubs, Go!”

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A Telling Dive Into Used Vehicle Inventory Age and Front-End Gross

Dale Pollak — Thu, 27 Oct 2016 18:22:28 +0000

For the past several years, I have been encouraging dealers to retail at least 50 percent of their used vehicle inventory in less than 30 days.

In more recent months, I’ve upped the ante, urging dealers to retail at least 55 percent of their used vehicles in less than 30 days.

This steeper operational standard follows my belief that the optimal retail window—or the number of days that you can expect to achieve a sufficient return on your investment in a used vehicle—is shrinking.

The other day, a dealer asked me for proof of this concept. He disputed the idea that a 30-day-old or older unit, by definition, could not yield as much front-end gross profit as a fresh unit. He wouldn’t take my word for it. He wanted hard evidence.

With that in mind, I made a few calls. I asked dealers for a breakdown of their front-end gross profits by inventory age. I combined the data, and here’s a quick review of what I found:

Age (Days) Front-End Average % Change From 0-10 Day Average

0-10 $2,400

11-20 $1,742 -27%

21-30 $1.310 -45%

31-45 $985 -60%

45+ -$75 -97%

I shared the findings with the dealer. He was still suspicious. He didn’t think the averages reflected the reality of his inventory. So, we took a closer look. Sure enough, we found the same age-correlated, downward trend in his front-end gross profit averages.

“Dale, I feel like an idiot,” he said. “I should have analyzed my inventory this way a long time ago.”

The dealer felt a little better after I told him that he wasn’t alone. Many dealers still don’t fully appreciate the profit-damaging effects caused by inventory age, much less take the time to assess where they stand.

I offered the dealer three take-aways to help him do a better job of retailing a larger share of vehicles in less than 30 days, and improving his overall profitability and ROI in used vehicles.

Minimize retail-ready delays. It’s still not uncommon for dealers to lose three, five, seven or even more days of a vehicle’s retail lifecycle waiting for reconditioning or detailing work to make it front-line ready. One could argue that a three-day delay doesn’t matter much if you are able to retail the vehicle in a week. But how often does that happen? Looking at his numbers, the dealer agreed that lost momentum in used cars is more likely to result in inertia and diminished profitability rather than a quick retail sale.
Market- and inventory age-attuned pricing. Top-performing retailers understand that pricing used vehicles amounts to a near-constant balancing act. You need to know where the vehicle stands in the market, in the context of competing cars and buyer demand, to determine the best initial retail asking price. You also need to account for how these variables change as your vehicle ages in your inventory, and adjust your price accordingly. In my experience, dealers who are less attentive to these market and pricing dynamics typically have more trouble retailing 55 percent of their inventory in less than 30 days.
Move the goal posts gradually. In the analysis of the dealer’s inventory, we found that he typically retailed about 30 percent of his 100-car inventory in less than 30 days. I advised that he/his team should work to reach the 55 percent benchmark over the course of three months—with a target of 35 percent for the first month, 40 percent for the second, and so on. The dealer understood that the gradual pace of improvement would afford sufficient time for his team to apply a greater degree of market awareness, attentiveness and urgency from the moment they appraise a vehicle and own it, to the moment it sells.

I closed my conversation with the dealer by pointing to the 20-plus percent of used vehicles he retailed after 45 days.

“These cars are costing you big money,” I noted. “And from now on, you must regard these vehicles for exactly what they are—a failure of proper management of your investment.”

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Shared Culture, People and Purpose Drive vAuto/Cox Automotive Success

Dale Pollak — Mon, 10 Oct 2016 17:44:52 +0000

Today marks an important anniversary for vAuto.

Six years ago, vAuto’s then-president Keith Jezek and I flew to Atlanta to sign the paperwork that brought our company into the Cox Automotive family.

We’d had other suitors. There were other companies willing to pay the nine-figure sum we sought for vAuto’s 3,000-plus dealer client base, our team of nearly 100 employees, and our game-changing inventory management technologies.

But we weren’t just looking for a pay-off. We wanted a like-minded partner. Someone who shared our mission to help dealers become better, more profitable retailers. Someone who could stomach the consequence of our mission, which often meant challenging the status quo for the betterment of our dealer clients. Someone who shared our belief that our people deserved to be paid well and treated like family.

I remember looking at Keith, with pen in hand. Pausing a moment before signing away the company we’d built over six sometimes difficult years. He leaned in. “We’re good, Dale,” he whispered. “We can trust these guys. They’re like us. I have no doubt vAuto and our team will prosper with this partnership.”

Six years later, I’m happy to report Keith was spot-on. vAuto’s client base has tripled to more than 9,000 dealers in North America, with $200 million in annual revenues. Our mission hasn’t changed. We continue to have the latitude to bring game-changing innovations to dealers and strive to help them be more successful.

But most important, all of the key leaders who helped make vAuto great remain with the company—a rare thing in the world of mergers and acquisitions, and an ongoing testimony to the power of a corporate culture that inspires a shared commitment to the success of our clients and team members.

There’s no question in my mind that the Cox Automotive culture owes to the integrity, values and vision of our corporate parent, Cox Enterprises, and its top leaders, Alex Taylor, executive vice president and COO, and John Dyer, President and CEO, as well as Sandy Schwartz, president of Cox Automotive.

Together, these leaders inspire and motivate all of us to serve our dealer clients to the best of our abilities.

I see this commitment to client success in my travels across the country as I join Cox Automotive field team members and meet with dealers.

I’m continually struck by the field teams’ collective desire and willingness to go the extra mile to help dealers improve their businesses. They know that gaining a dealer’s confidence, respect and trust requires taking the time to understand their business challenges and opportunities, and demonstrating sincere dedication and interest to each dealer’s cause.

My interactions with field team members provide ongoing inspiration and motivation. Their spirit is infectious. It makes me work harder to be a better steward of Cox Automotive and servant of our industry.

As I reflect on this anniversary, I must acknowledge several individuals who are directly responsible for vAuto’s early and ongoing success. Without them, there simply wouldn’t have been an opportunity for me to take a semi-crazy idea to market, much less transform the way dealers manage their new and used vehicle inventories:

Nancy Pollak: I am truly blessed to have Nancy by my side. When I first shared my idea for vAuto, she said, “Go for it.” Many months later, after I’d mortgaged our house and spent our savings to get my idea off the ground, her confidence and faith in me remained resolute. She stood in my corner during the darkest early days of vAuto, when our financial security and future, as well as my commitment to my own idea, was anything but certain. She is the rock that helps me roll. I’m ever-grateful that she believed in me then, and continues to believe in me today.

Mike Chiovari, vAuto’s vice president of IT operations. In the late 1980s, we hired Mike during his Christmas break from college to provide temporary help in our dealership’s accounting department. He proved to be a whiz, both with numbers and technology. In the earliest days of vAuto, Mike was the first guy to say “yes” when I asked him to help me start a new company. He committed to the venture, even though I didn’t really have the means to properly reward him for all the long hours of brainstorming and white-boarding ideas around my kitchen table.

Mike Krupka, managing director of Bain Capital Investments. Mike led the team that evaluated vAuto as an investment opportunity. I’d come to Mike with essentially empty pockets. Mike helped me understand that while our ideas and solution had potential to scale, we faced a significant obstacle—me. I simply couldn’t be in all the places I needed to be, nor was I the right guy to ensure our fledgling company had the right capacity, people and process to grow the way Mike thought it could and should. Our conversations were sometimes hot and humbling, but I’m ever-grateful for the lessons I learned about business, life and myself.

John Griffin, vice president of Performance Management for Cox Automotive. John was one of my first vAuto dealer clients. He understood how our Provision system would help him successfully sell more used vehicles in the Internet age. But I was most impressed by the way John managed his used vehicle team, leading them to adapt to a new, technology-driven way of doing business. I knew he’d be the perfect person to formalize our vision of providing a coach, or Performance Manager, for every vAuto client. At the time, the idea of a Performance Manager was an industry first. But through John’s leadership, the concept has become a norm for automotive retail solutions providers in Cox Automotive and beyond.

Randy Kobat, senior vice president, Cox Automotive. It’s a big deal when a start-up company comes of age. It’s customary to see a plateau in both growth and innovation. Thanks to Randy, who joined vAuto in January 2014, vAuto continues to defy these business norms. We serve more dealers across North America than ever before, and we continue to advance our mission of bringing innovative insights and solutions to the market.

The Band (Mandi Fang, Chris Stutsman, David Rice and David Hawkins). Before starting vAuto, I’d worked with a bright, young team that helped me create and build Digital Motorworks, the company that pioneered data transfer technology to help dealers put new/used vehicle inventory online. With the guidance and resources from Bain Capital in hand, I sounded a little bit like Joliet Jake in The Blues Brothers as I called each of them: “I’m putting the band back together….” They all signed on, and they remain a critical part of the innovation and product development brain trust in Austin, Texas for Cox Automotive and vAuto.

In addition to looking back, this anniversary also prompts me to ponder the future.

I think we can all agree that the pace of change in the car business will only continue to accelerate. We also know that change, especially fast-paced change, creates disruption, and sometimes chaos.

But this environment also creates a need for innovation, and it provides opportunity for those with the desire, know-how, means and will to embrace change and help shape its course.

Such conditions play to the strengths of vAuto and Cox Automotive, and I see a very bright future for our organization and our dealer clients.

Our success will ultimately depend on how well we live up to John Dyer’s challenge to act now, be bold and stay true in everything we do.

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6 Benchmarks Top Used Vehicle Dealers Achieve to Outpace Others

Dale Pollak — Tue, 04 Oct 2016 18:36:56 +0000

Most dealers agree that if you’re going to profitably and successfully sell a lot of used vehicles, there are many things you have to get right.

With this thought in mind, I analyzed the inventories of 60 dealers that made this year’s Automotive News’ “Top 100 Dealership Groups Ranked By Used Vehicle Sales” report. My goal is to help other dealers understand the operational benchmarks and metrics these groups follow to outperform their peers.

Market Days Supply: This metric measures the market supply and demand of used vehicles based on the number of competing units available in a market, and sales over the past 45 days. The best dealers review this metric in two ways-on a per-car basis as they make appraising, acquisition and pricing decisions, and on a total inventory basis as they gauge the overall desirability of their units in stock. In either case, dealers strive to find vehicles, and maintain their inventories, with a low Market Days Supply, which signals fewer competing units and a greater likelihood of a fast retail sale. My analysis shows the 60 dealer groups achieve an overall Market Days Supply average of 69 days for their inventories-a standard that suggests a good degree of discipline as they acquire inventory.

Cost to Market: This metric measures the difference between your cost to own/recondition a vehicle and current retail prices for competing cars. Top-performing dealers strive to keep a lid on their Cost to Market metrics to maximize the spread for their front-end profit. The inventories of the 60 dealer groups show a total Cost to Market ratio of 88 percent, which translates to a 12 percent spread for front-end gross. Interestingly, the 88 percent Cost to Market ratio is higher than the 85 percent benchmark I typically recommend-a sign, I believe, that keeping a vigilant eye on costs remains a persistent challenge for even the best dealers.

Price to Market: This metric shows how your vehicle prices compare to those of competing vehicles in the market. Many dealers religiously reference the Price to Market ratio as they decide how to position and price a vehicle in their market. The metric is also useful at an inventory-level view to identify a dealer’s pricing strategy. For example, if the total inventory Price to Market runs above 100 percent, a dealer either has a lot of vehicles that, based on their Market Days Supply, merit an above-market asking price or, more likely, the dealer uses price to maximize front-end gross. Among the 60 dealers in my analysis, only a few showed overall inventory Price to Market ratios above 100 percent. The average runs 98 percent-a figure that indicates a balanced approach of pricing vehicles based on the competition, age in inventory, profit objective, and other factors.

Average days in inventory: The 60 dealer groups showed an average days in inventory of 37 days-a figure that suggests room for improvement. I typically recommend that dealers maintain at least 55 percent of their inventory under 30 days of age to ensure sufficient sales velocity and profitability, given today’s era of price competition and margin compression. To meet this standard, a dealer’s average age in inventory should run closer to 30 days, or even less. I was glad to see a handful of dealers on the list with average days in inventory at 25 days or less.

Annual inventory turns: As a group, the 60 dealers turned their inventories an average of 13 times a year-exactly in line with the benchmark I recommend for today’s market conditions. I wasn’t at all surprised to see the following characteristics of dealers with average annual inventory turns at six times or less: Their average days in inventory often ran 50 days and higher, and their Price to Market metrics often ran north of 100 percent.

Average inventory cost: It’s only somewhat useful to compare the average inventory investment across a large number of dealers. The reason: Local markets vary as much as dealer preferences for the inventory they carry. The average inventory investment among the 60 dealers ran $19,852, a figure that appears to be skewed by a few dealers with averages above $50,000 (figures that owe, I suspect, to the high-line leanings of the dealers and their markets). The key take-away: Whatever your average inventory investment, you should strive to lower it to maximize your return on investment and mitigate risk.

Overall, my analysis suggests that metrics-driven management matters an awful lot to a majority of the dealer groups on the Top 100 list. I also have no doubt that much of their success owes to the consistency and diligence they apply to meeting these operational standards every day.

But we should also acknowledge another take-away from my analysis: Even among the best, there’s always room for improvement.

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A Used Car Operations Tune-Up With Tommy Gibbs

Dale Pollak — Thu, 29 Sep 2016 13:33:50 +0000

I thought I’d put out a plug for my friend, Tommy Gibbs, who is hosting a half-day Used Car Workshop on Wednesday, Oct. 19, in Chicago.

Tommy doesn’t do many public workshops. He’s normally busy traveling the country and meeting with dealers/dealer groups in private sessions where he helps them tune up their used vehicle operations.

Over the years, Tommy’s been a respected friend and teacher for me. Every time we talk, I come away with an insight or pearl of wisdom that makes me smarter about the business of retailing used vehicles.

I’m told seats are limited for Tommy’s upcoming Chicago workshop. I’d recommend it for dealers and used vehicle managers looking to take their used vehicle operations to the next level and set the stage for a strong performance in 2017.

You can get more information on Tommy’s workshop here.

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3 Reasons A Chief Complaint About Auction Purchases Falls Flat

Dale Pollak — Thu, 15 Sep 2016 17:22:37 +0000

It’s not uncommon for dealers and used vehicle managers to complain that “we have to pay too much” to acquire auction vehicles.

On one hand, I get it. The auction environment is one where complaints about cost are a natural reaction: It’s your imperative to acquire a vehicle for as little money as possible. Then, bidding starts and your numbers just don’t add up to what’s happening in the lane. On top of that, if you do make a purchase, you’ve got other costs for the actual transaction, inspections, transportation and other factors.

In some ways, it’s no wonder that nearly every dealer I talk to believes “we have to pay too much” for auction vehicles.

But the complaint starts to ring hollow when you drill into the specific ways many dealers determine what they should pay for an auction vehicle, and how effectively they stick to their acquisition game plan when they’re in the lanes and online. In my conversations with dealers, I’m often able to find three areas where dealers could do a better job identifying and sizing up potential auction purchases and making more investment-astute purchase decisions.

The size/scale of your sourcing network. An independent dealer outside Minneapolis recently shared that he’s cut his acquisition costs auction cars by about 10 percent in the past six months. How? The dealer is looking for specific units across a wider network of auction sources. “I never really looked beyond our local auctions,” says the dealer, who retails about 80 units a month. But, with the help of technology that shows him available vehicles across the country, he’s buying vehicles from auctions he never previously considered. “I bought a mini-van from Phoenix the other day for 15 percent less than I could have acquired it here, even with transportation,” he says. “I used to think I didn’t need to go beyond my backyard, until I saw the cars.”

Vehicle financials. It’s increasingly common for dealers to use a “retail-back” approach to determine how much they can pay for a particular auction vehicle. That is, they’ll assess the current retail market, the competing cars and prevailing retail prices, and then subtract their expected gross profit and related costs (e.g., buy fees, recondition, packs, transportation, etc.) to figure out how much they can pay.

When dealers complain “we have to pay too much” for auction vehicles, I’ll ask to unpack their formula to assess an auction vehicle’s financials. In many cases, I’ll find sizable allowances for front-end profit, reconditioning and packs. For example, a used vehicle manager at a Southwest Toyota store approached every car with a $2,000 front-end gross profit, $900 for reconditioning and an $800 pack. I asked the obvious question: “How often do you find vehicles where these numbers actually pencil out?” His response: “Rarely, if ever.”

After some discussion, the manager agreed that his formula for auction vehicle financials needed a make-over. For starters, we aligned his front-end profit expectations with his current front-end retail average (a $450 difference). We did the same thing with reconditioning (a $200 difference). We also agreed that he’d be better off with a lower pack for auction vehicles, something he pledged to negotiate with his dealer. In the end, the manager agreed that if he’d been using his revised formula, he’d likely be complaining less that “we have to pay too much” and he’d be a more efficient and productive auction buyer.

Purchase discipline. “I’d get so impatient, and tired of losing cars, I’d just buy them.” So goes the reaction of many dealers and used vehicle managers to today’s auction-buying experience. The problem, of course, is this frame of mind often results in paying too much for auction vehicles. The key? Sticking too your guns, even if it causes anxiety and heartburn. The fact is, used vehicle margins in today’s market are too thin to let emotions cloud a good investment decision. In addition, it’s important that dealers recognize there are, in fact, perfectly good reasons to seemingly “pay too much” for a particular car. “I’ll pay extra for a vehicle with a Market Days Supply below 70,” says the used vehicle director at a three-store group. “I’ll make a little less on the front-end, but I’ll sell the car quickly and pick up back-end and service gross. I’ll take that deal all day long.”

In the end, my goal in sharing these points isn’t to diminish the difficulty of properly (and profitably) acquiring auction vehicles. It’s really to suggest that when you consistently hear the “we have to pay too much” for auction cars complaint, it’s likely a symptom of a self-inflicted problem.

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Performance Matters Podcast Peels the Personal Onion

Dale Pollak — Fri, 02 Sep 2016 17:04:21 +0000

I do a fair number of interviews with analysts, reporters, students and others interested in the automotive industry.

As a general rule, the best interviews are really conversations, marked by a healthy exchange of ideas and perspectives. Likewise, the best interviewers are those whose curiosities, interests and personalities produce open-ended, thoughtful questions that inspire meaningful responses. A journalist friend describes the interview process as “peeling the onion.”

A few weeks ago, I was the “onion” on Performance Matters with Garrett Jorewicz, senior director of operations for NextGear Capital.

Some background: Garrett’s podcast is his brainchild. He launched it as a way to primarily help his NextGear colleagues better understand their business and its connective tissue to other parts of Cox Automotive. The podcast struck me as a cool idea, and I made time for it on my calendar.

During the interview, Garrett proved to be a good interviewer. We discussed Stockwave, my books and a few personal things.

Here’s a link to have a listen:

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3 Tips To Tune Up Your Used Vehicle Performance and Profitability

Dale Pollak — Tue, 23 Aug 2016 15:44:11 +0000

It’d be wise for dealers to take a deeper look at three aspects of their used vehicle inventories:

What percentage of your used vehicles are less than three years old? How does this figure compare to a year ago? For many dealers, 52 percent of their used vehicle inventory is less than three years old, according to Edmunds.com. The number represents a seven percent increase from 2011. The prevalence of “near-new” vehicles owes to the ongoing increases in off-lease vehicles returning to the market and dealers’ efforts to maximize their certified pre-owned (CPO) sales.
What’s your average cost of used vehicle inventory? How does this figure compare to a year or two ago? For many dealers, the average cost of inventory has increased by nearly double-digit percentages in recent years as they’ve pursued CPO opportunities, kept off-lease vehicles for retail and played to consumer demand for SUV and truck segments.
What percentage of your new vehicle deals involve trade-ins? What’s the average age of those vehicles? For many dealers, there’s been a fairly steady decline in new car deals that include trade-ins. Industry stats show it’s dropped to about 45 percent. At the same time, the average age of new vehicle trade-ins is about six years old.

I’ve been raising these questions with dealers recently as we address ways to improve their used vehicle performance and profitability.

In many instances, dealers are having a decent year volume-wise in used cars. The problem: They’re finding it harder to move the needle upward, both in the number of units they put across the curb, and in the gross profit they generate with each retail sale.

It’s my belief that these performance difficulties owe, at least in part, to the declining diversity of used vehicle inventories. Today, these inventories often feature a larger share of higher-dollar, near-new vehicles than in recent years past. On the surface, this trend isn’t necessarily a bad thing.

But it suggests a shift in operational focus toward the “easy pickings” in today’s market, and a step away from maintaining a used vehicle inventory that appeals to broader segments of potential buyers. As my colleague and friend Tommy Gibbs puts it, dealers are in the “newscar” business rather than the “used car business.”

Here are three tips I share to help dealers counter-balance these market trends and optimize their used vehicle inventory to increase performance and profitability:

Mind your average cost of inventory. The most-successful Velocity dealers keep a constant eye on their average cost of inventory. The goal: Whatever the current average, you should aim to keep it trending down, not up. The vigilance results in decisions to acquire and retail lower-cost, slightly older inventory to complement and contrast a dealer’s factory CPO business. The older-age inventory can also offer the potential for a faster retail sale due to lower Market Days Supply metrics.

Maximize your trade-in opportunities. Top-performing dealers say their best appraisers do two things: They achieve look-to-book ratios at 50 percent or better, consistently take in vehicles at a Cost to Market ratio near, and preferably below, 80 percent, and diligently record every appraisal for accurate performance data. Such efforts ensure that you make the most of every trade-in opportunity, balance the sometimes competing needs of your new and used vehicle departments, and shape a more diverse inventory.

Minimize your average inventory age. I advocate that dealers should maintain at least 55 percent of their used vehicle inventories under 30 days of age. This operational standard owes to today’s ongoing margin compression and market volatility—factors that combine to erode the retail shelf life of used vehicles. More and more, if you don’t sell used cars quickly, you won’t maximize gross.

Dealers who apply themselves to these best practices often don’t see dramatic, overnight improvements in their used vehicle performance and profitability. It takes time for managers, buyers and others involved in used vehicle operations to break old habits and develop (or re-develop) the process discipline and consistency that puts the benefits these best practices offer within reach.

As a Northwest dealer recently put it, “You’re right, Dale. If this stuff was easy, everybody would be doing it.”

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Sacred Cows That Merit Scrutiny, And Maybe The Sword

Dale Pollak — Wed, 03 Aug 2016 14:50:04 +0000

I recently asked a group of about 20 dealers and used vehicle managers a series of questions:

How many of you mow your own lawns? No one raised a hand. After some discussion, it was clear that each individual felt their time was better spent doing something else.

How many of you get your groceries delivered? Several hands went up, with comments like “I don’t have time for that” and “The convenience outweighs the cost.” Among those who still shopped at grocery stores, most also ate delivered/take-out food at two or three times a week.

How many of you use a cleaning service for your home? Most raised a hand, with several noting they and their spouses simply couldn’t keep up with housework given career demands and children.

In sum, the dealers all agreed that each example represents the rise of household outsourcing—where a third-party provider offered a better, faster, cheaper or more convenient alternative for the dealers and their families than doing these tasks themselves.

Next, I turned the tables. I asked the dealers if they’d ever consider outsourcing some of the work they’ve long regarded as the sole priority and province of their dealerships—specifically the acquisition and reconditioning of used vehicles.

I wasn’t surprised by the responses. Only a couple of the dealers said they’d consider this type of outsourcing. As one put it, “We can buy and recondition the cars better ourselves. Plus, we’d give up the internal gross profit for recon to someone else. It doesn’t make sense.”

Years ago, I would have wholeheartedly agreed with the dealer’s assessment. One of the most beneficial aspects of today’s typical dealership business model is the ability to make money at each phase of a used vehicle’s lifecycle. Indeed, in some cases, the internal and back-end gross a dealer pockets from a retail used vehicle sale represents the only gross profit opportunity, given margin compression and market volatility.

But I’m starting to question whether this sacred cow—of doing the vehicle acquisition and reconditioning work yourself—is no longer the no-brainer decision it used to be. I’ve arrived at this way of thinking for three reasons:

1. Larger dealer groups are opting for outsourcing. Perhaps the best example of this trend is the partnership between Sonic Automotive and Manheim, wherein the auction company buys the cars and makes them retail-ready. Sonic views the arrangement as one that drives greater efficiency and profitability for their used vehicle operations. In a recent AutoRemarketing article, Sonic CEO Scott Smith noted some of the benefits the group expects from the Manheim partnership: “We don’t have to build the facility to recondition cars. We don’t have to have the buying team. We don’t have to have all the technicians, all the staff, everything you have to have, so the economics will be significantly better.”

2. Vehicle acquisition and reconditioning efficiency remain persistent challenges for dealers. All of the dealers in the group admitted they wished they could more quickly acquire and recondition vehicles. A few dealers noted they consistently recondition vehicles in two days or less, thanks in part to reconditioning teams and resources dedicated to the task. For most, however, the standard reconditioning time runs closer to five days or more. Every dealer acknowledged and understood that they’d make more money if they minimized the cost and time it currently takes to acquire and make their used cars retail-ready.

3. Pressure to outsource will only grow more pronounced. I was struck by one dealer’s story as he and his wife decided it’d be best to hire a lawn service. The dealer considered mowing the lawn an important responsibility, particularly for the example it set for his young son. But every weekend, he found himself fighting for lawn time, while his wife protested that the time should spend it with the kids. Over time, I’m convinced dealers will face a similar trade-off as market realities and diminished profitability push them to consider outsourcing options that, at the moment, rub them the wrong way.

Make no mistake, I am not advocating that dealers rush to outsource their used vehicle acquisition and reconditioning work. I am, however, suggesting that the time appears to have arrived where these sacred cows may no longer be as sacred and smart as dealers have long believed.

The post Sacred Cows That Merit Scrutiny, And Maybe The Sword appeared first on Dale Pollak.

A Dealer’s Evolutionary Velocity Journey In Used Vehicles

Dale Pollak — Fri, 29 Jul 2016 13:09:15 +0000

Nearly a decade ago, I met Brian Benstock, general manager and vice president of Paragon Honda and Paragon Acura in Queens, N.Y.

At the time, Benstock thought he was doing pretty well in used vehicles. He retailed 80 units a month, and boasted a front-end gross profit that beat many other dealers.

But I wasn’t particularly impressed.

I was concerned about the cars Benstock wasn’t selling—the roughly 200 units that had aged well past 90 or 120 days in his inventory. With his pace of sales, Benstock turned his inventory less than three times a year, and carried $1.5 million in wholesale losses and uncounted opportunity cost. Yet, it didn’t seem to matter.

Today, Benstock and his team retail 300 vehicles a month. He consistently turns his inventory a remarkable 25 times a year. He sells more than half of these units within 15 days after he owns them. Front-end gross still matters, but Benstock uses a different formula to measure his performance–dollars-per-inventory-space-per-day. With that yardstick, Benstock’s used vehicle department generates $153/space/day now, compared to $60 back then.

“We used to have substantial gross per used vehicle retailed and little concern for the masked cost of aged units,” Benstock says. “Today, our front-end grosses are still healthy for the market, and there’s no water. We’ve also seen a big lift in gross profit, plus a 10-fold increase in internal labor profit for reconditioning. On top of that, we’ve got a lot more customers.”

Benstock describes his prior approach to retailing used vehicles with an iceberg analogy: “Usually, about three-quarters or more of an iceberg is underwater. We were quickly turning the small portion of the iceberg above water. Every month, the portion under water would get bigger and bigger and bigger. ”

I asked Benstock to share insights from his turnaround story to help other dealers increase the pace and profitability of their used vehicle sales.

Take the pain. “The pain is correcting the price of the cars that are underwater and to putting in strategies, habits, behaviors and disciplines to prevent your current cars from becoming old cars,” Benstock says. “We took the medicine over a 10-12 month period. At times, we had to price the old cars at several thousand dollars below cost. We told everyone it was going to hurt and, in the end, you’ll do better. It did hurt and, in the end, we got much, much better.”

Dump traditional pricing. “The mistake that we used to make, and many dealers still make, is putting the car out there high in the first 30 days to see if they can get lucky. With the efficiency in the market today, there is no getting lucky. I’ll ask the question: If oil is $30 a barrel, how much oil could you sell at $32 a barrel? The answer is not a drop. The same thing has happened with cars. The dealer who says, I’m going to get some gross and put my cars, or oil, out there at $35 a barrel, isn’t going to sell any. All he’s going to do is age his cars and play catch-up to the market.”

Revise your rulers. “If you asked how I measured aged units in 2007, I would have told you it’s a 100-days. If you asked today, I would tell you it’s 29 days,” Benstock says. This thinking reflects the reality of today’s more efficient, price-transparent and volatile market. The retail shelf-life of vehicles isn’t what it used to be. To manage this challenge, Benstock tracks vehicle age by buckets, and prices accordingly. Initially, the oldest bucket included units aged 120 days or more. Over time, the oldest age bucket became 90 days. Then 60. Then 45. Now, it’s 30 days.

“We moved the moat,” he says. “When we made 30 days the cut-off, we moved the moat to 18 days. That’s when the yellow warning sign starts flashing and you really look at the vehicles and ask, ‘what’s wrong with this car?’”

Keeping pressing for improvement. A couple years ago, I had the pleasure of a morning run with Benstock in Central Park. He set a persistent pace, one that picked up the longer we ran. He applies the same approach to managing used vehicles. Not long ago, I challenged Benstock and his team to maintain a benchmark of no less no less than 25 percent of their inventory in the 30-day-plus bucket (it had been hovering above 35 percent). Sure enough, within a month or two, Benstock had only 15 percent of his inventory in the 30-day-plus bucket, a standard he’s impressively maintained ever since.

If there’s one thing that underscores Benstock’s Velocity journey, it’s his persistent drive for ever-greater return on investment and success for his dealership and team.

“We strive to be above the top performers,” he says. “The used car business is really a business of math and metrics. If you have it all set up correctly and you execute, everything falls into line.”

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A Call For Improved Effectiveness and Efficiencies In Human Capital Management

Dale Pollak — Tue, 26 Jul 2016 19:52:02 +0000

If a new or used car manager made the wrong decision nearly 75 percent of the time, chances are pretty good that individual wouldn’t be working very long at your dealership.

Most dealers would agree with this statement.

Yet, according to National Automobile Dealers Association (NADA) stats from last year, dealers and their managers appear to “miss” nearly 75 percent of the time when it comes to their sales team hiring decisions. NADA says the average annual turnover for dealership sales consultants runs 72 percent (80 percent at non-luxury stores, 48 percent luxury).

A recent DrivingSales/Hireology study, “How Dealerships Build Teams,” underscores that dealers appear to be aware of the pervasive hiring/retention problems at their stores. The study notes: “All dealers, independent of size, report major challenges in their hiring process. Most dealers surveyed said that every aspect of the hiring process is either a challenge or a major challenge, with the most acute problem being candidate quality.”

The study also suggests that some dealers recognize that persistent hiring/retention problems translate to sub-par dealership performance and profitability. These dealers are investing in HR systems, and changing hiring/retention policies and process. They’re changing pay plans, work hours and vacation times to become more attractive employers.

But my concern is for dealers who aren’t rethinking how they hire and retain employees, and who likely view near-constant turnover as merely the nature of the car business. My concern flows from three market factors that are converging fast, and will make the ongoing costs of poor hiring/retention increasingly difficult for dealers to bear:

Margin compression: Like it or not, dealers make less, in terms of return on investment, from their new and used vehicle sales. Front-end gross profits aren’t what they used to be, and the cost of inventory continues to climb. In this environment, it’s incumbent on dealers to be more efficient, precise and profit-minded in everything they do—including hiring. Hireology estimates that dealers who successfully reverse the trend of poor hiring/retention can add $386,000 to their net profits, gains that flow from reduction in hiring costs and cycles.
Buyer expectations: Time and again, industry studies affirm that today’s vehicle buyers want a more efficient and positive in-dealership experience. No matter how hard you may try, it’s nearly impossible to deliver this kind of experience if you’ve got employees who are only partially engaged in the task at hand, and generally unhappy to be at work in the first place. The old axiom that “you can’t have happy customers without happy employees” is more true than ever. This reality is why a growing number of dealers strive to provide more employee-friendly environments, eliminating “bell to bell” work hours, and providing a higher level of coaching, training and pay plan stability than they’ve done in the past.
Need to differentiate: A Michigan dealer with two stores puts it this way: “In today’s day and age, with the number of competitors and the consistency and quality of the product. The market has become very homogenous. There’s no key differentiation. A Toyota store used to be able to rest on their laurels with a quality product that nobody could touch. Well, you know what? They’re all pretty damn good. We chose to differentiate ourselves through our culture and people. It’s a 10-month-old work in progress, but it’s headed in the right direction. We felt it was the last frontier for us to combat margin compression and distinguish ourselves from the competition.”

The DrivingSales/Hireology study also cites data that shows dealers will face a people/skills shortage in the next 10 to 15 years—in part because of the current swinging door-nature of dealership employment.

It seems to me that dealers who build better teams today, and proactively work to address their human capital management problems, will have less to worry about when good people will be even harder to find in the years ahead.

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Sourcing Auction Vehicles: What You See Is What You Get

Dale Pollak — Tue, 19 Jul 2016 15:20:14 +0000

It’s still fairly common for dealers to offer two complaints about buying wholesale vehicles from auctions—it’s tough to find the right cars, and even more difficult to buy them on the money.

The complaints seem somewhat surprising, given there are more wholesale vehicles on the market than we’ve seen in recent years. In 2016, industry analysts estimate the wholesale market will have well over 3 million more available vehicles than last year, thanks to the rise in available off-lease and off-fleet units. Next year, analysts predict another 4 million or so available units in the wholesale supply chain.

One might think these conditions create a more favorable environment for sourcing the right inventory at the right prices. But it appears only some dealers are having an easier time in the lanes and online as they look to fill the gaps in their used vehicle inventories.

The disparity led me to ask a key question: Why are some dealers able to get the auction units they need, at the front-end-friendly prices they expect, while others continue to struggle?

The answers revealed three common characteristics among dealers who report auction sourcing has actually become easier and more profitable in recent months:

1. Buyer-smart inventory streams: Dealers credit new tools that provide an instant stream of available inventory for putting more of the right vehicles in front of them for consideration. “I used to spend hours printing out run lists for my local auctions to find cars I need,” says an independent dealer near Minneapolis. “I’ve set up my feeds to show vehicles from auctions across the country that fit my condition and profit criteria. I’ve got more choices of vehicles that make sense, and I’m not spending time evaluating cars that I’ll never want to buy.”

2. Profit-first focus: The independent dealer and others noted that their auction sourcing tools offer the ability to be more efficient by making their potential profit a first-tier consideration. “We used to look at a car, check the Carfax and condition reports and then look at the financials,” says the used vehicle director for a six-store Midwest dealer group. “Now, we instantly see every unit’s retail profit potential right up front, which allows us to prioritize and pursue the cars with the best retail potential and condition.”

3. Dispassionate bids/purchases: Several dealers noted they have an easier time walking away from auction vehicles when bidding turns their profit and purchase parameters into toast. “We’ve learned the hard way that it’s better to walk away than over pay,” says an Atlanta-based independent dealer. “It’s also easier to walk away when you’ve got less research time invested up-front, and you know there are three other cars, at the same or different auctions, that’ll work just as well.”

Through these conversations, I couldn’t help but sense a shift in the way some dealers approach the wholesale marketplace. They don’t just buy auction cars because they need them, or guess whether a car will or won’t perform. They embrace technology and tools to become more efficient, market-precise and profitable auction buyers.

You could also say these dealers are taking “what you see is what you get” at auctions to a whole new level.

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Reflections On My First NIADA Convention

Dale Pollak — Sat, 18 Jun 2016 11:11:54 +0000

I had the privilege of attending my first National Independent Automobile Dealers Association (NIADA) convention this week in Las Vegas.

Quite honestly, I wasn’t sure what to expect, but I was pleased to discover many similarities with my experiences at 47 National Automobile Dealers Association (NADA) conventions for franshise dealers.

First, many of the dealers I met are as astute and keen about their business as many franchise dealers. They understand the wholesale and retail marketplaces are changing fast, and they are wisely seeking new ideas, tools and ways to make their businesses more profitable and successful.

Second, like many franchise dealers, the independent dealers are deeply committed to their businesses. It’s their money on the line every day. They are hands-on, pragmatic operators, some of whom are likely to pick up a wrench or a chamois cloth to get a car ready for retail.

Third, I was struck by the family nature of the event itself. I met dealers, their wives and their children on the NIADA floor—a reminder that many, if not most, dealers of all types are, by their nature a family affair.

Finally, I was pleased to be a part of Cox Automotive’s impressive presence on the NIADA floor—a testimony to our commitment to serve independent dealers as we collectively transform the way the world buys and sells cars.

My hat’s off to NIADA’s Steve Jordan, CEO, and Joe Lescota, director of dealer development, for hosting an enlightening, productive and well-run event.

This year’s NIADA convention may have been my first, but it most definitely won’t be my last.

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5 Pointers To Preserve and Protect Profitability As You Acquire Used Vehicles

Dale Pollak — Tue, 14 Jun 2016 19:54:02 +0000

Most dealers would agree that you make your money in used vehicles when you acquire a car.

If you pay too much for an auction or trade-in vehicle, you’ve shrunk the spread between your costs to acquire and recondition the unit, and its retail selling point. Conversely, if you “steal” a car, you’ve widened the spread, and set the stage for a healthy front-end gross.

I’ve been thinking about this age-old axiom of our business as I hear and read about declining used vehicle profitability.

This past spring, public dealer groups reported front-end gross profits on used vehicles declined $100 or more on a per-unit basis compared to the prior year. The drop runs consistent with the results I hear from private dealers. Even worse, the diminished profitability comes in spite of dealers buying and retailing more expensive used vehicles.

Astute dealers know the decline in used vehicle profitability isn’t just a one-off occurrence. It’s been a persistent feature of used vehicles for the past several years, thanks to the rise of internet-driven transparency and increased competition.

Given this backdrop, I thought it would be useful to revisit Ground Zero for used vehicle profitability—the moment when you own an auction or trade-in vehicle. I asked several top-performing dealers to share how they make their money when they acquire a vehicle. They offered five pointers:

A clear view of the “right” cars. The “right” cars are different for every dealer, given individual objectives for profit and inventory turns, and local market conditions. Dealers say it’s imperative to know, with exacting precision, the cars that are “right” for you, and to prioritize your auction and trade-in purchases around them.

“When we go to auction, we don’t buy 50 cars because we sold 50 cars,” says the general sales manager for a Southwest Toyota store. “That’s how we used to do it. Now, it’s always about the ‘right’ car. We’re sticklers for the right equipment, color, condition and mileage. We’ll sometimes pay more than we’d like for the ‘right’ car, but we’ll do it because it’s the ‘right’ car and know it’ll sell in our market.”

Exit strategy-minded acquisitions. The sharpest dealers use technology and tools to know each vehicle’s opportunities and risks before they book a trade or buy at auction. They know their costs (the price of the car, reconditioning, a pack, transportation/other costs). They compare those costs to prevailing retail values to determine a vehicle’s front-end profit potential. They evaluate each vehicle’s Market Days Supply to determine how long it will take to retail the unit.

A Southeast Chrysler dealer summarizes his exit-minded acquisition strategy this way: “Before I buy a vehicle, I know what I can make, and how long I have to retail it before it’s a break-even unit. From there, it’s a question of retailing the car quickly to maximize our gross and minimize a potential loss.”

Accountability. Dealers say they’re holding appraisers, buyers and managers more accountable for buying vehicles “on the money.” For example, a Northeast Honda dealer expects appraisers and auction buyers to purchase vehicles at or near a respective cost to market ratio of 80 percent and 85 percent. “If they land above the benchmark, there’s always a conversation,” the dealer says. “The market’s too competitive and our margins are too thin to give up our profit potential unnecessarily.”

Wider reach. For wholesale vehicles, dealers are tapping a larger, more diverse group of online and physical auctions than in the past. “Given the competition, you almost have to have eyes everywhere to get the cars at the prices you need,” says the used vehicle director for a Midwest dealer group. More and more, dealers rely on technology and tools to minimize the time required to find and evaluate vehicles, enabling them to focus on buying the “right” ones on the money.

An opportunistic eye. As students of the market, the dealers each noted that they keep their eyes open for opportunities to stock and retail vehicles they don’t typically sell. “I try to keep about 20 percent of my auction purchases for stuff I wouldn’t normally stock,” says the general sales manager at the Southwest Toyota store. “I won’t really know if a vehicle doesn’t work unless I try it.” To minimize the risk, he pursues vehicles with a relatively low market days supply (70 or less), and aims to purchase them at/near an 85 percent cost to market ratio.

In my next article, we’ll examine how dealers can preserve and protect used vehicle profitability after they’ve acquired the “right” cars on the money.

The post 5 Pointers To Preserve and Protect Profitability As You Acquire Used Vehicles appeared first on Dale Pollak.

A Precision-Focused Approach To Digital Retailing

Dale Pollak — Fri, 03 Jun 2016 17:44:31 +0000

You won’t find newspaper ads, radio spots or TV commercials promoting Cardinale Automotive Group.

The 19-store group, headquartered on the Monterey Peninsula in California, ditched traditional advertising in 2010 as it began its transformation to become an all-digital retailer.

Since then, the group has made incredible progress. This year, Cardinale ranks 2^nd on the Ward’s e-Dealer 100 list, retailing a combined 14,182 new/used vehicles via the internet. In 2013, the group ranked 7^thwith a combined 5,431 new/used internet sales.

I caught up recently with Erich K. Gail, COO of the Cardinale Group of Companies, to better understand the how’s and why’s behind their automotive group’s impressive achievement. The conversation revealed an organization that left no stone unturned as it climbed from near-bankruptcy in 2009 to become one of our industry’s top digitally focused dealer groups.

“The bottom line is when we looked at ourselves financially back then, we should not have survived,” Gail says. “It is truly by the grace of God that we are here today.”

Cardinale’s rebirth included several strategic initiatives:

Brand promise: Cardinale companies center on a singular commitment, known as the CardinaleWay: “We Develop Outstanding Relationships Where Everybody Wins.” This brand promise “guides every single decision we make, in everything we do, every single day,” Gail says. The organization-wide commitment to the CardinaleWay translates to daily expectations for leaders, managers and associates to coach, mentor and train to provide consistently positive experiences for their guests, communities, manufacturer partners as well as each other.

Management- vs. market-driven culture. “Throughout the entirety of this organization, which was founded in 1979, up and through 2009, we were market-driven,” Gail says. “If the market was up, we needed more people. We needed more stuff. We needed more locations. Life is great, the market is up and we need to grow.”

“Yet management-driven is the complete opposite,” he continues. “It says, ‘We don’t care what the market is doing, and whether it’s up or down.’ We will determine our goals and objectives. We define our growth and performance goals every month, every quarter and every year based upon specific objectives. If you are disciplined enough to do it, you will remove the condition of market subjectivity. You will not chase market share at a future cost or erosion of disciplines. You will not bloat your operation to an unsustainable level if the market turns. And you will manage around your worst month.”

Non-negotiables: Cardinale Automotive Group has established a minimum water-line of 20 percent net to gross profit ratio across all rooftops. To achieve this goal, Gail and other leaders established what they term as “non-negotiables” for performance in five key areas: CRM (the “center-nucleus of retail operations,” as Gail calls it); inventory management (with specific Cost to Market, inventory turn and merchandising disciplines); phone skill mastery (with real-time monitoring by managers); daily training (including three daily, one-on-one meetings between in-store managers and department associates), and a strict commitment to ZERO MOMENT Retail (where the emphasis is targeting in-Market vehicle buyers as opposed to just shoppers).

I asked Gail to dive in a little deeper on their commitment to the ZERO MOMENT Retail philosophy. It’s born, he says, from science that details specific shopper behaviors that signal shifts from initial stimulus, consideration and product research to an ‘I want it now’ buyer mindset.

“Our truth, from both an operational and investment standpoint, is that we target in-Market buyers who are 12 days or less from purchasing a vehicle. We’re not on the ‘hope-plan’ that chases someone who is 30 days, 60 days or 90 days out. They’re not at their ZERO MOMENT,” Gail says. “The ZERO MOMENT, or in-Market buyers, have done their research. They know what they want, and why they want it. As a direct result, they select their dealer of choice with every emotional trigger and intention to make a purchase provided they receive an Xperiential retail moment.”

Extending the reach of this ZERO MOMENT Retail science, the Cardinale-Group developed a dealer to dealer investment management and retail performance company, ZMOT Auto. The company, which serves dealers in the United States, Canada and Mexico with regional exclusivity, combines business intelligence and Cardinale retail process disciplines to integrate a dealer’s digital retail strategy to target, identify and serve in-Market buyers.

“With proper integration, all of our digital retail environments communicate together,” Gail says. “We can see that someone is looking at a specific pre-owned Accord at one of our dealerships. Further, we can see specific behavior within our digital footprint, such as reading our reviews. We can see they watched 46 seconds of a video in either English or Spanish and, four hours later, watched the entire video and forwarded it to someone. Based upon these and many other actions undertaken by in-Market buyers, should they not have engaged our stores or brands in what we consider an attributable direct-action (telephone call, chat, sms text or form-fill), we initiate a dealer-branded call to action to drive the needed direct-action engagement.”

Gail says this inMarket-buyer-focused digital retail strategy and process yields several positives for their automotive group. The average duration from initial contact-to-sold is 9.7 days, compared to a 50.3 day average for the industry. Additionally, the average direct-investment for advertising or marketing per unit sold runs less than $200 for Cardinale, compared to $600-plus for other dealers, according to National Automobile Dealers Association data.

“The Xperiential shift in our culture is that we don’t just sell cars, we help people buy cars,” Gail says. “We know exactly what our in-Market buyers want, and we serve them to fulfill their specific intentions. It’s just a shift in focus. But that’s the world we now live in. If we’re serving you as a guest in our home as opposed to just ‘one-and-done’ selling, we need to be gracious, convincing and ensure our entire culture and the experience you receive is persuasive about why our family-team represents great value for you.”

This precision-focused approach also advances Gail’s responsibility to efficiently and wisely manage not only the Cardinale investments, but those of the external dealers served through ZMOT Auto. “As dealers, we have finite resources, and we are 100 percent responsible for determining how to invest these resources every month to produce the best return,” he says. “We have chosen to invest all of our resources into what we know we can measure with attribution, as opposed to the old adage that says, ‘I know half my marketing is working I just can’t tell you which half.’”

In our conversation, Gail referred to Cardinale as a “laser-focused digital retailer.” The term seems fitting, both as a description for the way they operate and as an explanation for their rapid rise as a formidable e-focused dealer group.

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3 Ways to Maximize Your New Car Sales With Improved New Vehicle Management

Dale Pollak — Wed, 18 May 2016 16:34:14 +0000

It’s sometimes startling to see the disparity in the ways dealers manage their new and used vehicle inventories.

As a dealer recently put it, “I have $1.4 million in used vehicle inventory, and we pay attention to it every day. We track VDPs (vehicle detail pages), our price position and our merchandising. But I have $13 million in new vehicle inventory that I don’t look at much at all.”

The dealer’s approach to new vehicle inventory management is fairly common—particularly in times when sales are strong. Traditionally, dealers don’t believe that new vehicles depreciate, and factory floor plan assistance can help ease the cost of carrying older-age units.

But here’s the question: How much better off would dealers be doing, in terms of new car sales and profitability, if they took a more proactive approach to managing their new vehicle inventories to sell more vehicles in less time?

To answer the question, let’s consider the following new car inventory data points:

According to the National Automobile Dealers Association (NADA), the average dealer sells 87.5 new vehicles a month. AutoData reports the average days supply of dealers’ new car inventories runs near 70 days, which translates to roughly 200 units on the ground.
Industry data also shows that nearly half (48 percent, or 96 units) of the average dealer’s new vehicle inventory is older than 90 days.
NADA also reports the average dealer earned $143 in floor plan assistance per retail unit last year, or about $151,000.

To me, the most troubling data point above is the number of aged units. It suggests that dealers do a decent job retailing vehicles their customers want, and a less-than-acceptable job with less-desirable cars. Further, the aged units also underscore the cost of new vehicle inventory inattention—fewer sales, less gross profit, and less benefit from factory floor plan assistance and other below-the-line programs.

Dealers should tackle the aged new cars head-on, aiming to reduce the percentage of aged units by 10 percent, if not more. For many dealers, this operational goal will require more astute, buyer- and market-minded management of their new vehicle inventories and pricing.

Here are three best practices to help you get there:

Know each vehicle’s market “sweet spot.” A growing number of dealers are using technology and tools to fully understand how many in-/off-brand vehicles compete with their new cars, the prevailing asking prices in the market and buyer interest in their vehicles. Dealers who proactively apply these competitive insights to their new vehicle inventory and pricing decisions often find opportunities to ask for more gross, and to know the specific units they should price aggressively to increase turns and optimize their inventory mix.
Price with greater transparency. Today’s buyers prefer to see new vehicles listed online with transaction-like prices that include all relevant incentives. They view listings with “call for price” or “Get Your Internet” price as signs of the traditional car-buying shell game. By contrast, dealers who adopt transparency-focused pricing strategies typically benefit from increased buyer interest, more showroom traffic and more profitable sales.
Avoid the “lazy” mistakes. Dealers who adopt more proactive, market-focused new vehicle inventory management practices quickly identify two trouble spots. First, they discover that they often trade some of their best cars to other dealers. Second, they find a pattern of selling their freshest vehicles first, even though they’ve had the same car in stock for weeks or months. “I didn’t realize we had a problem,” says a Midwest Ford dealer. “We were simply trading or selling the cars closest to the showroom. These were stupid, lazy mistakes that cost me money every month.”

I would encourage dealers to adopt and follow these best practices as soon as possible. The outlook for new vehicles is decidedly less rosy than it was a year ago. Analysts are calling for sales to plateau, if not drop off.

When this market shift occurs, the true costs of a dealer’s inattention to new vehicle inventory management will become painfully evident—which is all the more reason to start paying attention today.

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Two Product Launches, Two Decidedly Different Timelines

Dale Pollak — Mon, 02 May 2016 21:33:05 +0000

I’m both a little amazed and humbled by the success of Stockwave, a tool that helps dealers efficiently source wholesale vehicles.

In less than 30 days after the product’s official launch at the National Automobile Dealers Association (NADA) convention last month, more than 1,000 franchise and independent dealers have signed up for Stockwave.

Frankly, I’m blown away by the positive response. It suggests that Stockwave’s benefits are right for dealers, and the product arrived at a time when dealers are hungry to find ways to spend less energy and time finding the auction vehicles they need and buying them on the money.

But I’m also reminded of how long it took to reach the 1,000 dealer customer mark with vAuto.

By my calculations, four years passed between the time I pitched vAuto to the first dealer (and promptly got asked to leave) and we had 1,000 dealer clients. That’s 1,460 days, nearly 50 times longer than it took Stockwave to reach the same milestone.

Why the difference? Two reasons come immediately to mind.

First, dealers are far more receptive to Stockwave than they were to vAuto in the early days. Looking back, vAuto hit the market a little before its time, and my family can attest to the emotional and financial pain of a father pursuing a vision others simply didn’t yet see.

Second, and most important, Stockwave represents a level of collaboration and commitment vAuto never had. When vAuto started, it was just my co-founder Mike Chiovari and me sitting at my kitchen table, hatching a new software idea.

By contrast, Stockwave represents the best and brightest at Cox Automotive. Its development and launch resulted from a high level of collaboration and cooperation from all corners of the company—marketing, product development/research, sales and support.

Given this backdrop, one might think Stockwave was destined to be a winner.

But I take a different view.

In any large company, there are entrenched and vested interests that, by their nature, tend to stifle innovation. In any other organization of Cox Automotive’s size, Stockwave might well have died in the woodshed.

Thankfully, Cox Automotive’s leadership team understands this risk, and actively cultivates a culture/work environment that prevents such resistance from taking root.

That’s the reason I continue to work for Cox Automotive, and Stockwave continues to shine.

#justturniton

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4 Operational Pearls From Roger Penske

Dale Pollak — Wed, 27 Apr 2016 17:37:09 +0000

I had the privilege of hearing Roger Penske, head of Penske Automotive Group, share his perspective on the car business today during a Q&A session with Cox Automotive president Sandy Schwartz.

The session is part of a Cox leadership team meeting this week in Fort Lauderdale, where we’re gathered to sharpen our knowledge and understanding of the challenges and opportunities facing dealers.

Now, in the interest of full disclosure, I should note that I hold a great deal of admiration and respect for Penske and his organization.

I’ve visited thousands of dealerships across the country over the years and, simply put, you can always tell when you’re in a Penske store. The facilities are consistently pristine, and every team member contributes to an unmistakable air of process, productivity and purpose in the dealerships. Based on these experiences, I’ve never been surprised as the Penske organization continues to build on its long track record of success and reputation as a top-performing dealer group.

In the Q&A session, Penske covered a lot of ground, but there were four key take-aways that struck me as instructive and relevant for every dealer:

The power of people. It’s clear to me that Penske and his organization put their people first. They place a high priority on recruiting, hiring and training people who fit well in their organization. They expect accountability, and they reward good performance with the additional opportunities and responsibilities good employees expect. As Penske shared his perspective, I couldn’t help but think that behind every great team, there’s a leader who views employees as assets, and champions the cause of proper human capital management.

Facility cost friction. Penske shared how his group has invested more than $2 billion in facility renovations and upgrades in the past few years. Penske wasn’t complaining; he astutely views the investments as part of a franchise dealer’s responsibility to maintain mutually beneficial relationships with factory partners. But Penske also noted the car business’ ever-accelerating shift toward digitally driven retailing. He openly wondered whether a dealer might be equally, if not more, successful in the future with just an “internet connection and a warehouse.” Ultimately, Penske’s observation points to what I’d call a growing gap between factory expectations for physical facilities, and the front-line realities dealers face with e-minded customers.

A customer trifecta. I liked how Penske framed today’s new/used vehicle buyers. You’ve got older customers, who buy at expected intervals and call “Charlie” when it’s time to make a vehicle purchase. There’s a second “hybrid”-like customer, who goes online and comes to the dealership armed with as much, if not more, information than sales associates. Millennials make up the third group, and their expectations require dealers to develop a meaningful and relevant presence in social media. Penske captured the key challenge and opportunity for dealers—how to serve each of these customer groups effectively, efficiently and equally well.

A “buffer” in tougher times. Penske touched on the cyclical nature of retail sales, noting that dealers will inevitably face tougher times ahead. His plan: Continue to build on the 42 percent of dealership gross profits that come from his service and parts departments. This emphasis on fixed operations performance and profitability creates a “buffer” that helps dealers weather more turbulent times in new and used vehicle sales. Penske’s correct, of course, and his point got me thinking: I wonder how many dealers will someday wish that they’d done a better job building their own “buffer” today, when times were good?

As Penske finished the session, I felt grateful for the opportunity to learn from one of the best in our business.

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3 Essential Steps To Maximize Gross Profits On Auction Cars

Dale Pollak — Tue, 26 Apr 2016 14:04:07 +0000

If you ask dealers for their top complaint about the used car business, many will say it’s difficult, if not impossible, to acquire wholesale vehicles “on the money.”

Dig a little deeper, and the root of the complaint becomes clear—dealers believe they can’t make the gross profit they would like to see in their used vehicle department, particularly on units they acquire from auction.

Part of the complaint owes to market conditions. Front-end grosses on most used vehicles simply aren’t what they used to be, thanks to increased price transparency. National Automobile Dealers Association data shows that the front-end gross profit as a percentage of the sales price of used vehicles has declined 20 percent over the last several years and, judging from recent industry reports, the downward trend continues.

But I would submit that the real reason dealers find auction cars profit-problematic owes to the ways they identify, purchase and manage these vehicles as part of their broader inventory management strategy.

Let’s take a closer look at each:

Identify: It used to be OK to just go to the auction and buy some cars. Not anymore. The market’s too competitive, transparent and volatile for such gut-driven guesswork. The best dealers today know exactly what they plan to buy before they spend any time in the lanes or online. They are extremely precise, as well, placing the highest priority on cars that meet the color-, condition-, equipment-, mileage- and profit-parameters that fit their market. Most use technology and tools to achieve this level of precision, purpose and specificity with their auction buy lists. It shouldn’t be too surprising that dealers who operate in a less sophisticated manner often have the most difficulty finding the right cars.

Purchase: Today’s best dealers approach the purchase of an auction unit the same way. It’s a dispassionate, stone-cold analysis. They assess whether they can buy the car they need on the money, with precise knowledge of the profit to expect, given how much they’ll pay for the car and put into it. They use technology and tools to estimate all the cost inputs—acquisition price, packs, post-sale inspections, transportation, and other fees, and determine their potential gross before the bidding starts. Likewise, these dealers are disciplined. They rarely purchase outside their pre-set parameters and, when they do, they have a very good reason.

Manage: Top-performing dealers know that, in today’s market, auction cars represent their most costly and risky used vehicle investments. This understanding drives the care and precision they apply to consistently knowing the right cars and buying them on the money. But this understanding carries further—to each day and every stage the dealer owns this more costly and risky investment. Auction cars get more attention and scrutiny in reconditioning, in online merchandising and in the ongoing reviews of asking prices compared to trade-in vehicles.

This level of extra-scrupulous management oversight is necessary to maximize profit and minimize risk. As one dealer put it, “I don’t like to have any over-age vehicles in my inventory, but I absolutely hate it when we let auction vehicles age. More often than not, we end up with a loss we could have avoided.”

Dealers who strive to heed these three best practices will typically find improvements in their front-end gross profits. Such gains stand to reason: They’ve got the right cars, they bought them correctly and they’ve done everything they can to maximize each unit’s return on investment.

These dealers may still believe that front-end gross profits aren’t what they should be for auction-sourced inventory.

But this belief is more of a commentary on current market conditions, and the all-points effort that’s now required to optimize used vehicle performance and profitability. These dealers understand there’s money to be made with auction vehicles if you have the fortitude and know-how to make it.

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An Independent Perspective On The Used Car Business

Dale Pollak — Fri, 22 Apr 2016 14:54:11 +0000

TJ Riley isn’t your typical independent car dealer.

For one thing, he’s a lot more disciplined than many franchise and independent dealers when it comes to buying vehicles at auctions.

“If you walk out to the Dallas Auto Auction on a Wednesday, it’s just eye-opening the amount of dollars changing hands, based solely on the hairs on the backs of people’s necks. There’s so much opinion, experience and perception driving decisions. There are also other motivations, like your boss said, ‘we sold 50 cars last month, let’s go get 50 more.’ Well, 50 more of what? Should we just go out and buy anything because you need them? These things happen at the auction every day. As an outsider coming into our industry, it’s mind-boggling.

“We ask ourselves two questions, every day. What is the right car, and what is the right price?” he continues. “If you can solve those two questions, and you know the answers as fact, you will win.”

Riley’s disciplined, efficiency-minded perspective follows the lessons learned and successes he achieved as an entrepreneur in construction and manufacturing.

“I gained a lot of understanding about process flow, especially in manufacturing,” he says. “Efficiencies, because of the margins manufacturers have to deal with, is the only way you can survive.”

Riley initially joined the Fort Worth, Texas-based Net Direct Auto Sales as an investor four years ago. He cites several “hard knocks,” mostly associated with buying the wrong cars at the wrong prices, as the catalyst for increasing his operational and ownership stake in the dealership.

Riley and his team set out to sell 25 to 40 vehicles a month—a goal they’ve long since surpassed as they’ve focused on market data and metrics to guide their decisions. The dealership specializes in trucks, a niche Riley identified as under-served and prime to deliver first-mover advantage.

I met Riley at the recent National Automobile Dealers Association (NADA) convention in Las Vegas. I found him to be a sharp student of the business, whose thinking on several fronts seems relevant to share:

Moneyball and used cars: Like me, Riley loved the way former Oakland A’s manager Billy Beane ditched traditional scouting reports, relying instead on player performance data to make roster decisions—the primary focus of Michael Lewis’ book, Moneyball. Riley takes the same approach to his inventory; it doesn’t matter if a buyer thinks a car is a good car, or that it might work. The data has to prove the case before he’ll make the investment.

“Here’s why the car business is so much easier than baseball,” Riley adds. “A car doesn’t wake up and have a bad day. It is what it is. A car is a commodity item. In baseball, or any other sport, there are a mass of human factors that are uncontrollable. A guy has a great year, something happened in his personal life, and he’s not the same player he was. That risk is really mitigated in the car business. The car business is really no different than if I’m trading pork on the market.”

Failure-friendly acquisitions: Across the country, dealers bemoan the effort and time it takes to properly acquire auction vehicles. Riley finds acquisition advantage by making failure a priority. “Our motto is we need to look at four times the average amount of inventory other buyers will look at every day. We have to appraise three times as many vehicles as the average buyer, and we have to be unsuccessful at a three times greater rate,” he explains. “So even if we are unsuccessful at a three times greater rate, but we’ve looked at quadruple the amount of cars and triple the number of appraisals, we still get the inventory we need. The hope is we’ll find the right cars at the right price. It’s just old-fashioned hard work at that point. My job is to make my buyers more and more efficient so that they can do this every day and not kill themselves. The ultimate goal is that they spend their time not on searching for cars, but working on the relationships, so that when they know the right car and the right price, and where it’s located, they have the right relationships in place to get the car.”

Continuous risk reduction: Riley views the used car business as akin to legalized gambling—where the person with the best math will win. “The best mathematicians work at NASA and Las Vegas. They have the metrics to reduce the gamble to as little as possible. You’re never going to get all of the risk out of any business, whether it’s Las Vegas or Wall Street or the car business. But your job as a dealer is to come in every day and reduce the gamble or risk you have in your investment.”

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vAuto’s Mandi Fang Earns An Automotive Honor

Dale Pollak — Tue, 19 Apr 2016 21:44:17 +0000

I love it when somebody I know gets recognition they deserve.

Many years ago, I found myself on the opposite side of a table with a very impressive woman.

I remember her tenacity as a negotiator, as well as her command of minute details related to the deal at hand. She stood tall at a table filled with car guys, winning our confidence, and concessions, as she made her case on behalf of her team.

A few years later, as vAuto was gaining headway in the market, I thought of Mandi Fang. “We need her on our team,” I told my partner, Keith Jezek.

So began what’s been a remarkable friendship and journey together for nearly eight years. I can’t count the times I told Mandi, “we need your magic on this one,” and she delivered.

Today, Mandi serves as vAuto’s vice president of product. She’s plays a vital role in vAuto’s efforts to bring new solutions to the market, working with cross-functional teams to conceptualize new products, prioritize workflows, solve the inevitable development setbacks and stay on schedule. In some ways, her job’s a little like herding cats. Yet, she does a stellar job, day in and day out, with an unflappable spirit and one of the fastest wits I know.

It makes me proud to know Mandi is one of the 2016 Women In Autoremarketing honorees. She’s been a source of inspiration for me, and many of us at vAuto. I’m delighted she’s receiving recognition for her contributions both to vAuto, dealers and our industry.

I’d encourage everyone to read about Mandi’s impressive career path in Auto Remarketing.

Wouldn’t you know it, her career in automotive started with paint and rivet guns on a General Motors assembly line.

Congratulations, Mandi! Much love and respect!

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4 Ways To Turn Auction Cars Into Advantage At Your Store

Dale Pollak — Wed, 13 Apr 2016 17:18:48 +0000

You could say auction cars offer a blessing and a curse for dealers.

The blessing is that auction cars are always available—offering a way for dealers to acquire inventory they need that they can’t get through trade-ins. For most dealers, auction cars make up 30 percent or more of their used vehicle inventory.

But auction cars also carry a curse. In general, auction cars cost more to acquire than trade-ins. Their profit potential is leaner from Day 1. In addition, auction cars often have a higher market days supply metric than trade-ins, given the frequency of off-fleet/program cars in the lanes.

With less inherent market appeal and profit potential, auction cars are, by their nature, more challenging as retail units for dealers than trade-ins. This reality explains why auction-purchased vehicles are often chief contributors to inventory aging problems.

But I’ve come to understand that auction cars themselves aren’t the problem. The problem is the way many dealers acquire auction cars. Simply put, they aren’t as efficient, precise and sophisticated as they should be to pinpoint the vehicles they need and bring them home on the money, time and time again.

The following are four operational imperatives I recommend to help dealers do a better job sourcing auction cars:

1. Know exactly what to buy. Many dealers and their buyers believe they know the exact cars that will best advance their used vehicle objectives. Some take pride in being “in the know,” and not doing any homework before they arrive at an auction. Yet, the cars they purchase end up being aged units, month after month. What gives? The problem is the variety and number of available auction cars, and today’s ever-changing retail market. It’s impossible, without the help of technology and tools, to know how a specific vehicle’s color, equipment, mileage, ownership history and trim level will play against competing cars. Dealers who reinvent their acquisition strategies use this car-specific precision to build auction shopping lists that include alternative choices if they can’t get the cars they want the most.

2. Know where to buy. With increased competition to acquire auction cars, many dealers recognize they need to expand their sourcing efforts beyond the local auction. The challenge then becomes how to easily and efficiently determine the auctions where the cars that best fit your retailing objectives are available. The most proficient dealers and buyers rely on technology to tell them where the cars they want reside. They also use technology to facilitate the transfer of the purchased units back to the dealership. The end result: They are more efficient and productive buyers every time they go to an auction to supplement their inventories.

3. Buy at the right price. Dealers who reinvent their auction sourcing efforts eliminate the guesswork that once guided their bidding on auction cars. Today, they know the maximum they can afford to pay on every vehicle. How? They use technology and tools to calculate each unit’s profit potential (accounting for the costs of acquisition, transportation, reconditioning, a pack, etc.) before they make a first bid. Of course, it takes discipline to stick to these parameters in the lanes, particularly if you’re frustrated by losing cars you really wanted. But the bidding precision, and accompanying discipline, are critical to ensure you make your margin when you acquire an auction car.

4. Do it all faster. With technology, dealers and used vehicle managers can prepare for auctions in minutes, not hours. They eliminate trips to auctions where the cars they need weren’t there in the first place. They waste no time bidding on the wrong cars. In an effort to gain even more efficiency and speed as they acquire auction cars, some dealers now rely solely on online sources, a time-saving shift that improves showroom efficiency; managers are in the dealership, working deals and managing their teams.

The good news for all dealers is that the effort needed to achieve these operational imperatives won’t be as daunting as it may seem. In fact, I’m excited that there now is a technology solution that, almost with the flip of a switch, will help dealers achieve a higher level of auction sourcing efficiency and proficiency than previously possible.

As I look ahead, the used vehicle market won’t get any easier, and auction cars will continue to play a critical role in helping dealers achieve their sales and profit objectives. It stands to reason that dealers who reinvent the way they source auction vehicles will gain advantage over those who prefer the inefficiencies of the status quo.

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NADA 2016 Wrap-Up: A Few Thoughts As The Convention Closes

Dale Pollak — Mon, 04 Apr 2016 21:41:12 +0000

For much of the past year, I’ve been concerned that dealers might be forgetting that the car business is cyclical.

I worried that dealers would take the past five-plus years of record-setting growth in new and used vehicle sales for granted. That they would overlook the reality that the good times simply can’t last forever. That they would be caught flat-footed when sales volumes and profitability soften.

But as this year’s NADA convention comes to a close, I’m sensing that some dealers have turned the corner. They aren’t simply waiting for sales to fall off before they make operational adjustments. They’re taking steps today to increase operational efficiencies as a way to maintain, if not increase, their performance and profitability as market conditions become less favorable.

At the vAuto booth at NADA, our new vehicle pricing and inventory management system, Conquest, saw an unprecedented degree of dealer interest and sales. The reason? Dealers realize that, when the rising sales volumes they’ve enjoyed in recent years dissipates, they need to more efficiently and proactively manage their new vehicle inventories to maintain market share and maximize the profit potential in every used vehicle.

As one dealer put it, “I’ve got more inventory and my new car sales are softer. It’s on us to move the needle. We’ve realized that we need to do a better job managing our inventory mix and pricing our vehicles to sell.”

Here are a few other take-aways as NADA attendees and I head home:

Employee turnover. This remains a persistent problem. At the convention, NADA analysts discussed findings of the 2015 Dealership Workforce Study, which shows overall turnover in dealerships increased to 39 percent, with sales positions seeing the highest rate of turnover (72 percent). Some dealers recognize turnover as a costly drain on their operational efficiency and profitability. Most, it seems, simply regard turnover as the nature of the car business.

Used vehicle volatility. The combination of rising numbers of off-lease used vehicles, and increased incentive spending by factories to move new vehicles, will likely hasten depreciation in the used vehicle market in the coming months. These factors will require dealers to be ever-more astute about acquiring used vehicles “on the money” and retailing them quickly—a key factor, I believe, that resulted in significant numbers of non-vAuto dealers signing up for Stockwave here at NADA.

Cox Automotive collaboration. It’s been inspiring to see such a high level of collaboration between Cox Automotive brand team members at NADA. At the vAuto and Stockwave booths alone, we had dozens of dealer referrals from other team members—a sign that Cox Automotive is fulfilling its mission to make the needs of our dealer clients our highest shared priority.

My sincere thanks to the vAuto and Cox Automotive teams, as well as everyone who stopped by the vAuto and Stockwave booths, for making this year’s NADA an extra-special and highly memorable success.

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NADA Day 3: A Touching Moment That Inspires And Transcends

Dale Pollak — Sun, 03 Apr 2016 15:30:53 +0000

I need to go off the reservation for today’s NADA dispatch.

It’s not that today’s time on the NADA exhibit floor wasn’t noteworthy. Rather, it’s because something far more personal and profound occurred elsewhere—at the Baccarat Bar at the Bellagio Hotel. Something that brought tears to my eyes, and that I’ll treasure forever.

I had gone to the Baccarat Bar to attend the Germain Motor Company’s annual vendor appreciation party. Dealer Steve Germain started the event in 2011. He thought it was “B.S.” that dealers only attended parties thrown by vendors. He wanted to give back. He wanted to demonstrate his gratitude for vendors who “give more than they get,” and helped the Germain team build a disciplined, process-focused business to drive future growth and success.

Steve explained all this at the event, and then he noted that he, his family and his team wanted to recognize someone special, and present the Germain Family Vendor Appreciation Award.

“This is a trophy you get because you give us results,” Steve says.

Then he called my name and asked me to come forward.

“Dale’s tireless work has been critical to Germain’s continued growth,” Steve told the group. “We are grateful for his friendship and committed partnership to our family and business.”

I was completely surprised and totally floored. I can probably count the times in my life when I’ve been truly surprised on one hand. I can typically sense when someone’s being coy or evasive to keep a secret or, as a blind guy, when someone’s moved the furniture in a familiar room.

Well, the Germains got me. I now have to add a second hand to tally my life’s true surprises. The only words I could muster in the moment were, “Really? Me?”

Steve presented the trophy. His son Zach gave me a “G” lapel pin. His son Austin presented a pen he custom-made himself. Their gifts are really their way of saying “you’re part of the family.”

I left the event thinking I’m the most blessed man on the planet. It’s pretty special that my work, and my passion for the business, results in deep, enduring friendships with first-class families like the Germains. The recognition from the Germains underscores how so much of the car business boils down to people, and shared commitment and trust.

My deepest, and most sincere thanks to the Germain family and organization for this once-in-a-lifetime honor. It means more to me than I can express.

I’m still on Cloud Nine. I’m inspired for another day at NADA. See you on the floor.

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NADA Day 2: A Few Firsts From The Floor

Dale Pollak — Sat, 02 Apr 2016 16:07:19 +0000

It was a lively, long day on the exhibit floor at NADA on Friday.

A dealer joked, “Dale, I heard things weren’t going so well, and that you’re selling socks at NADA this year.”

The truth is, I was giving away Stockwave-themed socks as part of our launch of the innovative wholesale sourcing solution. I handed out dozens of pairs to dealers who stopped by the Stockwave and vAuto booths. The give-away highlighted our belief that Stockwave would knock the socks off of dealers who saw it.

It didn’t take long to ink the first Stockwave deal. Soon after the exhibit hall opened at 8:30 a.m., dealer Chase Smith of Houston-based Russell & Smith Automotive earned the honor of being the first to sign up here for Stockwave.

The deal was one of several firsts that occurred during opening day on the exhibit floor:

It was the first time in some time that I spoke with dealers who were not using any kind of technology or tool to manage their used vehicle inventories. In one case, the GM at a Ford store says his dealer’s been content with 40-50 retail used sales a month. I asked him why make a change now. “I want to take things to the next level,” he says.

I also found some initial signs that while dealers are generally doing well, some recognize that tougher times are likely on the horizon. In my conversations with dealers, we discussed how they’ll need to become even more efficiency and profitability-focused as they contend with rising supplies of used vehicles, factories like General Motors taking a more active hand in retailing used vehicles, the growing number of buyers in longer-term finance deals and negative equity positions, an inevitable rise in interest rates and the industry’s dependence on leasing to drive new vehicle sales.

We had an unprecedented number of referrals from other software brands with Cox Automotive. The hand-offs resulted from in-booth conversations with dealers who expressed concerns/needs about their new/used vehicle inventory management and performance.

As we closed up shop for the day, and tallied up our booth sales and leads, I couldn’t help but think back to vAuto’s earliest days. We sold more deals today, in one day, than vAuto managed in its entire first year of business. That’s quite an achievement, and it underscores a lesson it wasn’t easy for me to learn as vAuto’s founder—get professional help when all the signs suggest you need it.

I’m looking forward to what Day 3 at NADA will bring. See you on the floor. #justturniton

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NADA Day 1: Cox Lays Plans For A Successful NADA

Dale Pollak — Fri, 01 Apr 2016 16:53:15 +0000

I had an eye-opening thought while standing before hundreds of Cox Automotive team members gathered for pre-NADA meetings here in Las Vegas.

In all of the 47 years I’ve come to NADA, there’s never been a company with the scale and scope of produc

ts and solutions that Cox Automotive offers to dealers—as well as one with such potential to positively transform the future of automotive retail.

For the past several months, teams from across Cox Automotive have been working together to integrate our products to better serve the business interests of dealers. I was also impressed during the meetings as speaker after speaker shared how their goals to help dealers hinge on successful collaborations across the company.

As the NADA exhibit hall opens today, I think dealers will have a clearer vision for how Cox Automotive brands are partnering to help dealers operate their businesses in a more customer-centric and efficient manner that drives increased sales and profitability.

I also expect the vibe at each of the Cox Automotive booths will be a little different than what dealers experience at other booths. Our emphasis will be consultation and conversation, as team members seek to first understand a dealer’s particular challenge or need, rather than just rolling through standard product spiels.

This collective, consultative approach will be front and center at the vAuto and Stockwave booths. We’ll be conducting live assessments of dealers’ new and used vehicle inventories, looking for opportunities to help dealers drive more consistent, profitable performance in each department.

I’m a little antsy, just as I always am before the NADA exhibit hall officially opens. I’ll be spending the bulk of my time at the Stockwave booth (#1512C) and look forward to a productive day connecting with dealers and friends.

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Final Countdown: Stockwave Is Set To Sail At NADA

Dale Pollak — Wed, 30 Mar 2016 15:40:34 +0000

Thanks to the Cox Automotive family, Stockwave has started strong.

We’ve signed up hundreds of dealers in our lead-up to Stockwave’s official debut at the National Automobile Dealers Association convention in Las Vegas.

It’s really a proud moment for all of us at Cox Automotive, given that Stockwave represents the first broad-scale example of our mission to combine our efforts and resources to create innovative solutions that benefit dealers.

But even with the positive early going for Stockwave, I’m still a bit anxious.

Because, to me, the real test arrives this week in Las Vegas. The test will be whether dealers, who are looking for better ways to do business, find Stockwave to be the transformational tool Cox Automotive built it to be.

My anxiety eases a bit when I recognize the tireless efforts of everyone behind the scenes.

The marketing, product and sales teams across Cox Automotive that helped bring us to where we are today.

vAuto’s marketing, operations, performance management, support and training teams, and the stellar job they’ve done stellar job generating Stockwave awareness and getting us ready for Stockwave’s NADA debut and beyond.

The Stockwave business development, product, sales and strategy teams that have been crushing it in recent weeks and months. The demo’s ready. The booth team’s pumped.

All we need now are dealers in the Stockwave booth.

We’ve been working hard to secure pre-set appointments with dealers to see Stockwave at NADA. In addition, we’ve got a plan for handling referrals of dealers from other Cox Automotive brands at the show. If a sales team member at any Cox Automotive booth engages a dealer interested in Stockwave, we have Cox Ambassadors who can help make the connection with the Stockwave team. Of course, the team will ensure the referring sales team member gets proper credit and reward if it’s a qualified referral that results in a Stockwave sale.

While packing for NADA, my wife asked me how I was feeling about Stockwave’s debut. I relayed my anxiety and she put up a hand. “Hold on, Dale,” she told me. “Isn’t Stockwave more ready for NADA than any other product you’ve ever brought there?”

The question gave me pause and perspective. She’s right. Stockwave is ready, thanks to an awful lot of shared commitment and hard work from a lot of people across Cox Automotive. These collective efforts give me confidence that I, and vAuto, are not alone as Stockwave gets set to sail at NADA.

As we all prepare for Stockwave’s imminent curtain call at NADA, it’s worth sharing what Manheim president Janet Barnard said when we hatched the idea for Stockwave nearly two years ago: “Let’s do this!”

Amen. I look forward to seeing everyone in Las Vegas.

#justturniton

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Three Take-Aways From Honda’s Used Vehicle Stop Sale

Dale Pollak — Thu, 17 Mar 2016 18:10:21 +0000

It’s been a little more than a month since American Honda Motor Company told its Acura/Honda dealers to stop selling used vehicles affected by the airbag-related recall.

In that time, Honda has informed dealers how it plans to make up for the disruption the “stop sale” will create in their used vehicle businesses.

As I’ve talked to Acura and Honda dealers, I’ve been struck by three things.

First, while the dealers may not be happy about the unprecedented nature of the stop-sale order and the as-yet unknown financial risks it will create, they aren’t uniformly railing against their factory partner.

“You can’t be a fair weather dealer,” a Northeast Acura/Honda dealer says. “You’ve got to be in for a penny and a pound with the manufacturer. Sometimes these things are going to happen. We all wish it wouldn’t happen. But if a Honda dealer doesn’t like it, they could always sell their franchise.”

Second, it seems to me that Honda has done a fairly decent job thinking through how to make things right with their dealers. The stop sale affects an estimated 10 percent to 15 percent of used vehicle inventory for Honda dealers, and up to 40 percent of inventory for Acura dealers.

Honda has articulated plans to provide financial assistance. The plan appears to account for the costs of dealers’ capital tied up in used vehicles they can’t sell, as well as the costs of depreciation, potential “lot rot” and storage for the vehicles until replacement parts become available.

As one Honda dealer says, “It’s better than nothing, but there’s really no way to know if it will go far enough.”

In particular, some dealers are really and rightly worried about how Honda plans to account for the depreciation of vehicles that might sit for six, nine or even 12 months. The current plans calls for capturing a vehicle’s Black Book wholesale value on the day it gets parked, and its wholesale value 60 days after the vehicle gets fixed and goes back on the market.

This approach sounds good on paper, but I share the concern of some dealers that it won’t be enough. Think about it: If replacement parts and repairs occur at roughly the same time, Honda dealers will see a six-, nine- or even 12-month supply of used vehicles entering the market at exactly the same time.

The spike, which a West Coast Honda dealer likened to a rogue wave, will likely cause wholesale values (and retail prices) to drop like a stone in the water, with a corresponding upward spiral of Market Days Supply.

I share the belief of some Honda dealers that it could reasonably take four to five months for the market to normalize after these vehicles return as retail units—a reality that Honda’s current plans to account for depreciation don’t seem to sufficiently capture. It may serve the interests of Honda and its dealers to devise some type of retail-focused incentive that would further iron out the market volatility and financial risk for dealers.

My third take-away is that every franchised dealer has a stake in the current Honda predicament.

To me, the Honda stop-sale order is really a sign of things to come. We operate in an era of ever-more complex and technology-filled vehicles, where recalls seem to only grow in number and scope, and the National Highway Transportation Safety Administration wants everyone to do a better job on behalf of vehicle owners.

It’s not inconceivable that some other factory, and their dealer partners, will find themselves in Honda’s shoes. When that happens, they’ll look at past precedent to determine how to proceed.

I sincerely hope that they take a cue from Honda’s example, and craft an earnest, if not perfect, plan to help their dealer partners avoid undue harm.

The post Three Take-Aways From Honda’s Used Vehicle Stop Sale appeared first on Dale Pollak.

3 Tips To Stay Strong In New Vehicles As Sales Volumes Slow

Dale Pollak — Wed, 16 Mar 2016 16:43:23 +0000

You can already see signs that 2016 won’t be the same as the past few years in new vehicles:

Incentives are on the rise. An Automotive News article notes that incentives are climbing as a percentage of new vehicle transaction prices. Overall, incentives ran nearly 9 percent last month, slightly less than December, but up from a year ago. Despite the incentives, most dealers saw little net gain in sales volumes.
Fleet sales are on the rise. The article also reports that while new vehicle sales were essentially flat in January, they would have declined by nearly 4 percent if fleet sales hadn’t buoyed overall industry volumes.
Analysts predict a “sales plateau.” Industry observers say the industry may see some growth in the coming year, but it won’t be anything like the consecutive year-over-year increases of 1 million or more new vehicle sales.
Margins remain challenged. Public dealer groups essentially all reported that new vehicle margins in December were lower than the prior year, in some cases by double-digit percentages. Unfortunately, I’m unaware of any reason to think margin compression will abate.

Such signs indicate that dealers will be challenged to do as well as, if not better, in new vehicles in the coming year. This reality shouldn’t surprise anyone, especially dealers who have been around long enough to remember that ours is a highly cyclical business, and we’ve had a really good run the past few years.

The key question, though, is what can dealers do to increase sales and profitability in this more challenged environment?

I see three areas where dealers have an opportunity for improvement, despite the prospect of fewer sales.

Inventory management. Simply put, dealers need to be more scientific and strategic as they manage their new vehicle inventories. Vehicle orders should be driven by current market supply and demand insights, not best guesses. When it comes to color and equipment configurations, close enough won’t be good enough in an environment with fewer buyers bring ever-more exact purchase preferences. I recognize that factory “below the line” programs can incentivize dealers to order and take new vehicles they’d prefer not to carry. As 2016 unfolds, I suspect dealers will face more factory pressure to take cars. The dealers who push back with objective market insights will stand a better chance to avoid carrying the factory’s water.

Dealers could also do a much better job of managing the average age of their new vehicle inventories. It’s not uncommon for dealers to have 40 percent or more of their new vehicle inventories above 90 days of age. In the past, this slow-moving inventory hasn’t been a big problem as sales kept climbing. Looking ahead, it’ll be important for dealers to focus their attention on retailing the older cars faster, if not first.

Market-focused pricing. As dealers become accustomed to using new vehicle pricing technology and tools, they typically find two problems with the way they’d previously priced their new vehicles: They had vehicles priced too far above the competitive market average to attract buyers, and they had vehicles unnecessarily priced below the average. Each scenario indicates an opportunity that, if addressed, would help dealers drive sales and improve front-end margins. Top-performing dealers also recognize that including available incentives and discounts in their new vehicle pricing has shifted from being “nice” to “necessary” as they aim to align their new vehicle prices to buyer expectations and differentiate themselves from competitors.

Transaction times. A growing number of dealers are working to bring vehicle transaction times down to 60 minutes or less. They are doing this for good reason. They understand that buyers will pay more for the increased convenience and fast purchase experience they really prefer. A Midwest General Motors dealer puts it this way: “When buyers see my new vehicle prices and my promise to get them in and out of the dealership in an hour or less, they pay attention. When they’re here, they’re more comfortable and at ease. Best of all, they tell their friends when they discover that buying a car from us is easier than they expected.”

Some dealers are going even further, using technology and tools to allow new vehicle buyers to initiate and, in some cases, complete a new vehicle deal (including financing and trade-in) online. Dealers say they’re seeing the percentage of customers who take advantage of these online deal-making options steadily increase, they’re not just younger buyers.

As I share these recommendations with dealers, some ask which one I’d make a top priority. I typically respond that while they are all important, you’re always better off when you have the exactly right mix of the right new cars your market wants.

The post 3 Tips To Stay Strong In New Vehicles As Sales Volumes Slow appeared first on Dale Pollak.

3 Ways To Power Through The New Car Sales Plateau

Dale Pollak — Thu, 03 Mar 2016 15:37:47 +0000

Maybe it’s the sub-zero temperatures or forecasts of heavy snow across the country. Or maybe dealers are getting smarter.

Either way, there’s a bit of cold, hard reality in the air.

More analysts and dealers are recognizing that while 2016 should be a decent year, it won’t be as good as 2015 or the previous couple years. There’s growing doubt that we’ll see another consecutive year when new vehicle sales volumes climb by 1 million or more units.

It’s curious that, in the span of a few weeks, the outlook has shifted from rosy to reserved.

The key question for dealers, of course, is how to sustain the prior year’s performance and profitability in new vehicles at a time when sales volumes plateau and market forces continue to compress dealer margins.

The answer lies in achieving greater efficiencies in your new vehicle operations, and providing greater ease to the customers you sell and serve.

Here are three areas where current inefficiencies offer opportunity for dealers to profitably power through a new vehicle sales plateau:

Increased transparency: The big losers in a less robust new vehicle market will be dealers who continue to resist the more market- and transaction-transparent pricing new vehicle buyers want to see. Industry stats show that dealers who adopt a new vehicle pricing strategy that accounts for the competition, available incentives and their own discounts see more engagement with potential buyers (e.g., vehicle details page (VDP) views, completed forms, e-mail leads) than those who don’t.

The prospective buyer’s desire for increased transparency also extends to the online marketing and merchandising of the vehicle. It’s all too common to see new vehicles posted online with stock photos, ho-hum descriptions and poorly thought placements on classified sites and landing pages.

Dealers would do well to put themselves in the buyer’s shoes: Would you be more likely to lock in or look past a new car listing that raises more questions than it answers?

Online deal-making: Today, most dealers have some type of interactive tool on their websites that’s meant to help customers put themselves in a new vehicle. Instant messaging. Payment calculators. Trade-in evaluation tools.

But here’s the puzzler: Why is it that only 30 percent of prospective new vehicle buyers actually use these tools? The answer can’t be that buyers don’t want the information. We know they do. To some degree or another, they always have.

The problem is that dealers typically don’t use these tools to truly give buyers the information they want. Instead, the tools serve the dealer’s appointment-setting and lead generation efforts. They exist to capture customer information and drive showroom visits rather than address questions and provide credible answers.

The important take-away is that dealers should recognize the efficiency (and online technology investment) gains they’d achieve by using tools to facilitate at least part of a transaction online.

Large public dealer groups, and many progressive dealers, have made online deal-making a strategic priority in the coming year for two reasons.

First, it builds credibility and trust with buyers. They understand when dealers are trying to make the job of purchasing a vehicle easier on their behalf. Second, it increases the efficiency of their sales operations. If buyers can work out key terms of a deal online, sales associates can spend less time working deals with managers and more time satisfying the customer’s desire to get to know and test drive the vehicle, and take delivery.

Showroom Reinvention: Dealers who address the first two inefficiencies are best poised to take full advantage of the third opportunity—making the customer’s time in the showroom more easy and efficient. It seems as if dealers have a hard time believing, or even understanding, that a customer really is largely “sold” on a vehicle by the time they arrive at the showroom, thanks to all their effort and research online.

In most showrooms, the sales process hasn’t changed much in at least 20 years. Today’s buyers really don’t like the typical cat-and-mouse deal-making. They have a number in mind, if not in hand, for the vehicle’s purchase price and, if applicable, their monthly payment.

When dealers come to terms with this reality, they find that it’s both possible and prudent to complete transactions in 60 to 90 minutes or less. In turn, customers are more satisfied and receptive to options that allow them to personalize their new vehicle or protect its long-term value.

Dealers who have already addressed these inefficiencies aren’t worried too much that new vehicle sales volumes will plateau in the coming year. In fact, they welcome it as an opportunity to distance themselves from the closest competitor as they both race to meet the needs of today’s customers.

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Stockwave Starts Out Strong

Dale Pollak — Fri, 26 Feb 2016 15:12:49 +0000

I think we can all imagine a moment when you feel the collective energy of a lot of people.

Maybe it’s in church, at a concert or even on a conference call.

It’s that moment when you say to yourself, “Wow. This is exciting. I’m part of something much, much bigger than just me.”

That’s how I’m feeling as I reflect on Stockwave, and the combined enthusiasm and support this innovative tool has received the past several weeks from all corners of Cox Automotive.

Here are just a few of the impressive things we’ve accomplished together as we’ve rallied around Stockwave as a shared priority:

Dealer Interest. Through conversations with dealers by Cox Automotive’s Manheim, Media, Next Gear and Software field teams, we’re seeing strong interest from dealers. The Stockwave team has been busy following up, encouraging dealers to register for Stockwave webinar demos that begin March 1.

Media coverage. Thanks to the collective efforts of PR teams across Cox Automotive and a Detroit media tour, Stockwave has earned ink in AutoRemarketing, and we expect coverage in Automotive News and WardsAuto’s Dealer Business magazine

Industry events: Stockwave got front-and-center attention at the recent Digital Dealer and CBT News conferences. I had the privilege of sharing Stockwave directly with dealers at both events. Their response? Enthusiastic and encouraging.

Auction awareness: A couple weeks ago, my Facebook page blew up, and I wasn’t sure why. Then I remembered: It was Facebook Friday for Stockwave at Manheim. Team members across the country lit up their Facebook pages with the Stockwave message. My fingers got tired responding to all the posts. Better still, we’ll soon have Stockwave posters, floor clings and other awareness-building collateral at Manheim locations across the country—all part of our effort to build in-the-lane awareness.

The list goes on and on.

The fact is, the Stockwave team and I are grateful and humbled by the growing interest and support for Stockwave. It’s going to be an exciting launch at NADA!

#justturniton

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If Everyone Uses The Same Tools, Where’s The Advantage?

Dale Pollak — Fri, 19 Feb 2016 11:56:38 +0000

A dealer recently posed a good question after reading an article of mine about Stockwave, vAuto’s latest innovation.

The question: If all dealers and consumers share and use similar technology, how does anyone gain an advantage?

My response: Thank you for your question, Joe. It’s one that I often here from dealers, and one that is especially relevant in today’s era of constant change and innovation.

The advantage comes from the individuals using the technology, not necessarily the technology itself.

Think of Excel or Powerpoint. Both are ubiquitous in business.

I’ll bet you can think of someone who’s an absolute whiz at either program, someone who’s pretty good, someone who’s just OK, and someone who could use a little help.

The same is true with the way consumers and dealers use technology. The advantage for a consumer lies in how well he/she uses available technology to research and purchase a vehicle. The most technically savvy buyers stand a better chance than others of getting the best deal, because of their skill using the same tools everyone else does.

This dynamic is no different among dealers. It shouldn’t be a surprise that dealers who have the best technology, and the best people using it, are reaping larger rewards in their local markets than their less technology-savvy peers. Perhaps the biggest reward of all is the increased efficiency and profitability these dealers achieve through more sophisticated, technology-driven operations.

I hope this helps. Thank you again for your question.

The post If Everyone Uses The Same Tools, Where’s The Advantage? appeared first on Dale Pollak.

4 Ways To Drive A Retail-First Strategy In Used Vehicles

Dale Pollak — Tue, 16 Feb 2016 16:27:42 +0000

Here’s a key question every dealer should consider as they look for ways to improve their performance in used vehicles: Are we wholesaling too many cars and, if so, how can we retail more of these units?

The question follows recent discussions with dealers who have set ambitious goals to improve their used vehicle sales and profitability in 2016. To their credit, many of these dealers plan to focus on making vehicle acquisition, merchandising and pricing more efficient and market-focused.

But I found it curious that only a few of these dealers had established firm goals for reducing, if not eliminating, the number of retail vehicles they took to auction every month. As one dealer put it, “Yes, we would have liked to retail those cars, but we’re making money at auction so they’re not really a big concern.”

The statement is troubling, particularly as the wholesale market is poised to become even more volatile. Analysts predict rising supplies of used vehicles in the auction lanes. Likewise, it’s possible that retail demand for used vehicles, which has been strong and highly beneficial for dealers in recent years, will wane. Both of these conditions will make it more difficult for dealers to see a positive return if/when they take cars to auction.

Now, to be clear, I’m referring to auction cars that dealers choose to recondition and run as retail units—not the vehicles they designated, often at the time of a trade-in, as a wholesale unit.

I’m a firm believer that if a dealer decides to recondition and retail a vehicle, it should be sold to a retail customer. If the car ends up at auction, something went wrong. Either the initial decision was bad, or managers failed to do everything they could during the vehicle’s retail lifecycle to put a customer in the car. It’s these failures of management that I encourage dealers to address as they strive to sell every car they decide to retail.

There are four key components to effectively execute a retail-first strategy and minimize the number of retail cars that wind up at auction:

The initial assessment. The best dealers use technology and tools to make the initial retail/wholesale determination. As they appraise an auction or trade-in vehicle, they know right away how much front-end profit the vehicle may generate, given the costs to acquire and recondition the car. They also get a clear view of how difficult it may be to find a retail buyer, given the vehicle’s color, condition, equipment and mileage compared to similar units available in the market. The analysis is dispassionate, and it provides important clues to guide subsequent merchandising and pricing decisions.
Pricing. I often find that dealers who wholesale more retail units than they should miss the mark as they set and adjust their asking prices. Sometimes they’ve paid too much to acquire a vehicle, and want the customer to pay off the mistake. In other cases, the initial asking prices don’t reflect the vehicle’s appeal compared to competing units. Ultimately, used vehicle pricing decisions should always be tied to each vehicle’s specific market potential—not someone’s judgment of what the vehicle should bring as a retail unit.
Retail timeline. Today’s used vehicle market is far less forgiving than it’s ever been. At many dealerships, used vehicles that age past 30 days have largely lost their profit potential, thanks to a greater number of available cars in the market and more intense pricing competition. Dealers who successfully execute a retail-first strategy recognize these realities. They strive to retail every vehicle in 45 days or less. They monitor their average inventory age, and aim to retail at least 50 percent of their inventory in less than 30 days. By design, this tight timeline forces the proactive evaluation/re-evaluation of every unit’s merchandising and pricing position to drive a timely retail sale.
Accountability. As noted above, I view the need to wholesale a retail unit as a failure of management. The Internet has made it possible for dealers to sell any vehicle, on any given day, provided it’s properly priced and merchandised for the market. Retail-first dealers understand that they may not always get it right on every car. But if/when they take a retail unit to auction, there’s at least a conversation, if not a penalty. The goal is to determine how/why they couldn’t sell the car and to turn the mistake into a positive lesson.

Dealers who adopt a retail-first strategy in used vehicles often see benefits that extend beyond increased sales volumes, including increases in F&I sales, more trade-in opportunities and fewer hassles handling wholesale units that didn’t sell at auction.

The next question becomes, what are you doing to make a retail-first strategy a priority at your dealership?

The post 4 Ways To Drive A Retail-First Strategy In Used Vehicles appeared first on Dale Pollak.

A Warm Dealertrack Welcome For Stockwave

Dale Pollak — Thu, 11 Feb 2016 14:26:30 +0000

It was a striking contrast.

Outside the hotel in Atlanta this morning, I felt a stiff, unfriendly wind, and temperatures in the mid-20s.

Inside the hotel, I got the warmest welcome I could imagine from the 900 Cox Automotive Software Group team members gathered here for the Dealertrack Sales Conference.

My mission: To share Stockwave with the team, and encourage their support to bring Stockwave to their dealer customers.

Like my previous Stockwave sessions with Cox Automotive teams, the Dealertrack gang got it. They know a cool innovation when they see it. I’m once again humbled by the commitment, priority and support Stockwave has received from all corners of the Cox Automotive family.

My sincere thanks to Dealertrack CEO and Cox Automotive Software Group president Mark O’Neil and his team for the opportunity to be here and present Stockwave.

What a way to start my day. I’m headed to the airport and Austin, Texas. I’m traveling there for a pre-launch check-in meeting with the Stockwave development team. The wave moves forward…

#justturniton

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A Used Vehicle Market Warning: Tune Up Inventory Turns Or You’re Toast

Dale Pollak — Wed, 10 Feb 2016 21:32:49 +0000

I’ve noticed a troubling trend in used vehicle inventories for dealers across the country in recent weeks.

The problem: The average Market Days Supply for many dealers’ used vehicle inventories is creeping toward or past 100 days. Typically, this critical metric, which indicates how quickly a dealer’s used vehicles are likely to sell in a local market, hovers near 80 days.

This shift hasn’t happened overnight. It’s the result of a steady increase in used vehicle supplies, driven in large part by the return of fleet and off-lease vehicles into the market.

But many dealers don’t appear to be aware of, or directly addressing, the harmful effects that ever-rising supplies can create for their used vehicle performance and profitability. It’s like there’s a cancer in used vehicle inventories, and dealers aren’t heading the warning signs.

Even more troubling, this upward trend in the average Market Days Supply is occurring as industry analysts and observers acknowledge what many students of the market have been saying for some time—front-end margins for used aren’t what they used to be, and they’re getting worse. An AutoRemarketing article this week notes that public dealer groups like Asbury saw their front-end margins decline from 8.5 percent to 8 percent in 2015.

It’s fair to ask why dealers aren’t aggressively adjusting to these more challenging market conditions. The answer, I believe, owes to the old axiom that “volume cures many ills in the car business.” Indeed, dealers have collectively sold more used vehicles in the past few years, commanding a larger share of retail market. Analysts also predict relatively stable sales volumes for the year ahead.

But I worry that dealers will wake up to the unwelcome reality of over-age units and a less-than-satisfactory return on investment for the vehicles they do retail. The time has come, I believe, for dealers to apply an even greater focus to turning their used vehicle inventories quickly to mitigate these retail risks.

Here are three recommendations I’ve been making to help dealers tune up their inventory turn rates:

Minimize acquisition mistakes: The AutoRemarketing article includes an astute comment from Manheim chief economist Tom Webb: Dealers “can’t afford to make buying mistakes. You’re not going to get those big gross deals, because there’s not only been a narrowing (of margin), but the bell curve distribution of those grosses, if you would, has actually narrowed quite a bit.” It’s imperative that dealers appraise auction or trade-in vehicles with a clear, objective view of every unit’s market potential—and avoid the emotion/speculation that leads to bad purchase decisions.

Match pricing to market conditions: Dealers who spotted the rise in their average Market Days Supply are setting more aggressive initial asking prices and revisiting each vehicle’s price position more frequently. “We’re far more focused, frequent and precise in our pricing than we used to be,” says a Northeast dealer. “The market doesn’t seem to care that we think a car should deliver a better front-end gross.”

Reduce your average inventory age: As I’ve long advocated, today’s market conditions require dealers to retail at least 50 percent of their used vehicles in less than 30 days. To achieve this operational standard, dealers must make the proper purchase and pricing decisions noted above. In addition, dealers need to inspire collective recognition—in sales, service and parts—that reducing each vehicle’s days to sale is a necessary imperative to maximize used vehicle performance and profitability.

I think Asbury CEO Craig Monaghan, who’s quoted in the AutoRemarketing article, aptly summarizes what changing used vehicle market conditions mean for dealers: “The game for us is to get the car, get it reconditioned, get it back on the front line and move it quickly.”

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vAuto’s Stockwave Debuts, Gains Steam For NADA Launch

Dale Pollak — Mon, 01 Feb 2016 16:59:44 +0000

I’m pleased and proud to share news that vAuto is unveiling its latest innovation, Stockwave, this week.

You’ll be seeing ads for Stockwave in industry publications and online, and hearing about Stockwave from Cox Automotive and vAuto teams.

I’ve very excited about Stockwave’s potential to solve the persistent challenges of acquiring wholesale inventory from auctions, and make the entire process far more efficient and simple for every dealer.

Stockwave is a unique solution in many ways—but I’d like to mention two here.

First, Stockwave represents the first large-scale example of Cox Automotive’s mission to use our expertise and resources to provide integrated innovation that helps dealers increase efficiencies and profitability. Simply put, Stockwave wouldn’t have been possible without an unprecedented degree of collaboration and cooperation between Manheim, vAuto and other Cox Automotive brands.

Second, Stockwave also fulfills Cox Automotive’s vision to develop agnostic and open solutions that, first and foremost, serve the interests of dealers. As such, Stockwave isn’t just about Manheim; rather, Stockwave brings together vehicles from Adesa, SmartAuction and other leading auctions to create what we’re calling “surprisingly simple sourcing.”

We’ll be sharing more details about Stockwave in the coming weeks as we prepare for its official launch at the National Automobile Dealers Association (NADA) convention in Las Vegas this spring.

In the meantime, I’d invite you to visit www.stockwave.com and view the video below to learn how sourcing wholesale vehicles is about to change for the better.

https://www.youtube.com/watch?v=Mcm7z27QGi4

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4 Factors That Make Auction-Buying More Difficult Than It Should Be

Dale Pollak — Wed, 27 Jan 2016 15:10:27 +0000

You might think that with rising supplies of wholesale vehicles, dealers would have an easier time as they seek out auction cars to fill gaps in their used vehicle inventories.

But the reality is much different.

Across the country, dealers, used vehicle managers and their buyers still struggle to acquire the cars that will appeal most to buyers in their markets, and purchase them at prices that will yield respectable retail front-end margins.

To be sure, competition accounts for part of the struggle. Even with more available cars, there are more dealers vying for them.

But I would submit that the difficulties dealers face also owes to four factors that encompass the ways dealers prepare for auctions, their auction expectations, and the inherent inefficiencies of sourcing vehicles from remote locations.

Factor 1: Knowing exactly what to buy. Despite technology and tools that can effectively and efficiently tell dealers the exact vehicles they should acquire before they go to an auction, many dealers and their buyers just show up. They do little, if any, advance homework. Instead, they rely on instinct and judgement to size up cars they believe they need on the day of a sale. The approach is far less efficient and productive than dealers who, thanks to technology, know the precise cars to pursue, even if they fail to win their first car of choice. Likewise, it’s not uncommon for dealers who rely mostly on instinct to find their auction units contribute significantly to inventory age issues.

Factor 2: Finding the right inventory. It’s one thing to know the exact used vehicles you need for your dealership; it’s another task altogether to locate these vehicles at auctions across the country. While some dealers have adopted new technologies to efficiently identify the auctions where the cars they need reside, many still rely only on auctions closer to home. This preference may help minimize transportation costs, but in today’s wholesale market, it also limits selection and concentrates competition for the same vehicles. The end result: Dealers restrict their opportunities to acquire the right inventory when they stay local.

Factor 3: Buying at the right price. A Southwest Chrysler dealer recently shared that while he’d love to pay less to acquire near-new vehicles for his certified pre-owned (CPO) program, he’s come to understand that it’s impossible if he wants to maintain his retail sales velocity. “I’ve found the ‘right’ price at auction translates to a roughly $1,000 front-end gross,” he says. “To me, they’re ‘spinner’ cars that we buy and then spin them through the shop and sell fast. Then, we repeat the cycle.” The key take-away: The dealer’s determined the “right” price for himself with every car. He uses technology and tools to calculate each unit’s profit potential (accounting for the costs of acquisition, transportation, reconditioning, a pack, etc.) and the maximum he might pay, before he places his first bid. When dealers complain they can’t acquire auction vehicles for the “right” money, I typically find they haven’t conducted a dispassionate calculation of the “right” price for themselves, or their expectations for a front-end profit don’t match the realities of today’s market.

Factor 4: Reducing the time required. Dealers who proactively address each of the preceding factors will, by design, become more efficient as they source used vehicles from auctions. But the level of efficiency and speed dealers achieve will depend primarily how well they use the technology and tools that facilitate faster acquisitions of auction cars. I would also add that auctions, as well as solutions providers, could do more to make the wholesale marketplace a more efficient place for dealers to do business.

It’d be pretty cool, I think, if dealers could count on a system that, almost automatically, began the work of re-supplying their inventories when a retail used unit heads home with a customer, if not sooner.

Until that day, however, there’s much dealers can do themselves to become more effective and efficient acquiring the cars they need at auction.

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A “No Barriers” Life Lives On At Cox Automotive

Dale Pollak — Tue, 12 Jan 2016 12:21:57 +0000

At this time last year, I stood on the stage at the Cox Automotive annual sales meeting with Erik Weihenmayer.

As many of you may know, Erik’s inspirational story brings the house down whenever he speaks.

A blind guy who climbs the world’s tallest mountains, kayaks ferocious Class 5 whitewater, and skis black diamond slopes with great finesse and skill. Erik explained that no obstacle in front of you equals the power inside of you—the foundation for his “No Barriers” philosophy.

At the sales meeting, Erik challenged me. “Why don’t you come skiing with me?”

Years before, I’d given up skiing due to my declining vision. Buoyed by Erik’s message, I took him up on the offer. We hit the slopes last February, and I had the time of my life. I came home committed to making Erik’s “No Barriers” part of my outlook on business and life.

Erik’s influence and inspiration is on my mind a lot this week as I head to Phoenix for Cox Automotive’s annual sales meeting.

I’ll be there to unveil a bold, revolutionary product that will forever change the way dealers source wholesale vehicles. It’s a pretty big deal, with positive implications and upside for everyone in Cox Automotive and the industry at large.

The product represents the first broad-scale public showing of our “Better Together” mission and purpose as a company. As such, the product will test us—can we, as Cox Automotive, successfully adopt our own “No Barriers” approach to ensure the long-term success of the product and our dealer customers?

I thought I’d share the following video as a source of inspiration and invigoration as I head to Phoenix and prepare to forever change the car business for the better.

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Three Keys To Improved Performance, Profitability In 2016

Dale Pollak — Tue, 22 Dec 2015 19:25:07 +0000

I have bad news to share about the upcoming year.

It’s not that 2016 won’t be good for dealers. Most signs suggest we’ll have another robust year of new and used vehicle sales.

But here’s the problem: Dealers won’t necessarily be making more money in 2016, even if they’re able to sell more new and used vehicles than they did in 2015.

I make this prediction based on three factors that will shape dealer destinies in the coming year:

Margin compression. The past five years have seen front-end margins decline by double-digit percentages in new and used vehicles—a trend that will no doubt continue in 2016. This ongoing margin compression owes to ever-increasing levels of competition, operational costs and price transparency in the auto retail market.
Supply/demand imbalances. As we’ve closed out 2015, we’ve seen rumblings that factories are purchasing demand for new vehicles by increasing incentives. On the used vehicle side, everyone’s aware that wholesale supplies are growing, a rise that’s expected to continue in 2016. Both trends will make it difficult for dealers to maintain, if not surpass, the level of new/used vehicle performance and profitability they achieved in 2015.
Market volatility. Dealers who over-rely on F&I income will face increased profit pressure as captive finance companies, lenders and regulators reduce dealer discretion in loan mark-ups. It’s also likely that dealers will face difficulties if interest rates rise, or the economy takes a hit from as-yet unforeseen circumstances in the coming year.

In light of this outlook, I’ve been encouraging dealers to take an honest, no-holds-barred review of their dealership operations. The goal is to identify, and then work to eliminate, operational inefficiencies that currently impede dealership performance and profitability—and will only get worse if left unaddressed.

Here are three areas that often pose efficiency challenges for many dealers:

Inventory age. Aging units remain a persistent problem in both new and used vehicles for many dealers. As the market becomes more challenging, dealers will need to become even more age-aggressive. In new vehicles, this mandate means striving to retail at least 50 percent of your inventory in 60 days or less—a bigger challenge (and opportunity) for dealers who traditionally haven’t regarded aging new vehicles as a problem.

In used vehicles, I advocate that dealers maintain at least 50 percent of their inventory under 30 days. The best-performing dealers actually retail half of their used vehicles in this timeframe.

As dealers become faster, more efficient new/used vehicle retailers, they typically find that speed minimizes the risks from inventory supply/demand imbalances and maximizes total dealership profitability.

Transaction times. I would encourage dealers to aim for average new/used vehicle transaction times of 90 minutes or less. At traditional, negotiation-based dealerships, this benchmark may seem completely out of reach. If so, strive to reduce your average transaction time by 25 percent. Dealers who reduce transaction times see two key benefits. First, they provide a more satisfying experience for customers, who have long wanted an easier, more convenient way to purchase cars. Second, they enable their sales associates to sell more cars in less time, which increases their production and profitability. Dealers achieve transaction efficiencies by re-thinking the stages/steps in their sales processes, and shifting a greater portion of each transaction online.

Employee turnover. It’s not uncommon for dealers to see at least 50 percent turnover in their sales teams—a statistic that suggests dealers would sell more cars and make more money if they weren’t always trying to fill empty seats. I would submit the industry’s persistent turnover problem results from a mismatch between candidates, job responsibilities and the in-store culture that greets them on their first day of work. Dealers who address this problem have reinvented their hiring process, invested in management and mentoring programs, and implemented clear-cut career paths that pave the way for longevity and loyalty.

I should note that these areas of inefficiency are not the only ones that merit attention and scrutiny. Each one, however, represents an opportunity for dealers to improve their performance and profitability as retailers, and to capitalize on the challenges and opportunities in the months ahead.

Here’s hoping that everyone has a great holiday season and an even better New Year!

The post Three Keys To Improved Performance, Profitability In 2016 appeared first on Dale Pollak.

Refresher: Market Days Supply And What It Means

Dale Pollak — Thu, 03 Dec 2015 20:37:53 +0000

I thought it’d be useful to share my e-mail exchange with a dealer who got stuck interpreting the Market Days Supply for a used vehicle.

The dealer: “I am sitting here pondering a question with vAuto and need help to solve this in my mind. How can you have a high volume (high demand) vehicle (Chevrolet Impala) but that vehicle can have a high market days supply (190 days)?”

Me: “Thanks for the question. Market Days Supply (MDS) is derived by a calculation that divides current available supply by the average daily retail sales rate over the past 45 days. The answer to your question is that in spite of high volume (i.e. your denominator), there is also extraordinarily high supply (numerator), which derives a high MDS. Given this condition on your Impala, it is likely to sell fast, assuming it is priced very aggressively from the onset. Therefore, it becomes especially imperative to own the vehicle for the proper amount of money to make a respectable investment return. I hope this helps.”

The dealer: “Dale, thanks so much for solving this!”

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3 Ways To Make The Good Times In New Cars Even Better

Dale Pollak — Wed, 25 Nov 2015 21:22:24 +0000

We’ve had an amazing year in new vehicles.

September’s sales were very strong, spurring some analysts to raise predictions that we’ll close 2015 with more than 17 million new vehicles on the road.

As the good times roll, I like to poke around behind the curtain—to see if dealers are doing as well as they could while the sales juggernaut continues.

In recent conversations, I’ve asked dealers three questions:

1. Do your sales associates sell more cars on an individual basis than they used to? The question’s intended to determine if dealers are leading their sales teams to achieve higher levels of efficiencies and productivity. Interestingly, the answers I get reflect a roughly 60/40 split.

For 60 percent of dealers, the monthly unit-sold average for sales associates is about the same as it’s always been, roughly 10-12 retail deals a month. Meanwhile, 40 percent of dealers have raised the individual sales associate performance benchmark to 15-18 deals.

2. What percentage of your new vehicles are online at any given time with a competitive price and proper complement of custom descriptions, photos? This question follows industry stats that suggest only 25 percent of dealers consistently price/market all of their new vehicles online, all of the time.

The stat reflects findings from my conversations. A Colorado dealer estimates roughly half his inventory isn’t priced or marketed properly at any given time. “It’s too time-consuming,” he says. “We do need a better process to be more competitive and consistent.”

3. What percentage of your new vehicle inventory is over 90 days old? Some dealers don’t track inventory age in new vehicles. Among dealers who do pay attention to new vehicle inventory age, I found that roughly 40 percent of dealers’ new car inventories hit 90 days or more. Dealers cited a combination of factors for the aged units—cars that either they or the factory didn’t get right, or a lack of attention, given faster-selling models in their inventories.

While my findings are not scientific, they do reflect areas of operational inefficiency that, if addressed, would help dealers do even better in today’s record-setting new vehicle market. I asked dealers who have addressed these inefficiencies for tips to help other dealers improve:

Emphasize volume, not gross, in sales compensation plans. “We made the switch about two years ago and haven’t looked back,” says a Midwest dealer who now requires a minimum of 15 sales/month from associates. The dealer says the change followed a realization that market factors—increased pricing transparency, better-educated buyers and stiffer competition—have a greater effect on gross profit levels than sales associates. The dealer also credits a more market-competitive pricing strategy, and “no discount” bonuses for elevating his sales team’s productivity and maximizing front-end gross. The dealer’s next goal: Reduce transaction times to 90 minutes or less.

Use technology/tools to improve new vehicle pricing/marketing consistency, efficiency. The new vehicle manager for a Florida Ford dealership says he used to spend nearly two full days pricing the store’s 600 new vehicles at the beginning of each month. Today, he uses a pricing system that helps him tie incentives to his asking prices and price every vehicle in minutes. The manager also says the technology allows him time to keep up with pricing new vehicles as they arrive from the factory, and stay on top of competitors’ price changes. “I used to spend an hour or two a day checking Autotrader and competing dealer sites,” he says. “Now, I see where I stand on a single screen and make adjustments on the fly.”

Make inventory age reduction a higher priority. Traditionally, dealers don’t believe age matters in new vehicles. But when dealers make inventory age a priority, and focus on retailing units based on time-in-inventory parameters, two things happen. First, they eliminate the shell game of using floorplan credits earned for fast-selling vehicles to offset the expense of slower-moving vehicles. Second, they have an opportunity to redeploy the investment toward better-performing units. “It’s a mental shift,” a Southwest GM dealer says. “Now, my new cars don’t just sell when they sell. They sell when I want or need them to.”

Some dealers may dismiss the need to address these inefficiencies today, when times are good in new vehicles. But here’s a key question: How much more will these inefficiencies cost you when sales slow and times aren’t so good?

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House Bill To Protect Dealer Reserves Gets Help From NADA, Dealers

Dale Pollak — Tue, 24 Nov 2015 11:54:48 +0000

I caught a snippet of last week’s debate on C-SPAN around the U.S. House of Representatives bill H.R. 1737. The bill seeks two goals—to roll back the Consumer Financial Protection Bureau’s (CFPB) efforts to limit dealer reserves on finance deals, and require greater public participation as CFPB issues guidance to dealers and lenders.

In the C-SPAN coverage, I was struck by the passion of Rep. Mike Kelly, a Pennsylvania Republican and third generation dealer, who spoke in support of the bill, which passed the House by a 332-96 vote:

“We are a third-generation automobile dealer. I can tell you that it is a people business, not a white person business, not a black person business, not a brown person business, not a red person business, or a yellow person business. It is a business that is done face-to-face. I have sat across the desk from many people, lower income people, who cannot afford to get a car because they don’t have the ability to negotiate the auto loan.

It is our business, and I am stunned by people who have never done what we have done who have somehow decided that we are racist and that we are overcharging people. We are doing exactly the opposite…Three generations of Kellys have sold over 150,000 cars. You don’t do that by cheating people. You don’t do that by being a racist. You don’t do that by discriminating against people. You do that by working with people….The ability to get these people transportation–private transportation–falls on the shoulders of those who are the dealers. We negotiate in their best interest.

How stunning to think that somehow we are these predators who are just taking advantage of these poor people who don’t have any financial literacy. That, my friends, ultimately, is the biggest insult you could give people of color or people of gender. It is absolutely incredible to me that we would bring it to this issue.”

The House’s overwhelming support of H.R. 1737 owes in no small part to the work of the National Automobile Dealers Association (NADA). The group has been opposed to CFPB’s efforts to limit dealer reserves since the agency’s initial guidance in 2013.

As H.R. 1737 moves to the Senate, the bill faces an uphill battle to garner enough support to overcome the threat of a veto from President Obama.

I would encourage every dealer and industry stakeholder to do what I’ll do—call your Senators and ask them to support the bill to protect the future of our industry.

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How To Turn Your Hiring Into Competitive Advantage

Dale Pollak — Wed, 11 Nov 2015 22:57:43 +0000

On November 23^rd, I’ll be on a panel webinar hosted by Automotive News and presented by Hireology. Please join me to hear advice on how to turn your hiring process into a competitive advantage. You can register here.

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3 Ways To Avoid Falling Flat With Today’s Vehicle Buyers

Dale Pollak — Wed, 11 Nov 2015 16:15:10 +0000

Let’s imagine that you’re sitting front and center, as your favorite band takes the stage.

You bought tickets a few weeks ago. You cleared your schedule. You’re pretty excited as the band cranks up the opening tune. The singer steps up to the microphone.

But the first note falls flat, followed by another clunker. You wince, and think: “WTF? I didn’t come all the way here for this!”

I share the anecdote because it’s similar to how today’s vehicle buyers feel when they find a vehicle they like online, and contact the dealership by chat, phone or e-mail.

In most cases, the buyers engage the dealership to learn two things—whether the car they like is available, and what it will cost to purchase. In other words, they want to start working the deal without coming into the showroom.

But how do most dealers respond? Too often, it’s some variation of “Come on in!” The effect is exactly like the singer’s sour notes. It greatly reduces the buyer’s confidence in the dealer, and his/her interest in completing the deal.

My colleague, Mike Burgiss of Cox Automotive’s MakeMyDeal, says his team sees this dynamic every day. He shared a recent example from a Southeast Kia dealer:

A husband sent a chat message to ask about pricing for a Kia Soul, which his wife had recently checked out at the dealership. The sales associate’s first response: “Let’s sit down with my GM and talk numbers. He’s done crazy things when he’s with a customer.”

The buyer politely declined, and the sales associate sent another message that offered a price range, details about Kia’s powertrain warranty and a second invitation to come to the dealership. The buyer’s final response: “I understand. I will keep looking. Thanks for your time.”

Burgiss says the exchange would have gone better if the sales associate answered the inquiry with deal terms personalized for the buyer. “The example highlights a prevailing belief among dealers that customers must be in the showroom to negotiate a vehicle’s price or other terms,” he says. “Unfortunately, that’s out of step with today’s buyers. They’d prefer to work out deals from their home or office, just as they do with other retailers.”

I asked Burgiss for recommendations to help dealers better today’s vehicle buyer preferences. He shared three:

Recognize the “shopper” vs. “buyer” distinction. When customers find a vehicle they like, and take the time to view a VDP, they have shifted from simply shopping to an active stage of buying, Burgiss says. “The question for dealers is whether the information they present online facilitates the transaction right then and there,” he says. “If it doesn’t, potential buyers won’t see the signs of an easy, efficient purchase they’re looking for.”

Allow buyers to work deal terms online. Burgiss says new technologies give buyers the ability to configure a vehicle deal on a VDP and make an offer—without requiring them to provide personal information, send an e-mail or contact a sales associate. Even though buyers work deals under dealer-set parameters, the process and technology gives them a greater sense of control and self-direction.

“Dealers who adopt this process see higher levels of buyer engagement and improved closing ratios,” he says. “These improvements come because the dealers made the leap to serve buyers in the manner they prefer.”

Be authentic. When buyers take the opportunity to configure deals online, they send a signal that they expect an easy, efficient transaction, just as they would from other retailers. “If you play coy on price with these buyers, you’ll end up like the Kia dealer and lose them to a dealer who isn’t playing the traditional deal-making game,” Burgiss says.

I like this thinking on multiple levels.

By working deals online, dealers could achieve greater efficiency and satisfaction in showrooms. Customers could essentially show up, test drive a vehicle and, if they like it, take delivery. Less time equals increased customer satisfaction—and more time for sales associates to sell more cars.

Finally, this e-enabled approach to retailing vehicles creates another benefit for dealers. You’ll have less risk of hitting a bad note when it’s your turn to step up to the microphone.

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vAuto: 10 Years Old—Still Inspiring, Still Going Strong

Dale Pollak — Fri, 06 Nov 2015 17:07:16 +0000

I reached another milestone in my career this week—the 10^th anniversary of the day my colleague and friend, Mike Chiovari, and I huddled together in my kitchen and began the work that gave birth to vAuto.

We celebrated the anniversary last night, bringing together more than 260 vAuto team members from across the country.

I nearly came to tears several times, as long-time and newer employees pulled me aside. They told me they consider working for vAuto as the best experience of their life, one that enriches themselves, their families and, most importantly, our dealer clients.

I felt humbled as their words sunk in. I immediately understood how much the vAuto team embodies the commitment and passion to help dealers that sustained Mike and me during the sometimes dark, early days at my kitchen table. We both had sunk everything we had into what amounted to an untested idea. We worried about our families, our mortgages and our future.

But we both believed vAuto could be a successful, industry-changing company. Standing in front of the room last night, I truly felt inspired as I recognized that the founding mission for Mike and me has grown into a can-do, collaborative and results-focused culture that benefits everyone who experiences it.

I was also blown away by the palpable sense of excitement and optimism everyone feels for the future. Through our partnership with Cox Automotive, we are once again poised to positively change the future for our industry. Several people told me, “Dale, we’ve had an amazing run, but our best days are yet to come.”

I’d be remiss if I didn’t offer some heart-felt, public thank-yous.

First, vAuto’s Employee Engagement Committee, led by Susan Taft and Jennifer McMillen, deserve huge credit and thanks for coordinating an off-the-chart anniversary celebration that was first-class and efficient—a perfect reflection of vAuto’s culture and tradition.

Second, I cannot offer enough thanks to everyone at vAuto. Your commitment to our collective cause and industry-transforming purpose inspires and motivates me to continue going the extra mile for you and our dealer clients.

Finally, on behalf of everyone at vAuto, I’d like to thank each and every one of our dealer clients. Without your belief, confidence, faith and trust in us and the services we provide, we wouldn’t be here today.

I can’t wait to see what we’ll all collectively achieve in the next 10 years.

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Top-Performing CPO Dealer Shares Three Keys To Success

Dale Pollak — Thu, 05 Nov 2015 20:21:35 +0000

Congratulations to vAuto dealer Don Luke and his team at Bill Luke Chrysler Jeep Dodge & Ram in Phoenix for earning AutoRemarketing’s 2015 CPO Dealer of the Year Award.

The honor follows a stellar performance. Luke and his team retail 500 used vehicles a month, including roughly 200 certified pre-owned (CPO) vehicles. They average a 30-day retail turn rate on used vehicles, which translates to an annualized inventory turn of 12 times a year.

Luke shares that he’s found a welcome surprise since he decided three and a half years ago to step up his CPO efforts with Chrysler.

“I was concerned about service contract penetration,” he says. “I worried that we might be hurting our penetration as we increased CPOV sales—because, truthfully, that’s where you’re making your money. It’s not, unfortunately, selling the car sometimes.”

Luke says the dealership averages nearly 60 percent service contract penetration on all used vehicle sales, and estimates the penetration runs 5 percent to 10 percent more for CPO units.

He explains: “The mindset is that customers already believe the vehicle is more valuable because it’s a CPO vehicle. You’re offering them a 90-day, almost bumper-to-bumper warranty, you’re giving them a 100,000-mile powertrain wrap. That has value. That takes a little bit of the sting out of buying a used car.”

Luke adds that it’s important to emphasize a CPO vehicle’s inherent value right up-front with customers.

“We start that conversation early in the process—‘this is a great car, it happens to be a CPO car, and has these benefits,’” he says. “When you take them into F&I and offer an extended warranty with even more coverage, they see the value. You don’t start that conversation after a customer has bought the car, goes into the F&I office and hears someone telling them about extending a warranty.”

As a vAuto dealer, I asked Luke for pointers that might help other dealers improve their CPO business. He shared three:

Don’t get too proud of your CPO units. “You definitely have to be willing to play the game in today’s market,” he says. “This past month, we sold a great many of our fairly fresh units at a loss because the market is starting to change as it always does at this time of year. When you realize the market’s shifting, you have to be willing to retail out of your cars. Get rid of them, even if they’re all losers. You can go to the auction and buy fresh stuff you won’t lose on.”

Stay committed to your turn objectives. “You have to be totally committed all the time,” Luke says. “If you pause, and you decide I won’t take those losses, and I’ll hold my prices up, you’re not going to have a 30-day turn. You’re going to go to a 60-day turn, or a 90-day turn. Instead of losing $1,000 a car, you’ll end up losing $1500 to $1800, and you’ve really got a bloodbath. To be in this, you’ve got to constantly concentrate on that 30-day turn, regardless of the pain level.”

Invest in your sourcing strategy. “We literally take every opportunity we can to buy cars,” he says. “We just added a third online buyer. My used car manager also buys online and at times he’s looking at two auctions at the same time. We’ve got to buy a lot of cars to keep up with 500 units a month retail. The key, of course, is buying the right cars at the right prices.”

Our conversation also touched on current market conditions. Not surprisingly, Luke sees a lot of opportunity.

“A lot of guys have been sitting on inventory they bought 90 days ago or more to take advantage of selling in the summer,” he says. “Now they’re sitting on those cars, and they don’t want to go into the winter with them. So what do they do? Send them to the auction. When you get a glut of cars at the auction, prices start to go down. And guess who’s there waiting to buy them?”

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How Good Is Your “Swing” In Used Vehicles?

Dale Pollak — Mon, 02 Nov 2015 21:47:06 +0000

I recently read a great book, The Boys In The Boat, about an unlikely crew team from Seattle that captivated the world when it earned a gold medal in the 1936 Olympics.

The book discusses the art, science, tenacity and will required to create synchronicity, or “swing,” among eight rowers on the water:

“There is a thing that sometimes happens in rowing that is hard to achieve and hard to define. Many crews, even winning crews, never really find it. Others find it but can’t sustain it. It’s called ‘swing.’ It only happens when all eight oarsmen are rowing in such perfect unison that no single action by any one is out of synch with those of all the others. It’s not just that the oars enter and leave the water at precisely the same instant. Sixteen arms must begin to pull, sixteen knees must begin to fold and unfold, eight bodies must being to slide forward and backward, eight backs must bend and straighten all at once. Each minute action—each subtle turning of wrists—must be mirrored exactly by each oarsman, from one end of the boat to the other. Only then will the boat continue to run, unchecked, fluidly and gracefully between pulls of the oars. Only then will it feel as if the boat is part of each of them, moving as if on its own. Only then does pain entirely give way to exultation. Rowing then becomes a kind of perfect language. Poetry, that’s what a good swing feels like.”

This passage makes me think of the “swing” some dealers achieve in their used vehicle departments—that point of harmony that occurs when buyers, managers, service technicians and sales associates align every decision and task toward the common goal of efficiently maximizing opportunity in every vehicle.

As the book excerpt indicates, even winning used vehicle teams may never find their collective “swing.”

But I’d submit it’s a worthy goal to aspire to, and one that pays rich dividends every time it arrives.

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Addressing Increased Used Vehicle Supplies, Depreciation

Dale Pollak — Mon, 26 Oct 2015 19:52:56 +0000

You might say that the blessing we’ve enjoyed in used vehicles is running out of gas.

The blessing has been a relatively stable balance between used vehicle supplies and demand. These market forces have helped to subdue the effects of used vehicle depreciation for much of the year.

But industry analysts predict a continued rise in used vehicle supplies—driven by increased trade-in units, off-lease units and fleet sales—is reaching the point where depreciation is becoming more pronounced. A report by Black Book and Fitch in late August suggests that the annual depreciation rate will reach 15 percent in 2015, up from 12 percent in 2014.

For dealers, the market dynamics create an operational challenge: What’s the best way to minimize your exposure to depreciation and maximize your profit opportunity?

To answer the question, I recommend three best practices:

A balanced, market-wise mix of inventory: The profit-sapping effect of used vehicle depreciation isn’t uniform across all vehicle segments. Some segments, like compact cars and sedans, tend to suffer more than SUVs and trucks, where consumer demand helps to mitigate value declines even as supplies increase. In this environment, it can be tempting for dealers to place their bets on the least-risky segments, stacking their inventories to take advantage of better-performing segments.

The problem: This approach is akin to “putting all your eggs in one basket.” It over-exposes dealers to volatility—particularly as more dealers pursue the same segment-specific strategy or, other factors, such as gas prices, shrink demand.

Generally, I recommend that dealers base the composition of their inventory based on market insights. By doing so, you’ll spot opportunities to step up or step back in specific segments, as market conditions change. In addition, this strategy, by design, helps you build a balanced inventory that minimizes over-exposure to volatility in any one segment.

Minimize inventory age. With projections of an ever-increasing supply of used vehicles, dealers will face greater pressure to retail used vehicles in less time. This best practice follows the basic economics of supply and demand: As fresher vehicles enter the market, they create competitive choices for buyers that diminish the value of older units they’ve already shopped.

To combat these market forces, I recommend that dealers follow two standards: Strive to maintain at least 50 percent of their inventory under 30 days of age, and stick to a maximum 45-day retail window. Together, these operational standards breed a culture where time is money, and a greater share of vehicles retail while they’re fresh and grosses are better.

Price for profitability, not solely front-end profit. This best practice reflects the reality of today’s well-supplied used vehicle market: Some cars are true-blue winners from a front-end gross perspective. They face fewer competing units, and you can price them above the competition and expect buyers to pay your asking price.

Unfortunately, such vehicles do not represent the majority of most dealers’ used vehicle inventories. While most units have the potential to generate a decent front-end gross profit, their real value to the dealership extends beyond the sales desk. Each of these units, when retailed efficiently and quickly, creates additional opportunities to generate F&I and service income, acquire a trade-in, and repeat the reconditioning/retail cycle all over again. As dealers embrace this philosophy, their used vehicle pricing helps execute a “turn and earn” inventory management strategy that minimizes depreciation and maximizes the “total gross” of the dealership.

It’s worth noting that dealers who embrace these best practices don’t worry too much about rising used vehicle supplies and increased depreciation risks.

“The market is what it is, and it will do what it does,” says the CEO of a California-based dealer group. “In used vehicles, our goal is to create the most opportunity with every car. When we do that successfully, the worst case scenario isn’t as bad for us as other dealers.”

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Dealers Shine A Light On The Power Of Good People

Dale Pollak — Fri, 16 Oct 2015 20:44:18 +0000

While attending this week’s Automotive News Best Dealerships To Work For event, I wondered how many dealers could honestly answer this question:

Have you mapped out career paths at your dealership?

The topic came up during panel presentations on hiring and retention. The upshot: Dealers who’ve taken the time to map how employees might progress in every department appear to suffer less from hiring the wrong people and losing good ones too soon.

This pearl was one of several take-aways at this year’s annual contest in Chicago, where I had the honor of serving as kick-off speaker.

After congratulating the dealers on their achievements, I shared my belief that they are all doing good things for our industry. They are lighting the way forward to make automotive retail careers rise above the perception that they’re last-ditch options for people who can’t do better. They have realized that tomorrow’s prosperity comes from hiring and nurturing good, if not great, people today.

I found a couple take-aways from the afternoon sessions worthy to share:

1. Pay plans and sales process efficiency. The topic of pay plans came up a few times at the event. I have to be honest. I was a little surprised to learn that a couple dealer speakers still used commission-only pay plans in their sales departments. I would have thought that their progressive approach to their people would have necessitated moving to non-commission alternatives, particularly given declining margins in new/used vehicles. But these dealers also noted they’ve worked to reduce transaction times—a move to satisfy customers, and maximize each associate’s productivity.

2. Selling technology, not the car. I found the old car guy in me questioning the wisdom of touting the latest technology as a chief selling point for a vehicle. What about fuel efficiency, quality and reliability? Times have definitely changed, as we’ve reached a point where product quality and reliability is largely a given, and buyers care more about being connected.

I would encourage readers to check out Automotive News’ coverage of the event, particularly the profiles of the Best Dealerships. I’m confident you’ll find an idea or two that makes your dealership and your team even better.

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A Moment Of Empathy For VW Dealers

Dale Pollak — Fri, 16 Oct 2015 15:32:42 +0000

As I read the ongoing coverage of the VW scandal, I can’t help but think of the early days at Pollak Cadillac.

My father and I became Cadillac dealers in 1985. My Dad had been a long-time Buick-GMC-Jeep-Renault dealer in Gary, Ind. Our new store in Elmhurst, Ill., represented our collective hopes and dreams for an even more successful future.

Our honeymoon didn’t last long.

Cadillac’s line-up didn’t prove as popular with buyers as we’d hoped. As dealers, we could only question the factory’s wisdom as customers didn’t like the product redesigns and shared platforms. For us, the used car department became the lifeline for our investment.

Thankfully, years later, Cadillac has come around, and its dealers are blessed.

I can only wonder how long it’ll take for VW to restore the confidence and faith of its dealers, and make up the market share it’s losing to rivals.

News reports indicate VW has been taking steps make things right with dealers. I hope it’s enough, and I feel for dealers their investment in the brand. I trust that despite the adversity, the best VW dealers will find opportunity.

Perhaps there’s a relevant take-away for every franchised dealer: Even when the factory deals a hand you didn’t ask for, you’ve still got to deliver for yourself.

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A Change Of Plans For DrivingSales Executive Summit

Dale Pollak — Tue, 13 Oct 2015 20:33:47 +0000

I’m disappointed to share that I won’t be speaking at the upcoming DrivingSales Executive Summit in Las Vegas.

My purpose at the event would have been to share an important announcement, and offer a vision for the future prosperity of our industry, one that would arrive through technology-driven efficiencies and transparency that benefit dealers and their vendor partners.

Unfortunately, DrivingSales won’t be the appropriate venue to share this message at this time.

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Vote For vAuto To Win A Chicago Innovation Award

Dale Pollak — Thu, 08 Oct 2015 21:20:20 +0000

I’m proud to report that vAuto’s Conquest system is a finalist for this year’s Chicago Innovation Awards.

This honor comes after a group of judges selected Conquest from more than 500 other innovations from Chicago-area organizations.

If you’re inclined, we’d appreciate your support for a People’s Choice Award, which goes to innovations that receive most online votes. You can vote here until Oct. 14.

Thank you.

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A Three-Step Test To Improve Your Used Vehicle Department Performance

Dale Pollak — Tue, 29 Sep 2015 21:44:01 +0000

I’d recommend that every dealer conduct the following three-part test of their used vehicle department:

Step 1: Determine your average cost of inventory. How does this figure compare to three or six months ago? Is it up or down, and by how much?

Step 2: Assess your inventory age. What percentage of your inventory is less than 30 days old? What percentage is older than 30 days? How have these figures changed, if at all, in the past three to six months?

Step 3: Calculate your average front-end gross by vehicle age. What’s the average front-end gross for vehicles retailed within 30 days? After 30 days? What’s the difference between the two? Remember this number.

The test helps identify operational problems that can slow the pace and profitability of your used vehicle sales. It’s a useful test at this time of year as fall arrives. Being what they are, the summer months can cause diligence and discipline to dissipate as the mercury rises. Used vehicle performance suffers. Sales slow, and grosses go.

As you take the test, here are some points to consider for each step:

Step 1: If you’re like many dealers, your average cost of inventory has likely headed north—despite month-over-month declines in wholesale vehicle valuations. Hopefully, the increases owe to conscious decisions to accept a higher acquisition Cost of Market ratio as you acquire vehicles from auctions or trade-ins. This scenario is particularly true for dealers that proactively participate in factory certified pre-owned (CPO) programs.

But be honest with yourself: How much of the increase really owes to appraisers offering too much, or buyers simply purchasing the easier-to-find (and more expensive) late model units at auctions?

The best-performing dealers strive to acquire and recondition every used vehicle at a Cost to Market ratio below 85 percent. This ratio, which compares the unit’s cost to prevailing retail asking prices, sets the baseline profit margin potential for every unit. As dealers work to beat this benchmark on every used vehicle acquisition, they effectively keep a lid on the average cost of inventory.

Step 2: If you found more than 50 percent of your used vehicle inventory is older than 30 days, you’ve got at least one problem—your cars aren’t selling fast enough to maximize your gross profit and minimize risk, given today’s market. This is why I recommend dealers maintain at least 50 percent of their used vehicle inventory under 30 days of age. To achieve this operational standard, dealers make it a priority to acquire the right cars for their market, and use pricing and online merchandising as primary, time-sensitive levers to attract buyers and sell the unit quickly.

Step 3: OK, so what was your number? Was it eye-opening to see the difference? If you’re like most dealers, you probably see a steep decline in the average front-end gross profits after 30 days in inventory. In fact, if you look closer, you’ll likely notice a handful of vehicles propped up your average front-end grosses after 30 days, while the rest of the vehicles were effectively money-losing units.

This part of the test reveals a stark retailing reality in used vehicles: You can’t really expect to make a sufficient return on investment on used vehicles once they age past the 30-day mark. This fact of life can be difficult for dealers to accept—and it’s a key reason why the most profitable and successful used vehicle retailers have made 45 days as the final cut off for every unit. Period. End of story.

Perhaps the best part of the test is that it offers useful insights for any dealer.

If you’ve felt like you’re not selling enough used vehicles or making enough money, the test should reveal some operational priorities that help you achieve both. And, if you’re among the dealers who feel satisfied with your used vehicle performance, I suspect the test identified an area or two where your team can improve.

Either way, the test is over. The results are in. What’s your next step?

The post A Three-Step Test To Improve Your Used Vehicle Department Performance appeared first on Dale Pollak.

3 Keys To CarMax’s Ongoing Used Vehicle Success

Dale Pollak — Fri, 25 Sep 2015 16:07:37 +0000

I typically find it’s time well spent to keep an eye on how CarMax is doing. That’s why I reviewed this week’s release of CarMax’s second quarter results and related earnings call transcript.

Three items caught my attention and seemed relevant for all used vehicle retailers:

1. A disciplined, efficient, technology-driven vehicle purchase process. Dealers and their buyers sometimes marvel at how much CarMax buyers seem willing to pay in the lanes for vehicles. During the earnings call, CarMax CEO Tom Folliard offered a quick overview of the company’s auction purchase process—an impressive approach that suggests their buyers know exactly what they’re doing:

“We are much more organized today than we were 10 years ago. We’re much more analytical about the way we approach car buying at the auction, and I think we’re in a better position today to optimize the inventory that we acquire at the auction because of all the analytics that we’ve put into it and all the digital capabilities that we’ve given our buyers. Our buyers are now all using tablets at the auctions. We’re tracking every single car that a buyer at CarMax looks at at the auction and deciding whether or not that car is worthy, and then the next time a buyer goes to the auction, they don’t have to look at that same car and we’re saving an enormous amount of time in evaluating cars at the auction. We have all the auctions on a program where the CarMax buyers are buying under one kind of generic card, and we can analytically decide where those cars go later.”

2. A robust “we’ll buy your used car” program. I initially viewed CarMax’s reported 8 percent increase in wholesale unit sales and an 18 percent increase in wholesale profit ($951/car in the second quarter) as troubling signs. After all, CarMax is in the retail car business. Then I remembered: They’ve long touted the “we’ll buy your car even if you don’t buy ours” promise for years. The wholesale volume and profit increases reflect the success of this committed initiative more than any retail shortcomings. CarMax’s effort also signals its belief that engaging a customer in the dealership, even if they only want to sell a clunker, is an opportunity to seed a future retail sale—a useful insight for dealers struggling to make their own off-the-street purchase programs more successful.

3. A recognition that today’s buyers are different. CarMax has embraced the idea that today’s buyers would welcome the opportunity to complete at least some parts of a vehicle purchase online—and they will reward dealers who do so. Here’s a quick overview that Folliard offered in response to an earnings call question:

“What we are trying to do is make sure our customers can do as much of the transaction as they want to do from home. We’ve definitely seen the sentiment shift where customers are looking to do more and more research, more and more pieces of the transaction from home, and in some cases the entire transaction from home. Our current capabilities are our customer can obviously do all kinds of inventory searches….We also give the customer the ability to put a car on hold. We give the customer the ability to transfer a car. If it’s a paid transfer, they can do it with a credit card without speaking to anybody and have that car transferred to the store of their choice. They can fill out a big chunk of the paperwork from home. We have tested online credit applications, and we are continuing to enhance our capabilities there. We’ve seen some start-ups and some smaller competitors that are doing kind of beginning-to-end transactions online. I don’t think anybody is in a better position than we are to be able to do those things, and those are some of the things that we’ll continue to work on and continue to evaluate as our business grows.”

The key point here is that CarMax is going further than other dealers when it comes to facilitating deals online. My colleague, Mike Burgiss of Cox Automotive’s MakeMyDeal, says it’s not uncommon for dealers to offer online tools, but they use the tools to generate leads, not actually work deals. “This remains a disconnect for many dealers, and an opportunity for those who make the shift to what I call a ‘connected commerce’ model for selling cars,” he says.

As I finished my review, I couldn’t help but think that while some dealers might not like CarMax, it would be foolish to ignore the rationale and reason behind their ongoing success.

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3 Factors That Impede New Vehicle Sales, Market Share Growth

Dale Pollak — Mon, 21 Sep 2015 20:13:23 +0000

For many dealers, the new car business is increasingly all about volume. This reality doesn’t hold for every new vehicle—particularly in cross-over and truck segments that continue to be sought-after purchases by consumers and yield respectable grosses. But overall, the business is less about front-end gross profit, and more about volume, than it has ever been in the past.

This reality owes to several factors. The Internet has brought ever-higher levels of price availability and transparency to the market, which increases price competition and compresses front-end margins. At the same time, manufacturers have steadily narrowed the margin between dealer invoice and the Manufacturer’s Suggested Retail Price (MSRP). According to Kelley Blue Book, the invoice-to-MSRP margin has shrunk 60 percent since 1990.

In addition, factory-to-dealer bonus programs drive an emphasis on volume over gross. You can see signs of this trend at the end of nearly every month, when dealers will effectively give away even their best-grossing units to get their bonus checks.

But here’s what I find curious: Even as the new vehicle market moves ever closer to being a low-to-no-margin business where volume matters most, dealers have been slow to change the way they stock, manage and price their new car inventories to capture a greater share of sales.

I’ve come to this conclusion after analyzing new vehicle pricing and inventory management practices for dealers across the country. I undertook the study to find areas where dealers could do a better job, from an operational perspective, at meeting the need to increase sales volumes while maximizing gross profit on the vehicles that deserve it. Here’s what I found:

Aged units. While I understand that dealers often have to take in less-desirable vehicles the factory configured and produced, I was struck by two statistics: First, the average time in inventory runs near 100 days. Second, I found that, on average, 40 percent of a dealer’s new vehicle inventory is over 90 days—well past the point where floorplan expense typically becomes a factor. These findings appear to reflect a long-held belief that inventory age doesn’t matter in new vehicles. But I would disagree, and suggest that dealers could improve the profitability and velocity of new vehicle sales if inventory age became a higher operational priority.
Inventory turns. After seeing the prevalence of 90-day new vehicles, I wasn’t terribly surprised to find that dealers typically turn their new vehicle inventories only five or six times a year. I dug a little deeper and segmented the data by make. I was curious to see if some dealers might suffer from slower-moving inventory because of their factory partners. But what I found told a different story: For every brand, there are dealers who turn their inventory more than twice as often as their peers. This finding suggests that while some dealers fully embrace the importance of sales velocity and volume, others lag far behind.
Pricing practices. My findings around inventory age and turn rates led me to look closer at pricing practices. My premise: Just as in used vehicles, proper pricing in new vehicles is essential to attract buyers and sell more cars in today’s market. I found multiple instances where dealers had a sizable share of their new vehicle inventories (in some cases as high as 50 percent) online without a price (Note: I counted listings “call for details” or MSRP-only pricing, given these are often defaults for vehicles without a dealer-set price). Upon investigation, I found the absence of a market-compelling price owed mostly to inattention. Time and again, I saw that dealers who priced their new vehicles at the beginning of the month were more likely to have cars online without a price than those who pay more frequent attention to new vehicle pricing, particularly as fresh units from dealer trades or the factory arrive.

In addition to inconsistent pricing, I found wide variation in the strategies dealers apply when they do price new vehicles. Some are far more attuned to competing vehicles and their markets than others. These dealers are more likely to include incentives in their pricing strategies to differentiate from the competition. In addition, some of these dealers monitor online activity (e.g., the number of vehicle details page (VDP) views) as part of their pricing strategies to account for current and emerging demand.

Overall, my analysis suggests a lot of opportunity for dealers to tighten up their new vehicle inventory management and pricing practices. Those who do will inevitably capture more market share and sales volume than those who stay the current course.

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Combatting Margin Compression Podcast

Dale Pollak — Fri, 18 Sep 2015 15:37:10 +0000

On August 25th, Thomas Williams from AutoSuccess and I had a discussion regarding combatting margin compression. Please listen to our discussion and let me know your thoughts.

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Hireology CEO Talks Dealership People, Processes and Recruiting

Dale Pollak — Tue, 08 Sep 2015 21:04:38 +0000

The common denominator for high performance are the people in your organization. This simple statement comes as a surprise to no one. In spite of this wide-spread recognition, few dealerships give sufficient attention to the process of recruiting, interviewing and screening perspective employees. Just like everything else, there are proven best practices. The link below will take you to an interview with Adam Robinson, the CEO of Hireology. I’ve come to know Adam, his organization and his solution, and I believe that they have developed a sound approach to hiring the right people.

One note of caution, however. Don’t think that the approach that Adam outlines doesn’t take time and effort, and ultimately disciplined procedures. As Adam often says, you will spend the time dealing with employment issues, the only choice is whether you will make the effort and spend the time properly recruiting, interviewing and screening, or whether you will do it on the backside managing poor performers, termination and the unpleasant consequences associated therewith. It’s your choice. Watch the interview and let me know what you think.

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Three Reasons Dealers Are Unhappy Amid A Strong Market

Dale Pollak — Tue, 08 Sep 2015 18:27:50 +0000

(AutoSuccess magazine’s blog published a post from me today. I thought I’d share it here, too.)

I found myself asking why dealers might be unhappy, despite a new vehicle market that has, and continues to be, quite strong.

The question follows an Automotive News article about the recent Dealer Attitude Survey conducted by the National Automobile Dealers Association (NADA). The headline: “Despite Growth, Some Grumble.”

The survey queries dealer attitudes about the value of their franchises, as well as factory policies and people. If the survey results were a test, dealers collectively gave their factory partners a “B-.” Dealers also graded 20 of the 32 franchises surveyed as a “C” or worse.

If one of my sons brought home a report card with these kind of grades, there would be a reckoning. For the industry, the survey results suggest a sizable disconnect between dealers and their factory partners.

The article aptly notes that factories fare worse when they lack the right product, in the right places, at the right time. Dealers invest their family fortunes in their dealerships, and trust their factory partners to get it right with the product.

But I wondered what the survey results suggest about issues other than products. I believe there are three areas that, if better addressed by factories, would lessen the current level of dealer-to-factory dissatisfaction:

Inventory: If you ask dealers whether they can consistently get the cars they want from the factory, you get a mix of answers. Some can only request what they’d like. Others order the cars they want with little or no guarantee they’ll get them. Too often, it seems, dealers end up with vehicles they didn’t necessarily want or need.

At its root, the problem owes to factory desires to control vehicle production and distribution on their terms. But these terms don’t necessarily serve the needs of dealers or their local buyers.

The challenge for factories is to more closely align their vehicle production and distribution practices with dealer choice and desire. Of course, they can’t make every requested vehicle. But I suspect even small improvements to link new vehicle supply/demand would improve dealer sentiments.

Facility Investments: Factories continue to require dealers to make sizable investments in facilities on prime retail locations. These requirements come despite the reality that today’s buyers shop physical stores less frequently. A relatively strong new vehicle market tends to mask the burden facility requirements create for dealer profitability. Yet, I suspect some of the dealer dissatisfaction in NADA’s survey owes to a nagging fear I share with many dealers: How will these investments make sense when new vehicle sales diminish, and dealers must shift an ever-greater share of resources to offer the more efficient, e-enabled vehicle purchase process buyers want?

Below-the-Line Money: You also get a mixed reaction when you ask dealers whether they like the stair-step incentive programs and other below-the-line money factories now provide to drive sales volume and, in some cases, offset the dealer’s facility investment. For some dealers, earning this money becomes a chief part their new vehicle retail strategy, creating scenarios where volume-based dealers can effectively under-cut competitor pricing and retail vehicles well below invoice.

I recognize it would be difficult for factories to eliminate these programs, given they’ve become an operational standard in the industry. Still, there’s little doubt that some of the NADA survey dissatisfaction owes to the contribution, albeit indirect, that factories make to the “race to the bottom” dealers complain about.

A final point about the NADA survey data: This year, dealers gave an average grade of “B” to the 10 best-scoring factories — the same grade they gave to the top 10 in 2011. The parity comes despite projections that dealers will sell four million more new vehicles this year than five years ago — a sign, I believe, that factories have some work to do.

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3 Ways To Increase New Vehicle Pricing Efficiency, Profitability

Dale Pollak — Wed, 02 Sep 2015 15:32:48 +0000

I’ve been getting requests from dealers recently to help them evaluate their performance in new vehicles.

The inquiries follow dealer concerns about ever-smaller margins on the new vehicles they sell, and a desire to increase market share and volume while maximizing the profitability for every retail unit.

These discussions have revealed three curious findings:

Inventory turns: I’ve found that, on average, dealers turn their new vehicle inventories five to seven times a year. This benchmark even applies to dealers who achieve a respectable annualized inventory turn of 12-15 times a year in their used vehicle department.

Inventory age: The average days in inventory for new vehicles runs close to 100 days, with roughly 40 percent of the cars above the 90-day mark. By contrast, many of these dealers consistently maintain an average days in inventory for used vehicles below 30 days, and they rarely see vehicles age past 45 or 60 days.

Pricing: Each dealer typically had his/her own strategy. Some priced everything at the Manufacturer’s Suggested Retail Price (MSRP), others preferred to show the MSRP and an asking price that conveyed an initial dealer discount. I was struck, however, by the prevalence of pricing strategies that either a) did not incorporate incentives to show a discount; b) lacked relevance to competing cars in the market; or c) sent confusing signals to potential customers.

For example, I asked a Chrysler Dodge Jeep dealer in the Midwest why nearly half of his vehicles showed an aggressive discount, while the rest showed MSRP. The reason: He priced his new vehicles once a month. As he retailed cars, new ones arrived from the factory or dealer trades. These units did not receive a price until the beginning of the next month.

The dealer agreed this pricing inefficiency might contribute to missed opportunities. “I can see that if a customer saw 10 of my Grand Cherokees at sticker and 10 at a discount, it might be confusing. And, if my competitor has the same car priced correctly, I might not get a crack at the business.”

Most dealers would not tolerate such inventory and pricing inefficiencies in their used car departments. Yet, they don’t seem to mind the less-than-optimal performance in new vehicles.

I encouraged the dealers to follow three best practices to increase new vehicle sales and profitability:

Match your new vehicle prices to the market. Dealers should recognize that today’s new vehicle buyers are aware of prevailing prices in the market—and they know if your asking prices fall in/out of the fair market range for specific models. In the past, it’s been difficult to efficiently make these price comparisons. Today, however, new technology and tools give dealers the ability to set competitive prices, and apply available incentives, within a matter of minutes, not hours.

Revisit new vehicle pricing at least once a week. As the Chrysler Dodge Jeep dealer’s experience attests, a once-a-month pricing policy can do more harm than good in today’s market. Just as we’ve seen in used vehicles, proactive new vehicle pricing helps you deliver the pricing clarity and consistency buyers have come to expect. I recommend dealers revisit their new vehicle pricing at least once a week, if not more often, to make sure your vehicles align with buyers’ pricing expectations.

Manage inventory age. A Chevrolet dealer explained his inattention to aging new vehicle inventory this way: “New cars don’t spoil like used cars.” After we examined his average days in inventory and annual turn rate, he recognized two things: First, he could do a better job focusing his pricing and sales team attention on older units, rather than retailing fresher cars because they’re parked closer to the showroom door. Second, as he worked to retail older-age units first, he’d reduce his exposure to monthly floorplan expense.

Dealers who consistently follow these new vehicle pricing and inventory management best practices invariably find that sales and profits improve. As one dealer put it, “margins are bad enough in new cars for me to be making them worse by not paying attention.”

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How To Avoid Two Common Sins Of Summer In Used Vehicles

Dale Pollak — Tue, 01 Sep 2015 15:17:14 +0000

It’s not uncommon for dealers to commit two cardinal sins in used vehicles as summer gets into full swing.

The first sin is the impulse to beef up used vehicle inventory to drive additional sales. Every summer, it seems, I hear from dealers who plan to add 30 to 50 units to their used vehicle inventories. Their goal: Use the extra cars to attract more buyers and make more deals.

I’ll often ask these dealers a question: “What’s your plan to deal with the 75 to 100 cars on your lot that haven’t sold yet?”

In most cases, the question does the trick. It gets dealers to realize that they shouldn’t stock up on additional inventory when the units they own aren’t moving fast enough. In addition, the question opens a deeper analysis into their current inventory. In many cases, the dealers uncover merchandising and pricing problems that contribute to a less-than-optimal sales performance.

During these discussions, I remind dealers that they should only increase their used vehicle inventory when they meet the following conditions:

You already achieve an annualized inventory turn rate of 15 or 16. I generally recommend that dealers should consistently meet this benchmark before they add more cars. The reason: These dealers have proven their ability to acquire, recondition, merchandise and price each unit for an efficient, profitable retail sale. Dealers who lack this operational capacity and discipline often find that the influx of additional inventory only exacerbates inventory age, pricing and profitability problems they haven’t addressed.
You add inventory incrementally. The best-performing dealerships tend to add used vehicle inventory in five- and 10-car increments. This approach does two things—it hedges the risk of burdening the used vehicle/service departments with too many cars too quickly, and it helps ensure your annualized inventory turn rate does not fall below 12, which I consider the minimum performance benchmark for today’s more volatile market.

The second summertime sin occurs during used vehicle appraisals. As new vehicle sales soften during the summer, some dealers press their managers and appraisers to acquire an even larger share of their used inventory from trade-ins.

The problem: As dealers seek to acquire more trade-ins, they often don’t hold appraisers accountable for purchasing these vehicles “on the money.”

To avoid this profit-damaging problem, I encourage dealers to evaluate each appraiser’s performance on a monthly basis. The evaluation should address two metrics—the appraiser’s Look to Book and Acquisition Cost to Market ratios.

The Look to Book ratio reveals the percentage of vehicles that each appraiser evaluated and the dealership purchased. The Acquisition Cost to Market ratio measures the appraiser’s valuation against current retail asking prices for a specific vehicle; it provides a guide to the unit’s front-end profit potential before reconditioning/other costs.

When I review appraiser performance, I like to see an overall Look to Book ratio around 50 percent, coupled with an overall Acquisition Cost to Market ratio below 80 percent. These benchmarks, which can vary based on the individual and dealership, tell me that the appraiser is properly avoiding the sin of acquiring trade-ins at the expense of the unit’s front-end profit potential, or letting too many retail-worthy cars slip by.

I also encourage dealers to monitor the Acquisition Cost to Market ratio for buyers who purchase vehicles at auctions. This oversight should occur year-round, but it merits extra attention during the summer, when wholesale values are generally on the wane. In general, the Acquisition Cost to Market for auction-purchased vehicles should run less than 85 percent.

Dealers who commit these sins of summer will face a disadvantage as fall arrives. They’ll be sitting on aged cars and diminished profitability while their competitors reap the retail rewards that prudence always delivers.

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Cox Cares

Dale Pollak — Fri, 28 Aug 2015 15:54:34 +0000

I often say that Cox is one of the best companies to work for in America. One of many large examples is evidenced by the below note from Jim Kennedy, Cox’s Executive Chairman and Cox family member. In addition to genuinely caring and supporting fellow Cox associates in times of need, the family and organization commits significant resources to the environment, social causes and a multitude of other worthy initiatives, institutions and organizations. We should all be proud to support and do business with an organization that commits itself to making the world a better place.

Dear Cox Colleagues,

Ten years ago, in the wake of the overwhelming devastation brought by Hurricane Katrina, we established the Cox Employee Relief Fund (CERF) to help employees rebuild their lives. Since then, the fund has provided $4 million in employee grants, assisting more than 1,700 employees facing critical financial hardship.

But it’s so much more than these impressive numbers. It’s about truly being able to help our fellow employees and their families when they need us most.

Through the years, CERF has grown to become a 501(c)(3) charitable organization supported by employee donations. Its mission is to assist employees and their immediate families impacted by life’s setbacks, including natural disasters, injury or illness, or loss of a family member. CERF has aided employees with funeral costs, unexpected medical bills and rebuilding their lives after natural disasters such as Hurricane Sandy.

Thank you for your continued support. I am extremely proud that together we can support our colleagues and make a meaningful difference in each other’s lives.

Thank you,

Jim Kennedy

Chairman

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Where have you been?

Dale Pollak — Mon, 24 Aug 2015 22:26:42 +0000

Over the weekend I received the below question from a dealer. My reply follows.

Q: Can we create a feature in vauto that shows the sales history and results on every car like the Manheim results? This way when we appraise a car we will make a better decision by knowing when we sold it and how much we sold it for.

A: For the sake of my own sanity, I will assume that you are either new as a vAuto user and/or new to the used car business. This is because years ago I launched vAuto against two well-established, well-funded inventory solution providers that made stocking, appraising and pricing recommendations based on historical transaction experience. At that time, the industry was convinced that historical experience on the used car lot was good science for making decisions. I challenged that notion with the belief that unlike standardized packaged goods, used vehicles and their values perform predictably in the context of the live market. Put another way, past experience is not a reliable indicator of future performance on the used car lot.

Although it took many years, authorship of three books and much effort, today it is fair to say that most of the industry has adopted a methodology of pricing, appraising and stocking, largely, if not totally on competitive information derived from a local live market. vAuto’s market leadership, as well as the ever growing majority of Velocity-minded dealers, validates the correctness of this approach. Accordingly, although we always listen intently and often respond accordingly, we will not provide historical information in vAuto as a means of assessing vehicle values or desirability for inventory. Having said that, I respect the fact that there are still some who believe otherwise, and for those individuals or dealerships, there are still some inventory management products that continue to offer historical information as a means for decision support. Much thanks for your question.

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Tackling The Problem Of Older-Age New Vehicles

Dale Pollak — Tue, 04 Aug 2015 22:36:44 +0000

I’m seeing far too many 2014, even 2013, model-year new vehicles in dealers’ current inventories.

Yes, those cars. The ones nobody wants to talk about. The ones that mean tens, if not hundreds, of thousands of dollars in unproductive capital for many dealers.

In my time as a dealer, it was pretty rare to carry last year’s cars. With Cadillac, we could count on fall incentives to help us clean out our inventories. We generally considered it a failure if we hadn’t eliminated all prior-year vehicles by January 1^st.

It’s unfortunate those days appear to be long gone.

Dealers offer several reasons for keeping these cars—their factory partner sent a dud, they got it wrong when they ordered or they simply can’t find a buyer.

There are other factors that contribute to aging new vehicles. Factories introduce new-year models at different times during the year, not just in the fall. In addition, factories use incentives throughout the year to achieve their market share objectives, not necessarily a dealer’s need to clear out prior-year units. The end result: The responsibility to mind and manage older-age new vehicle inventory increasingly fall’s on the dealer’s shoulders.

Interestingly, however, dealers don’t seem concerned that the presence of older-age new vehicles is hurting their performance and profitability. Some believe that, unlike used vehicles, new cars do not depreciate. If you follow this thinking, a 300-day-old new vehicle is as appealing and fresh as the same vehicle that just came off the hauler.

When I take a closer look at these older units, I often find they are priced the same as newer units—a sign that the dealer is banking on finding a buyer willing to pay up to own the older car. But I have to ask: In this day and age of ever-greater pricing and product transparency, does anyone really believe such buyers exist?

Some dealers recognize that older-age new vehicles poses the same problem as old-age used vehicle inventory. As time goes on, these vehicles become less and less appealing to buyers, and their ability to deliver a sufficient return on investment diminishes at the same or greater rate.

When I mention this dynamic to dealers, some disagree. “Dale, you’re wrong,” they’ll say. “New cars don’t spoil like used cars.”

On some level, these dealers are correct. In today’s market, the prime retail window for used vehicles is 45 days or less. One could make a case that the shelf life for new vehicles is twice as long.

But even by this standard, you really can’t argue that a 2014 unit has little luster as a new vehicle to today’s buyers—and it’s unquestionably counter-productive from the dealer’s investment perspective.

My advice: Stop hoping for the buyers who probably won’t come. Price your 2014 and older vehicles to retail right away. Take the loss today, if necessary, and accept it as a lesson learned to shape a more profitable tomorrow.

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Two Troubling Trends For Tradition-Minded Dealers

Dale Pollak — Tue, 28 Jul 2015 20:01:49 +0000

This week’s Automotive News brings word that while dealers may be selling more new vehicles, they are making less money on the cars they retail.

The front page article’s headline deftly summarizes the dynamic: “As Dealership Sales Climb, Margins Slide.”

But I was most struck by what the article, which quotes executives from public dealer groups that reported front-end margin declines in new vehicles during the second quarter, does not address. You won’t find much mention that margin compression has, and will remain, a fact of life for dealers.

On some level, I can understand that the dealer group executives might shy away from public stating what seems pretty obvious—making money in this business is no longer as simple as selling more new cars. To their credit, however, the executives do relay their confidence that a “total gross” strategy, where you may concede front-end margin to build volume and F&I, service and parts revenues, will result in shareholder-friendly balance sheets.

This story follows other profit-unfriendly news—the recent consent order from the Consumer Financial Protection Bureau (CFPB) that requires American Honda Finance Corporation to limit dealer mark-ups on loan interest rates to 1.25 percent or less.

Much of the industry coverage focused on reaction from dealer associations, which decried the agreement as bad for consumers and dealers. Some observers dug deeper, questioning whether CFPB used faulty data to justify the order.

But I didn’t see much discussion of how the ever-growing effort to restrict reserve income in the F&I office is yet another troubling fact of life for automotive retail.

Taken together, these news stories highlight trends that should serve as a wake-up call for dealers. This wake-up call is especially relevant for dealers who have opted to make up for lost front-end margin by pulling two levers that have traditionally worked—increasing sales volumes and leaning more on their F&I managers to increase production/profitability.

Let’s remember that dealers are, by design, blessed with five profit centers—new vehicles, used vehicles, F&I, service and parts. Looking ahead, the most successful dealers will be those who maximize efficiency, production and profitability across all departments, not just those where it’s typically been easiest to move the needle.

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A Call For Reality In New Vehicle Incentives/Rebates and Pricing

Dale Pollak — Fri, 17 Jul 2015 16:44:16 +0000

I’ve been talking new cars with dealers lately, helping them create and navigate strategies for proper pricing in today’s market.

Naturally, customer incentives and rebates are a key part of the discussion—particularly as some manufacturers rely on them more than ever to drive market share and sales.

From these conversations, I think it’s fair to group dealers in three buckets:

Bucket 1: These dealers resist applying any incentives or rebates as they price new vehicles. The chief reason: The dealers prefer to limit incentive/rebate discussion to the showroom floor, where they can be absolutely certain they’ve matched specific customers with the correct price discounts.

Bucket 2: These dealers believe it’s appropriate to include incentives/rebates in their new vehicle pricing, provided a) most buyers would qualify for them, and b) each vehicle listing properly discloses the conditional nature of the rebates/incentives, and shows how a dealer uses them to calculate each asking price. The dealers have adopted this practice to meet buyer desires for a greater level of pricing transparency.

Bucket 3: These dealers include nearly all available incentives/rebates in their new vehicle pricing, even those that may only apply to a small percentage of potential buyers. The dealers rationalize this “kitchen sink” approach by noting that they provide the proper disclosures, and they hear few complaints from customers who might feel misled.

I can understand why dealers in Bucket 1 are where they are. It’s only been of late that dealers have the technology and tools to accurately apply/stack incentives and rebates in their pricing strategies.

I typically applaud dealers in Bucket 2. They’re keeping it real and realistic as they include incentives/rebates and offer more transparent asking prices.

With Bucket 3 dealers, I offer a word of caution. Just as you get more proficient at applying incentives/rebates as they price new vehicles, customers and industry regulators get better evaluating them. The “kitchen sink” approach may be working for now, but I have to question the strategy’s risks and viability moving forward.

It wasn’t all that long ago that every dealer was essentially a Bucket 1 dealer. Incentives/rebates were too complex, and online pricing technology too limited, to confidently and efficiently include them in a new vehicle pricing strategy.

Times are different now, of course. The technology is now available and, more importantly, dealers recognize that it’s increasingly important to provide consumers incentive/rebate information right away, while they shop new vehicles online.

Looking ahead, I believe incentive/rebate-based new vehicle pricing will become the norm, and we’ll see the vast majority of dealers in Bucket 2.

As this transition continues, dealers would be wise to remember what our customers will be thinking when they evaluate new car prices—“if it seems too good to be true, it probably is.”

The post A Call For Reality In New Vehicle Incentives/Rebates and Pricing appeared first on Dale Pollak.

3 Ways To Drive Dealers To Discover Profitability Through Efficiency

Dale Pollak — Tue, 14 Jul 2015 18:14:33 +0000

It’s time for a little truth-telling.

Let’s start with TrueCar. As a matter of principle, dealers don’t like the company. And who’d blame them? TrueCar essentially tells customers, “we’ll set you straight on a vehicle price before you contact the dealer.” Yet, if you take the company’s customer base at face value, roughly half of all franchise dealers have signed on.

What gives? The answer is TrueCar’s relevance to today’s consumers. Their “never overpay” message taps into a chief car-buying emotion for consumers—fear of paying too much. At the same time, TrueCar’s promise of a faster, less frustrating purchase experience addresses another consumer concern—the last time they bought a car it took forever, and who’s got that kind of time?

I know some dealers wish that TrueCar would just go away. A handful of dealer-driven lawsuits this spring suggest this sentiment is alive and well.

But here’s the reality: TrueCar, and other companies that aim to erode or take away the traditional role of dealers in the car-buying process, will remain unless and until dealers credibly capture the mantle of relevance these third-party players have claimed for themselves.

At its most fundamental level, this challenge will require that dealers embrace a higher level of efficiency and transparency than they’re accustomed to providing.

This resistance owes to three factors.

First, dealers’ businesses have seen great success in spite of minimal efficiency and transparency. Like many business owners, past precedent sets practice for dealers. This makes it difficult for dealers to change even if their business practices are less effective than they used to be.

Second, the pain of inefficiency and a lack of transparency isn’t readily apparent to most dealers. Indeed, we’ve all been blessed by ever-better good times the past few years, with rising new/used vehicle sales volumes. But as dealers view their top-line numbers with satisfaction, many miss that the return on their investment in cars, facilities and people is lower than it used to be. Stats from the National Automobile Dealers Association show a steady decline in margins for new/used vehicles (31 percent and 20 percent, respectively) over the past five years

Third, the traditional dealership model’s inherent inefficiency and lack of transparency is a matter of great pride among dealers. The thinking goes like this: Car deals are complicated, and it takes the expertise of a dealer to ensure buyers find the right car and right price. In addition, it’s as American as apple pie for consumers to expect that they will negotiate the vehicle price, trade-in values, loan rates and, to some degree, F&I product purchases.

Unfortunately, all three of these factors have combined to create the current predicament, where industry outsiders, like TrueCar, are capturing consumer attention and carving out a part of the car business for themselves.

But some dealers aren’t taking these circumstances sitting down. They’ve made greater levels of efficiency and transparency operational imperatives for their businesses. Their efforts to transform the way they retail new/used vehicles provide a roadmap for other dealers to become more relevant for car buyers today and tomorrow. Their efforts often focus on three key areas:

Adoption of new technologies. These technologies help dealers identify the new/used vehicles that hold the greatest appeal to potential buyers and to price every unit to meet the current market. The end goal is two-fold: to stock the vehicles that will garner the most consumer attention and to create a clear and transparent value proposition that stands up to competition. As they price new vehicles, dealers account for the transaction price ranges advertised by TrueCar and others and, in fact, use them to enhance credibility with potential buyers.
Faster transaction times. Large dealer groups like AutoNation and Sonic Automotive have made a “one hour or less” transaction time an operational goal. To achieve the benchmark, they’ve reduced, if not eliminated, the traditional back-and-forth negotiation with customers in the showroom. In some cases, negotiations over vehicle prices and trade-in values occur online, with the help of tools that allow buyers to self-direct their deal. In other cases, the dealers stand behind the asking prices they’ve posted online, telling buyers “what you see is what you pay.”
Increased productivity. With the right cars and right prices, and a faster sales process, efficiency- and transparency-focused dealers correctly conclude that sales associates can and should be more productive. It’s not uncommon for these dealers to set 15 deals a month as a minimum performance standard. By creating an environment where increased productivity is the norm, dealers are able to reduce personnel costs, which benefits their bottom lines.

In summary, dealers should at least be aware that our industry is in the midst of a transition to a different way of capturing the hearts and minds of car buyers. Perhaps the key lesson is that in times of transition, tradition is often the biggest impediment to success.

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Cox Automotive’s Can-Do, Caring Spirit Really Shines

Dale Pollak — Thu, 09 Jul 2015 19:08:40 +0000

I couldn’t believe what I’d heard. I asked my assistant to read the e-mail again.

82,195 pounds of food. $100,000. 468,496 meals.

It took me a moment to process these impressive tallies from Cox Automotive’s just-completed Drive Away Hunger campaign.

I thought about how just one of those meals would keep a child from going to bed hungry. And how another meal might ease the gnawing worries of a parent struggling to provide for his/her family.

I also considered how the child or parent would probably have no idea that the meal came from someone at Cox Automotive—and that it doesn’t really matter. What matters is that someone from Cox Automotive answered the call to donate food to help those in need.

The impressive Drive Away Hunger campaign results prove that we’re more than just a successful company. We are a connected collective of individuals who care about our communities and each other. We step up and answer the call for help when it comes.

Everyone who participated in this year’s Drive Away Hunger campaign should know that you are the reason that Cox Automotive is a special place to work. Your care and concern for the community inspire me to go the extra mile. You make me proud—of you and our company.

Thank you.

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3 Reasons Efficiency Will Ultimately Drive New Car Profitability

Dale Pollak — Wed, 24 Jun 2015 19:25:50 +0000

It’s probably not the best time to talk about problems in the new car business.

After all, dealers have been enjoying what may go down in history as unprecedented success in new vehicles. Sales have been on steady uphill climb since 2008, and everyone expects the current year to end on the same, if not better, note than last year.

But the buoyancy around the industry’s performance tends to mask three underlying fundamentals that I find disturbing:

Margin compression: While dealers have been selling more vehicles, they’ve effectively been making less money on a per-car basis. Stats from the National Automobile Dealers Association (NADA) show that gross profits as a percentage of sales prices have declined 31 percent since 2009 (from 3.6 percent that year to 2.5 percent in 2014).

Part of this decline owes to rising transaction price transparency. It’s easier than ever for today’s buyers to learn how much they should pay for a vehicle online. The decline also owes to factory pricing decisions. This spring, Fiat Chrysler became the latest to shave a percentage from the margin between the dealer invoice and the manufacturer’s suggested retail price (MSRP).

The cyclical nature of car sales: Dealers should know better than anyone else that ours is a cyclical business. We’ve enjoyed a really good run the past several years as new vehicle sales have satisfied demand that effectively disappeared during the economic downturn.

But this market demand simply can’t last forever, particularly when the past few years of sales have been marked by ever-longer finance terms. Analysts may disagree on the timing, but most concur that sales volumes will eventually level off, if not decline, from current levels.

Increased reliance on “below the line” monies: I recently spoke to a Chrysler dealer who has all but given up on front-end gross profit in new vehicles. The reason: The dealer’s determined that it’s in his best financial interests to essentially give up front-end gross profit in favor of retailing more cars to meet factory stair-step incentive targets.

This dealer’s decision is increasingly common. In the face of an ever-smaller pool of front-end gross, who can blame a dealer for chasing the bigger pot of gold? The problem, of course, is that the “below the line” money carries conditions, some of which erode the entrepreneurial nature of being a car dealer.

Likewise, the “below the line” money isn’t guaranteed. While factories are pretty flush right now, it’s not irrational to consider that bonus program rewards will diminish as sales volumes decline.

Taken together, the underlying new vehicle market fundamentals suggest a darker horizon for dealers. The next question becomes: What can dealers do today to prepare for conditions that may create a perfect storm of problems in the not-so-distant future?

The answer, at least to me, rests in increased efficiencies. Dealers will simply have to retail a greater volume of new vehicles at a lower cost per unit, and in less time, than they’ve been accustomed to in the past.

Some dealers have already embraced this efficiency-focused operational standard. Their emphasis on efficiencies typically manifests in three ways:

Stocking the right new vehicles. The dealers use new technology and tools to consistently align their inventory mix to current market demand. The strategy builds volume while reducing time in inventory and related carrying costs. The dealers essentially create an advantage over other dealers who are less adept at mining market data to make inventory decisions.
Pricing to meet customer expectations. Just as we’ve seen in used vehicles, more and more dealers are adopting a “near one-price”-type approach to pricing their new vehicles. That is, their asking prices include incentives and other discounts to advertise prices that fit the range of transaction prices today’s buyers can easily find online. These dealerships also adopt pay plans that reward sales associates for selling more cars and minimizing discounts.
Reducing transaction times. Progressive dealers are embracing a goal of a one-hour-or-less average transaction time for new vehicle customers. To achieve the goal, the dealers employ e-commerce-type tools to effectively complete a deal before customers arrive at the showroom for a test drive. The ultimate goal: A faster, more satisfying in-dealership experience that seeds repeat/referral business.

I realize some dealers likely won’t appreciate my frank assessment of the future new car market. But, as my Dad has always said, “the worst days aren’t quite as bad if you see them coming.”

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When Should You Increase Your Inventory?

Dale Pollak — Tue, 16 Jun 2015 23:09:12 +0000

Following is an email from a friend and customer about increasing his inventory as we enter the summer slowdown.

Good afternoon Dale. Hope all is well with you. Last month was a down month for my used car department. Sold 62 at $1200 per copy. I had around 15% of my used inventory as trades and the rest were “p” cars that I know I’m paying up for. Anyway the turned dropped from 18 to 10. I’ve identified some changes I need to make and will spare you the details. My pay plan is maximized at 80 used so my thoughts are taking the inventory up from 88 used in stock to 120. So even at a 10 times turn I still end up at 85. I’m simply adjusting my math. I killed it March and April, breaking store records selling around 85 cars at $1700 front end per copy. But I also had trades coming in. It’s tough when you have to pay up at auction but necessary to generate an opportunity.

So my questions are what are your thoughts going into the second half of June and the rest of the summer? It seems there are less “right” cars on Smart Auction and people are less willing to deal on them. I’ve been the used car manager here since mid-February so I’m still trying to dial in the right inventory. They previously carried 110 cars and sold 48 on average. It also seems the used car business is slow in this area. What are your thoughts on the overall used car market now? Thanks in advance for your time.

Here is my reply:

WARNING, WARNING, WARNING. DO NOT INCREASE YOUR INVENTORY

You’re about to make one of the most common mistakes in the used car business. Specifically, you do not ever increase inventory for the purpose of selling more cars. The only proper justification for increasing units is to slow your turn. Once your retail turn reaches 15-16 turns, you have the right to either raise your prices slightly and generate more gross or add a few more units to your inventory. Either approach under such conditions is prudent so long as you do not fall below 12 retail turns per year.

This advice is especially critical at this particular moment of time. This is because the values in the wholesale market have already peaked and will only be declining for the balance of the year. Your approach is also ill-advised because of the large quantity of late-model expensive off-lease cars that are due to be returned to the market in the coming months. If you go out and buy a whole bunch of used cars now you will surely have an excess amount of over-valued inventory in the coming weeks and months.

Think about the analogy of operating a fish market. If your current sales were below your expectation, would you go out and buy more fish with the belief that it would generate additional sales? The answer is obviously no. Sell what you have in stock as it already represents more units than you should have.

In other words, what you have on your hands right now is a sales problem, not an inventory problem, and therefore, you should address it as such.

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3 Ways To Turn Your Average Inventory Cost Into Advantage

Dale Pollak — Wed, 10 Jun 2015 14:26:30 +0000

It’s becoming more critical for dealers to pay close attention to the average cost of their used vehicle inventory.

I say this for three reasons:

First, today’s market can lead dealers to believe that managing your average used vehicle cost isn’t important. After all, cars are more expensive and, if you want to play in today’s highly competitive used vehicle market, you’ve got to pay.

Second, even if a dealer recognizes how/why a lower average inventory cost helps a used vehicle department reach its peak performance potential, it’s easy to look the other way when buyers or managers consistently pay too much for trade-ins or auction purchases.

Third, dealers who do proactively manage their average used vehicle inventory cost tend to sell more cars in less time than dealers who don’t. Among the best-performing dealers I know, the average cost of their inventory is a topic of conversation and investigation every day. They live and breathe the metric, and their results prove the benefit of their cost-minded commitment.

One of these dealers is Bradley Williams, general manager for Rivertown Buick GMC in Columbus, Ga. His take: “The further you drive down your cost, the quicker your inventory turns. Increased volume should follow.”

Some dealers may question this thinking but, if you step back, it makes sense. There are far more potential buyers for lower-priced vehicles, and these units also typically pose less depreciation and valuation risk than their higher-priced counterparts.

The key question then becomes, “OK, Dale, what’s the best way to set and manage our inventory cost targets?” Here are three best practices I’ve gleaned from Williams and other dealers:

1. Recognize the relationship between average new/used vehicle costs. I like Williams’ formula: He strives to maintain his average used vehicle cost at 50 percent of his average new vehicle cost. For example, if his average new vehicle cost is $26,000, his average cost goal in used vehicles is $13,000.

This goal serves two key purposes. It helps create an inventory mix that delineates the value proposition between new and used vehicles for customers and, if managed correctly, can mitigate the preferences of individual buyers/managers, who like stocking higher-cost cars.

2. Evaluate your inventory turn by cost segment. For Williams, this analysis taught him that lower-cost cars turn more quickly. “As I managed my $13,000 cost target, I could usually expect an increase in monthly volume of one unit when we landed $100 below the goal,” he says. “I could also expect a reduction in unit volume as average cost increased.”

Other dealers arrive at the same conclusion as they evaluate inventory age by cost segment. In many cases, the oldest vehicles are also the most expensive and, in turn, they often suffer from the most significant price (and gross profit) reductions as dealers do their best to retail them.

3. Be realistic, and not too rigid, with your average cost target. The best used vehicle retailers recognize that managing your inventory to meet your average cost target is a balancing act. If you’re too firm, you’ll pass up retail-worthy vehicles that happen to fall outside your cost parameters. If you’re too flexible, you run the risk of burdening your inventory performance with too many expensive cars.

“You have to be realistic,” says the used vehicle director for a six-store group in the Midwest. “There are times when I’ve relaxed our cost targets to make trades and fill inventory gaps. But when I do, I know I’ve got to focus on retailing those higher-cost cars quickly to keep our turn and grosses in line.”

In closing, I should note that I’m writing this article as the spring selling season is coming to a close, and analysts indicate used vehicle values in most segments are on the wane.

My prediction: This seasonal volatility will prove far less problematic for cost-conscious dealers who, through their ongoing diligence and discipline, will have the advantage of less inventory water to bail as summer arrives.

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A Case Of One Step Forward, Two Steps Back

Dale Pollak — Fri, 29 May 2015 13:32:28 +0000

Mistakes happen in used vehicles. Simply put, there are too many things that could go wrong, for everything to always go right.

That’s what makes the following story from a used vehicle manager so troubling.

Last December, the manager made a decision to stock up on inventory. He had no choice but to acquire the vehicles from auction, given new vehicle sales had slowed the pipeline of trade-ins. His ratio of auction to trade-in vehicles went from 50/50 to 70/30, respectively.

To make matters worse, auction prices were high. The manager, a student of the Velocity Method of Management, realized that he’d likely acquire the vehicles at a Cost to Market ratio at/near the Price to Market ratio where he typically retailed many units (around 92 percent to 94 percent).

The manager pulled the trigger. “For the past two years, if we had inventory and we followed our strategy, we sold the cars,” he says. “I made the choice to have vehicles available to sell.”

The manager also accepted the risk of additional inventory in the context of the bigger, “total gross” picture. During the prior two years, he made auction-purchased units a fast-turn priority. It wasn’t uncommon for these vehicles to retail as “$0 gross” deals to drive gross in other departments. “We made nearly $1 million in back-end money off the auction units last year,” the manager says. “That doesn’t count dock fees or F&I income.”

But then the market slowed down, forcing the manager to become even more price-aggressive to retail out of the higher-cost cars. “We took a thumping,” he says. “But the worst thing we could have done, from an investment perspective, was to sit on those cars.”

From my vantage point, the manager did exactly the right thing. If you make a mistake, face the music fast, and move on.

Unfortunately, the manager’s dealer didn’t see it that way. Instead, the dealer issued an edict to raise front-end grosses by $450/car.

Guess what’s happening now? As he works to meet the dealer’s directive, the manager’s unable to maintain inventory velocity, and monthly sales are down by two dozen-plus units.

“Our front-end grosses are better, but we’re actually losing money if you look at the dollars returned to the dealership from used vehicles,” the manager says. “It’s a little frustrating to feel like we’re going backwards, but we’ll get it right after the dealer sees the missed opportunities.”

I promised to keep in touch with the manager as he strives to re-ignite his Velocity strategy. Stay tuned.

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3 Ways To Boost Used Vehicle Profitability While Selling More Cars

Dale Pollak — Thu, 28 May 2015 18:22:38 +0000

In its 2014 report on dealership financial performance, the National Automobile Dealers Association (NADA) highlights a disturbing trend in used vehicles.

The NADA report notes that franchise dealers enjoyed a 6 percent increase in used vehicle sales compared to 2013—an increase similar to what dealers saw in 2013, compared to 2012.

Yet, net profits for used vehicles declined last year, which leads to a key question, “What gives?”

To answer the question, I took a deeper look at the data from 2012 to 2014. I found two data points that help explain why dealers are selling more cars and making less money:

1. Dealers relied more on auction purchases in 2014 than they did in the prior year. NADA reports auction units made up 26 percent of used vehicle acquisitions, while trade-ins remained relatively flat year over year. In 2013, auction cars fed 25 percent of dealers’ used vehicle inventories, up from 24 percent in 2012.

2. Dealers continue to sell more expensive vehicles. In 2014, the average sales price of a used vehicle ran $18,846 up 4.1 percent from the prior year. The increase marked the fifth consecutive year where the average dealer investment in a used vehicle increased.

Some of you may be thinking, “Thanks, Dale. You’ve just re-stated the obvious. We all know it’s tough to acquire the cars we need at a price that provides sufficient front-end margin.”

But , in light of a market where you can’t source all the used cars you need at your door, and you’ve got to pay more than you’d like to buy units for elsewhere, here’s the question dealers should be asking: What are we doing to retail these units faster to maximize profit and minimize risk?

Unfortunately, the NADA data suggests most dealers aren’t asking this question. I say this based on evidence from dealers who do ask the question, and do so diligently. These dealers beat the NADA averages. Their used vehicle net profits have increased in recent years, and keep getting better.

The following are three best practices these dealers follow to sell more used vehicles and make more money:

Know your opportunity/risk right away. The dealers recognize that the more they can know about a vehicle’s retail potential before they acquire it, the better. By evaluating each vehicle’s Market Days Supply and Cost to Market metrics, the dealers know pretty well, if not precisely, how their investment in the vehicle will perform. With this knowledge, the dealers plot the best retail exit strategy that will maximize front-end margin and minimize losses. It’s also not uncommon for these dealers to have more aggressive retail exit plans for auction cars, given the cost/margin challenges these vehicles pose in today’s market.

Press down your days-in-inventory average. I would encourage every dealer to conduct a two-pronged test of their past three months of used vehicle sales. First, assess the front-end gross profit and return on investment (ROI) for each sale. Second, segment the sales by days in inventory. If you’re like most dealers today, you’ll find that most, if not all, of the units retailed after 30 days performed significantly worse than those sold in less than 30 days. I suspect you’ll also find the bulk of your break-even and money-losing deals occurred after the 30-day mark.

Top-performing dealers accept this 30-day reality. They approach it like investors. They know they have 30 days to maximize the margin/ROI on every car and, if a unit is/becomes especially troubled, they’ll work even faster to retail the unit and redeploy the investment dollars in a vehicle with better potential.

I encourage dealers to maintain at least 50 percent of their used vehicle inventory under 30 days of age at all times. Anything less, I’m afraid, means you’re under-cutting your department’s net profit potential.

Source more cars in your store. In addition to showing that dealers relied more on auction vehicles in 2014, NADA stats indicate that dealers acquired more trade-ins from new vehicle sales (42 percent compared to 41 percent in 2013), while getting fewer trade-ins from used vehicle customers (24 percent compared to 25 percent) and off-the-street purchases (4 percent, 5 percent, respectively).

You could read these stats one of two ways: Dealers saw fewer retail-worthy units from used vehicle trade-ins and off-the-street purchases, or they did a better job acquiring cars from new vehicle buyers, while letting other in-store acquisitions slip.

Either way, the stats indicate dealers are probably missing cars that, if acquired, would offer better margin/ROI potential and reduce the reliance on auctions.

In a year from now, it’ll be interesting to review the NADA data for the current year. In particular, I’ll be curious to see how well dealers have reversed the trend of selling more used vehicles and making less money.

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A Quick Look At Closing Ratios And “Closers”

Dale Pollak — Fri, 22 May 2015 14:05:34 +0000

I’ve been asked recently for benchmarks on closing ratios for dealers.

The frequency of the question, I suspect, follows the fundamental change in the way today’s new/used vehicle shoppers zero in on a potential purchase. As most dealers are aware, shoppers do the bulk of their homework and research online. On average, they visit fewer than two dealerships to ink their next vehicle deal.

This dynamic makes it ever-more important for dealers to make the most of the in-store opportunities that come their way. Statistically speaking, it’s a near-certainty that if the customer doesn’t say “yes” and buy your car, another dealer will get the deal.

I asked some top-performing dealers for their closing ratio stats to offer some number-crunched benchmarks:

Internet: 15 percent

Phone: 20 percent

Walk-in: 40 percent to 50 percent

Note: Some dealers rely a simpler closing ratio rule of thumb. They expect to close at least 50 percent of every showroom opportunity, irrespective of the source.

The dealers also shared an insight: More and more, their closing ratios depend on the consistent execution of customer-centric processes, rather than people you’d consider to be “closers.”

“Our sales process starts online with our listings,” a Colorado dealer says. “From there, our people follow a process that facilitates, rather than forces, customers to make their decisions. When everyone does their part, and follows the process, we keep more business than we let go.”

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3 Ways Packs Prove Problematic For Dealers

Dale Pollak — Fri, 15 May 2015 18:09:04 +0000

There’s no question that dealers like packs.

But packs have become increasingly problematic for dealers, sometimes in ways they fail or refuse to see.

I recently asked a group of dealers to share how much they packed their used vehicles. The responses ranged from $0/per car to $1,200/car.

I then asked the dealers at the low and high end for additional details:

Average monthly volume: The $0-pack dealer sells 120 units per month, off an inventory of roughly the same number of vehicles. The $1,200-pack dealer averages 40 units per month, off a 90-vehicle inventory.

Average front-end gross: The $0-pack dealer typically sees a front-end gross average of $1,300/car (for a monthly average total of $144,000); the $1,200-pack dealer averages $2,800/car front-end (for a monthly average total of $112,000).

Average sales associate pay/production: The $0-pack dealer pays an average $275 flat for each sold unit ($300 for cars sold at asking price; $250 if they’re discounted), and sales associates average 15 cars/month (or $4,675/month). The $1,200-pack dealer pays a straight 25 percent commission off of gross (minus pack), or a $150 mini for no-gross deals. The sales associates typically sell 10 units, which usually includes an average of three mini deals (or $3,250/month). This dealership also pays $50 spiffs for selling aged cars and F&I sales, which the dealer estimates adds another $300 or so to a sales associate’s paycheck.

After running through these numbers, I went a little deeper. I asked about average sales team turnover. The $0-pack dealer might lose one, maybe two, sales associates a year; the $1200-pack dealer loses about half of his team.

With this comparative backdrop, I asked the group if they thought the dealer’s $1,200 pack might be crimping his ability to increase market share and sell more used cars.

Some dealers immediately said “yes.” They pointed to the dealer’s relatively low monthly sales volume, slower inventory turns and higher turnover as evidence that the $1,200 pack contributed to a less-than-optimal performance for the used vehicle department and dealership as a whole.

Other dealers cried foul. It wasn’t a fair comparison. The dealers had different markets and operating philosophies. Besides, even if things could be better, the $1,200-pack dealer has every right to “protect the house.”

I asked a follow-up question: If the two dealers were competing in the same market, which dealer would more likely enjoy a higher level of market share and overall profitability?

At this point, all the dealers in the group at least acknowledged that the $0-pack dealer would likely be selling more cars, and making a better return on investment.

I then shared the three reasons I believe packs create trouble for today’s dealers:

Packs are a tax. By applying this tax, dealers effectively burden every car with additional cost. To offset the effects of the added cost on their front-end margin, dealers increase asking prices. By definition, this practice makes each unit less appealing to today’s price-conscious buyers. You can spot a high-pack dealer pretty quickly: Their used vehicles are often priced higher, and retail less quickly, than the competition. To me, these are symptoms of a dealer trying to collect a tax that is out of step with today’s market.
Packs breed picky buyers and high pressure appraisers. I asked the group: Do you think buyers and appraisers might simply look past perfectly good retail units at auctions and trade-ins because the cars can’t absorb the pack and deliver a desired front-end margin? Is it possible you’re missing at least a few trades because packs cause appraisers to get too aggressive? The dealers agreed that the scope of either problem would directly relate to the size of the pack.
Packs slow your inventory velocity. If a pack causes a dealer to miss inventory acquisition opportunities, or contributes to the consistent loss of half your sales team, the used vehicle department isn’t performing to its potential. The $1,200-pack dealer admitted that while he’d like to sell more than 40 used units a month, he’d come to believe the benchmark represented a “good job” in the department.

As we wrapped up the discussion, I asked the $0-pack dealer how he arrived there.

“It didn’t happen overnight,” he says. “When we started, I had a $1,000/car pack and cut it by $200. Our volume and total gross picked up right away. The rest is pretty much history.”

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Dealer Enjoys Early, E-Commerce Success

Dale Pollak — Fri, 08 May 2015 20:23:43 +0000

General Manager Todd Long dares to be different at O’Neill Honda in Kansas City.

Before he took the job in December 2013, Long mystery-shopped the competition. “It was the epitome of the ‘90s all over again,” he says. “Nobody’s outside. Nobody’s helping you. No manager TO. The MSRP is the price.

His findings convinced him of an opportunity to pursue a different, digital-focused strategy.

“We’re really trying to make our purchase process transparent, efficient and seamless,” Long says. “You make us an initial offer online. You deal with a product specialist, then you talk to a sales manager and you’re done. My whole deal behind this is, you get what you give.”

The centerpiece of Long’s digital strategy is the MakeMyDeal application, which allows potential buyers to self-direct the terms of their new/used vehicle purchase, financing and trade-in online. “It’s like Burger King. The customer’s calling the shots. Customers aren’t used to that, and it gives us an opportunity,” he says.

Long quietly launched this strategy in April, adding the MakeMyDeal icon to new/used vehicle listings on his website and AutoTrader. Since then, he’s sold six vehicles (three new/three used), all with better front-end gross profits than he typically sees from walk-in customers.

“I negotiated the first deal with two e-mails,” Long says. “The customer said ‘I’m done’ and came here 40 minutes later. He drove the vehicle and then went to F&I. We made $2,187 in gross on a used Dodge Ram. After the first one I was like, ‘Oh man. If I can get a hold on this and we can do this right, I think we’ve got a winner.’”

Why the higher grosses? “The experience lends itself to gross,” Long says. “It’s like buying water at a convenience store. You pay a lot more than you would if you bought four cases at Costco. But you pay the price because it’s convenient.”

With the early results, Long plans to aggressively market the MakeMyDeal-driven buying experience this month. He’s also refined the process to include delivering vehicles to customers at their home or office for a 24-hour test drive, and a personalized VIP welcome when they come to the dealership to complete the deal.

“Customers have been asking for years for a seamless online buying experience,” Long says. “We’re giving them a taste. We’re saying, ‘You’ve spoken. We’ve listened, and we want to do our best as a forward-thinking digital dealer to provide the experience you want.’”

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3 Lessons From Top-Performing Used Vehicle Retailers

Dale Pollak — Mon, 04 May 2015 14:12:00 +0000

I was struck by several take-aways from Automotive News’ Top 100 Dealer Groups Ranked By Used Vehicles report published last week.

The dealer groups’ collective performance keeps getting better. The report says the groups saw a combined 9.9 percent gain in retail used vehicle sales in 2014, 4 percent better than the industry as a whole.
Some groups enjoyed gains well above the average, enjoying year-over-year used vehicle sales growth north of 20 percent.
Acquisitions fueled a sizable share of the groups’ collective retail sales improvement, as well as what appears to be a disciplined emphasis on ongoing performance improvement.

As I reviewed these impressive achievements, I found myself asking: What does this mean for the industry, particularly the smaller dealer groups and standalone stores?

Perhaps the most obvious implication is that the public groups are casting the die for the industry. Their example demonstrates that a strong used vehicle operation is essential to ongoing success and prosperity. In addition, their growth-focused strategy also indicates that dealers who merely plug along in used cars will have a tougher time capturing the used vehicle market share they have come to expect.

But the good news—and the opportunity—lies in the lessons that can be gleaned by reviewing the dealer groups’ performance. Here are three that I believe are relevant for all dealers:

1. Emphasize a “retail-first” strategy. Among the top 100 dealer groups, a third reported declines in their wholesale units. In a handful of cases, the drop resulted from a dip in retail sales. For the vast majority, however, the wholesale unit decline accompanied an increase in retail sales. The upshot? The big groups are doing a better job retailing the units they acquire from auctions and trade-ins. As one dealer group executive says in the report, “We try to limit what we wholesale as much as possible.”

This emphasis on a “retail-first” strategy often translates to more productive in-store processes for acquiring trade-ins, both to feed the retail sales strategy and to acquire cars at lower costs, which benefits front-end margins. In addition, the strategy drives growth in F&I, service and parts revenues. In turn, total dealership profitability improves, a bottom line benefit that many of these groups apply to acquire more stores.

2. Use technology to its fullest. The Automotive News report quotes a dealer group CEO crediting inventory management technology with helping his 16-store operation acquire the right cars, and then price them right to retail quickly. On its face, the statement reads a little ho-hummy—most dealers use some kind of inventory management software, what’s the big deal?

But I would submit that the technology is a big deal for the CEO and his in-store managers, as well as their peers on the list. I can personally attest that some of the larger, most-successful dealer groups not only invest in technologies to help them manage their used vehicle operations, they actually use the insights and tools to their fullest.

These groups recognize that in today’s market, where competition is fierce and margins are constantly under pressure, technology-driven decision-making and processes often spell the difference between making the right decision quickly and missing an opportunity.

3. Find your growth opportunities, and capitalize on them. As I mentioned earlier, the Top 100 list includes a few dealer groups who saw a year-over-year decline in retail volume. The rest, however, are keenly focused on growing their used vehicle operations. They have become students of their local markets. They know how their market share compares to the competition, down to individual vehicle segments, makes/models and even trim levels. They align their inventory acquisition, merchandising and pricing decisions to these market insights, and constantly pursue opportunities to increase their piece of the retail pie.

This “grow or go home” mentality in used vehicles can be difficult to initiate, let alone sustain. Inevitably, it requires everyone in the dealership to step up and embrace a new reality that the status quo isn’t good enough to efficiently and successfully grow a used vehicle department.

The underlying message here—that you’re either moving ahead in used vehicles or falling behind—probably won’t resonate with dealers who prefer to focus their attention and energy on new vehicle operations, which have been robust in recent years.

For them, I’d ask just one question: How much better could you be doing if you had a stronger used vehicle department?

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3 Ways To Eliminate The Used Vehicle Manager’s “Double Curse”

Dale Pollak — Wed, 29 Apr 2015 16:16:36 +0000

Some used vehicle managers carry a double curse.

The first curse is their absolute focus on average front-end gross profit. They’ll say, “I can’t change this price because there won’t be enough front-end gross,” or, “I can’t buy this auction car because there won’t be enough front-end gross,” or, “I can’t offer the customer what their trade-in’s really worth because there won’t be enough front-end gross.”

The second curse is their inability to recognize that the front-end gross-focused inaction on each of the preceding scenarios ultimately hurts the performance of their used vehicle department, as well as the size of their paychecks.

The used vehicle managers who carry this double curse create an even bigger problem for their dealers—the less-than-optimal performance of their used vehicle department ultimately saps the other dealership departments of their ability to maximize sales and profits.

Surprisingly, some dealers appear to be aware that their used vehicle manager’s double-curse is hurting the overall dealership prospects, but they choose to do nothing about it. How else to explain the disparities I see across dealer groups, where the performance of some stores—measured by the net impact of a strong used vehicle department across their peer departments—completely outshine the others?

The difference, of course, is that the used vehicle managers at the high-performing dealerships have effectively exorcised themselves of the double-curse, or they never suffered from it to begin with.

I understand the exorcism can be difficult, particularly for used vehicle managers who have spent years in the business. Unfortunately, they’ve been carrying the double-curse for a long time, and every year makes it more difficult to remove.

Used vehicle mangers who eliminate the double-curse have come to embrace three operational realities they previously failed to see:

First, it’s essential for used vehicle managers to recognize that in today’s market, there’s often very little money left in a used vehicle after you’ve owned it for 30 days. This timeline has become even more critical in 2015 in light of increasing supplies of available used cars. I would encourage dealers to compare the average front-end gross profits of used vehicle sales that occur in 15 and 30 days or less, against those that occur after the 30-day mark. (Note: I would ask that this be a full and honest accounting, that includes the holding costs associated with every car, irrespective of its sales date.)

Second, used vehicle managers must align their inventory management and pricing objectives to retail a greater share of vehicles within the timelines that will maximize their front-end profit potential. Inevitably, the managers will recognize that today’s market requires a balancing act between selling a car quickly to maximize its gross profit potential, and sacrificing some front-end margin to put the car over the curb fast and earn another retail opportunity. This turn-and-earn mentality, which I call the Velocity Method of Management, is often counter-intuitive to the most die-hard, double-curse-carrying used vehicle managers. But, in the end, the math works—selling more cars more quickly will improve gross profits, even if front-end averages slightly diminish.

Third, as used vehicle managers begin to retail more used vehicles in shorter timeframes, they begin to work on perfecting the throughput of their operations. They build alliances and understandings with their service directors that time is money in used vehicle reconditioning. Cars get fixed and front-line and online-ready in a matter of hours or days, not weeks. They continually work on ways to press down the costs of reconditioning, which builds front-end margin potential and greater efficiencies for both departments. They measure and share the impact of their efforts throughout the dealership, showing financials that reveal double-digit lifts in sales and net profits throughout the dealership.

It’s this final step that often gets the dealer’s attention. They start to see positive improvements in the financials for every dealership department. In some cases, the more enlightened dealers take additional steps to make the total dealership gains an ongoing reality. They measure and promote the positive impact the used vehicle department creates across all dealership departments. The dealers might even change pay plans to recognize and reward the used vehicle manager’s total dealership contributions.

As I mentioned, eliminating the double-curse isn’t easy. But I haven’t met a single used vehicle manager who cured themselves, and now wishes they hadn’t.

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Factory Pricing Decision Will Test Dealership Efficiencies

Dale Pollak — Wed, 22 Apr 2015 16:22:49 +0000

Here we go again. Another factory messing with dealer margins.

This time it’s Fiat Chrysler, according to an Automotive News article.

The upshot: The factory is raising invoice prices by 1 percent, while leaving its Manufacturer’s Suggested Retail Prices (MSRP) unchanged. The end result, of course, is less available front-end margin for dealers.

Such is the life of a franchise dealer. At any moment, the factory can fundamentally change the rules of the retail game.

Of course, Fiat Chrysler’s decision will sting some of its dealers worse than others, particularly those in markets where the invoice-to-MSRP margin is almost irrelevant due to fierce competition.

In some cases, however, the pain for these dealers will largely be on paper, thanks to the prevalence of “below the line” monies that, as one analyst put, are intended to make dealers “whole.”

But here’s the kicker: The article says Fiat Chrysler’s decision is an attempt to increase its profit margins, given higher operational and supplier costs it’s absorbed in recent years.

Fair enough, I suppose. But wouldn’t it be better for dealers if their factory partners would first strive to improve margins through greater efficiencies, rather than simply passing along higher costs (and smaller margins) through increased invoice prices?

This question seems especially relevant given the reality that today’s market doesn’t afford dealers the luxury of raising their prices when they’d like a better bottom line. More and more, the pathway for dealership profitability and prosperity lies in efficiencies—those who retail and service a greater number of vehicles in the least amount of time invariably come out on top of their less-efficient competition.

Perhaps that’s the point of Fiat Chrysler’s decision. By shrinking dealer margins, they are effectively forcing their dealers to become more efficient, whether they like it or not.

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3 Ways To Confront The Boogeyman In Used Vehicles

Dale Pollak — Tue, 21 Apr 2015 17:32:13 +0000

A dealer recently took issue with my assertion that the used vehicle business has been suffering from margin compression.

“Dale, we’re averaging $1,400 per vehicle in front-end gross,” the dealer says. “That’s a little less than we made seven to 10 years ago, but it’s not a lot less.”

The dealer’s comment underscores what I’d consider a troubling misunderstanding of the harmful effects margin compression creates for dealers in used vehicles. You might even call it a “boogeyman” due to its lack of recognition for some dealers.

Here are two realities of margin compression dealers often overlook:

The average cost of vehicles has increased. Edmunds.com reports that the average transaction prices for all used vehicle segments grew by nearly 6 percent in 2014, compared to the prior year. Analysts say the increase reflects the steady rise in new vehicle transaction prices, as well as market supply/demand factors. No matter the cause, the average cost dealers pay to acquire and retail used vehicles has gone up.
The return on investment (ROI) on a per-car basis has declined. While dealers have been paying more to acquire and retail vehicles at higher transaction prices, the gross profit they earn has diminished. NADA stats show that front-end gross as a percentage of used vehicle transaction prices has declined 20 percent between 2009 and last year (from 10.7 percent to 8.6 percent, respectively). The end result is that dealers are investing more in each used vehicle, and seeing a lower return for the effort, risk and time required to retail each unit.

Both realities beg the question: Why doesn’t the dealer who challenged my assertion about margin compression recognize the harmful effects it creates for his business?

Part of the answer lies in the dealer’s emphasis on front-end gross profit. He’s still seeing roughly $1,600 per car, and doesn’t feel the effects of margin compression because he’s not looking at the big picture. I would bet good money the dealer would be less satisfied if his parts manager told him the store earned $20 for a $100 part and $20 for a $3,500 engine block.

In addition, the dealer, like many others, is selling more used vehicles. The stronger sales volume also helps mask the effects of margin compression.

I told the dealer he wasn’t alone in thinking that things were actually going pretty well in used vehicles, simply because the front-end gross dollars per car hasn’t changed much. I also shared three must-dos that I believe are necessary for all dealers to maximize the true potential of their used vehicle operations and minimize margin compression:

Pay close attention to your acquisition cost. Some dealers make it a day-to-day priority to monitor the average acquisition cost of their used vehicle inventory. They look at the average dollars spent per car, and the overall cost to market metric for their inventory. With this oversight, they notice right away when a buyer gets goo-goo and pays too much for an expensive car, or an appraiser puts too much into a trade. They start asking questions. They want good reasons why they buyer or appraiser effectively put the vehicle’s profit potential at risk. Such conversations, which are most effective when constructive rather than critical, tend to focus everyone’s attention the goal of pressing down costs to preserve front-end margin.

Hold your people accountable. It’s absolutely essential that buyers and appraisers understand the reality of today’s market—it doesn’t forgive when you over-pay for a vehicle. In addition to the conversations noted above, the best dealers keep a running tally of each buyer and appraiser’s ability to meet the dealership’s cost to market acquisition targets. Some dealers go further, and include this metric in pay plans, often as a bonus if the individual beats the benchmark.

Press down reconditioning costs. I like the way a Midwest dealer tackled this challenge. He sat down with his General Manager (GM), and the used vehicle and service managers. They reviewed 200 reconditioning repair orders, and itemized the top 25 most-frequently used parts used, the 10 most-frequent sublet jobs and the average effective labor rate. Next, the dealer conditioned monthly bonuses on the three managers working together to knock 15 percent off the cost of the parts, a 10 percent reduction in sublet costs and a 2 percent reduction in the effective labor rate. The dealer reports that these efforts have helped him generate an additional $200 per vehicle in front-end margin.

As our conversation wrapped up, the dealer said he understood the choice: He could either confront margin compression or go on believing it doesn’t exist or matter too much.

“You’re right, Dale,” the dealer says. “There is a boogeyman out there. We could and should be doing better than $1,600 per car.”

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Used Vehicle Recall Regulation: A Future Part Of Life For Dealers?

Dale Pollak — Wed, 15 Apr 2015 16:52:57 +0000

A recent Detroit News article suggests dealers may have to worry more about recalls than they do today.

The article discusses the Obama administration efforts to extend recall responsibility to used vehicles, and require dealers to fix any open recalls before they retail a unit.

Currently, federal law requires dealers to address recalls for new vehicles, which doesn’t always happen before they’re sold. The article notes the National Highway Traffic Safety Administration issued fines last year to dealers who retailed new vehicles without fixing recall items.

On one level, the administration’s interest in requiring recall repairs for used vehicles is understandable. There are more recalls than ever, and some recall issues affect vehicle owner/occupant safety. Likewise, the problem of vehicle owners either not receiving recall information, or not responding when they do, remains persistent.

The article highlights NADA’s rightful resistance to the regulatory effort, particularly provisions that would effectively “ground” a used vehicle until the dealer fixes the recall issue.

The issue gets thorny when you consider how a Chevy dealer might be required to fix a Ford vehicle acquired at auction or trade, and how large public/private dealer groups might be at even greater risk, given their relationships with vehicle owners across a variety of franchises.

It’s still too early to say if the federal government’s interest in used vehicle recalls will result in more regulations for dealers. But I suspect, over time, dealers will bear a greater degree of responsibility for making recall repairs before they retail a new or used vehicle.

For some dealers, such responsibility will be viewed as a burden, which they will resist. Others, meanwhile, will recognize that as they seek to serve customers for life, recalls have become a part of life.

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How Factories Make New Vehicle Pricing Challenges Even Worse

Dale Pollak — Wed, 01 Apr 2015 14:21:52 +0000

Most dealers would agree that today’s typical customer is far more price-aware than those of previous generations.

This awareness stands to reason: A vehicle purchase is a big-ticket item. No one wants to pay too much. And, the Internet makes it easier than ever for buyers to get a sense of what a fair deal could be.

Progressive dealers have embraced this trend, adopting market-based pricing strategies that seek to affirm the findings buyers find online for themselves. The idea: Capture the attention and interest of buyers who want to find their vehicle of choice with a price that falls within their self-built ballpark. When this connection occurs, it’s typically good news for the dealer and buyer. Each has a level of confidence and trust toward the other, a good place to start any kind of deal.

Meanwhile, many dealers still use traditional new vehicle pricing practices. Such pricing is notable for its reliance on MSRP, and the absence of specificity for individual units. These dealers worry less about pricing insights potential buyers have found online; they’ll tackle those in the showroom.

But while both groups address the pricing challenge from different angles, there’s a third party making the job tougher for everyone, the factories.

An Automotive News article this week discusses Fiat Chrysler’s nearly five-year streak of month-over-month sales growth since 2009, and its impact on dealers. The piece notes that factory bonus money plays a big role in keeping dealers focused on moving more units. And it highlights a downside that, due to proliferation of these programs, is familiar to all dealers:

“At the beginning of each month, dealers must decide whether to chase the goal of the Volume Growth Program. If they do, they tend to accept lower offers to close deals, hurting profits. And they often spend extra advertising dollars to bring in customers.

If they reach the goal and get a big check from the factory, all is well. But if they fall short, they are stuck with a month of profit-eroding discounts and wasted advertising.

‘It’s a nightmare,’ said one Great Lakes area dealer, who spoke on condition of anonymity.

Some dealers happily chase the bonus, which can climb to $1,000 or more per vehicle. Others see their monthly goals as unobtainable and instead try to ensure that each deal is profitable, even if it puts them at a competitive disadvantage with other FCA retailers.”

Now, let’s go back to today’s price-smart buyers.

At a time when buyers increasingly expect rational prices, factory bonus programs incentivize dealers to do irrational things, like pricing new vehicles to lose front-end money in favor of a factory check. As one dealer put it, “we have to race to the bottom to get to the top of the bonus scale.”

This dynamic isn’t very buyer-friendly, particularly for those who did all the research and made the mistake of purchasing a new car toward the beginning of the month.

I can’t help but think if the factory bonus-driven retail rollercoaster ran more like an efficient train, everyone would be better off.

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3 Ways Dealers Work To Minimize Inventory Age In Used Vehicles

Dale Pollak — Mon, 30 Mar 2015 18:48:46 +0000

It wasn’t all that long ago when most dealers really only worried about one or two things in their used vehicle departments—the average front-end gross profit, and the number of cars they’d sold to date in a given month.

As a result, the used vehicle manager would also focus on the same things. On occasion, you might find a used vehicle manager who truly focused on inventory age, but these individuals were as rare as the dealers who truly cared about aging units.

We’ve come a long way since then. While the average front-end gross profit and sales volumes still matter, many dealers now rely on additional market-based metrics to manage their used vehicle success.

As they acquire used vehicles, dealers examine each unit’s market days supply, cost to market and price to market to determine each vehicle’s destiny. The best dealers use these metrics to know, right up front, how quickly the vehicle should retail and the front-end gross profit it should generate if it sells within the expected timeframe.

At the same time, dealers have come to understand that they can no longer ignore inventory age the way they used to. In fact, the average age of a dealer’s inventory has become an essential fourth metric dealers must monitor to ensure they retail vehicles as quickly as possible to maximize their profitability potential for every unit and maintain the throughput, or velocity, of their sales volumes.

Here are three ways dealers and used vehicle managers apply this increasingly important metric as they make inventory management decisions to maximize profitability and volume:

1. Know the break-even point on every car. Unfortunately, the transparency and volatility of today’s used vehicle market have combined to shrink the window of time a used vehicle will generate a sufficient front-end margin. Depending on the market and specific vehicle, dealers tell me their front-end margins diminish fast after a car reaches 20 or 30 days in inventory.

“I know for a fact that we start losing money on most cars after they’ve been here 20 days,” says the used vehicle manager for a five store group in the Midwest. “When cars get to 35 days or older, I’m at risk of losing front-end gross faster than I can make it up by selling fresher units.”

To combat these market conditions, I recommend that dealers maintain at least 50 percent of their inventory under 30 days of age. But even this operational standard, I’m told, can be insufficient in highly competitive markets. The Midwest used vehicle manager sets his sights on maintaining at least 80 percent of his inventory under the 30-day mark to minimize the risks diminished front-end margins.

2. Align your pricing to inventory age. Most dealers are aware of the relationship between inventory age and vehicle pricing: When cars are fresh, you can set asking prices that reflect each unit’s desirability in the market to maximize front-end gross profit. But, as cars age, your asking prices become the primary lever to attract buyers and retail the unit.

Unfortunately, dealers often do not apply the discipline necessary to consistently make these price adjustments at the specific age intervals spelled out in their pricing strategies. In addition, I would recommend that dealers reexamine their pricing strategies to determine if their age intervals should be shortened.

For example, the Midwest used vehicle manager used to make price adjustments after a vehicle had reached the 15-day mark. Now, the initial price adjustment occurs within seven days. Other dealers price more proactively, setting three-to-five-day age intervals.

Note: Dealers should assess the merits of price changes as vehicles hit their age-related triggers, rather than make them automatically. The assessment should include vehicle’s competitive position, recent shopper activity and other factors to determine if the time is right for a price adjustment.

3. Be firm about moving on. It’s sometimes difficult for dealers and used vehicle managers to accept the fact that when a vehicle hits 45 days or more in inventory, it represents a management failure. The traditional impulse is to continue holding on to the unit, waiting for a buyer.

But age-minded dealers resist the impulse and do their best to retail the unit, even at a loss, to create the opportunity to reinvest the money in a fresh car that offers a better return on investment.

These three inventory age-focused best practices, by themselves, do not guarantee the success of a used vehicle department, but they do underscore that less time in inventory means more money for dealers in today’s market.

The post 3 Ways Dealers Work To Minimize Inventory Age In Used Vehicles appeared first on Dale Pollak.

A “Connection Commerce” Challenge For Dealers

Dale Pollak — Tue, 24 Mar 2015 13:45:44 +0000

Most dealers understand that today’s car business is an Internet business.

They know that new and used vehicles aren’t really for sale unless they’re posted online.

The best dealers also recognize that they see more customers when online vehicle listings offer competitive, market-based pricing, and their merchandising (e.g., descriptions, photos, videos) tells a compelling story customized for each car.

I would describe all of these online efforts as “informational.” That is, they provide potential buyers with the information about the vehicle and dealership to make their purchase decision.

But here’s where these informational efforts online fall short for dealers. They do not help consumers initiate, let alone iron out, the terms of a vehicle purchase deal while they’re online—especially when they look repeatedly at a vehicle details page (VDP) for a specific car. This shortfall will become more profound as vehicle shoppers expect dealers to offer the same kind of click-to-purchase options they use on any other retail website.

Now, to be clear, I’m not suggesting that most consumers will want an Amazon-like vehicle purchase experience, where they click to buy and the car gets delivered to their front door.

I do, however, believe that consumers increasingly expect to find a more convenient and efficient way to know the ins/outs of a vehicle deal before they go to a dealership. This expectation, which is fed by consumers’ increasing use of the Internet to buy goods and services, will require dealers’ online efforts to become more “transactional” than they have been in the past.

And therein lies both an opportunity and a rub for dealers.

On the opportunity: Dealers who shift their online strategies to become more transactional will be in the best position to attract and serve customers who want the ease and convenience these emerging online experiences offer. In addition, new technology and tools are available to help dealers provide this experience while meeting their need to manage the profitability, structure and terms of every deal.

On the rub: Dealers aren’t used to providing the type of information car-buying consumers seek online. To be sure, some offer payment calculators, trade-in appraisal tools and other applications that help facilitate the purchase process. But, to date, most of these applications do little to help customers put themselves into the car and the deal. Instead, they are often viewed by dealers as a means to generate a lead and an appointment in the showroom, where the real deal-making begins.

I like how Mike Burgiss, CEO of MakeMyDeal, describes this shift for dealers. He calls it “Connection Commerce, not shopping-cart eCommerce,” where dealers offer a way for consumers to self-guide their purchase experience online.

“Selling cars has, and always will, be a relationship business. But the relationship today has to start differently, with the dealer effectively ‘going first’ by offering payment options and a complete set of deal terms without catches or conditions,” Burgiss says. “We find that when dealers ‘go first,’ they make a connection with customers. In turn, the customers give back by sharing their car-buying story and situation in a more honest and direct way. This connection also translates to faster in-store transactions and a better buying experience.”

Looking ahead, it’ll become increasingly important for dealers to become more transaction-focused in their online strategies. Those who make this strategic shift first will be best positioned to reap the biggest rewards.

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Three Pointers To Right-Size Your Springtime Inventory

Dale Pollak — Wed, 11 Mar 2015 21:40:37 +0000

Earlier this morning, I heard a robin singing outside our house.

I listened a bit and smiled. The robin’s basically making his play for the summer. Hopefully, his song will attract a suitable mate. They’ll start a family and we’ll have a few more birds around here.

But it also occurred to me that the robin’s efforts to woo a mate are similar to a temptation dealers face as spring approaches: Should I beef up my used vehicle inventory to set the stage for a strong selling season?

In fact, I received an e-mail the other day from a used vehicle manager who’d just started at a Buick/Cadillac/GMC dealer in the Midwest. He wanted my advice on how best to increase his inventory from 80 to 110 units to help drive his sales volume in the coming months.

I offered three pointers that I believe are relevant for all dealers as their instincts urge them to stock up inventory for the spring:

1. Examine your current turn. I asked the manager for the department’s current inventory turn, which runs about seven times per year. I then stressed that adding more units to this level of inventory velocity would only exacerbate an existing problem: He has too many aged vehicles on the ground today. Adding more inventory would only make it more difficult to get rid of these aged units and might, in fact, increase their number.

I told the manager that he would need to endure some short-term pain (and heat from the dealer) as he cleaned up the mess left behind by the prior manager. This clean-up effort, I advised, would expose retail and wholesale losses that, while painful, are necessary as a first step toward achieving the 12-times inventory turn benchmark.

“I understand, Dale,” he says. “My inventory must be clean before I can run lean and mean.”

2. Know your true capacity. A decision to increase used vehicle inventory, and maintain a minimum 12-times annual inventory turn, means more work across the dealership. More cars to acquire. More cars to recondition. More cars to photograph and merchandise online. More cars to price and promote. More cars to efficiently retail with customers. More deals in F&I.

Furthermore, all of the additional work must be done in a timely fashion—or you risk turning the additional inventory into your first wave of aged units.

For all of these reasons, I advise dealers to build inventory levels based on an honest assessment of what your dealership can efficiently manage. In most cases, this assessment translates to decisions to add inventory in three-, five- or seven-car increments, and adding more only as the dealership’s capacity remains consistent.

3. Prepare to stay the course. More cars in your inventory means more risk from setbacks—whether they come from internal factors (as noted above) or external factors, like a decline in consumer demand and sales due to weather, an economic change, etc. It’s often tempting for dealers to use such setbacks, particularly if they involve pressure from the dealer to increase front-end gross profits, as excuses to slow their inventory turn.

When these situations occur, I advise managers to do their best to maintain the minimum 12-times/year inventory turn benchmark. A slower pace may satisfy a dealer’s desire for increased front-end gross profits, but it will cause the number of aged units to grow—possibly setting the stage for another painful inventory clean-up effort.

In addition, a slower pace of inventory velocity diminishes any efficiency gains you might achieve across all dealership departments, and saps the “total gross” opportunity the added inventory is supposed to create for everyone.

Ultimately, dealers and used vehicle managers should recognize that the decisions they make about inventory today, as spring approaches, will have the same impact as the decision the robin outside my window makes about its mate: If you get it wrong, it’s going to be a difficult and potentially painful spring and summer.

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3 Ways Efficiency-Focused Dealers Will Gain Advantage In New Vehicles

Dale Pollak — Tue, 10 Mar 2015 13:21:36 +0000

It’d be safe to bet that 2015 will be a good year for dealers.

The forecasts are rosy: The consensus among analysts is that dealers will likely retail around 17 million new vehicles this year, a tally the industry hasn’t seen since 2006.

Generally speaking, you could say that all boats will rise for dealers as the tide of new vehicle sales continues to swell.

But some dealers will do a lot better in this positive retail environment than others.

Their advantage will come from two primary factors. First, these dealers will work hard to claim their fair share, if not more, of increased new vehicle market share and sales volumes. But more importantly, the dealers will also deploy an operational strategy that emphasizes efficiencies to increase the margin they make on the sale of every vehicle, and help them sell more new vehicles in less time.

I believe this efficiency-focused strategy will provide a keen competitive advantage for dealers who adopt it. That’s because these dealers will be proactively managing the market forces—such as increased factory incentive spending, a higher level of pricing transparency, and a greater hunger among dealers to sell more new cars—that continue to compress the profit margin potential on every new vehicle.

The efficiency-focused dealers tend to apply this strategy to three key areas of their new vehicle operations to maximize sales and margins:

Stocking new vehicle inventory: The dealers base stocking decisions on market data that instantly shows the vehicles on the ground in their markets, and the specific cars/colors/configurations that buyers want the most. With these competitive insights, the dealers gain inventory and margin efficiencies as they consistently acquire vehicles that will sell quickly and pose less, if any, risk from interest expense.

New vehicle pricing: The dealers understand that most buyers are at least aware of the fair market asking and transaction prices, given the time they typically spend online to figure them out. By applying this knowledge to their new vehicle pricing online, dealers gain a larger share of interested buyers because asking prices fit their expectations for a deal. In many ways, the emerging science of market-efficient new vehicle pricing follows the same principles dealers have applied in their used vehicle departments.

New vehicle purchase process: When dealers stock the specific new vehicles buyers want, and offer prices the market validates as fair and reasonable, a good thing happens in the showroom: It’s a lot easier to come to consensus with customers on a deal. Efficiency-minded dealers apply this reality as they reinvent their sales processes to minimize discounts and negotiations, and shrink the time it takes to close a deal. The dealers view such sales process overhauls as necessary to maximize their front-end profit margin and the productivity of individual sales associates, while making it more easy and efficient for customers to purchase cars.

Some progressive and tech-savvy dealers are going even further in their efforts to make purchase processes more efficient. They are changing their websites and new vehicle listings to make both more transactional, rather than informational, in nature. The end goal, of course, is to facilitate the efficient purchase of a vehicle while maximizing the margin on every sale—gains that flow, in part, by allowing technology and tools to perform elements of a transaction that have traditionally been handled by highly paid personnel in the dealership.

It should be noted that dealers making these efficiency-focused operational changes are doing so at a time when they really don’t have to. They could simply continue doing business as usual and close out 2015 with decent results in their new vehicle departments.

But decent isn’t good enough for these efficiency-focused dealers, which is why I think they’ll have a better year than their less-efficient competition.

The post 3 Ways Efficiency-Focused Dealers Will Gain Advantage In New Vehicles appeared first on Dale Pollak.

Nagging Doubts About Net Neutrality

Dale Pollak — Tue, 03 Mar 2015 18:28:00 +0000

Several dealers have asked me for my take on the Federal Communications Commission (FCC) vote last week to treat broadband Internet providers like utilities.

First, I’ll note that I’m not the most impartial observer. My employer, Cox Automotive, is owned by Cox Enterprises, which provides broadband services through its Cox Communications division. I’m not involved in the broadband business, but it’s important that dealers recognize the relationship.

Second, I’ll share that the FCC’s action seems a little bit like a solution looking for a problem. I may be a bit naïve and uninformed on these matters, but I didn’t realize that there was anything fundamentally wrong with the ways broadband companies provide their services to consumers. I can certainly recognize the potential for problems, but I’m unaware of any that would justify the FCC’s action.

Third, I’m concerned about the FCC—or any government agency, for that matter—regulating Internet traffic. The specifics of the FCC’s regulation haven’t been published, which makes it difficult to predict future consequences. But I, like others, can’t help but question that such governmental oversight may well create unintended consequences that prove detrimental to both businesses and consumers.

As the FCC’s regulations become public, it’ll be important for everyone to pay close attention, and make their views known to elected officials. This will be especially true for dealers, for whom the Internet has become the primary pipeline today’s customers use to buy, sell and service their vehicles.

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A Unique and Wise Industry Voice Goes Silent

Dale Pollak — Mon, 02 Mar 2015 20:08:19 +0000

I heard the news last week about the sudden passing of Art Spinella, head of CNW Marketing Research, from congestive heart failure at the age of 68.

Spinella had a unique view of the industry, and his monthly reports about vehicle buyer preferences and market supply/demand dynamics in new and used vehicles were must-reads for me.

To the best of my knowledge, Spinella’s business and influence didn’t result from a lot of promotion. Instead, it grew and sustained on the strength of his innate curiosity about the car business and the insights he published every month. Not surprisingly, these were also the reasons automotive journalists kept Spinella as an A-list source for their stories.

I didn’t know Art all that well. But through our conversations over the years I came to respect him as a person—a super-smart guy devoted to his family, a loyal fan of the Chicago Cubs (no matter their win/loss record), the author of a series of detective novels and an avid Harley-Davidson rider.

I also gained a deep appreciation for Art’s encyclopedic knowledge of our industry and its history, his early-on understanding of the ways technology would transform the automotive industry and his ever-present journalist’s desire to sniff out stories others might easily overlook.

Rest in peace, Art. You will be missed.

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Feds Step Up Retail Automotive Financing Inquiries

Dale Pollak — Fri, 27 Feb 2015 23:08:30 +0000

Most dealers are aware that the federal Justice Department is paying extra-close attention to the ways and means of automotive financing.

This week brings more news of the department’s interest in potential racial disparities in retail loans among captive and non-captive lenders, with J.P. Morgan Chase acknowledging it’s also been asked to provide regulators details on its lending practices and standards.

In addition, a Justice Department official says the agency is also concerned about the growing trend of auto loan securitization. A Bloomberg news report says this investigation follows Justice Department concerns that the rapid rise of auto loan-backed securities could lead to deceptive, discriminatory and fraudulent practices that marked the build-up and bursting of the mortgage-backed securities market a few years ago.

I was particularly struck by the official’s characterization of the inquiry’s decidedly proactive nature. “We can and should use our experience investigating mortgage-backed securities to be on the lookout for, and head off, any potential threat, rather than waiting until after losses have been suffered,” the official says.

I know a few dealers who feel insulted by the distrust that’s inherent in the Justice Department’s auto securitization inquiry. “We dot every ‘i’ and cross every ‘t’ in our F&I offices,” says the head of a dealer group in the Northwest. “We’d be out of business if we tried to pull the kinds of stuff mortgage brokers got away with. It’s off-putting, to say the least, that dealers don’t seem to be getting any benefit of the doubt.”

It’ll be interesting to see if anything substantial comes from the Justice Department’s query. In the meantime, it’d be wise for dealers, particularly those who’ve come to over-rely on F&I income to drive dealership profitability, to mind another quote the Justice Department official offered, “We shouldn’t wait until there is a crisis to pay attention.”

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Memories From The Mountain Carry On

Dale Pollak — Fri, 13 Feb 2015 22:05:38 +0000

I just received more photos from my recent No Barriers ski adventure with Erik Weihenmayer.

Their arrival, via e-mail and a Dropbox link, reminded me of how far we’ve come since our family ski trips when I was a kid: You’d drop your film off at a local camera shop or drug store, and wait a week or more for word that your prints had arrived—hoping for the best.

The photos recharged the friendships and memories we made on the mountain, which have proved transformative in so many ways for me.

Ryan “Buck” Ross, who headed the production team that filmed and photographed our time at Beaver Creek, says he especially likes how many of the photos of me feature a smile. “I remember seeing you the first day, with a look of uncertainty as we got started,” he says. “After our first run, that expression changed to a smile that never went away.”

Here are a few images, taken by photographer Sean Boggs, from the trip:

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An Insight From Air Traffic Control Automation

Dale Pollak — Wed, 11 Feb 2015 17:13:10 +0000

I recently heard a National Public Radio story that sounds kinda crazy. In Sweden, they’re landing airplanes without the benefit of an on-the-ground air traffic controller.

The person who informs pilots of local wind/other conditions sits in a tower 100 miles away. But thanks to a sophisticated camera/sensor system, he’s apparently got a reliable bird’s eye view of the airport, and so far the technology-driven remote guidance is working well.

To be sure, this aviation innovation is occurring at a rural airport, where flights are far less frequent than Midway or O’Hare in Chicago.

But, even so, I couldn’t help but think: If the Swedes can land an airplane full of people without an air traffic controller sitting next to the runway, don’t you think it’s feasible that a dealer can buy a car without standing next to it in the auction lane?

I understand why some dealers resist buying cars sight-unseen. There’s definitely a greater risk, and there’s always merit to seeing, smelling and touching a car before you buy it.

But the best-performing used vehicle dealers I know rely on buying auction cars online. They’ve found such purchases are necessary to reduce costs, increase efficiencies, keep managers in the store to work deals and maintain an aggressive throughput of retail units.

These dealers also tell me that the online purchase/delivery/as-needed arbitration processes work pretty well. There’s less risk for buyers than there used to be, and auction companies recognize their reputations increasingly rest on proving that dealers can trust their online marketplaces to acquire needed inventory.

Again, I recognize that some dealers may never be comfortable with the way new technologies are changing the business. But I would suggest they consider that if pilots trust themselves and a planeload of passengers to technology, maybe it’s time to put the fears of buying a car online to the test.

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Rethinking The Problem Of Serving Subprime Customers

Dale Pollak — Fri, 06 Feb 2015 14:39:56 +0000

Industry analysts estimate that subprime customers account for about 25 percent of used vehicle financing deals in the past year.

With this stat as a backdrop, many dealers are eyeing the subprime segment in the current year as they extend their goals for used vehicle market share and sales.

To achieve this goal, some dealers have charged their F&I departments with doing a better job of getting more subprime customers “bought” by lenders. In some cases, this means re-upping efforts to work with a wider array of lenders who specialize in subprime financing deals.

But I would submit that dealers who solely look to F&I for increased subprime success are missing the bigger picture. In fact, the difficulties dealer’s encounter in subprime often owe to shortcomings in their used vehicle inventory management and sales processes—not the F&I office.

I’ve come to this understanding after many discussions with dealers about their difficulties serving subprime customers. In most cases, the dealers have not made subprime-worthy vehicles a priority as they acquire used vehicles via the auctions or trade-ins. In addition, the dealers have not provided their sales teams with the ability to efficiently and effectively match subprime customers to vehicles that will satisfy lenders.

With subprime inventory acquisition, dealership appraisers and buyers need to be aware of exactly how far “back of book” they need to purchase vehicles to fit subprime lending parameters. Without this knowledge, it’s no wonder that dealers have difficulty getting subprime customers “bought” in the F&I office, because the cars weren’t acquired with an emphasis on a subprime-oriented exit strategy.

Similarly, every dealer knows the frustration that follows a sales associate working with a customer to select, test drive and work up a deal, only to learn the customer’s in the wrong car due to their credit and financial position.

The good news is that dealers now have technology and tools to help them address both the inventory acquisition and sales process challenges. These tools can arm your appraisers and buyers with the lender parameters to instantly know if a used vehicle acquisition makes sense as a subprime unit or not. Similarly, the tools can give your sales associates instant access to a list of subprime-eligible vehicles in your inventory when they determine a customer really should be financed through a subprime lender.

Of course, your sales associates also need to know how to effectively assess a customer’s budget and payment needs early in your sales engagement process, and use those findings to align customer expectations with available financing and vehicle options.

But when dealers correctly address the subprime inventory acquisition challenge, and properly match subprime customers to the correct cars, they typically find that the F&I office has little, if any, difficulty getting deals “bought.” Likewise, the dealership will be better able to use its ability to serve subprime customers as an avenue to achieve its goals for expanded used vehicle market share and sales.

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A Different Kind Of Ski Lesson: A No Barriers Approach To Business

Dale Pollak — Mon, 02 Feb 2015 20:39:04 +0000

I’m still reliving and re-appreciating last week’s No Barriers ski adventure in Beaver Creek, Colo.

Over the weekend, as I was replaying the experience in my mind, I found myself asking questions again and again: Why did the entire experience feel a little like magic? What made this adventure so special, beyond giving me the opportunity to live my dream to ski again? And, why couldn’t every day in business feel as good as the ones we shared on the mountain?

These questions came up for a couple of reasons:

First, the trip had a clear business objective. Blind adventurer Erik Weihenmayer has inspired the Cox Automotive leadership team to embrace his No Barriers philosophy as a way of doing business. The opportunity for me to join Erik in Beaver Creek is but the first sign of this commitment, and we had a film crew on hand to chronicle our adventure and create a documentary that might inspire and drive innovation throughout Cox Automotive.

Second, even though we were there to work and achieve a business objective, it didn’t feel like work at all. That’s no small feat considering our group had nine people (including two blind guys), going up and down the mountain all day long, and we couldn’t get any work done unless and until we were sure everyone was always safe. Our film crew and guides deserve incredible props for making the work feel effortless and fluid. The crew would essentially hop-scotch down the mountain on snowboards, setting up cameras and tripods up ahead to film our descent. As we passed, they’d pack up and film us as they raced to set up the next shot. All the while, the guides relayed our progress and helped the crew pick shot locations that fit the pitch of the slope and our skiing abilities. I’m still amazed at the artful nature of this complex, coordinated choreography.

On top of all that, there were a myriad of other logistical details—getting breakfast and gear in the morning, making it up to and off of lift chairs, coordinating hotel rooms and transportation, etc. Put simply, a lot could have gone very wrong. But nothing did.

Third, our group started as mostly strangers. Some of us knew each other, but we’d never worked together before. Yet, we functioned as a cohesive, tight-knit group for three days. I now understand why this previously disconnected group proved to be the perfect cast for our trip. Each individual had his own personality and special talent, both of which circumstances called upon at some point. No one complained or hesitated when his turn to set up arrived. No egos got in the way when someone else’s suggestion proved to be the best idea. My friend and protector, dealer Brian Benstock of Paragon Honda, aptly observed, “The worst guy on this team is a great guy.”

Finally, we had a highly successful trip without much advance planning. The trip itself came together in roughly a week’s time. Our group only met once, on the night before our first day, to plan the following three days. Everyone quickly understood our mission and objectives, and then we went to work. On the mountain, we made decisions on the fly, trusting the instincts, judgment and talent of each team member to execute his responsibility and role. We assessed our progress and adjusted course in the moment, focusing on the challenge ahead while heeding lessons learned from behind. In many ways, our largely improvised experience turned out to be harmony on the hill, with the radio chatter of our film crew and guides providing the melody.

As I continue to reflect on how my “No Barriers” experience might translate to Cox Automotive and dealers, I’m reminded of the great things that happen when you assemble the right people, commit to a shared mission and empower each individual to perform to his/her potential.

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Time To Give Thanks For A Life-Changing Gift

Dale Pollak — Fri, 30 Jan 2015 19:59:21 +0000

Our final day here at Beaver Creek started as soon as the slopes opened. It’s been another picture-perfect day on the mountain, with mild temperatures, plenty of sunshine and relatively uncrowded runs.

As I rode the lifts today, I couldn’t help but feel an overwhelming sense of gratitude for the opportunity to take part in this life-changing experience with blind adventurer Erik Weihenmayer. It’s a gift that ranks among the most precious I’ve received in my lifetime.

There are a lot of people who merit a public thank-you for making my adventure in Beaver Creek possible:

Our ski guides. Jeff Ulrich and Rob Leavitt truly are the “secret sauce” that enables two blind guys to repeatedly and successfully ski black diamond slopes. Both are top-shelf individuals, the kind who would sacrifice themselves if it meant keeping us safe. They also lead interesting lives—Jeff is a golf pro in Colorado Springs, and Rob is a ski instructor at Aspen and councilman for the nearby city of Basalt.

Our can-do creative crew: We had two guys from Boulder-based Buck Ross Productions—Ryan “Buck” Cross and Matt Silton—filming us as we rode the mountain. They seemed to defy gravity on their snowboards as they shot in front of us, behind us, off to our sides…their movements reminded me of ballet, except these two were heading backwards down the mountain at 40 miles an hour.

Our Cox Automotive leadership, support teams. I owe much to Cox Enterprises executive vice president Alex Taylor and CEO John Dyer, as well as Sandy Schwartz, head of Cox Automotive. They instantly embraced the idea of adopting Erik’s “No Barriers” approach to life and business within our organization, and they encouraged me to join Erik here in Beaver Creek this week. I’m also indebted to Cox Automotive’s events team, including director Christina Zara and senior event planner Thais Toro. They provided invaluable support in arranging our activities and accommodations.

Our ski group. I’m grateful that Alex Taylor, dealer Brian Benstock of Paragon Honda and Lou Laste from Cox Automotive’s PR team could join us. In particular, I’m especially thankful to know that Brian Benstock always had my back on the mountain, helping steer others clear of a blind guy who’s rekindled a need for speed on the slopes.

Our inspiration. I’ve never met anyone like Erik Weihenmayer, and I’m ever-thankful that our paths crossed, and we had the opportunity to be and ski together this week. I also owe a great thank-you to Erik’s assistant, Skyler Williams, who has that behind-the-scenes knack to make things happen, often before anyone else knew they would be needed.

I’m looking forward to seeing how our “No Barriers” experience in Beaver Creek will serve to inspire others throughout the Cox organization and beyond in the coming months.

In the meantime, I’m heading back to my skis. We just finished lunch and Erik said, “I’m exhausted. Let’s take it up a notch.”

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Trust, Teamwork And Inspiration At 11,000 Feet

Dale Pollak — Fri, 30 Jan 2015 00:00:46 +0000

We’ve just wrapped up our first day of skiing at Beaver Creek. It’s been an incredible day that saw three key themes emerge.

Trust: After we got our gear, we drilled the verbal commands and cues our guides would use to help us ski safely down the mountain. We started on the blue, intermediate slopes to get familiar with the cadence and rhythm of listening for/reacting to our guide voices.

My ski legs came back pretty quickly. After a while, I could feel the vertical drop lines just as my guide called them out. It didn’t take us long to graduate to the black slopes, where I felt the euphoria and freedom of dropping into a line without fear. I’m told I hit 40 miles per hour a couple of times, which means I was flying.

Teamwork: My lack of fear came from total faith and trust in my guide, dealer Brian Benstock, who was at my hip the entire time, and the rest of our group, which included my fellow blind adventurer Erik Weihenmayer and his guide, Alex Taylor, executive vice president of Cox Enterprises and Lou Laste, senior director of public relations for Cox Automotive.

We worked the slopes together, with those of us who skied faster waiting for the rest of the group to catch up. Each of us kept an eye/ear out for the other—a collective commitment to each other that resulted in a day without any serious mishaps or injury, and a lot of laughing and smiling.

Inspiration: Every time I’ve heard or been with Erik, he effectively shows me a door that I can open and find inspiration on the other side. On the slopes, Erik demonstrated a higher level of skiing proficiency than I ever achieved when I was actually able to see. His skiing is both deliberate and fast—he actively seeks out moguls that most others would avoid.

In addition to his skill on skis, Erik offered a profound comment while we were on the chair lift. We were talking about why some people, like him, are able to overcome doubt and adversity, while others tend to languish.

Erik shared a Tibetan proverb that he first heard during a difficult stretch of his ascent to Mount Everest: “The nature of the mind is like water. If you do not disturb it, it will become clear.”

Alex also found our shared experience inspiring. About mid-way through the day, he called his mother to relay his experiences from the top of the mountain. He handed me the phone—yet another reminder that Cox Enterprises and Cox Automotive really are a family business.

As the evening turns to night, I must confess that I feel the age in my legs. But I’m looking forward to putting myself to the test again tomorrow, and making a truly moving and wonderful experience even better.

Finally, I have a personal request for all who are reading: Erik is a finalist for this year’s National Geographic Adventurer of the Year award. In true Chicago fashion, I would ask that you all vote early and often for Erik here, before the deadline arrives on Saturday.

Thank you.

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Anticipation Builds In Beaver Creek

Dale Pollak — Wed, 28 Jan 2015 23:51:10 +0000

I’m in Beaver Creek, at an outdoor bar at our hotel, near the fireplace. The smell of mesquite and the sounds of a band playing “Southern Man” by Neil Young fill the air.

It’s a perfect evening—a fitting set-up for what promises to be a memorable day on the slopes tomorrow.

I’m joined here by my inspiration, Erik Weihenmayer, my good friend and dealer, Brian Benstock of Paragon Honda, and Lou Laste, from Cox Automotive’s public relations team.

Together, we begin our “No Barriers” ski adventure with Erik in the morning. It looks like we’ll have great weather and plenty of good snow.

I’m almost itchy with anticipation and, quite frankly, I’m a little worried that I’ll be able to sleep tonight.

But even if I toss and turn, I won’t mind. What’s a little lost sleep on the eve of a once-in-a-lifetime opportunity to make a dream come true?

https://www.youtube.com/watch?v=w33FVAlES84&feature=youtu.be

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A Used Vehicle Challenge: Increasing Your Share Of Subprime Deals

Dale Pollak — Tue, 27 Jan 2015 18:17:07 +0000

In 2014, CarMax started using its own finance company to book deals from subprime customers, rather than work the deals through other lenders.

During a recent quarterly conference call, company executives say they haven’t seen “anything negative” from the in-house subprime financing test, and they expect it to continue as planned.

The CarMax effort is yet another sign of the growing importance for dealers to properly serve credit-challenged used vehicle customers. Industry analysts estimate as much as 30 percent of today’s used vehicle finance deals go to subprime buyers.

The key question for dealers: How well are you handling this important segment of the business?

As I talk with dealers, the answer I get to this question is usually some form of “we definitely could be doing better.”

Dealers who understand the subprime opportunity have already recognized the need, like CarMax, to align their stores with lenders who specialize in financing subprime deals. Beyond that, though, there are typically two larger challenges:

1. Acquiring the right subprime inventory for your market at the right price. Achieving this imperative means three things—identifying the exact vehicles that fit subprime lender criteria, recognizing an auction or trade-in vehicle’s subprime potential when you appraise it, and purchasing these cars sufficiently “back of book” to ensure lender approval and your profit margin.

2. Efficiently matching subprime customers and cars. Dealers estimate they may miss 15-25 deals a month due to either lacking the inventory for a subprime customer, or failing to get customers “bought” in the F&I office. Dealers will be able to solve the first problem by using technology and tools to incorporate an emphasis on subprime vehicles as part of their inventory acquisition and management strategy, as noted above.

I would also submit that dealers can address the problem of getting subprime deals “bought” in F&I by doing a better job matching subprime customers to the correct cars early on in the sales process. If sales associates had a list of subprime-eligible vehicles at hand as they discuss a potential purchase with a subprime customer, there would be fewer instances when F&I managers would not be able to book deals with lenders, far less frustration and more completed sales.

I recognize that many dealers have traditionally shied away from the subprime business due to these difficulties, as well as volatility among subprime lenders themselves.

However, as CarMax notes, lender behavior has been consistently “stable” since the market correction and the number of credit-challenged buyers represents a sizable, if not growing, segment of the used vehicle business.

One could argue that these conditions represent the “new normal” for retailing used cars and create an opportunity for dealers who seek to increase their share of retail sales in their local markets.

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An Opportunity To Rekindle A Lost Love, And Live A Dream

Dale Pollak — Tue, 27 Jan 2015 14:11:44 +0000

For at least the last 15 years, I’ve had a recurring dream.

In the dream, I’m flying down a steep mountain slope, my skis cutting picture-perfect arcs in fresh powder. It’s just me, the mountain and a rush of adrenaline as I go faster and faster.

Then I wake up. The feeling of euphoria fades to frustration as I realize it’s just a dream and I’ll never really be able to ski like that again.

I first fell in love with skiing as a child. My family would go to Pines Peak in Valparaiso, Ind., where my brothers and I learned the basics of the sport. As we grew older and got better, we would head west every winter to Colorado and Montana. Some of my fondest family memories come from the time we spent in Vail Village, reliving our day on the slopes and planning the next day’s runs.

It was tough when my eyesight deteriorated to the point where I had to give up skiing. My family still went out west, but I had to bide my time at the lodge, wishing I could get back out there.

Well, thanks to Cox Automotive, it looks like I’ll have my chance later this week. I will be joining an extraordinary person, Erik Weihenmayer, who’s also blind, for a ski outing in Beaver Creek, Colorado. Erik’s got a long list of achievements, including being the only blind person to successfully reach the summit at Mount Everest.

Our ski adventure took shape following Erik’s inspirational speech at last month’s Cox Automotive annual meeting. He spoke of how he and his organization help others live a “No Barriers” life—a concept the leaders at Cox Automotive have embraced as an imperative for themselves and the entire family of Cox employees.

To say that I’m excited for the opportunity to personally apply the “No Barriers” mindset on the ski slopes and rekindle my love for skiing would be an understatement. It’s really a dream come true. I can’t wait to once again feel the euphoria, freedom of movement and sense of achievement that skiing provides—feelings that, for me, only arrive in my dreams.

I’m planning to share what promises to be a life-changing experience here on my blog and beyond. Stay tuned and wish me luck!

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NADA Day 4: Dealers Depart, Big Themes Emerge

Dale Pollak — Mon, 26 Jan 2015 20:20:42 +0000

It got quiet pretty early at the final day of NADA 2015 in San Francisco.

Word of bad weather out east prompted many to catch earlier flights back home and it was the final day of NADA, when pretty much everyone’s feeling the effects of three full and productive days and looking forward to getting back to their dealerships.

But the relative dearth of dealers afforded me time to reflect on the bigger themes that emerged during this year’s event:

A shift in online strategy. As I talked to dealers and other vendors, it’s become increasingly apparent that dealers’ marketing and vehicle merchandising online, across their own and third-party websites, is undergoing a transition from being largely informational to transactional. This strategic shift stands to reason: Dealers are catching up to other retail sectors where online purchasing has been the norm for some time. We’re still a ways away from start-to-finish purchases of vehicles online, but it’s fair to say that the rise of market-based pricing and online tools that facilitate many aspects of a vehicle purchase mark automotive retails initial steps into e-commerce.

A focus on fixed operations. Vendors selling service lifts, tire replacement/rotation equipment and car washes saw plenty of business during the convention—a sign that dealers are investing in fixed operations. The focus on fixed operations is a good thing. Dealers have long struggled to retain customers in their service departments, where the margin on every dollar earned is larger than in either their new or used vehicle departments. Les Abrams of NADA’s Dealer Academy notes that top-performing dealers say a 31 percent increase in their customer pay labor hours in 2014. The gains flowed from tactical changes such as extended service hours and online marketing campaigns that give customers good reasons to visit the dealership for vehicle maintenance and other work.

Troubling business fundamentals. Over the past couple days, I’ve noted the ongoing challenges margin compression and new/used vehicle supply volatility will create for dealers. In addition to these concerns, I would add the prospect of higher interest rates and the seismic change in gas prices.

On the former, dealers have been blessed with an unprecedented run of record-low interest rates, a good thing for retailers who typically borrow a lot of money. Most signs point to a rise in interest rates in the coming year, which will require keen attention from dealers to maintain the profitability they want to achieve.

With gas prices, dealers may well find themselves on the short end of the stick. Manufacturers have invested hundreds of millions of dollars to produce ever-more efficient vehicles that may well fall flat with buyers who, in light of falling prices at the pump, see no reason to look past the gas guzzling vehicles they really want to buy.

As one dealer put it, “it’s only a matter of time before one of these shoes drops and we find ourselves in a pickle.”

Like it does every year, leaving NADA stirs a mix of emotions—a bit of melancholy that our industry’s single-best event has come to a close, and a renewed sense of mission and purpose to serve dealers in the months ahead.

Thank you to all the dealers who stopped by the vAuto booth, and a special thank-you to the entire vAuto team at NADA, who demonstrated once again why they are the best in our business.

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NADA Day 3: A Great Start And An Even Better Finish

Dale Pollak — Sun, 25 Jan 2015 17:51:45 +0000

I started today with a memory that makes me smile.

Before the exhibit hall opened, Mike Burgiss, the CEO and architect behind Cox Automotive’s new MakeMyDeal application, handed me a sticker.

The sticker’s a reproduction of napkin he’s kept in his pocket since a conversation two years ago at NADA in Orlando. Mike had asked me to help him brainstorm a new product that might help dealers work deals with customers online.

We talked about the fundamental friction between dealers and customers in the purchase process. Dealers want to maintain control of a deal’s elements and information, while customers need a greater level of information transparency and, in some cases, they want to work the deal themselves if they could.

We concluded there had to be a way for these competing needs to converge. Mike sketched the intersection point on a napkin—a drawing that has provided the inspiration and guiding principles as the MakeMyDeal too has come to life.

Mike tells me they’ve had a strong debut here at NADA, with dealers signing up to use MakeMyDeal and provide a different, more efficient and satisfying way to help customers purchase cars from online vehicle listings. I’m excited to see the results dealers will be able to achieve with this product.

A few minutes after Mike stopped by, a team from NADA came to vAuto’s booth to give us a “Best Booth” award for mid-sized companies. The award goes to exhibitors who combine branding, creativity and design in the most compelling way.

The award validates all the great work vAuto’s partner, The MX Group, and our marketing team put into creating our company presence at NADA. On a more personal note, however, the award makes me think of our first official exhibit at NADA just eight years ago…where we had little more than a couple of laptops and a banner in a space that seemed the size of a phone booth.

Both experiences proved to be a very positive way to start what became a very good day. Here are a couple nuggets from my time on the exhibit floor with dealers:

Buying vehicles online: Several dealers talked about how they had seen greater success in used vehicles after they more fully embraced acquiring/selling wholesale used vehicles via online auctions. One dealer confirmed that some dealers’ fears about online vehicle purchases are over-blown. “There’s actually more protection for dealers buying online than you get in the lane,” he says.

An inspirational quote: Mike Porro, vice president and general manager for Sam Swope Honda World in Louisville, shared his strategies for incorporating tablets in his sales process at the dealership, which has helped cut transaction times and make a smaller sales team more productive. He also offered this quote: “You can make an excuse or make a change. Only one of them will make a difference.”

The strength of Certified Pre-Owned (CPO) vehicles. Several dealers shared positive stories about their experience retailing CPO vehicles in the past year, and wondered how the segment will fare in the coming year. I relayed that it’ll be more challenging to manage margins amid the expected rise in off-lease units. But I also believe CPO programs have come of age and consumers now recognize that a CPO badge can ease their No. 1 worry that they’ll buy a bad used car.

After the exhibit closed, I had the honor and privilege to attend a Germain Motor Company vendor appreciation event. Once again, Steve Germain, John Malishenko and the entire Germain team demonstrated that success in our business has been, and will continue to be, built on the strength of family and relationships.

See you all on the exhibit floor on Sunday.

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NADA Day 2: A Good Year For Dealers Shows On The Exhibit Floor

Dale Pollak — Sat, 24 Jan 2015 16:37:08 +0000

It’s easy to tell that dealers had a good year in 2014.

I lost count of the number of time dealers told me they set sales and profitability records in their used vehicle department last year, thanks to their “all-in” adoption of Velocity management principles. Such success was also apparent as you walked the exhibit floor at NADA—dealers were in the aisles from “bell to bell,” looking to invest in products and solutions that would benefit their businesses.

Like other vendors here, the vAuto booth was bustling all day.

Dealers took particular interest in the new Subprime Booking module for our Provision system. As one dealer told me, “We’re making customers with marginal credit a bigger priority because we have to. We see more of them all the time.”

I was also pleased to see a high degree of interest in Conquest 2.0, vAuto’s new vehicle inventory management and pricing system, as well as vAuto Genius Labs’ new Kelley Blue Book® Price Advisor Report for new vehicles. This interest reflects a growing understanding among dealers that pricing and product transparency are becoming ever-more important strategies to maximize new car sales and profitability—even as the year ahead promises a higher level of sales volumes than we saw in 2014.

But amid the bullish and buoyant mood on the exhibit floor, I encountered a few gray, if not dark, clouds. These clouds came in my conversations with reporters from industry and mainstream news organizations. Collectively, the reporters were curious about three topics:

1. Imbalances in new/used vehicle supply and demand. The reporters’ inquiries here could be boiled down to a single question: “How long can the good times for dealers go on?” I shared my view that while increased supplies of new and used vehicles will pose challenges, dealers will do just fine provided they counter the inevitable demand and pricing volatility by striving to consistently retail the best-selling vehicles for their markets in the most customer-centric and profit-efficient manner possible.

2. Margin compression. The reporters correctly noted that while dealers are selling new and used vehicles at higher transaction prices, their front-end gross profits are roughly the same. I agreed that this ongoing dynamic is a clear sign of margin compression, and I offered that it can be difficult for dealers blessed with rising sales volumes to truly feel the effects of this profit pressure. But I also noted that many dealers proactively address this challenge by adopting more efficient, technology-enabled processes to sell vehicles in a less cost- and time-intensive manner to mitigate the effects of margin compression.

3. Future operational challenges. One reporter’s queries went beyond new/used vehicle sales and probed other areas of dealership operations that might prove challenging in the months and years ahead. In my response, I drew from my conversations with dealers who indicated they plan to increase customer pay work and retention in their service departments, part of longer-term strategy to offset margin pressures in other dealership departments. The reporter also asked about the federal scrutiny of F&I regulations, which I suggested would be most problematic for dealers who over-rely on this income amid profitability challenges in other areas of their business.

All in all, the opening day for exhibitors here at NADA proved both inspiring and instructive. I can’t wait to continue my conversations with dealers and see what Saturday will bring.

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NADA Day 1: The Birth Of Cox Automotive And Its Promise To Dealers

Dale Pollak — Fri, 23 Jan 2015 04:17:38 +0000

It’s been a busy first day here at NADA in San Francisco. I’ve spent much of my day huddled in meetings with the various teams that make up Cox Automotive.

The focal point of the meetings has been to make sure everyone—from AutoTrader.com, Haystak, Homenet, Kelley Blue Book, Manheim, vAuto, VinSolutions and Xtime—is ready to share the Cox Automotive story with dealers when the NADA exhibit hall opens tomorrow.

This story is pretty special. It’s about our collective opportunity at Cox Automotive to serve dealers better, and to do so in more integrated, seamless ways that no other company in automotive retail can offer.

At a very high level, the story is about a strategy to offer “separate and connected” solutions to dealers that help them become more efficient, effective and profitable as retailers.

The show floor tomorrow will offer dealers the first opportunity to see what this “separate and connected” story means on practical level. Here are just some examples:

vAuto/VinSolutions integration: We’ve connected our Provision system to VinSolutions’ VinConnect CRM. The reason: Dealers need instant access to current customer insights from the CRM as they look for inventory, and price the used vehicles they already own. For example, it’d be good for a dealer to know, before a price change, if the vehicle’s been test-driven in the past few days.

vAuto/Kelley Blue Book®: Tomorrow marks the official introduction of the Kelley Blue Book Price Advisor Report for new vehicles. This tool gives you the opportunity validate your asking prices on every new vehicle listing—a first step to building confidence and trust with today’s price-smart buyers.

MakeMyDeal: It’s unusual for a big company like AutoTrader.com to incubate a brand new business, but that’s the backdrop for MakeMyDeal. This innovative and unique solution gives dealers a way to “work deals, not leads” online, right from a VDP, on AutoTrader.com and dealer websites from VinSolutions, as well as a host of other providers.

Manheim/Homenet: This alliance gives dealers the opportunity to list a used vehicle online—with photos and descriptions—within minutes of its purchase at an auction. It’s too early to say how this benefit might reduce a dealer’s days in inventory metric, but there’s no doubt it’ll help used vehicle managers put pressure on service departments that aren’t moving fast enough to recondition cars.

I’m excited to see the curtain rise on exhibit hall floor tomorrow. It’ll mark the official public debut of the Cox Automotive story, and I think dealers will be encouraged to see what a collection of best-in-class solutions can do to help our industry.

I’ll be spending a lot of time at the vAuto booth (#1718S). I look forward to seeing you there.

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3 Beacons To Guide Dealers At NADA 2015

Dale Pollak — Wed, 21 Jan 2015 17:33:19 +0000

I’m pumped for this year’s NADA convention in San Francisco.

Like other dealers, I regard NADA as pretty special. It’s a one-time opportunity to meet with many of my dealer friends from across the country in person. The convention also provides a wealth of ideas and insights to apply in the coming year.

It’s easy to feel overwhelmed and worried at NADA. What if you miss something important? I fight this worry these days by doing my best to get more sleep and exercise during NADA than I used to.

But I’ve also found it helps to head into NADA with a handful of strategic beacons to illuminate all the convention offers and determine whether an idea or product really offers a good fit for your dealership. Call it a way to winnow the worthy from the worthless.

As I head to NADA, here are three beacons that I believe are relevant for all dealers:

1. The need for greater in-dealership efficiencies. It’s no secret that while most dealers have been blessed with rising new and used vehicle sales volumes, profitability per car has diminished. This reality owes to a variety of factors, including the ever-increasing influence of the Internet, volatility in vehicle pricing and valuations and the rising costs of doing business.

In this environment, dealers can continue to sell more vehicles but they won’t achieve maximum profitability, either on a per-car or total dealership basis, unless they pursue ways to provide sales and service to customers more efficiently.

If we look around at other retail sectors, the pursuit of increased efficiencies is everywhere. Executives understand that the sale of products and services in a highly competitive, price-sensitive retail environment is the final leg of profitability—your opportunity to maximize margin must occur before a transaction with a customer.

For dealers, the need for greater efficiencies should be a paramount consideration as they evaluate the array of ideas and solutions proffered at NADA. In my view, if a solution doesn’t help sell a car or serve a customer in a more cost-effective and efficient manner, it probably isn’t a good fit for today or the future.

2. The need to become more customer-centric. One of the most significant paradigm shifts for dealers is that today’s highly wired, technology-driven marketplace offers more insights about customer desires, wants and needs than ever before. These insights can and should inform virtually every aspect of your business, from the new/used vehicles you choose to stock, to the way you present these vehicles for sale online, and to the processes you employ as customers come to you to buy or service vehicles and leave your dealership.

In this environment, it seems to me there are few “fresh ups” on the showroom floor or service drive any more—after all, customers today typically engage your websites and call centers before they arrive. Similarly, it’s important for dealers to recognize that a customer’s satisfaction doesn’t end after a vehicle sale or service visit.

As dealers attend workshops and visit the exhibit floor, it seems critical that they look for ways to advance their ability to know and serve a broader array of customers in a manner that differentiates them from the competition.

3. The need to better serve and retain employees. Despite all the advances in our business, dealers still suffer from persistent turnover—a problem that often undermines their ability to become more efficient and serve their customers in the more me-centric fashion they desire. The sharpest dealers have already begun to reckon with this long-standing issue. They’ve adopted benefits packages, hiring/recruitment strategies, leadership training, pay plans and performance management models that, years ago, would seem ill-fitted to the realities of highly charged dealership operations.

Many dealers still believe the car business is different than other retail businesses and, in many ways, this remains true. However, few retail businesses suffer the productivity and profit losses that result from poor employee retention, and many dealers appear to accept these consequences as “the cost of doing business.”

This mindset will only, over time, hamper a dealer’s ability to profit and prosper in the years ahead—particularly as the next generation of employees want more from their work experiences than a paycheck. It’ll be no small challenge for dealers to understand what makes these employees tick, capture their interest in recruitment efforts and offer career paths that play to their passions.

Interestingly, NADA’s Human Resources workshop track addresses many of these employee recruitment and retention topics, and I won’t be surprised if the sessions see more dealers than they have in the past.

I hope these beacons prove useful for dealers heading to NADA in San Francisco this week and beyond.

I’ll be spending a lot of time at the vAuto booth (#1718S) and look forward to seeing you there, and sharing my NADA insights and observations here.

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3 Ways To Minimize Discounts And Improve Front-End Margins

Dale Pollak — Wed, 14 Jan 2015 17:53:46 +0000

If dealers compare their current front-end gross profit averages in new and used vehicles to similar data five years ago, you’d likely notice a troubling trend.

I’ve conducted this exercise with dealers recently as part of conversations about margin compression in automotive retail. In most cases, the analysis shows that front-end gross profits are pretty much what they used to be, if not even a little less, depending on a dealer’s franchise.

Likewise, the analysis often shows that front-end gross profit averages haven’t grown in tandem with rising transaction prices, which continue to climb in new and used vehicles as the best-selling cars often carry more equipment and special features than their less-popular peers.

The best dealers have come to terms with margin compression on two fronts in their new and used vehicle departments—their strategies for inventory management emphasize selling more units in less time to increase total dealership profitability through volume, and their processes for selling new and used vehicles aim to close common profit leaks that typically make the problem of margin compression only worse.

For this article, I’d like to focus on the second front. The following are three ways that dealers are changing their sales processes to eliminate lost profits that occur when their managers and sales associates discount asking prices and frequently give away more gross profit than they need to or should with customers.

1. Market-transparent pricing. This is the starting point for building confidence and credibility with today’s buyers. Thanks to their online research, customers know if your new or used vehicle price is decent and fair for the market. Dealers who align their pricing strategies to this higher level of customer price awareness find that their cars get more attention online, and retail in less time than dealers who have yet to fully embrace a transparency-minded pricing strategy.

2. A transparency-minded sales process. A growing number of dealers now start their in-store conversations with customers by explaining how and why they price their new and used vehicles to the market. This “documentation as negotiation” approach bucks traditional sales methods that steer price discussions to the final steps of the sale.

Herein lies a common disconnect: Dealers sometimes offer market-based pricing, but their in-store sales processes effectively pretend that the prices customers saw online don’t exist. Rather than diffuse a customer’s concerns about getting a fair price, this traditional approach often steels customers to negotiate—and sets up the fear among managers and sales associates that they’ll lose the customer unless they knock another $300 to $500 off the price.

Of course, a successful transparency-minded sales process needs careful oversight. This oversight should include measuring the discounts managers and sales associates offer on every new and used vehicle deal, and training them to avoid unnecessary give-aways of front-end margin. A benchmark: Dealers say they expect to see 70 percent to 80 percent of their new and used vehicle deals close at the asking price.

In addition, more dealers are now arming their managers with a “bottom price” for every new and used vehicle. That is, the managers know exactly how low they can go if necessary to complete a deal. As a Northeast Toyota dealer puts it, “my managers are really telling the truth now when they tell a customer, ‘this is it.’ The managers love it, and over time, they’ve gotten better at sticking close to our asking prices. In fact, I’m now planning to raise my ‘bottom price to help us increase our front-end averages even more.”

3. A pay plan that promotes transparency There are two hallmarks of the compensation plans dealers are now using as they work to minimize discounts and maximize front-end gross profits in new and used vehicles. First, dealers pay their teams on a per-unit, volume basis. Typically, the “real money” kicks in for sales associates after they sell 15 units, as the pay plans generally pay more per unit as sales associates sell more cars. Second, the pay plans include bonuses that reward managers and sales associates when they close more deals at the asking price—an incentive to stand behind the market-based pricing that attracted customers to a new or used vehicle in the first place.

Taken together, these efforts have helped dealers increase their average front-end margins in new and used vehicles by as much as $500 per car. In addition, these dealers see another benefit: Their customers like the experience, and they tell their friends.

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Our time together this week in Atlanta

Dale Pollak — Fri, 09 Jan 2015 21:17:15 +0000

Upon reflection of this week’s Annual Sales Event, I would just like to share some thoughts. First and foremost, I just want to let the entire field team know how much I appreciate your enthusiasm and support of our Cox Automotive mission. Your spirit and dedication was evident in every moment of our time together. I am continuously committed to the belief that all of you out in the field are Cox Automotive’s most valuable assets. You inspire me beyond belief.

Next, I want to congratulate Jared Rowe, Jim Menard and John Kovac for putting together and delivering what I consider to be, the best annual event that I’ve had the opportunity to attend since 2008. I thought the content and execution was just stellar.

We all must also take our hats off to the behind-the-scenes event coordination and marketing team members who flawlessly ran the event. Could you possibly have imagined any detail that was missed or anything that could have been done better? I can’t. Also, how about that personal address from Alex Taylor? How lucky are we to be working for a big family company like Cox that has participating family who are committed, hard-working and possessive of such good values. I believe that we work for the best company in America. It’s so rare that people are valued in a big company as they are here at Cox.

Finally, I just want to let you know that I had more fun and derived more inspiration in these few days than from anything else in the past year. It’s just a ton of fun being together with everyone, celebrating our success and sharing our vision and commitment for the future. I’m looking forward to working hard and having fun with everyone in the coming year.

Love and respect,

Dale

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5 Potentially Tough Conditions Dealers Will Face In 2015

Dale Pollak — Wed, 24 Dec 2014 18:05:43 +0000

I’ve been spending the past few days in budget and strategy sessions, planning for 2015.

The work has left me with a pretty clear conclusion: Things aren’t going to get any easier for dealers next year and, in some cases, the challenging horizon may prove too much for those who take too long to adjust to the changing new/used vehicle retail landscape.

This conclusion owes to five conditions that aren’t necessarily new, but they all seem to be gaining in momentum and scope:

Condition 1: Margin Compression. Most forecasters believe 2015 will see even more new vehicle sales than the estimated 16.5 million or so units that are expected to be sold in the current year. The forecasters also anticipate that factories will step up incentive spending (which is currently running near levels last seen in 2010) to spur retail demand and sales.

This is not a new phenomenon by any stretch, but dealers would be wise to remember the days of “profitless prosperity” that defined our industry not so long ago, when they were selling cars but making little, if any, money on the actual sale of a new vehicle.

If the more aggressive incentive spending comes to pass, it could also complicate, and potentially compress, used vehicle margins. This will be a bigger concern and risk for dealers who do not attune their used vehicle operations to the market—an operational strategy that helps them ride out the downstream volatility that occurs when factories chase market share with open checkbooks.

Condition 2: Increased Used Vehicle Supplies. The volumes of off-lease and -fleet vehicles are expected to climb higher in 2015 compared to the current year. The good news: Dealers should be accustomed to this trend, given our collective experience during the past year-plus. That said, the anticipated rise in supplies is accompanied by questions about a commiserate rise in retail demand—in fact, some dark-cloud forecasters suggest credit challenges, and less appetite for risk among lenders, will crimp retail sales.

For dealers, these dynamics will mean that doing a “good job” in used vehicles will likely get a bit more difficult. This challenge will be felt less by dealers who, today, consistently make sure that every used vehicle acquisition, reconditioning, merchandising, pricing and desking decision makes sense for the current market and the dealership’s profit and inventory turn objectives.

Condition 3: The Rising Reliance On Fixed Operations For Profitability. In early November, an Automotive News article highlighted dealers who were investing big in their fixed operations. The dealers recognize two important factors: First, they typically make more money in fixed operations than their new/used vehicle departments combined; and, second, they see an opportunity to recapture customers lost to independents and other competitors by providing a more professional, satisfying, seamless and technology-enhanced experience for customers. I might suggest that such efforts send a strong message to dealers more accustomed to treating fixed operations as a “back-end” part of their business.

Condition 4: F&I Regulation. So far, dealers have largely been spared in the efforts by the Consumer Financial Protection Bureau (CFBP) to regulate dealer loan reserves and F&I product mark-ups. But I think it’s fair to say the hand-writing’s on the wall. It’s no secret that, in the face of shorter margins in new and used vehicles, dealers have placed a greater emphasis on making every dollar they can in F&I. The problem is that some dealers now over-rely on F&I income to boost their bottom lines—often because they chose not to make efficiency-minded adjustments in other departments that are necessary to maximize the “total” gross of their dealerships. It is these dealers who will suffer the most if stricter F&I regulations arrive in the coming year.

Condition 5: Increased consolidation, competition. The current year is likely to feature one of the most active buy-sell environments in the history of automotive retail. It’s a trend that analysts expect will continue as growth-minded dealers and investors aim to reap the benefits that come with economies of scale and efficiencies applied across multiple rooftops. Inevitably, this more consolidated retail landscape will increase the level of competition and create additional pressures on less-efficient, often smaller dealers to step up their game or risk finding themselves (and their family fortunes) tied to an operation their factory partners, and the market, no longer deem relevant.

Even with these conditions, I remain buoyant and optimistic that dealers will have a good year in 2015, provided they continually pay attention to improving their performance and take nothing for granted.

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3 Keys To Maximizing Gross As Transparency Grows In 2015

Dale Pollak — Tue, 23 Dec 2014 16:27:26 +0000

It shouldn’t be news for dealers that margins in new/used vehicles are under pressure. As we look ahead to the coming year, there are few, if any, signs that margin compression will abate.

On the new vehicle side, there are predictions that a push to sell more cars will drive higher factory incentive spending and, in turn, press down front-end margins for dealers as they retail the vehicles.

On the used vehicle side, an expected (and ongoing) rise in wholesale supplies will put dealer margins at risk unless dealers are able to maintain their inventory velocity while carefully controlling costs as they acquire and recondition used units for retail.

To be sure, the effects of margin compression will be most problematic when dealers stock the wrong new and used vehicles. The right cars will always fare better gross-wise than less desirable units. Thankfully, many dealers today use technology and tools to help them identify the new and used vehicles that align best with market demand and acquire them in a cost-effective and efficient manner.

But even when dealers have the right new and used vehicles, they often lose margin as they follow traditional pricing formulas and sales processes. The problem is that the traditional, negotiation-based methods are out of step with today’s buyers, who increasingly want (and will pay for) a far more transparency-focused purchase experience.

In recognition of this reality, big dealer groups like AutoNation and Sonic are choosing to let go of traditional pricing and sales practices. Instead, they are adopting pricing and sales models that limit, if not eliminate, negotiations, and aim to provide a more efficient and satisfying experience for their customers.

At the same time, these retailers are placing their bets that these transparency-minded processes will help them retain, if not increase, their front-end margins as market conditions continue to put them at risk.

As dealers map out their goals for new/used vehicles for 2015, I believe they would be wise to consider three operational strategies that help them satisfy customer desires for a more transparent experience and minimize the harmful effects of margin compression:

Align asking prices to the market. I believe 2015 will be a watershed year for market-based pricing of new vehicles, thanks to the advent of new vehicle inventory management tools that help dealers easily identify competitor pricing and allow them to find the pricing sweet spot for every new car. In many ways, this trend mirrors the shift toward market-based pricing of used vehicles that has occurred during the past five years. With more transaction-realistic asking prices, dealers effectively convey a fair market price to potential buyers that mitigates their desire to negotiate. In simple terms, buyers are less likely to push back if they perceive you’re offering a fair price for a vehicle. And, if they do ask for a better price, you’ve got the market data to stand behind your offer.

Promote your pricing strategy. When dealers price their new/used vehicles to the market, they sometimes overlook the next step—telling customers, right up front, about the way they arrived at their asking prices. This runs counter to traditional sales practices that use craft and cunning to avoid the price discussion, and typically only deepen a buyer’s resolve to press for a better deal. By contrast, dealers who make the price discussion a primary part of the conversation find it builds buyer confidence and trust because it speaks directly to their desire for a more transparent experience.

Help your managers hold margin. I recently spoke with a Pennsylvania Toyota dealer who attributes a $400 increase in his front-end margin for new vehicles to two changes he made to his sales process. First, he set a “bottom-line” price for every car (typically 1.5 percent to 3 percent above invoice, depending on the unit). With this knowledge, managers can more honestly convey “this really is our best price,” and customers respond favorably, the dealer says. Second, the dealer tracks the amount of discounting that occurs for every new/used vehicle. He estimates the oversight has cut the average discounts from $400-plus to $150 or less. (Note: This dealer plans to roll out compensation plans that reward managers and sales associates for reducing the discounts even further in 2015.)

As dealers employ these transparency- and margin-minded pricing and sales practices, they begin to notice another positive outcome: It takes less time to complete every new and used vehicle deal, which means managers and sales associates have additional capacity to sell more cars—an operational efficiency that also helps the dealership maximize its profit margins.

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Insights From vAuto’s Performance Management Team Meeting

Dale Pollak — Fri, 12 Dec 2014 22:20:43 +0000

I had the honor and privilege of taking part in vAuto’s annual Performance Managers meeting this week.

The meeting gives the Performance Management team the opportunity to share best practices, compare notes and craft plans to help vAuto dealers sell more new and used cars and make more money in 2015.

I found two insights useful to share, particularly as we all look ahead to the coming year:

1. The need to minimize discounts to maximize margins. It’s clear that dealers from coast to coast follow pricing and sales strategies that are built for negotiating the price of new and used vehicles. The problem: If you’re already offering a fair market price online, your managers and sales associates need to do a better job standing behind your offer.

A Performance Manager shared a story from a secret-shopping trip to one of his dealer clients. On the lot, he was looking at a 2012 Mini Cooper Countryman with an asking price of $16,800. “I asked the sales guy, ‘I saw this car online, but my budget’s only $16,000. Do you think I could get it for that?’ He said, ‘I don’t see why not.’ The guy lopped $800 off the car without blinking!”

This dealership, by the way, has since made such automatic margin give-aways less common. Its average used vehicle discount is now less than $400 and getting smaller.

I think every dealer would agree that in today’s era of margin compression in new and used vehicles, a truly fair market price deserves the opportunity to be good enough for buyers.

2. Lost opportunities in appraisals. Every dealer understands that you really make your margin in used vehicles when you buy them “right.” In today’s market, however, buying them “right” requires a process that’s more customer-involved and –transparent than it used to be.

It wasn’t at all surprising to hear that dealers who had adopted such processes (and the requisite oversight of measuring look-to-book ratios and other metrics) were doing a far better job of acquiring more of the right cars “right” at the curb, which translates to a faster-moving, better-grossing used car department. Similarly, these dealers appear to have fewer complaints about finding inventory and making too-little money on their retail units.

I have to say, it was quite humbling and inspiring to see all of vAuto’s Performance Managers gathered in a single room, wrenching on ways to help dealers become more successful retailers.

I left the meeting with an even deeper appreciation for how much these men and women continue to be an indispensable part of our company and your business.

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Sam Swope: Our Industry Loses A Community Advocate And Pioneer

Dale Pollak — Thu, 11 Dec 2014 00:16:55 +0000

In the early days of vAuto, it wasn’t easy to get dealers to recognize that the Internet was changing the used car business, much less convince them to buy inventory management software to help them navigate this transformative shift in the market.

But some dealers got it right away.

One of those dealers was Sam Swope, the legendary head of the the Louisville, Ky.-based Sam Swope Auto Group. Sam passed away yesterday afternoon at his home in Louisville, surrounded by family.

“He was a fighter all the way to the end,” says Cary Donovan, Swope’s long-time director of used vehicle operations. “He was 88 years old and he just got low on fuel. I had lunch with him a few weeks ago and while he was moving slower, his mind was as sharp as ever.”

Sam’s passing received front-page coverage in today’s Louisville Courier-Journal. The article highlights his success as a car dealer and his commitment to the community. It states, “Swope showered millions of dollars on local charities. He had a soft spot for disabled children, animals and the elderly, those he felt were the most vulnerable.”

Two years ago, Swope formally retired from the business he started in 1952. But “he never really let go. The business was his lifeline,” Donovan says. “Our goal is to carry Sam’s vision forward into the future.”

I recall a meeting at Swope’s dealerships about five years ago, which I had requested to better understand why his dealership group was out-performing other dealers in used vehicles by leaps and bounds.

Sam shared his philosophy as an automotive retailer, which helped me see why he, Donovan and the rest of the Swope team seemed a step ahead of the industry: “We are not a new car dealer with a used car department. We are used car dealers who, in most cases, happen to have a new car franchise.”

Tonight, I’ll take a moment to remember Sam’s keen car business acumen and all the good that he embodied as one of the nation’s leading car dealers. I’ll also smile as I think of him riding his trademark Harley-Davidson up in heaven.

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Another Similarity Between Dealers And Family Farmers—Technology

Dale Pollak — Tue, 02 Dec 2014 19:34:03 +0000

About 15 years ago, I purchased a farm in Northwest Illinois, where I became a USDA-registered farmer. I had more than just a financial interest in the operation, as I was fascinated with the ways my partners planned and worked the land to produce corn and soybeans.

I thought of those days over the weekend while reading a New York Times article. It discusses the ever-more critical role that technology plays in helping today’s family farmers succeed in an increasingly difficult environment.

Take the opening lines from the Times article, titled “Working the Land and the Data:”

“Kip Tom, a seventh-generation family farmer, harvests the staples of modern agriculture: seed corn, feed corn, soybeans and data.

“I’m hooked on a drug of information and productivity,” he said, sitting in an office filled with computer screens and a whiteboard covered with schematics and plans for his farm’s computer network.

Mr. Tom, 59, is as much a chief technology officer as he is a farmer. Where his great-great-grandfather hitched a mule, “we’ve got sensors on the combine, GPS data from satellites, cellular modems on self-driving tractors, apps for irrigation on iPhones,” he said.

…But for farmers like Mr. Tom, technology offers a lifeline, a way to navigate the boom-and-bust cycles of making a living from the land. It is also helping them grow to compete with giant agribusinesses.”

As I read this article, I couldn’t help but think of how much farming has changed since the not-so-distant days when I would occasionally ride along as my partners would harvest or plow our fields.

I also thought of how much data and technology have changed the car business. I recalled countless conversations with dealers who, like farmer Kip Tom in the article, have come to rely on data-based insights to achieve the level of efficiencies and profitability today’s challenging automotive retail environment requires.

The piece goes on to highlight how some tech-savvy family farmers are taking their competitive advantage to the next level, expanding operations while their tradition-minded neighbors struggle to survive—a dynamic that’s familiar to most, if not all, dealers.

As I finished the piece, I realized that the same essential story could appear in any automotive industry publication, albeit with a different headline: “Working the Deals and the Data.”

The post Another Similarity Between Dealers And Family Farmers—Technology appeared first on Dale Pollak.

Using Market Share To Map Your 2015 Sales Goals

Dale Pollak — Wed, 26 Nov 2014 20:53:38 +0000

I received an extremely astute question from a fixed operations director in Gainesville, Fla.:

Dale: What’s the best way for us to forecast our sales goals for 2015? We typically look at current year volume as a guide for the future. However, this approach seems like we might be misleading ourselves, especially if we have been, and expect to be, in a strong selling environment. For example, our dealership is performing at 145 percent of last year’s sales volumes. But I concede we are in a better selling environment and the market this year was better than last year. I believe we should be looking at market share as opposed to volume. Your thoughts?

Before I share my response, I think it’s appropriate to offer two observations that don’t directly pertain to the question at hand.

First, it’s an extremely good sign that a fixed operations director wants to get a more realistic read on sales expectations for the coming year. As we all know, dealers are increasingly dependent on fixed operations revenue for their overall profitability—a reality this fixed operations director no doubt fully understands. By asking the question, this manager is clearly looking beyond the four walls of his department to properly manage his team’s performance next year—evidence, I believe, of a “total gross” mindset at the dealership.

Second, the manager’s looking ahead to 2015 before Thanksgiving. This proactivity suggests a careful, deliberative approach to planning for the new year, a stark contrast to the rush-jobs that often typify next-year planning at many dealerships.

Now, on to my response:

I told the fixed operations director that I agree with his assessment of the value of market share, rather than sales volumes, as a benchmark for future performance—particularly in the current environment where “a rising tide lifts all boats.”

I also cautioned that sales volume forecasts and projections are often too broad to be meaningful for dealers in a specific market or region, where more localized factors (e.g., economic conditions, weather, etc.) can spur or stunt vehicle sales volumes.

By contrast, a dealer’s new and used vehicle market share essentially measures a store’s piece of the automotive retail pie in a given area. Even as the pie itself grows or shrinks, a dealer’s market share remains a telling gauge of sales performance.

I would encourage all dealers to undertake the same exercise as the fixed operations director. Calculate your dealership’s new and used vehicle market share for the current year, and then, with an honest assessment of your retailing strengths/opportunities and the competition, set your sales goals for 2015.

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3 Ways To Win Amid A Declining Wholesale Used Vehicle Market

Dale Pollak — Wed, 26 Nov 2014 18:31:04 +0000

Let’s be honest: Some dealers have taken historically high wholesale used vehicle values for granted.

These dealers have eased up on their efforts to quickly retail every used vehicle, knowing that they’ll probably do OK if they decide it’s time to wholesale a unit. At some stores, dealers have realized a profit as they wholesale aged units.

But this luxury has pretty much disappeared as wholesale used vehicle values continue to decline, thanks to rising supplies and seasonally based value drops that arrive this time of year.

So now what?

The answer to this question, of course, is a return to the “retail-first” fundamentals that dealers should always follow, irrespective of the ebb/flow of wholesale market values. Indeed, dealers who focus on the decisions and steps required to retail every vehicle for maximum profitability believe wholesale values are simply the cost of entry to retail a car, not an aspect of their exit strategy.

Here are three fundamentals I recommend to help dealers maintain a “retail-first” focus as the wholesale market becomes more volatile:

Retail-focused appraisals. As wholesale values decline, it’s tempting for dealers to believe they’re stealing a car, particularly given the historically high wholesale valuations we’ve seen in the last two or three years. But this view typically obscures an important retail reality: In most instances, wholesale value declines result from increases in vehicle supplies. In turn, these cars inevitably end up as retail units, which often causes retail asking/transaction prices to diminish.

Dealers who appraise vehicles based on current retail conditions for a specific car rarely fall into this trap. Using technology and tools, they assess the current retail conditions as they size up an auction vehicle or a trade-in. In this scenario, wholesale valuations may play a role, but it’s the spread between the cost to acquire a vehicle (e.g., the Cost to Market) and its likely retail selling point (e.g., the Price to Market) that matter most.

When dealers use these retail-focused metrics, they instantly know if a vehicle fits their inventory needs and profit objectives, as well as steps they’ll need to take (e.g., cost-conscious reconditioning) to manage units that are likely to pose a retail profit challenge.

Real-time retail pricing. Dealers who focus on a retail-first used vehicle strategy are vigilant about each car’s price position relative to the market of the same/similar competing units. With this view, the ups and downs of the wholesale market merit little consideration; instead, the dealers balance each vehicle’s competitive retail price position (as measured by Price to Market data) with the unit’s profit and turn objectives.

At these dealerships, it’s common for dealers to check and adjust their retail pricing at least once a week, if not more frequently. By doing so, dealers are able to mitigate profitability and return on investment (ROI) risks that flow from incoming supplies of competing cars and diminished buyer demand.

Tighter retail turn timelines. I’ve long advocated that dealers maintain at least 50 percent of their used vehicle inventories under 30 days of age. The reason: This standard ensures dealers retail a greater share of their used vehicle inventory in less time to maximize profitability. In a volatile market, this turn-focused standard becomes even more important.

Interestingly, some dealers are even more aggressive, setting a goal to maintain 75 percent of their inventory under 30 days of age. This decision did not follow any worries about volatility in the wholesale market, or even significant shifts in the retail landscape. Rather, the dealers raised the bar for themselves. They recognized a higher level of process efficiency and sales throughput would elevate profitability and sales in used vehicles and other dealership departments.

Each of these fundamentals poses its own set of challenges, particularly for dealers who have become too dependent on the ability to wholesale used vehicles for a profit.

But, again, let’s be honest: A wholesale profit on a retail vehicle is really putting “lipstick on a pig.” After all, the vehicle failed as a retail unit, and this failure cost the dealership far more than the wholesale profit it might have earned.

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AutoSuccess Podcast: Fundamentals of a Retail First Focus

Dale Pollak — Fri, 21 Nov 2014 23:32:48 +0000

I recently participated in a podcast with Thomas Williams of AutoSuccess Magazine. Please click here to listen.

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A Return To Campus Spurs Memories And Inspiration

Dale Pollak — Mon, 17 Nov 2014 23:43:39 +0000

I had a most extraordinary and inspiring experience last week when I returned to Indiana University (IU) for the first time in nearly 35 years.

This visit was part of my responsibilities as this year’s Poling Chair at IU’s Kelley School of Business to share my entrepreneurial experiences and insights with students. I felt a mix of excitement and nervousness as I prepared to share my “4 P’s Of Entrepreneurial Success” with graduate and undergraduate students.

As soon as I arrived on campus and checked in, I was awash in memories.

I recalled the table in the student union where a girlfriend broke my heart. I stopped by the popular off-campus bar, Nick’s, where a stainless steel pint pail with my name once hung on a hook. I poked my head in my old room at the fraternity house, not so surprised that it essentially looked and smelled about the same.

I hadn’t returned to IU since my graduation in 1980 and I was surprised at how much the campus and community, for all the new buildings and other improvements, still seemed familiar and friendly.

But the real highlights of my visit came in my interactions with students. They asked insightful, penetrating questions as we discussed their current academic pursuits and their prospects in business.

An undergraduate exchange student from China asked, “Isn’t it better for us to know ourselves before we worry about networking?” As I tried my best to answer her question, I couldn’t help but think that I wasn’t nearly as introspective and mature when I was in college.

Several students asked if they would be better off seeking first-job opportunities in start-ups versus more established companies. This question wasn’t even relevant when I went to business school at IU—start-ups as we know them today didn’t exist, and you either went to work in the family business or sought jobs from a big-name company.

I also fielded several questions that all amounted to the same query—“How can I be sure if I’ll be happy in my career?” To me, the frequency of this question belies both the pressure today’s students feel to make the right choices, and an ingrained fear that a wrong choice now will yield dire consequences in the future.

I urged students to remember that college offers a rare opportunity to experiment and try new things. Their goal, as students, should be to understand what makes them tick as individuals, and to recognize the reality that life serves up a series of twists and turns that can render a good decision today irrelevant for tomorrow. I also shared a page from my life—that sometimes it can take years to recognize the signs that suggest your career path may not be as fulfilling as another might be.

As I left IU, I also couldn’t help but think that we’ll all be in good hands when these students become business and civic leaders in communities across America. Collectively, they showed a level of ambition, focus, gratitude and wisdom that I recall being rare among my college contemporaries.

I’m inspired to help these students, and I can’t wait to return to IU next spring.

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3 Ways To Minimize A Seasonal Slump In Your Used Vehicle Department

Dale Pollak — Sat, 08 Nov 2014 01:35:26 +0000

As the fall season is firmly upon us, I see three potentially problematic trends for dealers in used vehicles.

First, inventory levels are climbing. For many dealers, the increases are due to a rise in the number of off-lease and trade-in vehicles that flow from new vehicle sales. Some dealers have also chosen to increase inventory levels due to favorable purchase prices and a belief that consumer demand will not abate.

Second, wholesale values continue to slide south. In early October, analysts noted declines in most vehicle segments (an $84 drop for cars, and a $20 drop for trucks, according to Black Book analyst Ricky Beggs), with higher-end premium vehicles suffering the most. Most predict the trend to continue, which will put pressure on dealer margins for the inventory they currently own.

Third, it’s taking longer for dealers to retail their current inventory. I’ve heard from several dealers who report the average days in inventory is increasing, while their inventory turn rates are decreasing—a two-headed symptom that appears to owe to higher inventory levels and, in some segments, a potential softening in buyer demand.

To be sure, these dynamics are typical in used vehicles at this time of the year. Even so, they pose potential profitability and return on investment (ROI) risks for dealers who do not proactively address them as they manage their used vehicle inventories. In my recent conversations with dealers, I offer the following three best practices to minimize the chances that a seasonal slowdown becomes a seasonal slump:

Pay close attention to your pricing. A Midwest dealer recently noted that he’s making $300 to $400 weekly price adjustments to individual cars to keep his current inventory in line with the market and meet his inventory turn and profit objectives. As he says, “It’s painful, but we have no choice. The cars are still here and we need to move on.”
Stick to a 45-day retail window. In the current environment, some dealers choose to hold on to vehicles longer than they should because they “can’t replace the car for what I’ve got in it.” Such decisions typically only make a bad situation worse, particularly when there are few signs that wholesale values will increase in the near future. I encourage dealers to maintain at least 50 percent of their used vehicle inventory under 30 days of age, and to give each vehicle a maximum 45 days as a retail unit. If a car doesn’t sell in the 45-day timeframe, dealers and managers should examine the hows/whys behind their inability to retail the unit in a timely fashion.
Mind your average used vehicle investment. I’m seeing the average used vehicle investment increase for many dealers. The rise appears to be due to two factors: First, dealers are paying up to acquire certified pre-owned (CPO) vehicles, which has proven to be a profitable, fast-turning segment for much of the year. Second, some dealers are buying more large SUVs and other higher-dollar inventory because declining wholesale values make them more attractive. Neither approach is necessarily wrong, but I caution dealers that increasing their average used vehicle investment also means a commiserate increase in the amount of risk inherent in each vehicle.

Ultimately, dealers who maintain a consistent, steady course of market-based inventory management decisions during the fall will be better positioned to meet the challenges of fewer customers and slower sales as the winter months arrive.

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When Family’s On The Line, Cox Really Shines

Dale Pollak — Wed, 29 Oct 2014 16:32:31 +0000

I had a rough, and pretty scary weekend.

This past Friday night, my son Alex called from the emergency room at Emory University Hospital. He was suffering from severe abdominal pain. I did my best to comfort him over the phone, and we exchanged messages through the night as the medical team conducted multiple tests to determine the cause of the problem.

By Saturday morning, Alex was still in the emergency room, and we still didn’t know the reasons for his pain. I headed to the airport, full of worry that something serious was happening with my otherwise healthy and hearty 23-year-old son.

When I arrived at the hospital, Alex seemed fine. The pain was gone and he was ready to go home. Both of us thought the pain must have been caused by a fast-acting virus or something similar.

But the resident doctor thought otherwise. While still uncertain about an exact cause, the emergency room medical team recommended surgery. An MRI had shown an abnormal bulge on Alex’s small intestine, and there was concern that an infection could cause other problems like gangrene.

I was freaked out, to say the least. All of Alex’s cell counts and vitals were normal. Surgery seemed too invasive and potentially unnecessary. I also wasn’t satisfied that the medical team had done everything possible to make sure that surgery was, in fact, the best option. I needed better information and more answers, rather than what-ifs.

I started making phone calls. I rang my brother, a doctor, who shared my concern that surgery might not be necessary. Later that evening, I called my boss, Cox Automotive president Sandy Schwartz, thinking he might know someone at Emory who could help my situation.

The sequence of events that followed blew me away.

By early Sunday morning, with Sandy’s help, a team of senior specialists at Emory evaluated our situation. Joe Luppino, Cox Automotive’s senior vice president and chief corporate development officer, showed up and stayed through the day to make sure I was OK and provide counsel and support. I also received dozens of e-mails and calls from other Cox executives and employees offering their best wishes, prayers and thoughts.

By noon, we had the answers we needed. The medical team determined Alex had a rupture in his small intestine, much like appendicitis, and surgery proved to be the best course of action.

The surgery occurred at 3 p.m., and I’m happy to share that everything went well. As of this moment, Alex is recovering at home, after his discharge from the hospital yesterday—an exit that proved a bit challenging given all the balloons and flowers we received from Cox employees across the country.

As I reflect on a challenging weekend, I can’t help but feel an immense amount of gratitude, love and respect for my Cox colleagues and the team at Emory. It’s apparent to me that Cox and its employees really live up to the values its founders put in place decades ago—when family’s on the line, it’s time to shine.

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A Look At The Perils Of Positive Thinking And Selling Cars

Dale Pollak — Tue, 28 Oct 2014 18:18:42 +0000

I was fascinated by a column in the New York Times that suggests that too much positive thinking can be a bad thing.

The author, psychology professor Gabriele Oettingen, has studied the effects of positive thinking and concludes that it “fools our minds into perceiving that we’ve already attained our goal, slackening our readiness to pursue it.”

She recommends a different approach, one that combines optimism and realism, which she dubs, “mental contrasting.” Her explanation of how it should work:

“Think of a wish. For a few minutes, imagine the wish coming true, letting your mind wander and drift where it will. Then shift gears. Spend a few more minutes imagining the obstacles that stand in the way of realizing your wish.”

This process, Oettingen asserts, gives us a sharper, more realistic sense of the next steps necessary to achieve a goal, as well as the energy and stamina needed to take those steps and achieve the objective. She also believes “mental contrasting” helps us establish goals that we’re more likely to reach.

As I read the column, I couldn’t help but think of the high hopes many dealers bring to their new and used vehicle inventories. In fact, the column helps explain why dealers put too much positive faith into specific new and used vehicles, and stick with pricing and retailing strategies that amount to symptoms of false expectations and hope.

I also thought of the best Velocity dealers. For them, “mental contrasting” is a daily exercise that relies on market data to define the potential obstacles each new and used vehicle may encounter. With these insights, the dealers are able to correctly assess each vehicle’s prospects as a gross-generating retail unit, as well as the steps necessary to maximize the unit’s profit-making potential.

Oettingen’s closing lines seem useful to help dealers temper their typically optimistic outlook as retailers:

“Positive thinking is pleasurable, but that doesn’t mean it’s good for us. Like so much in life, attaining goals requires a balanced and moderate approach, neither dwelling on the downsides nor a forced jumping for joy.”

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3 Reasons A “Turn And Earn” Strategy Eludes Some Dealers

Dale Pollak — Fri, 24 Oct 2014 14:06:38 +0000

For the past several years, I’ve been a vocal advocate of the Velocity Method of Management—a market-based inventory management strategy that pushes dealers to turn their used vehicle inventories to maximize return on investment and minimize risk.

My advocacy flows from a firm belief that today’s market penalizes dealers who do not make a concerted effort to sell more used vehicles in less time. In today’s market, the longer a dealer hangs on to a vehicle, the less likely it will generate a sufficient return on investment. This reality owes to a combination of competition, pricing transparency and volatility—all of which contribute to margin compression.

My faith in a “turn and earn” retailing strategy also flows from the successes of dealers who adopt this approach. In a matter of months, the best “turn and earn” dealers double their monthly sales volumes and see record-setting levels of profitability in their used vehicle, service/parts and F&I departments. The big pay-off comes a bit later, when the higher level of performance and profitability become standard operating procedure, and dealers achieve a level of financial return and reward they hadn’t considered possible.

But for every Velocity success story, there are dealers who can’t successfully adopt a “turn and earn” inventory management strategy. I’ve seen enough of these implementation failures to identify three key reasons the dealers came up short:

1. They lose faith. A few years ago, I coached a New York dealer as he adopted a “turn and earn” strategy. His first course of action: Take accountability for all the aged vehicles in his inventory. This wasn’t easy because it required taking a $500,000 loss in the early months as the dealer retailed cars that had sat too long to offer a positive return.

This day of reckoning is a prerequisite for dealers who adopt a Velocity strategy and, for some, it’s too painful to accept. These dealers will blame the “turn and earn” strategy for the loss and ditch the strategy altogether. Of course, the strategy didn’t create the loss; rather, it exposed a “water problem” the dealer would rather ignore.

I compare the initial stage of Velocity strategy implementation to the experience anyone undergoes as they try to rid themselves of an addiction. At first, it feels terrible and, for some, this initial pain proves too much. But those with more persistence realize that, over time, they actually feel better as the addiction loses its grip.

The same is true for dealers adopting a “turn and earn” strategy. Their addiction is aged vehicles, and it’s a difficult habit to break. Those who have the faith to withstand and work through the initial pain, often wonder why they ever thought an aged unit was OK.

2. They can’t break the resistance. When dealers adopt a Velocity strategy, all the goal posts move closer. Dealers must put used vehicles online as soon as they purchase them. Likewise, reconditioning/detailing must be completed in day or two, not a week or more. Appraisals and asking prices must continually align and re-align with the market. Managers must make speedier decisions about each vehicle’s exit strategy.

In other words, a true “turn and earn” dealership requires a much higher level of collaboration among dealership departments, and everyone must understand that efficiency and speed drive the size of their paychecks and the dealership’s success. It’s not uncommon for dealers who adopt a Velocity strategy to find their skills as coaches and leaders put to the test.

“At times, it felt like I was herding cats,” says a Midwest dealer who adopted the Velocity strategy two years ago. “It’s tough to get everybody on the same page and we lost a couple people who couldn’t make the adjustment.”

3. The old habits never really go away. It’s common to hear dealers say that their average front-end gross profits decline as they adopt a “turn and earn” strategy. I address this complaint by showing dealers how their average gross profits have really normalized to the market. I also encourage them to focus on the “total” gross profit each vehicle, and their inventory as a whole, now generates for the dealership.

But some dealers have a hard time seeing the whole picture, and they end up undermining the “turn and earn” strategy with decisions that draw from a more traditional average front-end gross-focused playbook.

For example, dealers will set used vehicle asking prices well above the market in an effort to maximize average front-end gross profits—irrespective of whether the unit deserves the asking price, based on market data. This knee-jerk, control-the-gross impulse inevitably puts the dealer’s vehicles at a price disadvantage and slows their rate of sale.

Some “turn and earn” dealers also see diminished front-end profitability due to sales process “leaks.” This scenario occurs when dealers set market-competitive asking prices, and then allow sales associates to discount the price by $500 or more. The solution, of course, is a compensation plan that rewards sales associates when they stand firm on price and help sustain each vehicle’s front-end profit potential.

I advise dealers who want to adopt a “turn and earn” strategy that the transition will be a difficult, sometimes painful journey. I let them know they’ll face each of the challenges noted above, and probably a few more.

I also note that every successful Velocity dealer has been there. They’d be the first to tell you that adopting a “turn and earn” strategy isn’t easy. They’d let you know it takes an extraordinary level of commitment and courage to confront and contain the adversity that inevitably arrives.

But they’d also say the journey, for all its pain, has been well worth the gain.

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Drilling Down Into Overlooked Used Vehicle Opportunities

Dale Pollak — Tue, 21 Oct 2014 16:10:33 +0000

A quick test: What percentage of your used vehicle inventory do you retail in the first 10 days or less?

OK. Time’s up. Do you know the correct answer for your inventory?

Relax. I wouldn’t necessarily expect that you’d be able to ace the test. In fact, only a few dealers actually monitor their inventories at this level of granularity.

I’d also submit that one could make a case that dealers don’t really need to know how many vehicles you retail within the initial 10-day timeframe. If they’re paying attention to other, broad inventory metrics—like Market Days Supply, Cost to Market, Price To Market and Average Age (in days) of Inventory—they’ll do just fine in terms of inventory turns and profitability.

More and more, however, “just fine” really isn’t enough to maximize used vehicle department performance, not to mention the “total gross” potential of the dealership.

This realization has spurred bright-minded used vehicle managers to drill deeper into their inventory data.

Here’s an example shared during this month’s Access: Velocity event: Trent Waybright, director of used vehicle operations for Kelley Automotive Group, Fort Wayne, Ind., took a close look at his 10-day-or-less tally and found less than 20 percent of the group’s used vehicles sold in this timeframe. No surprise, the cars in this segment also produced the highest average gross profit when they sold, and they had the lowest average cost of all inventory units.

Next, Waybright calculated what his departmental gross would look like if he sold 5 percent more units in 10 days or less, a task that would require a 1 percent lowering of the transactional Price to Market average for vehicles in this age segment to 99 percent, and pulling forward sales that typically occur after 30 days. His exercise revealed an opportunity to increase departmental gross by $36,000/month.

Waybright is currently looking to address the challenges beyond price changes necessary to realize the improved results, with tighter reconditioning times first on the list.

I believe other dealers would benefit by examining how/why their inventory performs when it’s fresh and isn’t. Between these two poles, I suspect you’ll find opportunities that can make a “just fine” performance in used vehicles even better.

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Access: Velocity Wrap-Up: Dealer Take-Aways For The Not-So-Distant Future

Dale Pollak — Thu, 16 Oct 2014 22:01:48 +0000

We’re still getting feedback from last week’s Access: Velocity conference here in Chicago. So far, the vast majority of dealer attendees consider the two days spent here as well worth the effort and expense.

We also gained insights to make the next Access: Velocity event even better—with a particular emphasis on the real-life dealer-led workshops that address current management challenges for all dealers.

Not surprisingly, as I think ahead to the next event, I’m reminded of some of the insights I gleaned from the final-half day of this year’s Access: Velocity:

Retail margin compression. Dealer presenters Dan Hodges and Joe Humphrey of the Scott-McRae Automotive Group detailed their top-to-bottom efforts to deconstruct their traditional dealership structure to address a problem all dealers confront—declining margins. “We had to push cost out of the system, given the margins we found ourselves operating with,” Hodges says.

The deconstruction, which began in January of this year, included elimination of store GMs, new/used vehicle managers, F&I directors and separate Internet departments. The new structure now features centralized corporate management, with two vice presidents focused on fixed and variable operations, working directly with team leads in individual stores, and a centralized inventory acquisition team and business development center. The new structure also compensates corporate and in-store personnel on meeting volume targets at each location.

Hodges says the structure and compensation allow the execution of consistent processes across the platform, and emphasizes ongoing mentoring/training to create the same experience for customers, no matter the location. Rather than focusing on maximizing gross profit on a per-deal basis, employees in the dealership “are totally focused on how much business can I do today. The team leaders are focused on coaching and efficiencies.”

Humphrey shared how the centralized inventory acquisition team helps each store meet its goals by acquiring and distributing used vehicle inventory where it makes the most sense, based on current market data and recent sales trends. As stores sell more, they get more cars. “We’re trying to maximize our gross profits and inventory turns,” Humphrey says.

Perhaps most striking, the team has essentially eliminated auctions as it sources used vehicles, acquiring less than 15 percent of its inventory from these traditional wholesale outlets. “We’re buying from RV parks, estate sales and probate courts,” Humphrey says. “We’re trying to buy where no one else is buying.”

The results of this transformation are impressive—a 32 percent increase in used vehicle volume, a 33 percent increase in used vehicle gross profit and a 5 percent increase in “net to gross” for the four-store platform.

Sales process optimization. Panel facilitator John Malishenko of the Germain Auto Group asked a really sharp question to leaders of Cox Automotive’s business units. He wanted to know what three things the executives would do if they were given the keys to a dealership. I thought AutoTrader.com president Jared Rowe offered a good answer.

In addition to ensuring a consistent messaging across all channels and integrating sales/service to seed customer loyalty, Rowe said he would “attack the time it takes to sell a car.” He correctly noted that the industry average of 2.5-plus hours to complete a transaction is a top source of customer dissatisfaction.

I also thought Duncan Scarry, founder of Haystak Digital, made a good point about optimizing the typical sales process. In today’s market, customers only visit one, maybe two, dealerships after they’ve done their online shopping and research. He shared a comment he heard from a dealer friend, “The only reason we don’t sell a car to a customer is because we got in their way.”

This year’s Access: Velocity raised $250,000 to aid the Foundation Fighting Blindness, an achievement that makes me humble and proud. It also provides inspiration and motivation to make sure the next Access: Velocity event is even better and more impactful. We certainly have much work to do to achieve this objective.

Thank you to all who participated this year’s Access: Velocity and helped fulfill its mission to deliver unprecedented access and insights for top-performing Velocity dealers.

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Access: Velocity Day 1: Integration, Insights and Inspiration

Dale Pollak — Fri, 10 Oct 2014 21:08:57 +0000

I spoke to a couple dealers as yesterday’s Access: Velocity sessions ran down. A key sentiment: They, like me, felt a touch of information overload from today’s agenda.

The following are some of the high-level take-aways I gleaned from today’s sessions with Cox Automotive executives and our dealer speakers, as well as in-the-hall conversations:

A fulfillment of Cox Automotive’s responsibility to dealers: One of Access: Velocity’s objectives is to provide shared access and learnings from Cox’s leadership team, and to provide attendees a glimpse of how the company is tackling the challenge of providing better services and solutions to help them be more successful. The panel discussions addressed the future on both the wholesale and retail sides of our business:

1. Auctions “will look very different.” Cox Automotive CEO Sandy Schwartz made this point in discussing how Manheim will move from a largely physical, “event-based” marketplace to one where digital sales can occur 24/7 and vehicles aren’t necessarily sold from Manheim facilities. The company is also exploring ways to make the transport of vehicles to/from auctions, and the sales themselves, more efficient and less-costly for dealers. “We can drive your bottom lines up by driving your costs down,” says Joe George, senior vice president and chief strategy office for Cox Automotive.

2. A greater degree of integration. Cox Enterprises CEO John Dyer discussed a “cradle to grave” strategy that would include an array of digitally based, integrated solutions to help dealers derive more value from their investment in Cox Automotive solutions. Other executives highlighted the new ListingLogic tool for AutoTrader.com dealers, and efforts to link VinSolutions CRM and vAuto Provisioning data as examples of the broader strategy.

Used vehicle pricing as science. I was impressed by dealer speaker Trent Waybright’s efforts to make non-emotional, data-based decisions for pricing used vehicles at Kelley Automotive Group in Fort Wayne, Ind. His efforts, which effectively tie pricing decisions to Vehicle Details Page (VDP) views, ROI and past Price To Market transaction data for specific vehicles, have helped him achieve a 50 percent increase in the number of VDPs/vehicle his inventory receives, and consistently turn his 300-plus vehicle inventory 18 times a year.

The ETF&M formula. Dealer Adam Arens of Patriot Subaru, Saco, Maine, shared some of the reasons why his dealership won top honors in last year’s Automotive News’ Best Dealerships To Work competition. Part of the success owes to his efforts to teach managers how to find and hire candidates who fit the dealership’s culture and demonstrate initiative, leadership and organization in past positions. His team looks for employees who will be Enthusiastic, Trustworthy, Friendly and have a high-running Motor

Perhaps the highlight of the day, at least for me, came when our special guest speaker, Eric Weihenmayer, brought tears to many Access: Velocity attendees as he described the challenges and triumphs he’s faced after going blind as a teenager. He was inspiring as he described how he strives to live a “No Barriers” life that includes record-setting mountain climbs and whitewater rafting adventures. I especially liked this quote: “What’s inside of us is stronger than what’s in our way.”

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Access: Velocity Kicks Off Tonight!

Dale Pollak — Wed, 08 Oct 2014 21:38:20 +0000

I’ve just spent the past two hours with the vAuto team at the Peninsula Hotel in Chicago, working out final details for tonight’s kick-off of the second Access: Velocity event.

I’m extremely excited.

Two years ago, we hosted our first Access: Velocity, and this year’s gathering is bigger and better. We’ve brought together nearly 175 top-performing Velocity dealers to learn from each other and participate in interactive panel discussions with top Cox Enterprises and Cox Automotive executives, including Alex Taylor, the great-grandson of company founder James M. Cox, and John Dyer, CEO and president of Cox Enterprises.

I’m especially excited to hear our dealer presenters, Adam Arens of Patriot Subaru, Dan Hodges and Joe Humphrey from Scott-McRae Automotive Group, and Trent Waybright of Kelley Automotive Group. They will each offer insights to help their fellow dealers address key challenges facing all retailers.

In addition to providing unprecedented access and insights, Access: Velocity also benefits an important cause, the Foundation Fighting Blindness. We will be donating all registration fees to the Foundation, which funds research to help those with vision impairment. It’s gratifying and humbling to know that each Access: Velocity participant is willing to support a cause that’s personally important to me.

Finally, I want to publicly thank the members of vAuto’s marketing team. They’ve done an extremely impressive job planning and preparing for the event. Their tireless efforts will help us ensure that Access: Velocity proves an invaluable resource for our dealer participants.

I will be sharing insights and take-aways from Access: Velocity over the next two days. Stay tuned!

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Two Used Car Lessons From The Secret Service Snafu

Dale Pollak — Tue, 07 Oct 2014 22:36:07 +0000

I wouldn’t think that I’d ever find commonality between used vehicles and the U.S. Secret Service.

But last Thursday’s news of the White House security breach brought used vehicles to mind.

To be sure, losing one’s focus on used vehicle management processes produces less dire potential consequences than lapses among the elite corps of men and women who protect the president and other federal officials. If you fall asleep at the switch in used cars, you run the risk of lost opportunity and profitability—and it’s unlikely anyone would be physically harmed.

As I pondered the Secret Service snafu, I found two relevant take-aways for dealers:

1. People and consistent process execution are paramount. From what I can tell of the White House incident, it resulted from a breakdown in the fundamentals of day-to-day process execution by people at multiple levels. Dealers face similar a challenge—on any given day, if you or one of your team members misses any of the fundamental steps of the processes that help you retail vehicles quickly to maximize profitability, you diminish your chances of meeting this critical objective.

2. Mistakes can—and will—happen. If nothing else, the Secret Service problems remind us that even the best and brightest can make mistakes. The next challenge for the agency, of course, is to determine why the mistakes occurred and address the root causes to avoid a repeat. The same is true for dealers—even the best and brightest Velocity dealers occasionally fall short of their goals, sometimes due to mistakes that, in hindsight, were avoidable.

Perhaps the words of Winston Churchill offer the right perspective for the Secret Service and dealers as we face the future: “Success is not final, failure is not fatal: it is the courage to continue that counts.”

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Say Hello To ListingLogic—A Tool That Drives Better Online Used Vehicle Performance

Dale Pollak — Thu, 02 Oct 2014 23:08:51 +0000

Most dealers understand that today’s used vehicle business is an Internet business. That is, buyers size up your cars, prices and reputation online—before they get to your dealership.

This reality has led the smartest dealers to recognize that the online performance of their used vehicles provides the single-best indicator of each vehicle’s appeal with potential buyers and future showroom traffic. These dealers have long been paying close attention to the number of Search Results Page (SRP) to Vehicle Details Page (VDP) views their inventory receives to guide merchandising and pricing. In general, there’s a clear understanding that if a car isn’t getting looks online, there’s likely a problem in its presentation or price, or the unit itself.

But it’s fair to say that measuring the online performance of used vehicles has been an iffy science at best. To date, dealers haven’t had clear-cut evidence to understand why some vehicles get more SRPs and VDPs than others.

That’s why this week’s announcement from AutoTrader.com about the launch of the vAuto-powered ListingLogic tool is so important. The tool tells dealers exactly why some cars perform better than others and, even better, it recommends ways that dealers can enhance a vehicle’s potential online appeal based on factors that help competing vehicles stand taller (e.g., descriptions, photos, price, advertising package, etc.).

I see three clear implications from AutoTrader.com making ListingLogic available—for free—to dealers who use its latest advertising packages:

1. SRP/VDP conversion rates are largely obsolete as online performance indicators. With ListingLogic, dealers can track and trend the number of VDPs each vehicle receives on a daily basis, and quickly understand what to fix if a unit’s VDP-per-day metric falls short.

2. More precise used vehicle pricing. When we tested ListingLogic with vAuto dealers, some immediately began incorporating VDP-per-day data into daily reviews of their used vehicle inventory performance and their pricing strategies. The data drives more market-precise pricing adjustments and, in some cases, reveals opportunities to raise asking prices and improve front-end gross potential.

3. Faster inventory turns, better ROI. ListingLogic should empower dealers to make better, more efficient decisions about their used vehicle merchandising and pricing. Those who use this game-changing tool the most effectively will, I believe, be better equipped to meet their return on investment (ROI) objectives for their used vehicle inventories, as well as their investment with AutoTrader.com.

I would encourage all dealers who use AutoTrader.com to ask your rep to show you ListingLogic and demonstrate how the tool’s unprecedented insights can help you increase used vehicle VDPs and sell more cars in less time.

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A New/Used Vehicle Parallel: The Devil (And Your Gross) Is In The Details

Dale Pollak — Tue, 23 Sep 2014 14:07:46 +0000

Astute Velocity dealers have understood that the “car is the star” in used vehicles.

That’s why they go to great lengths to make sure they acquire vehicles with the color, equipment and trim levels that market data affirms will matter most to potential buyers. To be sure, they still acquire and retail “bread and butter” cars, but they don’t expect these vehicles to deliver the gross profit, or sell as quickly, as units that the market validates as truly special.

In recent weeks, I’ve been struck by the number of dealers who are realizing similar, “the car is the star” insights in new vehicles.

Take John Smith, Jr., owner of the Fort Smith, Arkansas-based Smith Auto Group. Earlier this year, his Chevrolet store had high hopes for the manufacturer’s newly redesigned ¾-ton Silverado pickup. But over the summer, Smith was troubled when he saw the numbers as they sold the trucks.

“I thought, ‘OK, why did we move this truck for this low amount of gross? It’s a pretty hot commodity,’” he says.

After reviewing market data with his manager, Smith and his team realized the problem. “We had the package below where we needed to be in the marketplace,” he says. “We found that in this market, people buying that truck are going all the way and want all the bells and whistles. That takes those trucks to the $60,000 range, which is a pretty steep truck. But they’re selling.”

To be sure, Smith notes the “constraints were on” and “we took what we could get” when ordering the pickups from the factory.

I’ve heard similar insights from dealers using vAuto’s Conquest system. They are now able to see how much color, equipment and trim nuances across model lines make the difference between a “star car” and a “bread and butter” unit that merits a turn-minded exit strategy.

“We’ve moved from having a knee-jerk reaction to keeping a watchful eye on our new vehicle inventory,” Smith says. “A consistent, watchful eye is far more valuable than having something creep up on you and hit you in the head.”

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3 Reasons A Front-End Focused Strategy Falls Short In Used Vehicles

Dale Pollak — Fri, 19 Sep 2014 14:13:35 +0000

I’ve been hearing more disenchantment and doubt from dealers about the value of a turn-and-earn strategy for retailing used vehicles, which I call the Velocity Method of Management.

The most vocal detractors are typically dealers who have long taken pride in the average front-end gross profit they achieve in used vehicles. The dealers like seeing their stores listed at the top of the 20 Group composites, with front-end gross averages that can run $1,000 or more than their peers.

It’s not too uncommon for turn and earn-focused Velocity dealers to come home from a 20 Group meeting feeling a bit deflated. Their front-end gross profit average is nowhere near the top dealer. They’ll then ask for guidance on how they can improve their performance and show up at the top of the page at the next 20 Group meeting.

More often than not, I tell these dealers to hold their horses. We’ll then take a closer look at the health of the high-gross dealer’s used vehicle inventory and their rate of used vehicle sales.

Time and again, the dealers with the highest front-end gross profit averages have more aged vehicles than they should, and their rate of used vehicle sales over the past five years tends to be flat or trending down. In other words, their front-end gross profits may be impressive, but the overall performance of the used vehicle departments isn’t where it could or should be.

The analysis gets even darker when you consider these dealers don’t regularly write down aged used vehicles to their actual wholesale cash value, and apply the loss to year-to-date, front-end gross profit. If the dealers undertook this level of honesty in their accounting, the average front-end gross profits they share would inspire much less envy.

Of course, such “dirty details” typically don’t generate much discussion at the 20 Group meetings—a symptom, I think, of the gentility dealers bring to the meetings and the traditional belief that average front-end gross profit is a reliable barometer of a dealership’s overall performance in used vehicles.

I advise dealers that they’d be better off worrying about the “total gross” they can generate from a turn and earn strategy in used vehicles rather than pumping up their average front-end gross profit. To make the case, I’ll share three reasons why I believe a single-minded focus on average front-end gross profit is the wrong strategy for today’s used vehicle market:

1. You can’t sell cars as quickly as the market requires. While my analysis of used vehicle inventories and sales rates at dealerships with high front-end gross profit averages isn’t scientific, the results are remarkably consistent. To me, the consistency indicates a market where consumers are too smart to pay too much for used vehicles, and dealers who only aim for high front-end gross profits on every car inevitably end up with aged inventory. This is not to suggest that dealers shouldn’t try to maximize front-end gross profits; rather, I’m saying that today’s market conditions require dealers to get in/out of their used vehicles faster than they had to in the past. In most cases, used vehicles lose their ability to make a meaningful margin contribution before 45 days in inventory. If you hold out for maximum front-end margin, you’ll pay the price with aged units and miss opportunities to redeploy the investment into more profit-productive vehicles.

2. You lose sight of other money-making opportunities. Think of your last trip to a gas station. Chances are pretty good you bought something other than gas (e.g., a snack, soda, etc.). The reason gas station owners offer so many non-fuel products flows from two factors—margins on gas sales are terrible, and each stop at the pump offers other higher-margin sales opportunities. To be sure, dealerships aren’t gas stations, but dealers share the pain of market-driven margin compression on the primary products they retail. To combat this market reality, I urge dealers to recognize that each used vehicle sale, whether it’s a short deal or even a loss, means money-making opportunities in F&I, service and parts—not to mention the cycle of future profits if they take in a trade.

As dealers adopt this “total gross” mindset, their inventories turn more quickly, they take fewer trips to the auction and every dealership department benefits. As a long-time Velocity dealer recently put it, “I don’t pay much attention to my front-end average anymore. I’m more focused on making my used vehicle department drive the profitability of my dealership.”

3. Your sales volume suffers. In market after market, dealers who adopt a turn-and-earn strategy that emphasizes “total gross” production are doing better than ever. They’re setting sales volume records, making more money and, in some cases, they’re buying up competitors who used to boast about their high front-end gross profit averages, even as their sales volumes limped along.

I would encourage tradition-minded dealers who believe that front-end gross matters most in used vehicles to consider the following quote from Mark Twain: “The less there is to justify a traditional custom, the harder it is to get rid of it.”

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A Look Ahead At Selling Tomorrow’s New/Used Vehicle Buyers

Dale Pollak — Tue, 16 Sep 2014 16:12:40 +0000

Consider the following research findings about the up-and-coming generation of car buyers, known as Milennials or Generation Y:

Theirs is a “kinship economy,” according to J. Walker Smith, chairman of The Futures Company, a marketing research firm. As Millennials engage retailers, a positive experience is paramount. “It’s all about how we resonate with people,” Smith says. “They don’t want a relationship with your brand, they want relationships with other people.
They expect to “co-create” retail experiences, says Sheralyn Hartwell, executive director of Frank N. Magid Associates, which specializes in business strategy research and development. “They expect to have their own custom experience, and they expect to be co-creaters,” Hartwell says.
They believe they are a generation of “creators” who are part of a group that will “change outdated systems,” says Dannielle Paponetti, director of ad sales research for Viacom Media Networks, which owns MTV and VH1.
They view cars as “appliances” that offer the ability to “explore and control” their destiny. They are less likely to get driver’s licenses when they reach driving age, and vehicle purchases often coincide with life events, such as a new job or relocation.
They use technology (smart phones, in particular) to research shopping decisions, and they “expect you to know more than they do” about the products/purchases under consideration, Hartwell says.
They are less than satisfied with the in-store experiences dealers offer, says Isabelle Helms, vice president, research and market intelligence for Cox Automotive. In particular, negotiation and paperwork are among the chief complaints they cite about buying vehicles, she says.

I gleaned these insights from a recent Cox Automotive-sponsored research summit in Atlanta. To me, the individual findings were not all that surprising—they ran consistent with what I’ve read and seen in the past. However, taken as a group, the insights got me thinking about three specific things dealers will need to do to remain relevant and satisfying retailers as they increasingly serve a new generation of smart, technology-astute buyers.

1. Align your sales process and strategy to emerging expectations: It shouldn’t surprise any dealer that tomorrow’s generation of vehicle buyers doesn’t like a purchase process that requires negotiation and up to four hours in the showroom to complete a deal. In fact, these are key drivers behind the growing number of dealers who have re-engineered their sales strategy toward a model that moves cars with little or no negotiation. Some are pressing the in-showroom sales timeline to 90 minutes and less.

This model requires two steps many dealers are still reluctant to undertake—putting “first pencil”-like prices on new/used vehicles online, and standing firmly behind their market-validated asking prices in the showroom.

To be sure, this sales strategy re-alignment isn’t easy. It’s really a cultural shift that requires payplan and process changes to advance a business model where transparency leads to trust and, in turn, trust leads to more cost- and time-efficient sales and improved profitability. Currently, dealers who have adopted the limited/no-negotiation models report positive early pay-offs, and greater satisfaction from Millennial/other buyers who are delighted to share their experiences with friends.

2. Embrace Technology: If anything, the findings listed above suggest that the speed of technological change for dealers will only increase. Millennial buyers like photos, but they love videos. They get frustrated when they can’t easily find prices or vehicles using mobile devices. More and more, they’ll also want to complete a greater share of their vehicle purchases online.

In her research findings, Hartwell shared that Millennials want to engage retailers who “get them.” This means dealers will need to know more about each customer before the first phone call or showroom visit—a level of understanding that is only possible with new technologies. In the end, dealers will need to make sure every customer engagement picks up where the last one left off.

3. Let go of the Gen Y stereotypes: Paponetti’s research reminds Baby Boomers like me that we can be dismissive of the positive traits Millennials can bring to a business. They consider themselves creative innovators who thrive in collaborative environments and question the “whys” behind processes that strike them as inefficient or outmoded. They’re technology “natives” for whom adapting to new technologies is relatively easy. They have a willingness to take risks and learn from mistakes. They are loyal and hard workers when they receive the near-constant level of feedback they need to shine and feel happy.

As dealers prepare for future buyers, they will be challenged yet again to let go of some of the traditional ways of retailing new/used vehicles. The good news: Based on the size of the Millennial demographic, there will be a lot of up-and-coming professionals entering the work force to help take their businesses where they’ll need to be.

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Germain Group Makes Finding Talent A Top Priority

Dale Pollak — Mon, 08 Sep 2014 19:38:22 +0000

There’s a lot of talk in our industry about the difficulties dealers face finding—and keeping—good employees.

Much of the discussion often focuses on ways dealers and the broader industry can change the less-than-favorable reputation of automotive retail careers as a “last resort”-type option for people who, for one reason or another, can’t find work in other industries.

Of course, the onus for changing this reputation largely falls to dealers. They are the ones who, on a day-to-day, employee-by-employee basis must prove that automotive retailing can be a meaningful, rewarding and satisfying career choice for aspiring young professionals.

Last week, I received a link to a video (see below) the Germain Motor Company, run by dealer Steve Germain, is using to attract new employees. It features one of Germain’s sons, Austin, in a variety of dealership roles explaining why the dealer group seeks employees who are “consistent, take ownership and build strong relationships” and how the group invests in their success through autonomy, ongoing investment, technology and training. The younger Germain urges viewers to “stop looking for your next job and start your career today.”

COO John Malishenko says the video is part of broader effort at Germain to take its recruitment and retention efforts to the next level. “As businesses, we’re as people- and process-focused as any other industry, if not more so,” Malishenko says. “We hope the video will connect Germain to a younger generation of employees. We want them to know that if they share our values, they’ll share in our success.”

The video strikes me as a good example of the proactive efforts dealers will need to undertake to both change the perception of automotive retailing careers in general, and to attract and retain the next generation of employees who can help ensure the long-term prosperity and viability of our business.

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A Velocity Dealer Turns Up The Heat—And Keeps It Hot

Dale Pollak — Thu, 04 Sep 2014 16:02:25 +0000

You might say the month-in-month-out focus of automotive retailing is both a blessing and a curse.

It’s a blessing when you’ve had a bad month. As the next month starts, the pain of a poor prior month tends to fade quickly.

Conversely, the month-to-month mindset is a curse when a really good month cascades into complacency when the calendar turns a page.

The challenge for dealers, of course, is to rise above the ups and downs of the business and stay focused on the long game of continuous performance improvement, irrespective of past failures or successes.

I was reminded of this higher order of operational excellence when I received a note this week from dealer Rick Ricart of the Ohio-based Ricart Automotive Group.

You may remember Ricart mentioned here recently for earning distinction as the No. 2 used vehicle retailer in the country. At the time, he pledged to make No. 1 for next year’s rankings.

Ricart and his team appear to be well on their way. They had a record-setting August with more than 770 used vehicle sales (more than double their monthly average a year ago), and he’s pushing his team to keep their collective feet on the accelerator.

In the note Ricart shared with his team, he gave them props for a record-setting month, and then focused their attention on next steps to finish the year, and start 2015 with an even higher degree of profitability and success. Here are some excerpts from the note, which I thought were worthy to share with the broader community of Velocity dealers:

“Welcome to September. A strong finish to August helped us deliver a record 771 retail used units. We took a hit on gross to get the units, but it helped move quite a few aged units, which is always good.

Switching gears and thinking about the 4th quarter, the key to the success of this department is all about Inventory and Velocity. We are past those summer months that huge volume of customers help hide some of the “dice rolls”, if you will. Time to tighten up the buying. Unless you are 100% sure we can make 6%-8% profit on day 21: Do not buy the car. Critical. I see too much repricing to target at day 14-21 that we are only asking a few hundred in markup. That has to stop now. We should be able to steal cars. The market is dropping. Don’t get tricked into over-paying….

Ricart’s note goes on to discuss game plans for specific, problematic vehicles, and ways to lower the group’s used vehicle inventory investment (e.g., “buy selective and smart”).

The note struck me as a great example of the kind of dealer-level involvement in used vehicle operations that is critical for success in today’s market. In addition, it’s another reminder that tomorrow’s used vehicle profitability and sales is rooted in the astute exercise of Velocity fundamentals today.

Congrats, Rick and team. Keep up the outstanding work!

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A Consumer Perspective On Vehicle Financing, F&I Practices

Dale Pollak — Fri, 22 Aug 2014 21:10:25 +0000

There’s been a fair amount of hand-wringing in the industry following the recent New York Times editorial that addresses the rise of vehicle financing for credit-challenged buyers and how some deals make their financial situations worse. The piece calls for greater regulation of the market and rules that would prohibit dealers from “gaining additional profit by manipulating interest rates.”

NADA issued a strong rebuttal, an Automotive News columnist says the editorial makes “unreasonable demands” while “grossly misrepresenting” industry F&I practices, and it’s a topic of discussion among dealers.

Here, however, I’d like to side-step the debate over greater regulation of dealer F&I practices—except to say that Wall Street’s new-found interest in vehicle loan portfolios, particularly in sub-prime, suggests more, not less, scrutiny in the future.

Instead, I’d like to focus on an aspect of the editorial that has generated little, if any, industry discussion—what consumers think about vehicle financing and other F&I practices at dealerships. Consider the following reader comments on the editorial:

From Joshua Bauman, Brooklyn, NY: “Car dealers are dependent on these types of loans to generate the kinds of profits they need to stay in business. Selling the used cars at large markups to people with bad credit makes up for all the new cars sold and leased at little or no profit. While most dealers are able to make 1500 to 2500 a unit on new cars, most of that money comes from the “back end” or F&I (finance and insurance) department….The solution is not so simple, but the sub-prime auto loans should be a thing of the past. Additionally, the ability for car buyers to make deals close to or even below dealer invoice on new cars needs to end as well, if we want to expect auto dealerships to stay in business while running a clean finance department.”

From David R (Location Undefined): “Lots of us (probably most of us) do research on what car to buy; how reliable it is, what kind of fuel economy it gets, etc. Yet few of us do that kind of research regarding the dealership, but fortunately, that task has gotten considerably easier. It is now pretty easy to go online and see what kinds of complaints any particular dealership has received. Angieslist.com and yelp.com are but two websites that have frank descriptions of consumer transactions…Considering that virtually all cars made now are tremendously safer and more reliable than cars of the past, picking the right dealer is more important than picking the right car.”

From Allison, Irvington, NY: “The internet has removed dealers’ monopoly on price information, but there is far less transparency on credit pricing. Therefore, they make more of a profit on the loan kickbacks than sale of the vehicles…If at all possible, get pre-qualified for a loan at an acceptable rate before setting foot in a dealership.”

From Jon Greene, NYC: “It is interesting to consider that we may be looking at the beginning of the collapse of the car dealership as a business model. If regulators are successful in clamping down on the banking side of dealerships’ profits, it just may be the end. Long regarded as one of the shadiest players in any local economy, car dealers have always found clever ways to squeeze enough from customers’ pockets to keep their own heads above water. But transparency in pricing has pinned them against a wall. That genie is out of the bottle and cannot be put back; so margins on sales are not enough to keep the doors open. Without the financing side, what’s next? We should ask what utility these dealerships provide…”

These reader comments caught my attention for two reasons:

First, the comments indicate a high level of awareness about the ins/outs of dealership F&I practices and profitability. This level of awareness will be particularly troubling for dealers who have come to over-rely on F&I income while paying less attention to profit-draining inefficiencies in other departments.

Second, dealers have an opportunity to turn the high level of consumer F&I awareness and dissatisfaction to an advantage. Just as today’s consumers respond favorably to more transparent pricing, they’re likely to have the same positive reaction when they feel comfy and confident with what your F&I managers tell and sell them behind closed doors.

I suspect we’ll see the regulatory debate heat up in the coming months, and it’ll likely boil down to what constitutes a “fair profit” for dealers and what steps they must take to earn it properly.

In this environment, dealers and industry leaders should be focused on defining what a “clean” and customer-friendly F&I department looks like before someone else does.

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A Parallel Between Electronic Dance Music and Retailing New/Used Vehicles

Dale Pollak — Mon, 18 Aug 2014 18:41:16 +0000

On Sunday, The New York Times published an article about efforts by organizers of the Electric Zoo Festival, a three-day electronic dance music (EDM) event in New York, to curtail drug use among attendees.

A year ago, the event shuttered a day early after two people died from apparent drug overdoses. In more recent weeks, six drug-related deaths occurred at EDM festivals in Canada, Maryland and Nevada.

I was drawn to the article both as a parent of a teenage son who listens to EDM, and as a curious fan of music of all types.

The article includes a quote from Robert F. X. Sillerman, a media mogul whose SFX Entertainment now holds a significant financial stake in the Electric Zoo Festival:

“Electronic music is the soundtrack for this generation. In my day, music was a series of short stories, with a beginning, middle and end. But what’s fascinating about Electric Zoo is that what you see are 10,000 kids dancing in unison, without a narrative, and not all hearing the same thing. The paradigm has changed. The Internet has created a collective mind-set of individuals. The audience is now in charge.”

I wasn’t expecting the article to offer any insights about retailing new/used vehicles, but there it was—today’s vehicle buyers are definitely in charge, and dealers who embrace this new reality will fare better than those who resist it.

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One-Price Dealers’ Time Has Come

Dale Pollak — Fri, 15 Aug 2014 22:35:15 +0000

Below is a comment and my response to a recent blog posting, questioning the success of one-price dealerships. (if you’ve read the initial conversation, there’s more below. Scroll down to “Additional Thoughts”)

Good afternoon Dale

I had the pleasure of reading one of your articles today. I found it interesting. However, it would be also interesting to go back through the history of this one price concept and see how many dealers have either gone completely out of business or had to abandon this noble concept.

Over the past 24 years I have witnessed many dealers try this, some have succeeded of course, but many, many more have failed or at least from my memory. It sounds great and there are a few of the used car outlets that have claimed to have success with this, but I can only name a couple that have lasted and each one of those had a gimmick that helped the process of one pricing. The one price model was not the sole basis of why people purchased from these dealers.

But, thank you for putting out an article that was easy to read and was not a direct attack on the rest of us. Have a great afternoon

Reply:

It is true that one-price automotive retailing as we know it today has been around since the 1980s. To be clear, however, the selling environment has changed considerably over this period. I believe initially those dealers that tried one-price selling in the 1980s had the right idea, but they were too early. For that reason and others, most failed. It should be noted, however, that a handful succeeded and today continue to thrive as a result of it. Examples include Edmark Superstore in Boise, Idaho and the Marsh Auto Group in Traverse City, Michigan. These retailers had a notion that there was a better way to buy and sell cars and they had the operational and executional discipline to prove the case. No doubt their road was difficult, and many others failed along the way.

Today, however, the selling environment is very different and continues to change. One major characteristic of this change is the emergence of Gen Y that are now just entering their car buying years. Every bit of research on Gen Y buyers indicates that, unlike their parents and grandparents, they are not intent on getting “the best deal” but rather a fair deal with the least amount of effort and time. For this reason, I believe firmly that the justification for one-price selling is very strong, or put another way, its time has come.

Having stated this conclusion, I must note that even though the time has come for one-price selling, it remains extremely difficult for most dealers. This is because true one-price selling is not just about eliminating negotiation but rather instilling the culture throughout the dealership around an experience that meets the needs of consumers who desire fairness, speed and ease. Visits to the aforementioned dealerships are very valuable and enlightening because, unless you see it and experience it in action, it is hard to grasp. It comes only through a religious-like dedication to a particular way of doing business.

Finally, I think it also needs to be noted that every dealership is on their way to one-price selling. Specifically, every dealer is on a journey of enlightenment to the understanding that unless they price vehicles competitively, they will not see enough shoppers, to make enough sales, to justify their investment. Some dealers, like one-price dealers, are already there, others on their way, and still others kicking and screaming and/or in denial, but all are truly on their way. Simply stated, if a dealer does not ultimately arrive at this conclusion, they will not remain in business. Once a dealer reaches this point of enlightenment, they also must come to the realization that they cannot discount or discount as much as in the past. So if you haven’t noticed, the spread between asking and transaction prices in the industry are narrowing and will continue to do so over time. Given this unstoppable phenomenon, I would strongly recommend to you and others that you learn the discipline of rational pricing and selling with little or no discount. I can personally attest to the fact that when it’s done right, the financial and personal rewards for the dealership, customers and employees are enormous. To state it simply, the question is not if, but only when…now or later.

Additional thoughts:

Good evening Dale,

Thank you for taking the time to write back to me. I see that you are very dedicated to the cause of One Price Selling. You do have valid points, but I do have to ask a question about Generation Y. Since studies seem to prove that Gen Y are not really interested in vehicles and currently the majority of the buyers are over 45, why should we move to sell a product to a generation that will not be buying the product that much?

But as for One price selling, I am all for it. Then it would come down to who provides the best customer buying experience and who has the best trained staff. But I think that there are/will be laws violated when this process becomes as popular as you believe it will be. I know in the past dealers have been slapped on the hand by the feds for trying to use one price pricing on new vehicles as a locked in process.

But Thank you again for writing back. Best of success to you.

Reply,

I really appreciate all of your thoughts. I would, however, like to make a few points regarding some of your assumptions. First, I almost never recommend to dealers that they convert to one-price. For the reasons that I stated, I believe that it is the most efficient selling model, and ultimately where our entire industry will end up. Even with these beliefs, I recognize that very few dealers actually understand or are prepared to do it properly, and for that reason, I do not prescribe it.

Also, you state that when the one-price environment becomes the norm, it comes down to who has the best customer experience and trained staff, and I completely agree. I also believe that there is yet one more very important differentiator, and that is, who has the most efficient operation. Since one-price selling necessarily entails thin margins, expense control and operational efficiency (i.e. processes throughout the dealership) will be yet another key differentiator.

It should also be noted that one-price selling is not illegal unless the various one-price sellers collude in setting their single price. This is not something that I would ever advocate or anticipate occurring.

Finally, I need to correct your statement that most Gen Y buyers are not interested in buying vehicles. Fortunately or unfortunately, vehicles are a necessity for most people whether they have a high or low degree of interest. I’ll acknowledge that previous generations of America had a love affair with the automobile, and the Gen Y population seems to be much less infatuated, but the fact remains that at least for the time being, car ownership represents the most viable form of transportation for most Americans.

Again, I just want to thank you for the quality of your thoughts and commend you on your curiosity. Asking the right questions is the first essential step to understanding the environment.

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Two Bright Stars Shine In East Tennessee

Dale Pollak — Fri, 08 Aug 2014 23:02:42 +0000

My travels this week took me to East Tennessee to visit two dealers, Daniel Johnson, GM of Johnson City Toyota and Dustin Walters, GM of Friendship Hyundai.

The visits were part of a larger Cox Automotive program that aims to help dealers earn financial rewards from their investments in AutoTrader.com, Manheim and software companies like vAuto.

Both Johnson and Walters are part of an up-and-coming generation of dealers who are making quite a mark in their local markets and beyond.

As the GM of the Toyota store, Johnson is leading a fast transformation of the business. In just 45 days, he and his team have added 50 additional new/used vehicle sales, a 30 percent improvement from the store’s average under prior ownership.

The success isn’t all that surprising when you consider Johnson’s own quick rise from service advisor to NADA Dealer Academy graduate to GM/owner—all before he’s 40. Johnson is a progressive thinker who also appreciates the history of our business (as evidenced by a general ledger and ribbon writer from the previous owner displayed in the showroom).

Just down the highway, Walters is a second-generation dealer whose family-owned group earned the honor of Automotive News’ Best Dealership To Work For award last year for its Chrysler-Jeep-Dodge-Ram in nearby Bristol. This dealership, and Walters’ Hyundai store in Johnson City, are also on the list of contenders for the 2014 Best Dealerships award.

In our meeting, Walters and his team were hungry for insights on how technology will give dealers more analytics and tools to make car-buying more efficient and satisfying for consumers than it is today. They also wanted to know how Cox Automotive would help them push their business forward—the mark of sharp minds that understand innovation by dealers and their vendor partners is essential for success today and tomorrow.

As I headed to the airport for home, my time with these dealers made me think that the car business, for all its past faults and indiscretions, has an incredibly bright future.

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Dealers As Hunter-Gatherers Or Farmers—Where Do You Stand?

Dale Pollak — Wed, 06 Aug 2014 19:23:23 +0000

Here’s a question that’s had me thinking: Has the evolution of the automotive retail business reached a point where dealers need to stop hunting and start farming?

The question came to mind during a conversation with an industry analyst. He offered an anthropologist-type view of the industry—some dealers are hunter-gatherers, while others appear to have advanced to more agrarian or farmer-like modes of operation.

To explain his view, the analyst shared two philosophies that guide distinct types of investors.

The first philosophy, known as “market timing,” has investors aiming for one-off opportunities that, because of market changes, offer quick-hit potential to maximize their returns on investment (ROI). This approach can yield big returns but it carries sizable risks and, by its nature, is a less-efficient investment strategy.

The analyst considers this investment philosophy akin to the traditional way dealers have managed their used vehicle inventories. For these dealers, the age of vehicles is less important than finding a buyer willing to pay the maximum front-end gross profit they expect on any given vehicle. Like hunter-gatherers, the dealers encounter periods of feast or famine, depending on their ability to find buyers. Unlike hunter-gatherers of the past, though, most dealers cannot pull up stakes and move to another area where buyers (or live game) might be more plentiful.

The second philosophy, known as “dollar-cost averaging,” emphasizes the execution of a consistent investment strategy over a longer course of time. Most of us, I think, typically follow this investment philosophy with our retirement portfolios—we align a mix of investments and risk to our strategy and seek a long-term, positive gain as we ride ups and downs the market.

The analyst likens this investment philosophy to the market-focused approach many dealers have undertaken in used vehicles. These dealers are like farmers, selecting a specific, strategy-based mix of vehicles (or crops) that will yield the best return given local market conditions. These dealers, like farmers, can be opportunistic on occasion, but their profitability rests on consistently and efficiently executing their strategy over time.

As we discussed the analyst’s view, we recognized that many dealers actually embody a blend of both types of investment philosophies in their used vehicle departments. Some dealers operate like hunter-gatherers as they set above-market prices for “fresh” used vehicles that don’t necessarily deserve the profit-prime market position. The hope, of course, is that the pricing decision, timed to reflect their desire for maximum gross profit on a “fresh” car, will yield a buyer willing to pay the premium.

But as the vehicles inevitably age, the dealers shift to a more farmer-like mode. They mine the market and readjust prices as they wind down their expectations for front-end gross profits and wind up their desire to sell the vehicle before it becomes a money-loser.

We then asked ourselves if there were any dealers who might truly follow the “dollar-cost averaging” or farmer-like philosophy in its purest form.

The analyst and I quickly realized that dealers who have adopted one-price or limited negotiation strategies in their used vehicle departments would qualify as automotive retail farmers in today’s market.

First, their strategy rests on a long-term view—they haven’t adopted one-price/limited negotiation environments as a quick fix; the dealers believe their strategy is right for customers today and tomorrow.

Second, the strategy emphasizes efficiencies and customer satisfaction. The dealers waste no time pricing every “fresh” car to its correct market “sweet spot,” and their showroom processes give sales associates the ability to close more deals in less time. In addition, the dealers believe that as their processes satisfy customers, they’ll see higher levels of repeat and referral business.

As the analyst and I wrapped up our conversation, we both predicted that the “dollar-cost averaging” or farmer-like philosophy would likely be the dominant operational model for dealers in the coming months and years.

The prediction flows from recognition that while many dealers may blend the two investment philosophies in their used vehicle operations today, the duality will eventually become counter-productive in the face of an ever-increasing need for improved efficiencies and sales throughput.

The analyst closed our discussion with an appropriate take-away quote: “If dealers were cavemen, it seems time to put down the club and pick up a plow.”

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A Closer Look At The Evolution Of Used Vehicle Inventory Age Benchmarks

Dale Pollak — Mon, 04 Aug 2014 19:18:28 +0000

It wasn’t too long ago that dealers routinely kept used vehicles for 90 days as retail units.

More recently, dealers have adjusted this retail timeline to account for rising price competition and transparency spurred by the Internet, as well as the always-increasing costs of keeping cars in retail-ready condition on your lot. It’s now common for dealers to set a 45-day or 60-day retailing timeline for used vehicles.

In my work with dealers, I’ve urged them to maintain at least 50 percent of their used vehicle inventory under 30 days of age. This operational standard effectively forces used vehicle managers to make pricing and merchandising decisions that will reduce the average days to sale for every vehicle, and helps them beat their 45- or 60-day retail window.

But lately, I’ve seen a growing number of dealers move the goal posts. They are making 30 days the maximum amount of time they’ll give any used vehicle a shot as a retail unit.

At a Chicago-area dealership, for example, the average age of its 70-vehicle inventory is 10 days, with all but four or five cars selling under 30 days. “I know exactly why those few units didn’t sell more quickly,” the dealer says. “We made a mistake along the way with our merchandising or pricing, plain and simple. Our next goal is to consistently retail everything under 30 days.”

At a six-store group in Indiana, the used vehicle director took a more data-detailed path to determine that retailing cars after 30 days isn’t doing the dealer group any financial favors. He examined the front- and back-end net profit generated from used vehicles sold by age (e.g., 0-10 days, 11-20 days, etc.).

The results were eye-opening: Cars retailed before 30 days generated an average net profit of $927/vehicle; those retailed between 30 and 60 days actually lost an average of $757 (even though average F&I gross profits were higher for the older units).

“I was a little shocked when I saw the numbers,” the used vehicle director says. “We’ve got a lot of work to sell more used vehicles under 30 days.”

Meanwhile, a New York dealer came to a similar conclusion. “We’ve crunched the numbers and found the return on investment (ROI) fades quickly after 30 days,” the dealer says. “With 30 days as our new goal, we’re putting our attention and time on vehicles where the effort is worthwhile to the dealership from an investment perspective. I now expect the cars to be gone on day 31.”

These dealers’ comments and performance suggest two takeaways for other dealers—particularly those who still consider a 60- or 90-day inventory age policy as OK.

First, less is more when it comes to a used vehicle’s time in inventory. The old axiom that “fresh cars deliver the best gross” is truer today than it’s ever been. I would submit that dealers who allow a retailing window beyond 45 days do not yet realize how much they could improve used vehicle sales and profitability if they shortened the timeline.

Second, turn-and-earn efficiency in used vehicles works. A dealer with a 30-day retailing window will sell three times as many vehicles—and triple the opportunities in F&I—than a dealer with a 90-day age policy. In addition, the more-efficient dealer will likely see little, if any, wholesale loss compared to the other dealer.

Each of the three dealers referenced in this article were highly profitable and successful in used vehicles before they focused on a 30-day retail timeline. I asked each of them why they felt the need to raise the bar.

“We’re never satisfied with good enough,” the New York dealer says. “We’re in the business to make more money, not just get by.”

The Chicago dealer adds: “Whether it’s in business or my personal life, I’ve always pushed to get better. I’m just applying that philosophy to used vehicles, where the market requires us to sell cars faster than we used to.”

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Dealer Discovery: Why “Total Gross” Matters Most In Used Vehicles

Dale Pollak — Fri, 01 Aug 2014 21:40:09 +0000

I had an e-mail exchange with a Chicago-area Honda dealer the other day that I think is relevant for all dealers, especially those who have adopted the Velocity Method of Management.

The dealer asked two important questions—What’s the optimal percentage of used vehicle inventory that should be maintained under 30 days of age?, and, What’s an average front-end gross profit benchmark for today’s market?

The questions go to the heart of the challenge dealers face in today’s used vehicle market. In the past, the age of vehicles in a dealer’s inventory and the front-end gross profit averages they might produce weren’t closely correlated. This retailing blessing gave rise to the operational belief that the age of a vehicle didn’t matter as long as it delivered a $3,000 to $4,000 front-end gross profit.

Today, unfortunately, things are different. Dealers now face a higher degree of pricing transparency, competition and operational costs as used vehicle retailers. The result: Most used vehicles lose their ability to make a meaningful margin contribution sometime between 30 and 45 days. In effect, these market conditions have tightened the correlation between inventory age and front-end gross profit potential, forcing dealers to retail vehicles in less time to make the investment and opportunity cost of capital for each car worthwhile.

In light of these circumstances, I advised the dealer that it’s now an imperative for dealers to maintain at least 50 percent of their inventory under 30 days of age—an operational benchmark that requires constantly striking a balance between pricing vehicles for what you hope to achieve in front-end gross profit and what the market will truly bear in 45 days or less.

I also told the dealer that he’d be better off worrying less about his average front-end gross profit for used vehicles and focusing more on the “total gross” each vehicle generates for his dealership.

I explained that most Velocity dealers now understand that every used vehicle really represents four opportunities to generate gross profit—in the used vehicle department, in parts, in service, and in F&I. With this understanding, the average front-end gross profit is only one element of a holistic strategy that seeks to maximize the “total gross” on every car quickly, and repeat the process again and again.

After I shared my thoughts, the Honda dealer did some calculations. He determined that he would meet the inventory age benchmark, sell more cars faster and maximize his “total gross” if he trimmed his front-end gross profit expectations by $300 to $400 per car.

I congratulated the dealer on discovering the secret to success in today’s more-challenged used vehicle market. But his new-found understanding about the necessity and bottom line value of a “total gross” strategy still eludes an awful lot of dealers.

For these dealers, I must ask the question: Do you pay your bills off your average front-end gross profit or your total variable gross profit? And, if it’s the latter, why wouldn’t you sacrifice a little of your average front-end gross for the benefit of increasing your “total gross” on every car time and time again?

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vAuto Dealers Shine On AutoRemarketing Top 100 List

Dale Pollak — Tue, 29 Jul 2014 21:44:09 +0000

It made me happy the other day to peruse AutoRemarketing’s Top 100 (Franchised) Used Car Dealers for 2014.

As I was going down the list, I kept seeing familiar names—stores where vAuto has played a role in helping dealers take their used vehicle operations to the next level. All told, we counted 43 vAuto customers on the Top 100 list (nearly 50 if you add in dealers who subscribe to vAuto Genius Labs products). We also noted the number of vAuto dealers on the list increased substantially from the publication’s inaugural list last year.

From my work with many of the vAuto dealers who made the Top 100 list, I know the transformation of their used vehicle performance has not been easy. It takes commitment and courage to shed the traditional ways of retailing used vehicles and adopt the turn-and-earn principles of the Velocity Method of Management.

Sometimes, the Velocity journey creates initial pain as dealers work through aged inventory and change their people/processes to achieve a higher level of retailing efficiencies, apply market data/metrics to management decisions and shift to a “total gross mindset.”

But I think each vAuto dealer would agree that the initial pain has been worth the long-term gain.

I’m proud of the successes vAuto dealers continue to achieve, and their hunger to do an even better job on a daily basis. Here’s an example of that hunger from dealer Rick Ricart, whose team earned the No. 2 ranking in this year’s Top 100 list:

“Keeping inventory lean, clean, and profitable has allowed us to grow bigger and faster than ever,” he says. “The only downside? Auto Remarketing has us at #2. We won’t stop and we won’t settle until we are #1 in the country.”

I love it. On behalf of the entire vAuto team, I want to publicly congratulate all of the vAuto dealers on the Top 100 list this year.

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Forecast Alert

Dale Pollak — Tue, 22 Jul 2014 15:24:17 +0000

Numerous reports are filtering in from across the country citing geese delivering root beer. Sightings have confirmed that these are not drones, but in fact real geese. Consultation with forecast analysts confirms the fact that there is a 100% chance of root beer delivery from coast to coast. Experts advise all affected populations to immediately ice and consume the shipments with friends, family and coworkers.

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Are You Asking The Wrong Question About Used Vehicle Reconditioning?

Dale Pollak — Thu, 17 Jul 2014 22:20:34 +0000

I received a note from a Velocity dealer asking for guidance to trim $100 to $200 from his reconditioning costs, part of a broader effort to increase used vehicle profitability.

It should be stated that this dealer is a smart operator who’s already wrung significant costs out of his reconditioning processes. He’s reduced mark-ups on parts to roughly 33 percent, and uses lower-cost, aftermarket parts to recondition vehicles that do not meet factory certified pre-owned vehicle program requirements.

Aside from lowering the retail labor rate used for reconditioning work or scrutinizing repair orders (ROs) to eliminate any “padding” by technicians, I didn’t see any sizable opportunity to cut more cost out of the picture.

Then it hit me. Perhaps the dealer, and others who are reexamining reconditioning costs to improve profit margins, may be focusing on the wrong aspect of their used vehicle retailing operation. The real problem, I thought, may well lie with the costs dealers incur to acquire inventory. If they pay too much, there’s really no amount of cost-cutting in reconditioning that’ll improve a vehicle’s profit potential.

In other words, while it’s good for dealers to continually ask, “what is the right amount of money to spend on reconditioning?,” the more important question should always be, “what is the right appraised value of a vehicle, given the likely costs needed to ready the vehicle for retail?”

The latter question is especially important in the current market. Wholesale values remain relatively strong and dealers are hungry to put customers in new vehicles—conditions that make it easy to over-pay for a used vehicle.

I liked how my friend and Velocity dealer Brian Benstock of Paragon Honda, White Plains, N.Y., addressed this challenge in an AutoRemarketing article this week.

“We cannot make the same mistakes that we used to make by overpaying for a car and worrying about that later on down the road,” Benstock says. “You have to buy it right from Day 1. You have to make sure you’ve taken all of the known factors into consideration from Day 1. And, frankly, you’ve got to be more judicious in purchasing the vehicles.”

With this approach, the costs required to recondition a vehicle effectively become a cost of doing business, which dealers can pass on to customers if a) it’s reasonable and b) they understand the hows/whys behind the reconditioning work. As Benstock says in the article, vehicle sellers and buyers “tend to be very understanding” of reconditioning costs if you take the time to explain them.

I complimented the Velocity dealer who contacted me for recognizing that consistent cost efficiencies in reconditioning are essential to profitable used vehicle operations. I also urged him to look a little further up the food chain to his acquisition process, where I suspect he’ll find far more than $100 to $200 in margin opportunity on every car.

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Achievement, Ambition and Blind Faith with Brian Benstock of Paragon Honda

Dale Pollak — Wed, 16 Jul 2014 16:38:51 +0000

Last Friday I had the privilege of conducting a mid-year review with the management team of Paragon Honda, Paragon Acura and Honda of White Plains, New York. All three of these dealerships are under the management and control of Brian Benstock. My experience with Brian and his management team on both Friday and Saturday were extraordinary life events.

Okay, how can a business meeting with a dealership group be an extraordinary life event? Well, the answer is for several reasons. First, it starts with the experience of knowing and working with Brian Benstock. At so many different levels, Brian embodies qualities to be both admired and respected. He has the ferocity and determination of a lion, and at the same time, possesses the intellect and sensitivity of a scholarly priest. In other words, he operates with deftness at a wide range of human, social and intellectual levels.

Brian’s extraordinary qualities are exemplified by the appearance, professionalism and performance of his dealerships and personnel. An outsider of New York approaches the dealership in Queens with the weariness of one entering an urban jungle. Crossing the threshold of the dealership’s front doors, one’s environment is transformed from an uncertain chaotic environment, into one of orderly activity. The facilities are immaculate, the personnel are friendly and professionally attired and one gets the clear impression of a well-executed Broadway performance. There is an upbeat energy in the air that defies the outside physical environment. One immediately knows that they’ve entered a special realm.

The meeting with Brian’s team was equally as motivating. Although I met many new people, I was warmly greeted by dozens of managers with whom I’ve made acquaintance over the 8 years of our relationship. The team was willing to accept my challenge to raise their game to an even higher level. Unlike many such experiences, Brian’s team eagerly accepted constructive criticism and the challenge to do even better. Unlike so many dealerships, Brian’s personnel are humble and eager to change. These qualities are all the more impressive in light of their clear dominance in new and used vehicle sales on a national basis. In short, one could not ask for a better team than Brian has assembled in the Paragon and White Plains organizations.

The most extraordinary experience of my visit this past weekend occurred on Saturday when Brian invited me to run with him through Central Park. So what made that experience so special? Well, let’s start with the fact that Brian, at age 53, is a marathon athlete capable of running 26 miles at approximately 7 minutes per mile. As if this wasn’t intimidating enough, I accepted Brian’s invitation with great reservation considering the fact that I can’t see. Although I love to run, I’m not capable of running at Brian’s level, nor was I comfortable running in an unfamiliar and crowded environment like Central Park. I repeatedly tried to decline Brian’s invitation to run, but he insisted that I accept.

Well, I have to say that it was an experience of a lifetime. The day was perfect, not too hot with a sunny blue sky. We agreed that we would run the 4+ mile loop around the northern end of the park. Brian gave me repeated assurances and confidence as we approached the park. I imagined everything going wrong, including not running fast enough, bumping into other runners and cyclists, and most frightening of all, the potential of injury to myself or others.

As we began to run, I immediately realized that I was in a good place and company. From my initial strides, Brian began a constant stream of communication, informing me of terrain, traffic and surroundings. While I couldn’t see much in the bright sunlight, I could see absolutely nothing in the frequently shaded areas of the track. I quickly discovered that I was running with complete blind faith in Brian. I think it’s fair to say that very quickly, Brian and I achieved a mutual understanding that we were running as one. Quickly my fear and inhibition melted away in favor of a sense of freedom and overwhelming emotion of joy. Moreover, my excitement was even heightened by the clear sense that Brian was enjoying the experience as much as me. I was completely in his hands, and he was completely in control, and together we were sharing an experience of a lifetime.

The rest of the day and weekend, and in fact, currently as I write, I cannot stop smiling when I think about the experience that I shared with Brian at both his dealership and in the park. I’m truly privileged for the relationship, experience, knowledge and friendship that I have derived from Brian. He is truly a treasure.

Brian, thank you, thank you, thank you for all that you have done for me and for the experience that we shared together last Saturday. I will treasure it for a lifetime.

(Watch and listen to Brian explain the up hill terrain to Dale )

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3 Ways The “Profit Per Day” Metric For Used Vehicles Falls Short

Dale Pollak — Mon, 30 Jun 2014 13:32:21 +0000

Several dealers have asked me recently about the value of measuring the “Profit Per Day” of their used vehicles.

As I understand it, the metric is determined by dividing a unit’s front-end gross profit by its days in inventory (e.g., a retail unit that generates $1500 in profit after 30 days would translate to $50 in profit per day).

The metric appears to help dealers see how some units generate a higher per-day profit than others, particularly if they sell quickly. Likewise, the metric would also help dealers recognize that inventory turns are important. (For example, if the same vehicle noted above sold in 60 days and generated a $1500 front-end gross, the per-day profit would be $25.)

But I don’t think the metric is really the “game-changer” for maximizing inventory turns and profitability that its proponents claim. I say this for three reasons:

1. The metric doesn’t pass the “So what?” test. I might be missing something, but the metric seems to affirm what any market-astute dealer already knows—some cars do better than others and, generally speaking, you make your best front-end gross on any car while it’s fresh. To be sure, the metric offers some potential value to help dealers spot problem cars. But I would submit most dealers, if they’re honest with themselves, are already aware of the winners and losers on their lots.

2. The metric’s built on a faulty premise. The metric seems to be built on the traditional belief that you “make your gross” when you sell a used vehicle. In my day as a dealer, this was largely true—the customer didn’t know how much we might/should have paid for the vehicle, and it wasn’t easy for buyers to compare cars and prices, which gave us a lot of latitude with our cost-up mark-ups and margins. Today, however, it’s different. Customers are more circumspect and smart about retail prices and, as a result, there’s unprecedented pressure on front-end margins. In this more transparent environment, dealers effectively establish the front-end gross profit margin potential on any car when they acquire it. If they pay too much, the front-end gross profit will suffer, irrespective how of quickly the vehicle sells. In this instance, the Profit Per Day metric wouldn’t reveal that a dealer may have a problem acquiring cars “on the money.”

3. The metric raises more questions than it answers. The beauty of the Profit Per Day metric, its simplicity, is also its curse. Beyond buying the “right” car for the “right” money, there are a host of other factors that affect a vehicle’s gross profit potential—paying too much or taking too long in reconditioning, a car-specific pricing strategy that balances gross and turn, proper merchandising, discounts at the sales desk. If, for example, the Profit Per Day metric showed a less-than-favorable result for a vehicle, I’d have to ask various questions and see a lot of other data to understand the root causes and learn a lesson.

As I tell dealers, there’s no single metric that will change their destiny in used vehicles. Rather, it’s the consistent, ongoing use of several metrics, in tandem with each other, that help dealers maximize their used vehicle inventory turns and profitability in the most efficient, sustainable fashion.

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AutoSuccess Podcast: 13 Minutes Of Velocity Fundamentals

Dale Pollak — Fri, 27 Jun 2014 19:24:48 +0000

AutoSuccess has posted a 13-minute podcast that covers several used vehicle pressure points for dealers and my views on how they should be addressed to maximize sales and profitability.

You can download the mp3 or listen to the podcast here—it’s a quick refresh of Velocity fundamentals for interested dealers.

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A Cause For Concern For Dealers Who Over-Rely On F&I Income

Dale Pollak — Mon, 23 Jun 2014 20:39:42 +0000

I’ve been struck by a couple trends emanating from dealer F&I offices:

1. Loans are longer. A recent Automotive News report noted that the average length of a car loan runs 66 months, the highest on record for Experian, which tracks the data. In addition, the report calls 72-month loans the “new normal,” and loans ranging from 73 to 84 months saw a sharp rise this year, accounting for nearly 25 percent of all new-car loans.

2. Customers are carrying more car-related debt. A recent TransUnion report shows a steady climb in the average amount of debt customers carry in their vehicle loans for the past three years. The increase appears to owe to factors like customers buying “more car” and carrying over unpaid balances from other vehicle loans. For the moment, customers are able to absorb this additional debt by stretching loan terms to make monthly payments more affordable.

3. Dealers are making lots of F&I money. The Automotive News report shows double-digit gains in F&I/car revenues for top dealer groups, with the top 10 groups averaging nearly $1700 or more per vehicle. The increases aren’t surprising, given the increased emphasis dealers place on F&I income as front-end margins face continued pressure.

4. Everybody’s buoyant. The reports quote dealers, financial company analysts and executives offering an optimistic view of current conditions. Risk factors like delinquencies, factory production levels and portfolio oversight are currently in balance. “There is good discipline across the industry,” one executive says in the Automotive News report.

Taken together, the trends make everyone a winner, which leaves me wondering how long the ride can or will last—and what specific market volatility might make the good times go away.

My biggest concern goes for dealers who have come to over-rely on F&I income for their storewide profitability. Typically, these dealers haven’t focused fully on increasing efficiencies—and margin performance—in their new and used vehicle departments. For them, making more in F&I has been the path of least resistance to increase profitability.

The problem, of course, is that this F&I-dominated strategy seems to rest on a shaky, phantom-like foundation; if any one of the aforementioned risk factors falls out of balance, or a new risk emerges (e.g., rising oil prices), the F&I-reliant dealers will likely find themselves in a tough spot.

First, they’ll see their principal source of profitability diminish due to factors beyond their control and, second, the weight of the untended inefficiencies in other dealership departments will hamper their ability to make up the difference.

Of course, I’m not worried at all about Velocity dealers. Their efficiency-driven and department-diversified profit streams will continue to yield positive results, even if times aren’t as flush in F&I.

The post A Cause For Concern For Dealers Who Over-Rely On F&I Income appeared first on Dale Pollak.

A 3-Step Plan To Prepare For The Sales Model of The Future

Dale Pollak — Thu, 19 Jun 2014 17:19:14 +0000

I’ve been getting more inquiries lately from dealers asking about the merits of a one-price sales environment at their dealerships.

The dealers have seen reports in automotive trade press about groups like Sonic Automotive adopting this non-traditional approach to provide a more efficient, cost-effective and customer-friendly process for selling new and used vehicles.

In some cases, the dealers are simply curious; in others, the dealers are looking to differentiate their dealerships from the competition, and they wonder if a “haggle-free” environment might be better than the traditional negotiation-based sales process they currently employ.

I’m quick to tell these dealers that while I believe one-price sales environments will become the industry norm over time, I will not encourage them not to rush to adopt this more efficient, customer-friendly way of selling vehicles.

My reasoning: It takes an absolute commitment from management, 100 percent buy-in from sales teams, and a complete change of culture and compensation to make the one-price process really work. The first exception, whether it occurs with the price of a vehicle or trade-in offer, always leads to the failure of the entire system. For many dealers, the learning curve is too steep and the risks too great for me to recommending they implement a one-price model.

But I will strongly recommend that dealers explore limiting negotiations to lay the foundation for the day when a one-price sales environment will become a necessary way of doing business. I outline three steps that many dealers have already undertaken:

Step 1: Market-based pricing. In most markets, dealers have come to understand that consumers can easily spot, and ignore, used vehicles that are priced “out of the market.” As a result, many dealers now apply more market-rational pricing decisions as a matter of necessity. These dealers may still negotiate when customers come to the dealership, but their used vehicle asking prices are a lot more transaction-realistic than they used to be.

This same dynamic is more nascent in new vehicles, but it’s a growing trend as dealers embrace technology and tools that allow them to view competing pricing data and combine incentives into their pricing and promotion strategies.

Step 2: Documentation as negotiation. This step often closely follows the adoption of market-based pricing in used vehicles. The idea: Sales associates explain the dealership’s market-based pricing strategy with each customer, and then offer comparative prices of competing cars to validate why the asking price represents a fair price for a vehicle. In addition, the discussion highlights how the dealership uses the vehicle’s unique attributes—color, condition, equipment, mileage and ownership history—to determine its asking price.

Step 3: Tracking discounts. Sonic’s effort to adopt a group-wide, one-price sales process follows the launch of its True Price model last year. Under the model, Sonic dealers would determine the lowest acceptable transaction price for each new and used vehicle, and set an asking price with $300 of “wiggle room” to negotiate with customers. This approach is similar to efforts by other dealers who track the variance between the asking and transaction prices of used vehicles in an effort to minimize discounts and “hold gross.” The thinking: With market-based pricing, there’s even less margin available on a vehicle so why give it away if you don’t have to?

When dealers employ this level of accountability, their average discount will drop from $400 to $500 to $250 or less. (Note: These dealers also incorporate the discount data into the volume-based pay plans they offer sales associates, providing greater rewards for those who give up the least amount of gross margin.)

As I explain these steps to dealers, some begin to understand that the decision by Sonic and other dealers to fully adopt a one-price model and eliminate negotiations altogether represents the next logical step to give customers the level of transaction transparency that they’ve always wanted. A smaller number of dealers will start doing the math and recognize the bottom-line benefits a one-price model can create through lower variable expenses and fewer “closers” on the showroom floor.

Most dealers, however, aren’t quite ready to embrace the trend toward limiting or eliminating negotiations on the price of a vehicle. It’s an understandable reaction given the level of investment and past success they’ve achieved with traditional negotiation-based sales models.

But I believe the handwriting’s on the wall when it comes to one-price selling.

In the not-too-distant future, customers will increasingly expect dealers to deliver the kind of experience they can get from other retailers—where the price you see is the price you pay, and you don’t have to spend an entire afternoon in a dealership to purchase the vehicle you want.

The post A 3-Step Plan To Prepare For The Sales Model of The Future appeared first on Dale Pollak.

Growth, Speed and Future-Focused Insights From A “Black Belt” Dealer

Dale Pollak — Fri, 06 Jun 2014 21:52:09 +0000

I love it when I have the honor of talking shop with Brian Benstock, general manager and vice president at Paragon Honda and Paragon Acura in New York.

As an early adopter of the Velocity Method of Management®, Benstock comes as close as anyone to perfecting the art and science of retailing used vehicles successfully in today’s ever-changing market. He and his team definitely deserve a “Velocity Black Belt,” earning seven consecutive years as the No. 1 certified pre-owned dealer (CPO) for the Honda and Acura brands.

The other day, Benstock shared stats that show his stores are well on their way to achieving the CPO honors for the eighth consecutive year. I took the opportunity to catch up and talk about the business.

“Our results in certified are pretty special, but the real story is that we’re selling 500-plus vehicles a month without adding a single space on the lot,” Benstock says. “We’ve had year after year after year of record growth. We’ve done it by getting more velocity and efficiencies into our used vehicle operations. And what I think makes this a real eyebrow-raiser is that the competition is definitely getting better in our market and outside our market.

“We’re now a very mature certified used car machine and the growth rate is measured in the 5 percent to 7 percent range,” he adds. “For us to continue to have any level of growth has been a quite an accomplishment for the team.”

The Paragon team consistently sells 500-plus used vehicles a month from an inventory of less than 300 units. That performance translates to 18 to 20 annualized inventory turns, and an exceedingly sharp focus on speed in the dealership.

“If we want to continue to dominate, we can’t be weak in any area of our game,” he says. “We’re in acquisition mode seven days a week, 365 days a year. We’ve got to know the time from acquisition to front-line ready and reduce it. We’ve got to make sure we’re adjusting the pricing as necessary every day, it’s no longer every two or three days. It’s got to be an everyday discipline.”

Benstock also shared how, over time, the emphasis on increased speed has spurred changes to the way they segment their inventory. A few years ago the store’s initial inventory “age bucket” ran from 0-30 days; now, it’s 0-seven days.

“Your maximum turn and gross profit opportunities now happen in the first bucket,” he says. “It’s no longer acceptable that it takes three to four days to get a car out of the shop—that’s 50 percent of your first bucket. In fact, it may be time for us to go to a zero to three-day bucket. We’re going to have to keep raising the bar.”

I asked Benstock if he worries about the competition—especially those who might also adopt Velocity principles and give his stores a run for their money.

“There’s no margin for error for us as other people adapt to the new reality of doing business,” he says. “But so much of what has to change in the dealership has nothing to do with technology or tools. It has everything to do with the culture. You can install a tool overnight. The culture takes a little longer to change. We’ve developed a level of expertise that’s going to take other guys a while to get. It’s not going to take seven years like it did for us, but it’s not going to happen overnight.”

As we wrapped up the conversation, I asked Benstock what he viewed as incoming future challenges for his dealerships and the industry.

For his stores, Benstock says their desire to continue their growth will require an even greater emphasis on used vehicles, beyond the success they’ve seen so far with their CPO efforts. “We’re shifting now. We think the advantage will be in the non-certified business as more dealers concentrate on certified,” he says.

For the industry, Benstock sees an emerging challenge as technology plays a larger role in helping dealers manage their businesses, giving less market-astute dealers the ability to compete more favorably with dealers who are already market-smart operators.

“The trend gives me some cause for concern but I think there’s always going to be a way for dealers who are on the edge to see the opportunities and get ahead of the market,” he says. “You’ve just got to be willing to change.”

The post Growth, Speed and Future-Focused Insights From A “Black Belt” Dealer appeared first on Dale Pollak.

A Three-Point Plan To Speed Up Your Sales Processes

Dale Pollak — Tue, 03 Jun 2014 15:35:19 +0000

In the past several years, many dealers have come to understand that speed matters in their dealerships.

This emphasis on speed has been most profound in used vehicles, where dealers have been aggressively working to sell a greater number of vehicles in less time. In market after market, there are dealers who have doubled their used vehicle sales volumes as they’ve made “time is money” a mantra for management and employees alike.

The “time is money” mantra has helped dealers and their teams zero in on problem areas that often slow the velocity of their sales, and crimp their profitability potential. For example, these dealers now get vehicles through reconditioning and detailing in 48 hours or less, and many price their vehicles on a near-daily basis. Both of these “time is money” initiatives go a long way to helping the dealers retail “fresh” cars faster to maximize gross profit.

But now some “time is money” dealers are starting to apply the mantra to another aspect of dealership operations that remains a costly source of inefficiency—their sales processes.

“We realized that customers don’t like the four-hour process we required to buy a new or used vehicle from us,” says a California dealer. “They liked our cars, our people, and our prices, but they didn’t like our process. Now, we try to close deals in two hours or less, and everybody’s happier. Customers like spending less time in the dealership, and our sales associates appreciate the opportunity to sell three or four vehicles a day, versus one or two.”

The California dealer’s experience mirrors that of other “time is money” dealers who have taken steps to shave the time they ask of customers to purchase vehicles. The following are three recommendations these dealers share to achieve what I believe will become a standard of excellence among dealers in the near future—offering customers the ability to buy cars in less than half the time it takes today:

1. Consider what your asking prices say about your sales process. This may seem like a no-brainer, but it’s not uncommon, especially in new vehicles, for dealers to post asking prices that effectively tell potential buyers, “Gear up. You’ll need to negotiate hard when you get here.” By contrast, the “time is money” dealers are going a different direction. Their asking prices do two things—they reflect the market and the process buyers will undergo at the dealership.

“We basically price our cars in line with what used to be our first pencil on deals,” says an Arizona dealer. “We also tell the customer that we price our vehicles competitively to save them time when they do business with us.”

2. Limit discounts and negotiations—or nix them altogether. The “time is money” dealers who have eliminated the most time from their sales processes have adopted a “near one-price”-type strategy. That is, they may still negotiate, but it’s a one-time pass, and the amount in play is often $500 or less.

“Our prices are very competitive and customers know it,” the California dealer says. “A few might insist on negotiating deeper discounts than we’re prepared to give, but we can successfully counter their offers by showing them the market data that validates we’re offering a fair deal.”

If you plan to negotiate, dealers say it’s important to track any discounts made by individual sales associates and managers. The purpose: Determine whose habits of discounting vehicle prices are hardest to break to minimize give-aways of your front-end gross profit.

3. Combine sales and F&I functions. This is a bigger step than many dealers are currently willing to make, given their reliance on F&I income for dealership profitability. However, the “time is money” dealers who combine sales and F&I functions (either with a sales associate or sales manager) say they won’t go back. “It’s a huge time-saver for customers, and we’ve seen positive gains in F&I income,” the California dealer says. “But it takes a blend of coaching, as well as the right type of person, to make it work. Consumers like dealing with a single person and, once you establish trust, it’s much easier to get past price and focus the sale on the value of our products and process.”

The efforts the “time is money” dealers have invested in speeding up their sales processes are a facet of the “race to the customer” reality in automotive retailing today. And, like any race, those who cross the finish line first reap the biggest reward.

The post A Three-Point Plan To Speed Up Your Sales Processes appeared first on Dale Pollak.

A Strong New Car Market Reveals Two Kinds Of Used Vehicle Retailers

Dale Pollak — Fri, 30 May 2014 18:06:10 +0000

“If you’re not getting better, you’re getting worse.”

I’ve heard this quote from Velocity dealers as we discuss their used vehicle operations. For them, the line is really a mantra that drives continuous performance improvement and ongoing gains in used vehicle sales and profitability.

The quote came to mind this week while reading an Automotive News story about dealers who have made used vehicle sales volumes and profitability a top priority—even as new vehicle sales and profits are strong.

The piece highlights efforts by dealers— including Velocity stand-outs John Malishenko, COO of the Germain Motor Co., and George Athan, vice president of sales for DCH Auto Group—to become even more efficient and profitable as they acquire, recondition and retail used vehicles.

The article emphasizes these dealers’ efforts to source vehicles more effectively:

At Germain, Malishenko and team are aiming to acquire 60 percent to 65 percent (up from 40 percent to 45 percent today) of their used vehicle inventory from trade-ins. They plan to achieve this objective by making market-transparent offers up front, rather than holding back to pad gross profit.

At DCH, Athan and team have turned away from live, physical auctions in favor of online auctions to obtain the used vehicles they need. The article quotes Athan explaining the shift: “When we do it online, we don’t have to waste our precious resource, which is our people, leaving the retail operations, driving to auctions and spending a day or two at auctions. We can research the vehicles much easier and quicker in an online environment. We can go from the East Coast to the West Coast if we are looking for specific cars.”

But while these dealers work to improve their used vehicle performance, some dealers seem headed in a different direction.

The article notes that even among the industry’s biggest dealer groups, the goal of a 1:1 ratio of new-to-used vehicle sales “has slipped the last two years as new-car sales recovered.” Translation: Some dealers are taking their eyes off the ball in used vehicles, preferring the satisfaction of putting more new vehicles across the curb.

This dichotomy made me think of the quote. On one hand, you’ve got dealers who are doing everything they can to get better and better in used vehicles. On the other hand, you’ve got dealers who appear to be losing ground in their used vehicle operations.

I don’t consider the situation dire for the second group of dealers at the moment. But, when new vehicle sales volumes begin to ebb and used vehicles become a higher priority out of necessity, these dealers will likely find themselves wondering why the market seems more challenging and difficult.

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Two More Signs Of The “E-Driven Evolution” Of Our Business

Dale Pollak — Wed, 21 May 2014 14:44:59 +0000

This week brings two news developments that suggest difficult times ahead for dealers who resist the car business’ fast-moving, e-driven evolution:

First, on the heels of going public, TrueCar says it’s testing a TrueTrade program that will offer consumers guaranteed trade-in values from participating dealers, according to an Automotive News story. In addition, the company indicates it plans to offer TrueLease and TrueLoan programs in the coming months.

Second, several outlets reported that the Atlanta-based Carvana, which urges consumers to “Buy The Car Without The Car Salesman,” plans to open a second retail outlet in Nashville. Carvana’s business model includes a start-to-finish online financing/purchasing processes, as well as free delivery of a vehicle to a buyer’s home for test drives.

Both of these developments could be viewed as an answer to what consumers have long been saying—we don’t like the traditional way of buying new and used vehicles.

It’ll be interesting to watch both ventures play out. In the meantime, I believe dealers would be wise to study the developments and look for ways they can adapt their new/used vehicle sales processes (both online and in the showroom) to meet consumer desires for convenience, efficiency and transparency.

The post Two More Signs Of The “E-Driven Evolution” Of Our Business appeared first on Dale Pollak.

A Troubling Tale From The Tarmac

Dale Pollak — Mon, 12 May 2014 13:59:56 +0000

A colleague shared the single-side of a cell phone conversation he overheard this week as his return flight from the Digital Dealer conference in Atlantic City taxied to the gate at O’Hare airport.

The passenger in the seat behind him took a call from someone seeking a sales job. The passenger, who described himself as a dealership’s Internet manager, laid out the dealership’s pay plan, which prompted my colleague to take some notes:

New Vehicles: The store pays a straight 20 percent commission on sales, with a $175 guarantee on no-gross deals (“Those are the ones we sell at invoice or need to blow out,” the manager explained to the caller.)

Used Vehicles: The manager broke down a stair-step commission structure: 12 percent on the first three deals sold in a month (e.g, 1-3 cars); 15 percent on the next four deals (4-7 cars); 20 percent on the next five deals (8-12 cars); and a retroactive 35 percent if a sales associate sells more than 12 vehicles.

The manager then explained, “If you sell a $3,000 deal at the beginning of the month, you’ll only make 12 percent, but it’ll be 35 percent if you sell more than 12 cars.”

My colleague shared this experience with me because he thought that I might write about the pay plan. He was correct. The pay plan is troubling to me on at least three levels:

1. It’s based on false assumptions and false hope. The first false assumption is that the sales associate controls the front-end gross profit on a used vehicle deal. As my father used to say, “you make your money when you buy the car” and, in today’s market, when you proactively manage the margin through your reconditioning, pricing and promotion. The second false assumption mixes a dash of false hope—that $3,000-gross deals are plentiful in today’s market.

2. It limits efficiency and productivity. The pay-plan’s gross profit-based foundation means that sales associates will inevitably go back-and-forth with managers to negotiate and close every deal. In this deal-by-deal environment, even the most efficient sales associate would seem to be hard-pressed to put more than two deals on the board in a single day. Over time, I suspect the best sales associates will leave, recognizing that the store’s pay plan and process makes it difficult to reach the magical 13-car threshold.

3. It de-emphasizes dealership profitability. The retroactive 35 percent commission in used vehicles strikes me as dangerous from a variable cost perspective—unless, as suggested above, no one ever hits the 13-car target. I don’t know of too many dealers or markets where a 35 percent commission on their used vehicle sales would leave sufficient after-expense profit to make the original investment in the vehicle worthwhile.

In addition to these issues, the pay plan also suggests a lack of pricing transparency and an in-store sales experience that isn’t likely to satisfy customers who’d rather know they’re getting a good deal in a short amount of time than to spend hours negotiating the price of a vehicle.

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Two Ways To Find The “Sweet Spot” For Your Inventory Turn Rate

Dale Pollak — Fri, 09 May 2014 16:15:12 +0000

You might call it an annual rite—just as the tulips start to bloom I hear from dealers excited about the start of the spring selling season.

This year is no different, as dealers wrapped up March with year-over-year records in used vehicle sales volumes and profitability and passed along their positive results.

Amid all this good news, I received an astute question from the chief financial officer (CFO) of a six store dealer group in the Southwest.

Like other dealers, the CFO was extremely pleased with the performance of his used vehicle managers. He shared stats from March that showed more than 60 percent of the used vehicles at his dealerships were less than 30 days old. Further, the average days in inventory ran less than 20 days across his stores, with some dealerships running less than 15 days. This performance translates to an annual inventory turn rate of more than 18 times.

Then came the CFO’s question: “Dale, is it possible that our average days in inventory can be too low, and our annual inventory turn rate too high?”

The CFO’s question reminded me how much the car business has changed in a very short time. Just a few years ago, most dealers paid little attention to their average days in inventory or, for that matter, their annual inventory turn rates.

Now, it’s a different story. Dealers are combing through their used vehicle inventory and market data, looking for ways to get better—with some like the CFO essentially asking if it’s possible to have too much of a good thing.

Unfortunately, there’s really no clear-cut answer to the CFO’s question. I’ve seen some dealers who turn their inventories more than 20 times without sacrificing any volume or gross profit. (Note: In some instances, these dealers have capital or space constraints that require this rapid pace of retail sales.)

I’ve also seen plenty of dealers who struggle to consistently maintain all the processes necessary to acquire, recondition and merchandise a sufficient supply of cars, and diligently price them all to the market, to maintain an inventory turn rate of 12 times a year.

I told the CFO that, in general, an annual inventory turn rate higher than 15 may suggest lost sales volume and profit opportunities. I suggested that the CFO consider two options that might ease his concern that his teams were selling too many vehicles too quickly.

Option 1: Add more vehicles to your inventory. The additions should be incremental, a few vehicles at a time. In the short run, this option will likely lower the turn rate as the used vehicle department takes on the additional inventory. Over time, though, the addition of a few more vehicles provides the opportunity to increase monthly sales volumes and improve profitability (assuming the additional vehicles don’t overly strain the people and processes necessary to acquire and retail them quickly).

Option 2: Be less aggressive with prices up front. This option almost automatically slows the inventory turn. But it also offers the opportunity for the dealership to increase front-end gross profit averages due to relatively higher retail asking prices. In most instances, this option requires dealers to slightly increase the Price to Market ratios on fresh vehicles (particularly those with dealer-favorable market data) and to be doubly diligent about pricing adjustments as the vehicles get older.

I encouraged the CFO to implement either option, or a combination of both, to help his managers determine the respective inventory turn rate “sweet spot” for their markets and performance objectives.

I also commended the CFO and his team for avoiding a common “spring fever”-induced trap that seems to get a good many dealers into trouble every year: As sales volumes increase, managers start to believe that they could close even more deals if they had more inventory to sell. They’ll then acquire truckloads of used cars, which they can’t efficiently retail in a timely manner. The end result is often a more difficult start to the already-challenged summer selling season.

The CFO promised to proceed with caution, and we agreed that we’d share his experience here in an upcoming column.

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Tempering The Temptations Of Spring In Used Vehicles

Dale Pollak — Fri, 02 May 2014 21:47:24 +0000

It feels pretty good to be a car dealer right now, particularly in used vehicles.

Dealers are reporting strong used vehicle results in April, with some setting records for both volume and profitability at their dealerships. So goes what we call the “spring selling season,” which buoys dealer confidence and their bottom lines.

But amid all the positivity, I feel compelled to offer a word of caution: A strong spring season for dealers invariably spurs some to make bad decisions. Their confidence can quickly turn to folly as they build up their used vehicle inventories based on the belief, as one dealer put, that “we think we can sell everything.”

Recent news about the seasonal adjustment in used vehicle wholesale prices—they’re declining (sharply in some segments) as the market digests large numbers of off-lease vehicles and trade-ins—only adds to the spring-time temptation for dealers to stock up and keep selling. The cars are plentiful, so what’s the harm in ramping up the inventory?

But here’s the problem: While in past years the spring-fed slide in wholesale used vehicle prices might have offered dealers the opportunity to acquire inventory at a lower cost and achieve additional front-end margin, today’s market doesn’t work that way. There’s too much competition and retail pricing transparency for dealers to expect that as wholesale prices decline, retail asking prices will stay the same.

If anything, retail price pressure will effectively erase the additional margin dealers might have enjoyed as a result of purchasing vehicles at a lower cost. Here’s how one Velocity dealer put it the other day: “I’m buying cars cheaper, but I still have to be aggressive with my prices to be competitive and maintain my inventory turns and profit objectives.”

The comment underscores the difficulty dealers face in today’s margin-compressed market. Acquiring used vehicles at the “right” price is only a first step; from there, you must make merchandising, pricing and promotion decisions that help you retail vehicles fast, to limit the market’s appetite to eat away your margin.

Unfortunately, there will be a lot of dealers who simply can’t resist the temptations of spring, and they’ll lack the velocity-focused management mindset that’s necessary to properly expand their used vehicle inventories and retail the additional vehicles quickly to maximize profitability.

For them, the decision to buy more cars today will lead to over-age vehicles tomorrow, and a very difficult summer.

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Factory Certified Pre-Owned Vehicles: 3 Ways To Maximize A Viable Market Segment

Dale Pollak — Wed, 30 Apr 2014 17:04:07 +0000

Dealers have been asking recently about factory certified pre-owned (CPO) programs. The questions flow in part from recent efforts by factories to step up their CPO sales volumes.

The questions essentially boil down to two queries—Are factory CPO programs really worth the price of entry? And, if CPO programs do make sense, how can I consistently make money selling CPO vehicles?

Before addressing the questions, I should note that I’m an advocate of factory CPO programs. To be sure, some are more dealer-favorable and –friendly than others.

But, generally speaking, CPO programs offer value to dealers: They help dealers retail off-lease vehicles, attract new buyers, develop brand/dealership loyalty and pick up future work in their service departments.

Most dealers recognize the benefits CPO programs can bring to their used vehicle operations. The questions really speak to the mechanics of running a CPO program that will maximize profitability and return on investment (ROI) for every vehicle that carries the CPO designation.

On the cost of entry question: Clearly, a factory CPO badge adds costs to a qualified vehicle that can put pressure on the vehicle’s profit potential. On top of that, a CPO-worthy vehicle will typically cost more to acquire and, depending on condition, will require higher reconditioning costs.

The key question for dealers, then, is whether the market (as measured by a vehicle’s Cost to Market and Price to Market ratios) will allow dealers to ask more money for CPO units to achieve the desired profit and ROI objectives. A quick look at recent market data suggests this is currently the case:

CNW Marketing Research notes that CPO sales helped drive a 6.1 percent increase in the value of used vehicles retailed by franchised dealers in February;
CPO sales were up 12.3 percent January and February of this year, according to a report from Manheim chief economist Thomas Webb;
Used vehicle “profits are on the rise, as throughput per store is higher and margins are stabilizing,” Webb adds.

The second question from dealers—how to consistently make money selling CPO cars?—is a little more tricky to answer. That’s because CPO units represent a higher investment risk for dealers. As I answer this question, I share three characteristics common among successful CPO dealers, irrespective of their franchise brand:

A committed, market-measured approach. “We work the program. If we can certify a car, we’ll do it,” says a Midwest Chrysler-Dodge-Jeep dealer, whose CPO sales now account for about 50 percent of his retail volume. “But the decision isn’t automatic. We need a reasonable level of certainty that the market will support our investment to make it a CPO unit.” Put another way, every CPO-worthy vehicle requires its own market assessment to inform whether the CPO investment is worth it. If this dealer decides to certify a vehicle, this market assessment travels with the car to the sales desk, where associates use it to validate why the vehicle is worth every penny of its asking price.
A wholistic view of every CPO deal. The Chrysler dealer and other successful CPO dealers don’t sweat the occasional “short” deal that’s sometimes necessary to retail a CPO unit. Instead, they view the transaction as the culmination of a series of money-making opportunities in service, parts, F&I and, if the unit was a trade-in, the new vehicle department. Likewise, if the deal brings in a trade, it sets off a new profit-making lifecycle for a fresh car. This wholistic view helps dealers recognize that retailing CPO units, just like other used vehicles, is a carefully managed mix of wins, losses and draws that collectively benefit the bottom line of every dealership department.
A 45-day-or-less retail window. Every CPO vehicle should be special, but not that special. Successful CPO dealers treat CPO vehicles like every other used car—each unit must sell within 45 days or less to maximize profitability and minimize risk. This can be a difficult timeline for some dealers to accept, especially since they paid good money to put the CPO badge on the car in the first place. But today’s market takes no prisoners when it comes to time in inventory, and any car, CPO or not, that hasn’t retailed in 45 days reflects a management failure.

As I noted above, some factory CPO programs are better than others for dealers. But I haven’t seen a factory program yet that’s picture-perfect, and the OEM efforts to enhance and protect their brands in the used vehicle arena seem an appropriate way to help their dealers differentiate from the competition and invest in tomorrow’s new car customers.

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Velocity Gains Notice—Next Stop, Your Sales Process

Dale Pollak — Fri, 18 Apr 2014 14:47:13 +0000

In its coverage of the New York Auto Show this week, Automotive News picked up on a concept that’s long been familiar here—the benefits that the Velocity Method of Management® offers for dealers and their manufacturer partners.

The coverage alluded to two points that are relevant to share:

First, velocity principles are coming quickly to new cars. Now, dealers have the on-the-ground competitive insights and market data to fashion fast-selling new vehicle inventories. There’s also a growing understanding that the “right” cars, coupled with more transparent pricing and promotion (as well as more credible trade-in evaluations and easier access to credit/financing information) will lead to a faster rate of sales.

Second, the traditional way of selling new or used vehicles—where customers effectively play a time-consuming game of ping pong with sales associates and managers to lock in the price of a car—needs a velocity-minded makeover. The Automotive News article quotes a TrueCar executive saying if dealers offer “a more efficient and more transparent process, people will actually come back and buy cars more frequently.”

I’m not sure that a more efficient sales process, in and of itself, will mean customers buy vehicles more frequently—especially with the financial strains many families still feel in their budgets. However, I completely agree that dealers who reinvent their sales processes to deliver vehicles in two hours or less will sell more cars and set the stage for repeat business better than those who don’t.

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3 Indicators To Make Market-Smart Used Vehicle Pricing Decisions

Dale Pollak — Fri, 11 Apr 2014 15:23:56 +0000

At a recent dealer group presentation, a used vehicle manager asked me an astute question:

“Dale, how can you tell when a used vehicle may need a price change?”

I liked the question because it suggested the manager was a thoughtful and proactive person—someone who doesn’t follow the more traditional set-it-and-forget-it practice for used vehicle pricing.

In answering the question, I shared the following three indicators that, when used together give dealers the best guidance to make used vehicle pricing decisions and retail every used vehicle for maximum profitability in the shortest amount of time:

1. Vehicle Details Page (VDP) performance: By now, most dealers and used vehicle managers can accurately define a VDP as the “look” a vehicle gets when a potential buyer clicks on an inventory listing to learn more about a specific car. Too few dealers, however, recognize the VDP as the “money metric”—the more VDPs a car gets, the better its chances to sell quickly and deliver the highest level of profitability.

If we assume a used vehicle is “right” for a dealer’s market, and it’s merchandised correctly and fully online, the vehicle’s daily VDP tally is an important indicator whether its price is resonating with potential buyers and the broader market. Some dealers carefully monitor a vehicle’s VDP counts and trendlines to help them determine if a price change is warranted. If the VDP views meet the minimum daily targets they expect to see, they may leave the price as-is; if the VDP exceed the targets, and they appear to be increasing, the dealers may adjust the price to reflect increased demand.

Both of these decisions, however, are contingent on a vehicle’s time in inventory.

2. Price To Market: This metric measures each vehicle’s price against identical, competing vehicles and their prices in a dealer’s market. Some dealers consider this their primary data point to craft their used vehicle pricing strategies and make subsequent pricing decisions on individual cars.

For example, it’s not uncommon for dealers to set Price to Market parameters for inventory age “buckets” (98 percent to 100 percent, 0-7 days; 94-97 percent, 7-15 days; 90-93 percent, 15-22 days; < 90 percent, 22-29 days). This approach recognizes two important fundamentals—fresh cars deliver the best gross profits, and time is often a used vehicle retailer’s worst enemy.

Dealers who use such Price to Market parameters fine-tune prices for individual cars within the individual “bucket” ranges. The key to success here, of course, is the degree of diligence a dealer or used vehicle manager applies to executing the Price To Market-guided strategy. Those who only price and re-price vehicles as they enter/leave an inventory age segment will inevitably leave gross profit on the table as vehicles don’t sell as quickly as they could. The most proficient dealers review used vehicle prices on a near-daily basis to keep pace with the current market.

3. Market Days Supply: This metric, which measures the sales rate and supply of identical used vehicles in a specific market, is most beneficial to dealers as they make the decision to acquire a vehicle. In an instant, the Market Days Supply tells them how much competition a specific used vehicle will face in their market.

The Market Days Supply also informs pricing decisions once dealers have acquired a vehicle. For example, vehicles with a high Market Days Supply (e.g., a greater level of competition) may see price adjustments that reflect the lower rungs of the inventory age “buckets” noted above. By definition, these vehicles aren’t as appealing and unique, hence the more aggressive pricing position.

Conversely, vehicles with a low Market Days Supply often deserve a higher Price to Market position. These are the in-demand cars that warrant more wishful asking prices.

I closed the pricing discussion by reiterating that these indicators work best when you’ve got the “right” cars for your market and they’re merchandised online correctly.

I also noted that when dealers have the “right” cars, and they diligently use these indicators to make used vehicle pricing decisions, good things start happening.

First, your used vehicles start to sell more quickly and, typically, generate better front-end gross profits. The market-based pricing strategy begins to fulfill its goals of retailing every used vehicle for maximum profitability in the least amount of time.

Second, you now have a market-based rationale to justify your asking prices with customers. In many cases, your “on the money” pricing means your sales team doesn’t have to justify anything—the buyer landed on your car because you priced it right.

And last, you’ve got a market-informed, scalable approach to pricing that can drive a “turn and earn” used vehicle inventory management strategy that drives improved performance and profitability in every dealership department.

The post 3 Indicators To Make Market-Smart Used Vehicle Pricing Decisions appeared first on Dale Pollak.

Who’s The “General” At Your Dealership?

Dale Pollak — Wed, 02 Apr 2014 14:15:39 +0000

A few months ago, I finished the biography of Abraham Lincoln, “Team of Rivals,” that inspired the award-winning movie, “Lincoln.”

The book struck me as more than just a masterfully written look back at one of our nation’s best presidents. In fact, I found “Team of Rivals” offered multiple lessons in leadership, revealed as Lincoln addressed ever-thornier challenges during his ascendancy to the presidency and the darkest hours of the Civil War.

One of Lincoln’s greatest challenges came from an assortment of generals who, in the heat of battle and beyond, proved to be ineffectual leaders. Their missteps and mistakes caused repeated setbacks for Lincoln’s goal of ending the Civil War and uniting the nation.

I thought of Lincoln’s struggles with top generals after talking with several dealers at the recent National Automobile Dealers Association (NADA) event about their current difficulties in used vehicles.

The dealers are in varying stages of implementing what I call the Velocity strategy for used vehicles—where market data and return on investment (ROI) are the chief guides for inventory management, pricing and merchandising decisions to maximize turn and profitability.

The dealers offered a variety of pain points—prices too high for the market, an inability to recondition cars quickly, persistent inventory age issues, too many appraisals that “bury” the car, too much discounting with customers, sloppy merchandising, difficulty finding the “right” inventory and others.

I asked these dealers what they would consider the No. 1 reason their dealerships weren’t able to work through these problems. The most common response: A lack of “buy-in” from key managers at the dealership, including the general manager or GM.

“I’m definitely losing my patience,” one dealer told me. “The reasons I get from GM sound an awful lot like excuses.”

That’s when Lincoln and “Team of Rivals” came to mind. The book notes that Lincoln sometimes faced direct resistance, if not insubordination, from top generals. It also highlights how Lincoln remained loyal toward these generals, even as they disappointed him with their performance.

I started wondering about the parallels between Lincoln’s generals and dealership managers charged with reinventing their used vehicle operations. To be sure, the challenges are different, but there are key similarities:

First, the terms of engagement are different. Today’s used vehicle buyers shop online and largely find the car they want before they get to the dealership. This shift has significant implications for the way dealers acquire, price, recondition and retail their used vehicle inventories. Yet, many dealership GMs and managers stick to what they know, which sinks their chances for the outcome their dealer expects.

Lincoln’s generals faced a similar challenge: Their conventional rank-and-file style of engagement was often ineffective against the guerilla and trench warfare tactics their Confederate counterparts employed.

Second, the little things matter a lot more than they used to. I often say, “there’s a thousand things a dealer has to get right on every used vehicle” to expect a profitable outcome. That’s not much of an overstatement considering the importance of getting the “right” car, reconditioning it, and then putting it online with quality photos, compelling descriptions and market-guided pricing. In this environment, it’s easy for dealership GMs and managers to get distracted, and focus on the wrong things, or lose their focus on the “turn and earn” strategy entirely.

For his part, Lincoln fretted on more than one occasion that a particular general lost sight of broader campaign strategy in the heat of battle, leaving an opportunity untaken or another Union force vulnerable.

Finally, the most-successful dealerships achieve higher levels of profitability and success only after they tear down silos, get all departments to work together and align every objective to maximizing the “total gross” of the dealership. In my latest book, Velocity Overdrive: The Road to Reinvention, I describe how the used vehicle department functions as the hub of a “wheel of fortune” that can lift sales and profitability across the entire dealership. It is difficult for some GMs and managers to shed their backgrounds and biases toward a particular department and embrace this “total gross” management mindset.

Lincoln also struggled to achieve harmony among his generals. Eventually, though, he appointed Gen. Ulysses S. Grant to command all Union forces. Together with other generals, Lincoln and Grant aligned Union forces under a strategy that simultaneously engaged Confederate troops and cut off their supplies. The strategy ultimately resulted in Confederate General Robert E. Lee surrendering to Grant at Appomattox Court House.

I liked how one dealer at NADA digested the comparisons I made between Lincoln’s struggles with his generals and the difficulties dealers encounter as they transform their used vehicle operations: “I need to be more like Lincoln, and my GM needs to be more like General Grant.”

“Bingo,” I said.

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Take-Aways From a Talk Radio Interview On “No Haggle” Retailing

Dale Pollak — Tue, 01 Apr 2014 13:33:34 +0000

I had the honor of taking part in a program for Cars, Trucks and Bucks, an online talk radio show hosted by former Chicago Tribune automotive writer Rick Popely, who also writes for Cars.com and other auto-related outlets.

The show’s featured guest was dealer Larry Mullinax, of Mullinax Ford, New Smyrna Beach, Fla. Larry is the son of Ed Mullinax, the dealer credited with first offering a “no haggle, one-price” experience for customers at his Ohio dealership in 1975.

I listened in to Mullinax’s segment and liked the way he answered several of Popely’s questions:

Question: Why does one-price work for you when it doesn’t work for others?

Answer: “It’s a commitment by management to stay with it,” Mullinax says. The commitment extends to the sales desk, where associates and managers must be firm with the “30 percent to 35 percent” of customers who want to “be horse traders” and negotiate for their vehicles. “We’re trying to sell to the masses. We’re going for the 65 percent to 70 percent of the people who like doing it this way.”

Question: Are your prices the lowest?

Answer: “That’s hard to say. We put a very aggressive price out there,” Mullinax says. “We really can’t afford to be high-priced on these vehicles. Are we the very lowest price? I don’t know, but it’s a fair price, it’s a discounted price with all the incentives and it’s a great experience for the customer.”

Question: Is there one price on a trade-in value?

Answer: “You’re buying our car, and we try to give you our best price up front,” Mullinax says. “You’re selling us your car and we’re going to try and give you the best price for it up front. I’m not saying we never move on that price. We’ll move $200 to $500 if that’s what it takes to make a deal.”

Question: What do customers say they like about doing business at Mullinax Ford?

Answer: “They really like having the sales person handle them from start to finish,” Mullinax says. “Our customer surveys are typically higher than group average because they like the process.”

Question: What things are important to customers? Transparency? Time? A simple straightforward process?

Answer: “Time is a factor, but the big factor is that people don’t want to pay too much,” Mullinax says. “Hence, you have people who want to find out dealer invoices, and they look at TrueCar and other services to tell you how much to pay for a car. We’re the same way. We try to get to the bottom line right away. The price you see in the window includes all dealer discounts and incentives. If you think about the way we sell cars, it’s really the same way that you buy everything else in your life.”

Question: Is the industry headed to one price?

The post Take-Aways From a Talk Radio Interview On “No Haggle” Retailing appeared first on Dale Pollak.

What’s Wrong With This Picture?

Dale Pollak — Tue, 25 Mar 2014 16:24:09 +0000

Following a debate-like exchange the other day with a few industry players about the state of today’s new car market, I did a quick search on AutoTrader.com.

My goal was to see whether my assumption—that the way dealers price and promote new vehicles today doesn’t do the dealers, the factories or buyers any favors—is true.

I kept my query simple. I wanted to see listings for 2014 Toyota Camry SEs in the Chicago market. I went seven pages deep to make sure my unscientific review had sufficient data to tell a story. Consider what I found:

Premium Listings: One dealer dominated the 20-plus Premium listings. All of the dealer’s vehicle listings advertised prices ranging from $2,400 to $3,200 below MSRP. Only one competing dealer appeared in the Premium space, occupying the last listing with a Camry priced $4,800 below MSRP.

I also noted that the dominant dealer offered a standard vehicle description that touted its sales process as “the future of car buying.” This dealer also took pains to offer a custom photo for every advertised vehicle.

My thoughts: Overall, I was impressed that both dealers with Premium listings were trying to differentiate their dealerships and Camry offerings. First, they’d ponied up for the Premium placement. Second, they both invested in custom photos to show potential buyers the specific car they had in stock. I wondered if the other dealer’s $4,800 below MSRP price would be an incentive or disincentive to potential buyers—meaning would they view it as a decent offer or something too good to be true.

Featured Listings: Here again, I found a single dealership dominating this paid-for advertising space. My search results included three pages of Featured listings offering an assortment of different-colored Camrys from the same suburban Chicago dealership. A majority of these vehicles listed a price $500 above MSRP, and all of the listings had descriptions imploring shoppers to “PLEASE CALL FOR OUR BEST PRICE.” In addition, I only found one Camry across these pages with a custom photo; the others all carried stock photos of a red Camry, irrespective of the listed vehicle’s color.

My thoughts: Really? I found the Featured listings troubling on several fronts. First, the dealer’s advertising cars above MSRP while telling customers to “call” for a better price. I mean, really? This truly seems like a page from yesterday’s new car playbook. If I were a consumer, I’d likely be wary of calling this dealer, given every listing essentially says “we’ll only play ball if you will.”

In the dealer’s defense, I have to believe there may be some kind of process or technical glitch here. There were far too many cars priced EXACTLY $500 above MSRP, and far too many vehicles with the wrong photos, for me to think that someone had consciously made these merchandising decisions. Either way, the listings suggest the dealer isn’t trying too hard to wow potential Camry customers.

Standard Listings: The Standard listings began on the fifth page of my search results. I evaluated about 70 vehicles from seven dealers (including the two who dominated the Premium/Featured listings). Among these Camrys, all but five vehicles were listed at MSRP; prices on these cars ran $3,100 to $6,000 below MSRP. All of the other Camrys listed MSRP pricing, and the vast majority also carried stock photos, which only occasionally matched the color of the listed vehicle.

My thoughts: If I actually wanted to buy a Camry, I’d be frustrated that a realistic purchase price—e.g., one that’s in the ballpark of transaction price ranges for 2014 Camry SEs on valuation sources like KBB.com and others—seems impossible to find. If I remained committed to a Camry, the dealers who listed the below-MSRP prices would most likely get my first calls. I would also approach each call warily, ready to pounce on price if I felt like I was getting the run-around. Conversely, I’d also probably feel an extreme sense of relief if I found a dealer who credibly diffused the pent-up emotions and pricing confusion I’d gathered while shopping online.

After seven pages of listings, I decided to stop my exercise on AutoTrader. I did a similar, though less-deep, look at 2014 Toyota Camry SE listings on Cars.com. There, I found much the same story—Camrys mostly priced at MSRP, with enough photo/car color mismatches for me to notice.

All in all, my exercise affirmed that my initial assumption was correct. When it comes to new vehicle pricing and promotion, our industry has a long way to go to provide the kind of transaction-oriented transparency that buyers today, and especially tomorrow, have come to expect. Put simply, I don’t think my experience searching online for 2014 Toyota Camry SEs is especially good for dealers, factories or potential buyers.

What an opportunity this is for dealers who see what I see, and take advantage of the technology and tools that help them do a better job pricing and promoting vehicles in a manner that satisfies the wants and needs for consumers searching for new vehicles online.

The post What’s Wrong With This Picture? appeared first on Dale Pollak.

An Apology, An Insight And A Touch of Humor

Dale Pollak — Sat, 22 Mar 2014 18:23:01 +0000

My phone started ringing around 8 a.m. CST this morning. A technical bug caused an extremely rare outage of vAuto’s system.

Our vAuto team scrambled, getting people out of bed and off the golf course to make the necessary fixes. We had the system largely restored in about two hours.

Of course, as temporary as it was, the outage caused inconvenience for vAuto dealers. I’d like to apologize on behalf of everyone at vAuto for the short-term system glitch. I’d also like to extend a heart-felt thank you to vAuto dealers for their patience and understanding as we restored the system.

The dealers who called me exhibited the utmost calm, class and dignity as I explained the situation.

In one of those conversations, a used vehicle director at a large dealer group relayed how he/his team were preparing for Saturday’s customers and considering the prospect of going about their work without the vAuto system.

The dealer’s son, who’s coming up in the business, asked, “How are we going to appraise a car without vAuto?”

The question got me thinking: We’re at a point in our business where the next generation of dealers is developing its “paint” proficiency by looking past the physical car itself. They’re using technology and tools like vAuto to balance the vehicle’s emotional appeal with its real-world retail prospects in a competitive market. I couldn’t help but think how rare this market-focused mindset used to be just a few short years ago.

Another conversation reminded me that humor always makes a tough situation a little better. A New York dealer shared that his appraisers, like the dealer’s son, were questioning the best way to determine the actual cash value (ACV) for customer trades without vAuto. “I just told them to use the loan pay-off amount as the ACV,” the dealer said, as we both shared a good laugh.

As I’m writing, the vAuto system is back at full strength. Thank you again to all our dealer customers, and here’s hoping you have a profitable and productive weekend.

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Marketing Guru Seth Godin Affirms Velocity Management Principles

Dale Pollak — Wed, 19 Mar 2014 21:55:20 +0000

A hat-tip to Velocity dealer CJ Romig of Motor Werks of Barrington, Ill: His “tweet” earlier today brought my attention to a blog post from Seth Godin on “The rotten fish problem.”

Godin’s post is worth the quick read. It succinctly underscores how/why rotten fish, like aging used cars, ultimately undermine a retailer’s profit and sales potential. Godin’s riff is essentially the same analogy Brian Benstock of Paragon Honda, New York, shares to describe his turn-and-earn success as a top-performing Velocity dealer.

Two key take-aways—retail the fish before they rot, and great minds definitely do think alike.

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7 Rules To Recondition Used Vehicles “Right” Every Time

Dale Pollak — Wed, 19 Mar 2014 20:14:28 +0000

I like the way the general manager of a Chevrolet dealership in upstate New York thinks about used vehicle reconditioning.

“It’s just as important in terms of gross profit as working the deal in the front of the store,” the GM says. “I know that may sound crazy but I really believe it. The faster you can get those cars to the front line with the right amount of reconditioning, the more actual time you’ve got to make the biggest gross you can make.”

This emphasis on the importance of reconditioning vehicles “right” has led the GM to audit and re-examine the reconditioning processes at his dealership. This examination came even though the GM and his team were anything but slouches when it comes to reconditioning and retailing used cars. In the past year, they’ve successfully trimmed the recon-to-front-line times to an average of three days, while doubling the dealership’s monthly used vehicle sales volumes to 130 units a month.

Still, the GM believes “there’s more gross to be made” if he and his team can make used vehicle reconditioning even more cost-effective and efficient. The following are 7 Rules For Used Vehicle Reconditioning that the GM and his team developed after a top-to-bottom review of what’s working and isn’t.

Rule 1: Make speed and quality your chief strategic objectives. For the GM, these dual objectives provide the basis for evaluating every aspect of his reconditioning processes and decision-making. “You ask yourself, ‘does X meet our objectives?’ If it doesn’t, you know you need to make an adjustment,” he says.

Rule 2: Show how individuals contribute to your key objectives. The dealership has a dedicated reconditioning team that includes a writer, technicians, detailers and photographers. Team members excelled at their respective tasks, but the group lacked a broader understanding of how their work affects the outcome on every car. “I broke it down and showed them what it costs us in gross profit if we lose a day in recon on a single car,” the GM says. “Once you have that conversation, you can get them to see the light and they have a greater amount of pride in their work because they’re contributing to something bigger than their own paycheck.”

Rule 3: Change payplans to match your goals. The GM has moved from a flat-rate pay plan to a team-style approach to help focus reconditioning technicians and detailers on the need for speed. The program pays individuals off their combined repair-order (RO) hours—a move the GM believes will spur more collaboration and create a disincentive to load an RO with unnecessary items that only benefit an individual’s compensation plan. “When everyone knows we all make more money by speeding things up, you’ll see things like the tech taking a car right off the lift and driving it down to the detail bay,” he says. “You can’t be fast if you’re putting fluff on the RO.”

Rule 4: Get better cars. The GM and his team now expect vehicles purchased from online auctions to effectively be “market-ready,” unless there’s a compelling reason for an exception. “It’s tough,” he says. “But you’ve got be buying good cars—late model, low mileage and good condition—to offset the older cars with higher miles that will need more recon work.”

Rule 5: Scrutinize estimated-to-actual recon costs. The GM and his managers meet daily to compare appraiser estimates of reconditioning costs to recommended work. “If we made a mistake with a purchased vehicle, and it needs significantly more than we expected or estimated, we must NOT make a second mistake and approve a much higher recon bill if the numbers don’t leave us a desirable initial sale profit,” he says. “In those instances, the car goes directly to wholesale and “we must accept that we made the mistake and move on without it costing us more money.” A benchmark: If the actual reconditioning costs exceed the estimate by more than 20 percent, I recommend wholesaling the vehicle to apply the investment in another vehicle with better gross profit potential.

Rule 6: Work to lower recon costs without sacrificing quality. The store currently averages about $1,110 in reconditioning costs, a figure the GM wants to trim by 20 percent to 30 percent. To reach the goal, his team now questions whether factory replacement parts/tires, body repairs, third-party dent/window/upholstery work is always necessary—and, if it is, to negotiate for the lowest possible cost. He also monitors policy expense to make sure the reconditioning work meets the store’s quality objective.

Rule 7: Reward the higher level of collaboration and trust between used vehicles and service. The GM understands the “tug of war for gross profit” that often occurs between the service and used vehicle departments over reconditioning. To address this risk, he has created a monthly bonus plan, paid for by the used vehicle and service departments, to reward the reconditioning team when they meet their new benchmarks for reconditioning cost, speed and quality.

I think the GM’s rules are relevant for all dealers. In addition, the GM’s appetite for continuous improvement is a model other dealers would do well to emulate: “If you keep pushing the envelope in every single area, you’re going to get better results. You simply can’t get better results if you keep doing what you’re doing.”

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Two Traditional Management Practices That Undermine Used Vehicle Potential

Dale Pollak — Mon, 17 Mar 2014 20:35:43 +0000

I’ve long advocated that dealers need to recognize the primacy of the used vehicle department as an engine of growth for sales volumes and profitability across the entire dealership.

As a dealer friend puts it, “the used vehicle department is the only department that touches every part of the dealership. Once we understood this, it changed our business. When you recondition 145 vehicles a month versus 40, the impact in service and parts is unbelievable. Then, you’re selling more in F&I and you’re improving your throughput in new vehicles because you can pay more for trades.”

But some dealers have difficulty making used vehicles a primary focus, much less making the department drive the “wheel of fortune” for the entire dealership.

I’ve come to recognize that this difficulty is more pronounced for dealers who adhere to two traditional dealership management practices:

1. Every dealership department’s performance must stand on its own. On the surface, this management practice makes sense from a financial perspective. Dealers are in business to make money and each department, like an oar in the water, should advance a dealer’s desire to run a profitable business. The problem, however, is that this management practice, and the pay plans that often accompany it, tends to create “silos” where managers are focused on the results in their specific departments with little regard for helping their peers in other departments.

In used vehicles, the “silo mentality” often contributes to difficulties to make used vehicle reconditioning a priority in service. I recently spoke with a dealer who was frustrated by an inability to increase used vehicle sales volumes and profitability—an impossible goal, he realized, after determining it took 16 days, on average, for “fresh” used vehicles to get reconditioned and ready for the front line.

2. A loss on a used vehicle should be avoided at all costs. Like successful coaches in sports, dealers are blessed with a keen competitive spirit and a strong, if not burning, desire to win. For dealers, the desire to win takes on even greater significance, given they often have their personal and family fortunes on the line.

But here’s where good coaches and dealers often differ: Most coaches recognize that an occasional loss is part and parcel of the job. It’s rare for any coach or team to go undefeated in a season, and when this occurs it’s largely regarded as a temporary blend of just-right circumstances—not an ongoing operational standard.

Many dealers, however, apply a more stringent, zero-tolerance attitude toward losses in used vehicles. It’s like they expect to win 100 percent of the time. As they strive to reach this nearly impossible standard, dealers will often create most costly problems, such as aged cars and missed opportunities to reinvest their money in vehicles that will sell faster and offer better profit potential.

To be clear, I’m not suggesting that dealers toss these traditional management practices completely out the window. Rather, I’m advocating that dealers adopt a more nuanced approach on both fronts to give their used vehicle operations a better opportunity to “lift all the boats” in the dealership.

Here are three recommendations I suggest to help dealers achieve a greater degree of used vehicle primacy and performance at their dealerships:

1. Adopt a “total gross” management mindset. This mindset effectively does two things: First, it helps managers and employees understand how their individual contributions benefit others in the dealership—which leads to a greater degree of collaboration and cooperation. Second, a “total gross” mindset frees dealers and managers from focusing solely on preserving (or propping up) their front-end gross profit average, a factor that feeds the desire to avoid a loss at all costs. Note: It may be necessary to adjust pay plans to reflect the new emphasis on “total gross.”

2. Accept the occasional retail loss as a lesson. Often, a dealer’s desire to avoid a loss on a used vehicle hinders their ability to recognize what is most likely a mistake—either the wrong car, the wrong pricing strategy, or inattention to indicators the unit’s headed in the wrong direction. Dealers who heed the lessons in each loss inevitably see them less often, and maximize the turn and earn potential of their investment in each vehicle.

3. Inspect what you expect. Dealers can’t simply will managers of different departments to collaborate, or get used vehicle managers to automatically focus on the day-to-day tasks that minimize potential losses before they occur. As Velocity dealers attest, it takes a greater degree of discipline and oversight to make used vehicles a priority across the entire dealership. The good news, however, is that once the “wheel of fortune” starts turning in a dealership, it gains momentum and spawns the motivation that keeps dealers and managers focused on the primacy of used vehicles for the long haul.

The post Two Traditional Management Practices That Undermine Used Vehicle Potential appeared first on Dale Pollak.

E-Commerce Update: “Self-Service” Auto Financing In Five Years?

Dale Pollak — Tue, 04 Mar 2014 20:41:53 +0000

I had a fascinating conversation the other day with Pete Radike, director of product management for Fiserv, a Wisconsin-based company that processes and services vehicle leases and loans on behalf of captive and indirect lender partners.

I’d called him after seeing a report last week about Toyota Financial’s success in the past year using a Fiserv electronic contracting (e-contracting) solution for its dealers. I was curious to get his take on how such lender decisions are advancing our industry’s evolution toward the more “click-and-buy”-style of e-commerce common in other industries.

“2014 will be a tipping point,” he says. In the coming year, Radike expects more lenders (and their dealer partners) will implement more sophisticated, paper-free electronic processing of vehicle leases and loans. With this backdrop of technology and process in place, lenders and dealers can then begin offering more “self-service” vehicle financing options to consumers (e.g., the ability to select and sign deals via kiosks or mobile devices).

“It’s not a bold statement to say ‘self-service’ is going to be the majority of the way people do the financing for their cars in five years,” Radike says. He offers three validators for this “self-service” timeline:

1. E-contracting is gaining ground. “Electronic contracting has historically suffered from the chicken and the egg syndrome,” Radike says. “That is, dealers are saying, ‘we’re probably willing to do it when more lenders do it.’ And lenders are saying, ‘when more dealers are willing to do it, we’ll offer it.’”

Now, however, “there is an absolute, deliberate market momentum to adopt electronic contracting now that a number of larger lenders have taken the process by the reins and deployed it,” he says. The momentum is fueled by an understanding that the business case makes sense for dealers and lenders, Radike adds.

For dealers, e-contracting typically means they’ll get paid faster, in part because the process means submitting deals with fewer data entry and similar mistakes. For lenders, the improved data integrity and access to electronic files allows for faster, more efficient processing and payments.

“The customer also wins because everything’s done right the first time,” he says.

2. Consumer preferences are changing with new technologies. As Radike notes, it’s no secret that consumers today, particularly those 25 and under, are comfortable using smart phones and tablets to make payments, check balances and conduct other transactional business. Among older consumers, the rising use of tablets among retirees and senior citizens suggests a comfort level with technology, and potentially, e-commerce, that is gaining ground. Taken together, the advances in technology suggest consumers of all ages will increasingly expect to view a digitally driven, “self-service”-style transaction as the norm.

3. Competition will drive the pace of change. As lenders lead the way and offer incentives for dealers to adopt e-contracting processes, competitive market forces will create added “me too” momentum. “If one or two in a market start adopting electronic contracting, the others will take notice and want to stay competitive,” Radike says. “After that, the next phase is pushing it out to a self-service model.”

Time will tell if this five-year timeline proves correct. But we’re already seeing manufacturers like BMW, General Motors and Volkswagen working to create more digital-heavy, Apple store-like customer experiences where “self-service” financing would seem to be a natural fit.

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A Look Ahead At The Future, And Why Velocity Matters Today

Dale Pollak — Thu, 20 Feb 2014 20:01:26 +0000

A recent report from the Roland Berger strategy consulting firm discussed challenges for auto dealers and manufacturers in the year ahead.

The firm’s “Re:Think Automotive Networks Study” highlights a variety of pressure points that will continue to converge and squeeze dealer profitability—the rise of pricing transparency, increased sales volumes of less-profitable new vehicles (e.g., smaller cars rather than trucks), the likelihood that new vehicle volumes will “stagnate,” the loss of service and parts business to independent/chain outlets, and the weight (and cost) of factory facility requirements.

Taken together, the report concludes these pressure points will make profitable operations problematic for many dealers in the coming years. It also suggests that as many as 3,800 dealerships will close (through a combination of consolidation and dealers shuttering profit-troubled stores).

But here’s what I found most intriguing: The report suggests that the top-performing dealers of tomorrow will be those who get bigger today—the ones who carefully apply their economies of scale, greater efficiencies and process-focused cultures to competitive advantage. Further, the report encourages OEMs to proactively encourage the growth and longevity of this larger, leaner and meaner type of dealer, which they call the “right” kind of dealer for tomorrow’s highly competitive and profit-challenged market.

If I were part of the team helping OEMs devise their dealer network strategy for the future, here are three things I’d strongly advocate that they account for in their plans:

1. The undeniable, dealership-wide improvements that follow the application of Velocity principles in used vehicles. Indeed, I know many dealers whose new vehicle sales, and overall dealership profitability, have benefited from a well-run used vehicle department. Further, there are many Velocity dealers who have expanded their regional footprint, adding additional stores and growing new/used vehicle market share, as a result of the financial successes they’ve achieved in used vehicles.

2. The process-driven cultures Velocity dealers create as they elevate their used vehicle performance to the next level. Sometimes, I don’t think factories really understand how difficult it can be for dealers to wrestle back the traditional department “silos” and reinvent the people and processes necessary to get every dealership manager and employee engaged in a highly collaborative manner and work toward the shared goal of profitably retailing a greater number of used vehicles in less time. Velocity dealers are now applying this successful, process-driven blueprint to increase their new vehicle sales performance and profitability—a fact that should not go unnoticed by OEMs.

3. The obvious benefits Velocity-style used vehicle management brings to factory certified pre-owned (CPO) programs. I haven’t done a formal study, but I suspect that, by and large, Velocity dealers are more willing CPO program participants than their non-Velocity counterparts. I also believe these dealers likely do a better job implementing a profitable and successful CPO strategy, even with the cost/margin challenges the CPO programs typically present. The reason: Velocity dealers understand how to manage CPO vehicle profit margins at every step—thanks to the process- and profit-focused culture they’ve created.

The Roland Berger report left me with a final thought: Dealers who are not proactively focused on the future, in close partnership with similarly minded OEM and vendor partners, probably won’t be around to see it.

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