In my newsletter from last week (CLICK HERE FOR ARTICLE) I discussed the idea of moving your reconditioning cost on used cars to a line item. I received a lot of positive responses. I also received the question below in regard to that article.

"I am trying to understand your last newsletter.  Are you trying to tell dealers to create a reconditioning expense line and not put recon into the cost of cars?  That seems crazy. That is a great way to have dealers lose money. Please advise if I am reading this wrong."

MY RESPONSE: 

Yep, that’s what I’m saying. Doesn’t mean I’m right…but, if I opened a new store today that’s exactly what I would do. That’s the way CarMax does it and they outsell and outbuy dealers in the markets they are in.

The point in the newsletter is that by doing recon as a “line item” you have a buying advantage over your competitors…if you buy more cars, you run more cars through your service department. If you buy more cars and end up with a lower cost than your competitor then you can advertise them cheaper. Advertising them cheaper on the Internet causes more traffic to show up. You sell more. You make more.

You turn more volume and more total gross goes on the books. CarMax reported in the last quarter that their average gross was $3236. Before I go further every used car manager will tell you that it’s impossible to outbid a CarMax buyer. The $3236 breaks down in the following way: Front $2212, F&I $1024.

But, but, but, but…the $2212 has no recon cost deducted from it. It’s hidden as a line item. So what? Why does it matter whether it’s part of the gross or a line item? It matters because of the competitive edge it gives you in buying, which runs more numbers through the store.

I don’t think many dealers are even close to making the switch, but in time they will have to do something creative to give them an edge in acquiring cars and an edge in getting the customer to show up at the front door. The front door traffic is being driven by Internet pricing. In general dealer’s average grosses continues to go down.

If one stays with the conventional way of doing business then another approach to consider is changing the concept of charging full retail in the service department. We both know the reason why it’s done that way.

Dealers cannot continue to have the used car department prop up the service department and give the used car department such "poor service" (speed, attitude, and overcharging for things that are not needed.) But for gosh sakes if we’re going to keep it that way someone needs to explain to the service manager whose name is on the sign.

The sales department drives the bottom line for the entire dealership. The attitude of the sales department is critical to the overall success of the bottom line. If they thought they were being treated fairly, how many more cars would they buy? How many more cars would they not wholesale? How many more would they retail? Bottom line is that they feel they are in one way or another being screwed by the service department. (It’s true and you know it’s true.)

We can both agree that Internet pricing is moving all dealers to more of a "one price" concept. Going to pay plans that pay on volume rather than gross is a direction that more dealers are moving towards (CarMax.)

At the risk of contradicting myself, the reality is that if we did not pay managers and sales people on gross then it would not matter what we charged them in service.

So, you can see why CarMax has such an advantage. They have the best of all worlds. They use a line item and they don’t pay on gross and Bingo, they outsell everyone else.

 We can’t always agree on everything, but I think one thing we can agree on is the "way we’ve always done business" is not going to be as effective as it once was. Technology is changing the business faster than most can keep up.

When I watch people hold their phone up to a song playing on the radio and it immediately tells them the name and artist of the song then I know I’m hanging out in a world that’s going to require me to get way out of my comfort zone in order to survive and thrive…That’s all I’m gonna say, Tommy Gibbs