Without exception I have multiple conversations each week with dealers and managers about how to avoid wholesale losses created by dumping inventory in the wholesale market as they have aged out.

The first point I always make when this conversation comes up is that if you have cars aging on you and you are dumping them in the wholesale market and losing money then you are totally on the wrong path. If you are paying attention to the right things and if you understand that you are in the retail automobile business there should be very few units you blow out and lose money on. It’s about retailing cars before they get to the end of the cycle.

5 Keys To Eliminating 99% of Aged Units and Wholesale Losses:

1. It starts by selecting the right inventory. Unless you are an exception to the rule, most of those aged units are purchase cars. Therefore, you are obviously buying the wrong stuff. I continue to be fascinated at how many overage cars have been purchased from the likes of Enterprise Rent-a-Car. If you were using tools like vAuto, Auto Trader and Auto Count USA then you wouldn’t be buying some of that stuff that’s killing ‘ya.

2. Tackle my "Life Cycle Management" concept like your life depends on it, because it does. You will never get your inventory under control as long as you allow all units to have the same number of days on the shelf. You have to identify and acknowledge what each car is on day 1 not day 61. Can’t you spot a Zebra in a herd of horses? Acknowledging what you are dealing with is a major step towards improving your used car turn and eliminating problem cars. Why is it so hard to understand that your most profitable car is a 20 day unit and that it goes down in value every day it sits after that?

3. Making smart and quick decisions on trade-ins you bury yourself in. Happens all the time. You step up for whatever reason, but since you don’t use "Life Cycle Management" you treat these units just like every other unit. Look Einstein, if you buried yourself in it on day one it’s only going to get worse. The best thing you can to is price that unit below market and make it disappear.

4. Don’t get too excited about a successful short term run. It will kick your butt every time. Stop it. All of a sudden you have a strong 30 day period when you sell 10 XYZs. For whatever reason they were hot. So, what do you do? You run out and buy 20 more of those bad boys. And guess what happens? They sit and they sit. And now you have some more huge wholesale losses staring you in the face.

If you go back and analyze those first 10 you popped out like hotcakes you will probably find something unique and special about those units. Might have been miles, might have been color or it might have been the price of gas during that stretch that influenced those sales. I’m not saying you shouldn’t get excited and try some more of those hot babies, but you need to be smart enough to keep your enthusiasm under control. You have much more control when you take them in small doses rather than choking yourself to death.

5. Understand that you are in the retail business. I mentioned this briefly back in the second paragraph. You need to make sure you are pricing your cars to market early enough and attractive enough to find a retail buyer early in the life cycle. In most cases, if you analyze your aged units you will discover that for whatever reason you overpriced them too long. Key words here are "too long." Sure you might have them priced correctly now, but they are now stale, the sales staff knows they can’t make any money on them so they walk around them.

Bullet point five takes me to my favorite subject CarMax and the reference in the title of this article to 99%. The quote below is directly from CarMax’s 2012 Fiscal Year Annual Report:

"Our proprietary inventory management and pricing system tracks each
vehicle throughout the sales process. Using the information provided by this system and applying statistical modeling techniques, we are able to optimize our inventory mix, anticipate future inventory needs at each store, evaluate sales consultant and buyer performance and refine our vehicle pricing strategy. Because of the pricing discipline afforded by the inventory
management and pricing system, generally more than 99% of the entire used car inventory offered at retail is sold at retail."

Re-read the last sentence. Has it sunk in yet? It’s all about figuring out how to retail a car. They retail 99% of what they put on their retail lot. They figure out how to find a retail buyer. When you are retailing your retail pieces you don’t have to worry about aged units and wholesale losses. That’s all I’m gonna say. Tommy Gibbs

Last week’s article was a discussion about the percentages you should be shooting for as a percent of profits to sales dollars. If you are not familiar with the terminology, it is a math formula using the total sales dollars achieved by the dealership vs. the total net profit.

Sales dollars are sometimes referred to as gross sales. The standard in the industry for years has been to try to achieve a 2% profit relative to the sales dollars. If you’re not in the automotive business you would think that’s a really small number. And you would be right; it is a very small margin when you get right down to it, especially when you consider the risk and the amount of effort it takes to make a profit.

What I basically said is that if you are in the 2% range today you are treading on unstable ground. During these good times you need to be more in the 4 to 6% range so that you would be able to maintain the old standard of 2% when the crap hits the fan.

Well, well, well…wouldn’t you know it just as soon as I put those numbers out NADA came out with a study that said something different, or did it? One of my clients emailed me the information and the bottom line is the numbers said that thru April YTD that the dealer average is 2.45% for all dealerships and that for the Best In Class, the top 20%, the numbers were 4.73%.

So, was I out in left field when I said last week you should be in the 4 to 6 range? That would be a big fat no I wasn’t. I was dead on. (Gloating just a bit sitting here.)

The current 2.45% is an average for all dealerships. It includes the best and the worst of dealers. Surely there are some well above 2.45% and some way below. So, can’t we safely assume that some are in the 4 plus range?

The numbers also indicated that the best performers are averaging 4.73%. Same deal here. Some are going to be a bit below and some a bit higher. So it stands to reason that some would be close to the high end of 6%. (I win, I win, I win.)

So, let me cut to the chase for you. One thing I know to be true is that if you are reading my material you are not of the mindset to be average in anything. My newsletters are not about being average. You are not about being average. You are about being the best you can be and doing everything you can to excel and grow your business.

6% may be a stretch and may not be realistic for you for whatever reason. There are always unique sets of circumstances that have to be dealt with. But surely you can move from the number you are sitting on today to some higher plateau? 
There are three things you have to ask yourself: 
1. Where are you today? 
2. Is your number moving north or south? 
3. What are you going to do about it if it’s moving south?

I fully realize everyone reading this is not in a position of Dealer, GM or Owner Operator, but everyone reading this is in a position to influence the bottom line of your organization. There are numbers you should be looking at and seeking to improve.

If you don’t know where you’ve been, and if you don’t know where you are, you surely don’t know where you’re going. It doesn’t matter if you’re selling cars, widgets, real estate, insurance, software, advertising, parts or service.

I’m confident my spin on the numbers from last week was correct. But what if they weren’t? Did the fact that I brought it up cause you to at least peek at yours to see where you are? I win, you win, we all win. That’s all I’m gonna say, Tommy Gibbs

Hurricane season is here and you will often hear the National Weather service issue a Hurricane warning. I have a new one for you. "This just in from the National Auto World Service: Warning, the winds of success are subject to change."

We’re 5 months into the year and you’ve done pretty darn well. Many of you have had record months. As we all know, it’s easy for complacency to kick in and with it a certain amount of self-assured confidence that you are a rock star, on a roll and you can do no wrong.

I’ve reminded you in the past that dealers make the most money when they are coming off of tough times. The reason for that is pretty simple. When things are tough, dealers get back to the basics and grinding it out. As business gets better they are in a great position to make a lot of money because they have cut all the fat out. But the better and better business gets, dealers tend to add this and that to the expense line and get further and further away from the basics.

Gross profit can cover up a lot of sins. (Can hide the wind.) The really smart dealers recognize the trend and look for opportunities to go from 2% net profit of sales up to 4 to 6% or more. It stands to reason that if you can get the percentage up during the good times then in the worst of times you can still maintain the 2% plus numbers.

If you are currently in the 2% bracket or less then you are missing something somewhere and need to re-evaluate your operation and do what you have to do to get it fixed.

There’s also another storm on the horizon and that’s the upcoming elections. If you check history you will discover that as we move closer to the November elections the buying public will start to tighten up their purse strings due to uncertainty that goes with the elections. There is no way of knowing how the economy will react regardless of who is in office. Uncertainty causes people to sit tight with their money.

A slip in your disciplines can create major damage to your bottom line. Keeping used vehicles 45 to 60 days and beyond (talk about a serious hurricane on the horizon) means you are not selling in "today’s market." Never forget that a car that you have owned in excess of 45 days is not going to make you the kind of serious money that a fresh piece would.

Realize that another dealer is buying or trading a similar vehicle today for less money than you have in yours and they therefore can sell it for less and make more money on it than the one you’ve been sitting on. Some of you are starting to think you can hold inventory longer than normal. Shame on you if you are keeping vehicles past 45 to 60 days. The days of carrying units 60 plus days are over.

Let’s review this Hurricane Warning in the simplest of terms:
1. Stick to your basics
2. Don’t get stupid with your expenses
3. Keep the inventory turning
4. Get your profits into the 4 to 6% of sales bracket so when it gets tough you are no less than 2%.

Warning over, that’s all I’m gonna say, Tommy Gibbs