After decades of automotive experience, the used car business still remains to me the most exciting aspect of the auto industry. I can’t find a department within a dealership that is not directly impacted by a healthy used car department. And at a time when the SAAR may be plateauing and dealership margins continue to be squeezed, a vibrant used car department is an even more critical component of dealership profitability.
With the brilliant foresight of people like Dale Pollak and the availability of used car inventory management tools such as vAuto, dealership leaders tasked with the management of their used vehicle operations have obtained remarkable insight into and control over effectively managing their used vehicle inventories. Unfortunately, however, all the insight and software tools in the world are rendered useless without solid inventory acquisition processes. Let’s look at one process I’ve seen broken in many dealerships today, and see how to correct it quickly in order to generate both increased internal and vehicle gross profit.
Assuming you subscribe to the “Velocity” used car inventory management approach (and I hope you do), you understand there is a ceiling on what a used vehicle can be sold for, and that missing or underestimating reconditioning requirements results in lower gross profit. If you subscribe to this notion, then we also agree that fully understanding the required reconditioning work is mandatory before buying the vehicle. In an era of compressed margins, we just cannot afford to make errors that exacerbate the problem.
So, how do we stem the tide and prevent this from happening in your dealership?
The first task is to understand that based on your acquisition strategy you have varying degrees of opportunities to affect missed reconditioning. If you acquire a large number of vehicles from auction, you are going to be very limited in your ability to affect the quality of your reconditioning estimates. If you over-estimate reconditioning needs based on auction condition reports, the likelihood of winning the vehicle is further reduced at a time when getting the right vehicles is already very challenging. If you underestimate reconditioning needs based on these same reports, your margin suffers. Therefore, we need to understand that auction purchases require a different effort and strategy to better understand reconditioning expenses, which we will address in another post. Today we are looking at the vehicles enabling us to accurately control reconditioning estimates and how we can prevent gross profit bleed. These vehicles are obtained through trade in’s, equity mining, and We Will Buy Your Car acquisition initiatives.
In order to determine accurate reconditioning in these three acquisition categories, it is imperative that a few very specific tools and processes be employed, starting with a thorough vehicle evaluation or appraisal process. If your current practice of appraising a vehicle consists of having the used car manager inspect it and drive it around the block your gross is probably reflecting your level of effort. To accurately estimate required vehicle mechanical and aesthetic needs I recommend:
- Including the vehicle owner in a well-defined and completely transparent evaluation process so they can provide more information on the vehicle while fully understanding your findings and reconditioning costs; the additional information of course helps with a more accurate evaluation while engaging the customer reduces pushback on the trade later.
- Using a few forms to collect and reference key information, including a vehicle evaluation form (illustration 1) resembling a body shop estimate document, and a reconditioning menu (illustration 2) containing all potential vehicle reconditioning elements priced at customer pay labor rates:
- An additional asset is a third-party resource validating the dealership’s offer to purchase the owner’s vehicle. I recommend Kelley Blue Book Instant Cash Offer.
Beyond the customer-facing processes and recommendations that I just described are a few “tail wagging the dog” problems you should also address to achieve more accurate reconditioning estimates and gross profit results. They have to do with accounting practices (the tail) that cause used vehicle acquisition processes (the dog) to underperform. The first situation involves relying on fixed reconditioning expenses to cover missed repairs. Establishing a fixed reconditioning expense only encourages people in the used vehicle department to be less vigilant both in their evaluations and in seeking out more desirable vehicles requiring limited reconditioning. My advice to you is to end this practice. Each vehicle must stand on its own and be assessed individually.