Here’s a section from last week’s newsletter:
…While it’s very smart to understand the market you are in it can be futile "to do as the market does." Just because everyone in the market charges a $500 processing fee doesn’t mean you should. Or, to be specific about your store, just because you’ve always charged packs, doesn’t mean it’s the right thing to do in today’s market. (You are killing your used car buyer, and your ability to sell cars in the Internet world with your old style thinking, but that’s another Zinger for another time.)…
As promised, packs will be the subject of today’s newsletter. I love packs. I’ve always loved packs. I also love manual typewriters, but they are no longer effective and neither are packs. Packs are "Voodoo Magic" of the past.
Wheee, I said it, I really said it. Packs are no longer effective and they are killing your ability to buy cars and sell cars in today’s market. Out with the voodoo and in with the "New new."
Packs are very much like the Labor Unions, Factory CSI scores, and all the stuff that J.D. Powers puts out. They were very effective at one time, but they have all outlived their usefulness. As is the case, especially with labor unions, many people want to hang on to the good old past and not accept the present.
Let’s review the history of packs and where we are today. My best guesstimate is packs came to being somewhere in the 1960’s. They were very effective because managers worked deals from the bottom up. If the mindset was to make a $1500 gross profit on each car sold then regardless of what was added to the cost, the managers would get the $1500 because they were working from cost up. Over the years talented sales managers have been darn good at working the deal, working the sales person, and working the customer. Many of you are dealers today because you had such skill and talent.
Dealers became very creative and developed hard packs and soft packs. Soft packs were added to the cost of the car for commission purposes. Often dealers (me included) would advertise up to 40% commission in order to lure new sales people to the dealership. By adding packs dealers were able to say they were paying a much higher percentage than they were actually paying. Everybody went away sort of happy and voodoo magic lived on.
Hard packs were a way of offsetting some expenses such as floor plan and advertising. Many dealers used part of the hard pack money to fund accounts often referred to as "Bruise, Slush Fund or Inventory Adjustment" accounts. These accounts were often used to write down or adjust aged inventory. In some cases dealers would use the money to zero out their wholesale losses. Dealers were able to justify these accounts to the management teams by paying the managers in one way or another on the "Packed money." More voodoo magic.
The bottom line is packs in one way or another increase the cost of your vehicles. I’ve known some dealers who have packs as high as $2500 per unit. Isn’t it obvious that such packs put the dealerships, the management team and the sales people at a big disadvantage when it comes time to sell a car and make a profit?
The problem in today’s market is the margins/profits are dropping because most customers shop the Internet when they are thinking of buying a vehicle. Dealers have come to realize that if they have a car they need to sell, it has to be priced right in order for a customer to show up.
To price it right you have to own it right. When you add packs to the high cost of reconditioning (that’s a subject for another newsletter) then you are at a huge disadvantage when it comes time to sell the car.
To quote my good friend Dale Pollak from his newest book (you need to get a copy) "Put another way, packs are really a tax that a dealer imposes on every used vehicle–an add-on that increases the unit’s cost but does not enhance the vehicle’s overall value."
If gross margins continue to compress, and they are and they will, then the only way to win the net profit game is to sell more cars. The only way to sell more cars is to be able to buy more cars at the auction and the front door.
You don’t have to have a big lot or a lot of money to sell more cars. You have to create a fast turn. You can only create a fast turn if you price your inventory right. You can only price your inventory right if you own it right. The rapid turn of inventory has never been as important as it is in today’s market.
The only way to buy more cars is to have a "cost advantage." Packs and other worn out strategies of the past are hurting you more than you realize. Let’s do some basic math:
Recon Cost $800
Front Gross Profit Objective $2000
Total Dis-advantage $3800
Why do I call the $3800 a dis-advantage? Because that number is etched in the brain of your used car manager or buyer every time they buy a car or price a car.
Dealers and used car managers often complain there is a shortage of used cars. I’m not going to debate that as such because to a point it may be true. But, did you know that for the last 7 years new car sales have averaged 13.9 million and used car sales have averaged 38.8 million? How did 38.8 million used cars change hands if there is such a shortage?
Adding additional cost to the cost of your used cars by the use of packs and high recon cost along with some of the other issues in today’s business climate is impacting your ability to maximize your new car and used car business.
Relying on voodoo "packs" will trick you into thinking you’ve got it right, while the savvy competition quietly makes the changes necessary to dominate today’s market.
One of the elements of voodoo magic is to take a little stuffed doll and stick pins in it to create pain in the person the doll represents. The more you rely on voodoo magic, the longer the pain is going to last.
People change when the pain of not changing exceeds the pain of changing. Enjoy the pain, that’s all I’m gonna say, Tommy Gibbs