If you have been reading my newsletters and emails then you know I totally believe we have to change the way we have always done this business.
I frequently rave about CarMax because more often than not they outsell everybody in whatever market they are located. And, they don’t do it the old fashioned way.
One of the things that sets them apart is they show reconditioning as a line item on the financial statement. For most of you that’s way over the top when it comes to making changes so I’m not even going to get into it. I know you don’t want to hear it.
Today’s subject is about some changes the industry needs to address as we move into the most competitive environment in the history of the automobile business.
In order to determine how much you and I agree or disagree please take this little informal survey. You don’t have to click anything. Just click it in your brain.
1. Has average gross profit per unit gone up or down in the last 5 years in your used car department?
2. Do you think used car average gross profit will be trending up or down nationwide over the next 5 years?
3. Is it becoming more challenging to keep your expenses in line?
4. What do you think will happen to your bottom line if average used car gross keeps coming down and you maintain the same used car volume?
5. If your grosses have come down, what role do you think the Internet is playing in the equation?
6. Do you think most dealers are using a pricing tool like vAuto?
7. If you could get more of the right inventory is it likely your volume would go up?
8. Do you often get outbid at the auctions by the likes of CarMax?
9. Do you think that if you had an advantage with the pricing from the service department to the used car department that you would be in a better position when it comes time to acquiring vehicles when appraising or buying at the auction?
10. Can you agree that more often than not volume has a greater overall impact on the bottom line than improving the average gross profit?
I’ve just used mental telepathy to conclude the following from your answers:
Expenses are going up, gross is going down and the only way to generate a substantial bottom line is to do volume? Did I get it right?
In order to do volume in used cars you need to have a "costing advantage." By "costing advantage," I mean what’s added to the car once you get it which includes packs and reconditioning. To have a costing average you have to re-think your packs (which usually gets down to pay plans) and most important what you charge the used car department from your shop.
If you review history you know that the reason dealers added packs and charged full retail from the service department to the used car department was because sales managers worked from cost up.
In the good old days sales managers had control over gross so you could nail them with high charges all you wanted. They still got the gross you needed and you could put the money from Parts, Service and Packs in your other pocket.
This is no longer true as your sales managers no longer have control over gross as they once did. That’s why dealers are more and more becoming one-price dealers and saying "no" when the customer shows up and wants a discount.
If you’ve already dropped your pants on the Internet with a price designed to get them to show up then you have nowhere else to go. So, without saying they are a one-price dealer, many dealers are taking a tougher stand as well as changing sales people’s pay plans to match their new found pricing and marketing.
I predict within due time more dealers will become more like CarMax and not pay sales people or managers on gross. Remember as we move more towards a once-price concept the skill and pay level of the "desk managers" will be much lower than today’s market.
You just got through agreeing with me that average gross will continue to come down. Then you have to agree that the only way you will win is to increase volume. The only way to increase volume is be able to acquire more cars. Am I repeating myself?
In order to acquire more cars (like CarMax) then you have to have a costing advantage when you go to the block or your front door. So, whichever dealers can figure a way to reduce the cost to the cars once they acquire them will win.
They will win because they have more of the right cars to sell and because they will have a pricing advantage over the competition. And, no doubt they will be pushing more volume through the shop.
I believe the reality is the overall shop profits will ultimately go up for these forward thinking dealers. As the shop profits go up they can sell their cars for even less gross due to the overall volume they are doing.
That last sentence may be a stretch but the rest of this is not. I have never been so sure of something in my life as what I just shared with you.
Another little side bar of this is if you have a cost advantage it only stands to reason you will trade for more cars. If you trade for more cars you will have more new car customers coming back to you for service after the sale.
As you may know the hours per RO for a customer pay ticket comes in at 1.7. The average hours per RO for a used car ticket is 4.0. I can tell you that nationwide service departments still don’t know who their best customer is. They say they do, but they don’t. Their actions in terms of how they treat the used car department speak louder than words. By and large most dealers/owners will not explain to the service departments whose name is on the sign.
So, what’s the conclusion of all this madness? There has to be a better, more efficient approach to the charges from the service department to the used car department. "Status Quo," needs to turn into "Status No."
I know a lot of really smart new car dealers and I know that somebody is going to figure it out. If you don’t, and you don’t do it soon, others will and when they do, you will find yourself wishing you had.
You can do it CarMax’s way, or you can do it your new way, but you can’t do it the old fashioned way. The pain of change or the pain of regret. You’re going to have one or the other and the cool thing is you get to pick. That’s all I’m gonna say, Tommy Gibbs