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:

Packs $1000

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

One of my readers, Robert Whisner with Robert Basil Auto Group in Fredonia, NY, recommended I read the book "American Icon" by Bryce Hoffman. It’s about how Alan Mulally saved Ford Motor Company.

Very early in the book there’s a quote by Henry Ford that we all should pay close attention to:

"Business men go down with their businesses because they like the old way so well they cannot bring themselves to change. One sees them all about–men who do not know that yesterday is past, and who woke up this morning with their last year’s ideas." 

No truer words have ever been spoken. One of the things I find so often when working with dealers and their managers is they tend to want to rely on their past success. And they should, to a point, but if you also think that way, then you need to realize your past successes may not carry you very far into the future.

As we age in the business we have to be careful not to fall into the trap of thinking that it worked for you in the past so it will work today. If you continue to hang on to the past you could wake up one day and wonder what day you are in.

Once the mind’s thinking has set out to do something, or has gotten in the habit of doing something, it is very difficult to implement change. You don’t have to be a brain surgeon or know much about how the human brain works to know that people resist change.

If leadership is smart enough to realize this well known fact then you would think they would be smart enough to develop a strategy that would lead the group into change knowing that change has to happen.

As cruel as it may seem, if you can’t get people to change then you may need to change the people. But therein lies the problem. Leaders fear change as much as anyone and they fear the change of people even more than the change of culture, processes and ideas. The concept of "the devil you know is better than the devil you don’t" may not serve you very well if you are allowing it to become a crutch for doing nothing. 

The problem with change is it sets up an automatic element of accountability. If you decide to change course and/or change people now the eyes of the world are upon you to make it work. For many, it’s far safer and less scary if you don’t implement change because nobody’s watching and you can ride a wave to nowhere as long as you can stand up.

I have a friend who lives in Key West, FL. When the hurricanes would head toward Key West the masses of the population would head for the mainland. One of his favorite sayings is "Don’t panic and never follow the crowd." I think more often than not, many in the car business panic when it’s too late and end up following the crowd far too long.

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.)

Isn’t it interesting all the changing that takes place when new ownership takes over? How many times in your career have you seen new ownership come into a market and turn the place upside down and double or triple the previous owner’s sales?

If you are going to succeed in this volatile market then you need to constantly evaluate your market, your staff and your thinking. You cannot be afraid to change just because you and the market have always done it that way. "That way" will not carry you very far.

Ralph Waldo Emerson said "Fear defeats more people than any other one thing in the world." Nothing was ever achieved by sitting on the sidelines waiting to see what others are going to do. You will not win by following the crowd. That’s all I’m gonna say. Tommy Gibbs

As is the case with most Zingers I write they are usually a result of issues I come across in my travels, or emails and phone calls from dealers and managers with specific questions.

I was contacted recently by a general manager whose dealer was putting pressure on him because the average F&I gross was falling.

Here’s the specific question as it was presented to me:

"Great article this past week and as always very true. Here’s my question. We have been selling more and more inexpensive cars (many that have over 100,000 miles) and the volume definitely has increased and our turn is much better, but that being said our backend averages have dropped. We are selling fewer products because the cheap cars are not eligible for product. My owner is putting tremendous pressure to keep backend averages up, but due to us pushing prices down and selling these older cars our averages are falling. Basically the numbers are telling me we are doing a poor job in used car F&I. Your thoughts?"

You have to believe the dealer likes the volume that these lower price cars are bringing to the table, but he also wants the higher F&I income. I get it, I really do.

However, it’s possible the dealer is missing the big picture or he is doing what dealers sometimes do; he’s working the management team. Been there and done that and there’s nothing wrong with it unless it totally screws up the heads of the members of the management team. It may also be he’s trying to create an environment of "If you think you can, you can."

The first thing that has to be realized is achieving high gross profit and doing volume is a contradiction. It goes against Tommy’s laws of nature.

I’m not saying it can’t be done but I will say it’s very unusual, and there has to be a very special set of circumstances for it to happen with consistency. If it’s going to happen in today’s market it’s because the dealership has amazing talent or they exist in a very unique market.

There is no question F&I is going to take a hit when selling cheaper cars. What has to be determined is, are you better off selling them, with a smaller F&I average or not selling them at all and pulling your F&I average up. Hello?

Suppose the dealer puts so much heat on the F&I averages that the GM throws in the towel on the less expensive units and goes back to retailing more expensive cars and a better F&I average. Is the dealership really better off?

Here are 10 key questions that need to be answered:

1. What about all the parts and service gross that would have been generated on the less expensive cars going through service and reconditioning? 

2. What about the fact that you could have put more money in some trades because you intend to retail them vs. wholesaling them? How many more car deals do you end up making because you have a better plan?

3. Does the increase in volume from the less expensive units impact the attitude of the sales staff and their ability to earn additional income? Isn’t it true the best time to sell a car is when you just sold a car?

4. What’s the benefit of having someone driving a car, any car, high dollar, low dollar, that they purchased from you? 

5. Is there a chance you just sold a car to someone who might never have set foot in your store because you had a vehicle at a price point they could afford to pay? 

6. Is it possible that this new customer has a friend or relative who might one day come back and buy something because of the way this new customer was treated during the buying experience?

7. Are the odds in your favor that they may come back for an oil change or other service?

8. Does doing business generate business?

9. What’s the "Return on Investment" on selling these less expensive cars? Relative to the amount of money tied up aren’t they a far better investment than what you would make with a $25,000 car? How many times in a year can you turn over a $7,000 to $10,000 investment vs. a $25,000 investment?

10. Doesn’t it make sense, that if you can sell more cars with less money tied up that it’s a good thing? There really isn’t much of a downside to increasing volume and decreasing investment.

To keep the accountability up on F&I it might be a good idea to keep two logs; one with the more expensive cars that you hold to your normal F&I standard and another for the less expensive cars. You have to decide how that gets broken down.

Let me remind you that what’s really important is how much total gross you are generating. I always say, "You cannot spend average gross profit. You can only spend total gross profit." That’s all I’m gonna say, Tommy Gibbs