Whatever the differences among franchise, independent, and Buy Here-Pay Here dealerships, asset depreciation erodes margins for all.
Dealers must manage two forms of depreciation – value erosion as assets age, which most every operator understands, and holding costs, which many do not.
The source of holding cost depreciation is the accumulation of expenses from general operating overhead, including floorplan inventory investment and cost of capital (including interest rates) that erode margin and make a dealership less profitable than it could be.
Informed dealers work hard to manage and minimize both forms of depreciation’s corrosive effect to their bottom lines.
Time is money
Managing inventory depreciation requires a more sophisticated approach to inventory acquisition, pricing, and repricing, so more cars sell within 30 days of purchase to maximize front-end gross. Maximizing holding cost reduction requires more efficient vehicle reconditioning that move vehicles to the sales line in days, ideally within three to seven days from transport unload.
In this market, a dealer must pay attention to these costs – reducing them is a more straight-forward way to holding front-end gross than holding onto cars hoping to sell your way out of them.
“For a dealer having 50 units or fewer on the lot, one or two inventory management mistakes can crush their month,” notes inventory management expert Jasen Rice of LotPop. His specialty is helping dealers manage their physical and online inventories, so they’re priced right to sell faster to improve turn and profitability.
“It is essential that new car dealers, independent, and BHPH dealers manage inventory because the laws of depreciation are the same across the board, whether selling new Mercedes-Benz automobiles in Beverly Hills or used sedans and trucks in Kansas City,” Rice says. “The sooner you get rid of depreciating assets the more gross you make. No matter what kind of dealer you are, you cannot outrun these truths.”
Adds dealer Dan Oakes of Oakes Auto, “We have to be selling the majority of our inventory within the first 30 days we own them and if we’re not focused on making that happen, naturally, even if what you have is new inventory it is going to age out.”
The Kansas City area’s largest independent dealer, Oakes Auto retails 180 to 220 units a month. It focuses on selling three-to-five-year-old models retailing from $15,000 to $25,000. The dealership uses vAuto to help with inventory management, but Oakes says LotPop’s services help him fine-tune profits.
In our current market, manufacturing is once again outpacing new car sales, leading to profit erosion, which is expected to continue. Profit margins on used cars, which are typically higher than new car sales, are also trending lower because “residual decline is accelerating and depreciation is accelerating,” according to Steven Szakaly, NADA’s Chief Economist.
Tightly controlled reconditioning is the best way to maximize margins during times of market compression.
Some managers feel that formal reconditioning workflow processes are for the largest dealerships and public groups. However, any dealer who reconditions and sells cars, whether franchise, independent or BHPH can benefit financially from tighter streamlining and monitoring of their reconditioning departments.
Now we are full-circle to the aforementioned Time to Line (T2L). “Days in recon” is a performance metric in used car sales. Days in recon is also the metric Rapid Recon began using as we started this venture in December 2010. However, after working closely with more than 1,000 dealerships across the country and internationally, Rapid Recon has found that to maximize used car operation profitability you must measure the total time from acquisition to the sales line – we call this T2L.
Industry benchmarks indicate an excellent T2L is between three and five days. When asked, many dealers anecdotally believe they are achieving this sort of turnaround. However, in reality, most are lacking actual data to give them an accurate answer. Upon more in-depth review, dealers are consistently surprised to learn their real T2L is closer to 12 to 15 days. How big of a deal are those extra 10 days? Well, it depends on your holding costs.
Manage holding costs
According to NCM Associates, holding costs for most domestic vehicles is approximately $40 per day per car. In his book, Like I See It, Dale Pollak writes that holding costs for used cars are closer to $85 per day.
If you like to play things conservatively, like most of us, you may be wary of projecting the $85 per day per car calculation. For the sake of argument, we will be using the $40 per day per vehicle holding cost benchmark throughout this book.
However, to make things more applicable to your specific dealership, there is a holding cost calculator tool at www.rapidrecon.com.
Given the above, when you eliminate six days from your T2L of 100 units at $40 daily per car holding cost, a dealership saves $24,000 a month, $288,000 a year! With an $85 holding cost, those numbers more than double.
“Because dealers don’t actually write a check out of the business account for hold costs, they don’t see what recon delays can cost them,” says Oakes. “Old-school dealers focus on overall front-end grosses. If they instead would focus on improving recon and inventory management, front-end gross would be better, and inventory would turn faster.”
Dennis McGinn, CEO of Rapid Recon, a reconditioning workflow software, says holding cost damage is done by lengthy and inefficient recon practices. Included in these practices, he adds, are recon shops that tolerate unnecessary delays and processes that stall cars from getting to the sales lot, whether physical or virtual, earlier than possible.
Used car operators who get cars from recon to the front line in three to five days rather than seven to 12 or more create a remarkable pricing advantage over competitors who don’t understand and manage holding costs, McGinn points out.
Says dealer Oakes, “Managing reconditioning is the main focus here because a car is not for sale until it’s shown online or on the lot. All hands on deck need to realize this, and always be asking one another, ‘Why are we waiting for parts…can we get them so recon doesn’t stop?’ The holding cost clock starts once I own the unit. We are very mindful of its ticking.”
Rapid reconditioning practices have helped him achieve and maintain a four-to-five-day recon time to line, which for Oakes starts when cars unload from transport. His goal is 72 hours.
“A dealer’s most profitable units are those that sell within two weeks. Taking two weeks to get those car to the lot consumes that opportunity window,” Oakes says.
“Everyone here who works with used cars knows the faster we can get them to the lot, the better chance we have of selling them at the highest gross profit,” notes Tom Dunn, General Manager for the Fred Martin Superstore, Barberton, Ohio.
Jared Ricart agrees. He is VP of Fixed Operations for Ricart Automotive, Columbus, Ohio. His dealership reconditions 600 vehicles a month. Using best practices, Ricart saw used car T2L reduce to four days from 12. “We thought we had good insight into how long it was taking us to get vehicles frontline ready, but when we turned on T2L software it showed us we were at 12 days! That long process was killing gross,” he says.
At Ft. Wayne, Indiana’s Kelley Automotive Group, Trent Waybright is Vice President of Pre-Owned Operations. He wanted to know how improved reconditioning practices and faster T2L trickled down to better margins. “Does getting used cars to the sales line faster actually translate into more sales gross?” he wondered.
“How much difference in gross is there on vehicles that sell at two, four or eight days – or longer? How much money do we lose by not getting cars through recon and to the sales line faster to take advantage of the optimal retail window?”
To find out, Waybright pulled sales gross data from Kelley’s Chevrolet store’s DMS for every vehicle having passed through recon and sold in 2016. Similarly, he extracted those vehicles’ average travel times through recon through the T2L workflow software the stores use to recon cars.
The original T2L was 15 days, which improved to 7.4 days quickly after Rapid Recon was installed. Kelley’s T2L dropped to 4.4 days as the staff gained familiarity and experience with the rapid reconditioning model.
- From 7.4 days to 4.4 days, another $291,951 in gross saved.
- Reduce T2L further to three days overall (1.4 days faster) yields an additional gross of $107,515 or $399,446 overall.
“Once you realize it cost around $40 a day to keep a car, it doesn’t make sense to keep it for 60 days,” notes Rice, a former Rice, a former vAuto performance manager.
“For gross and volume, figure out how to sell the most cars in the first 30 days. The best-performing stores will sell 60 to 70% of their inventory in the first 30 days,” he says.
He offers these inventory management suggestions:
- Track the percentage of current inventory that is 0 to 30 days, 31 to 60, and 61-plus; have less than 25% of current inventory in the 31-60 bucket and over 65% in the 0-30 bucket.
- Track what percentage of sold inventory is 0-30, 31-60, and 61-plus, and have at least 50% that sell within 0 to 30 days.
- When 25% of inventory falls in the 31-to-60-day bucket, sell like crazy to avoid an aging issue.
- Hold onto “subprime cars” until they don’t book out to your advantage, and then pull them into an aggressive retail strategy.
- Price cars at flat numbers, i.e. $8,000, $10,000, $15,000. Pricing at $7,999, for example, will miss a wide swath of potential buyers who’ve used an $8,000 search window.