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Retail expert breaks down a performance analysis that can gauge whether your used-vehicle department is ready for what promises to be an interesting year for the pre-owned segment.

January 2015, F&I and Showroom - Feature

by David S. Nathanson

In the current market, revenue generated by the used-vehicle department is more critical than ever. Certified pre-owned (CPO) programs are driving record sales volumes and will continue to grow with the influx of lease returns, particularly during the next 18 months. And those off-lease units are now being augmented by ideal subprime inventory coming into the market.

Which of those fundamental shifts have impacted your dealership? If you aren’t sure, or haven’t considered the question, it may be time to perform a realistic analysis of your pre-owned operations to determine how you are performing in each segment.

Last year closed with very strong new-vehicle deliveries and a seasonally adjusted annual rate (SAAR) approaching 17 million. CPO sales are also providing close to 22% of franchise dealership sales. And with lease penetrations approaching 30% or higher for a number of brands, OEMs continue to revitalize offerings and support programs to address current and projected lease returns.

The aftermath of the economic and industry downturn of 2008 now finds shoppers returning to market with older, high-mileage vehicles, many of which have both life and value remaining thanks to improved vehicle quality. And with lease and finance terms often exceeding 60 and even 84 months, there are many more vehicles that will not qualify for CPO at maturity, given OEM age and mileage guidelines.

Inventory Intelligence
While there will be a large supply of these high-mileage vehicles, there will be very high demand for the better, lower-risk units, driven by auctions and remarketers. Conversely, there are many dealerships that have been hesitant to engage in this category, due to lack of experience with the process — particularly risk mitigation.

Yes, there is every indication that OEMs will continue to revisit programs. But in my opinion, dealers must be prepared to work these units into deals and remarket them.

All those involved in the support of dealership remarketing efforts in the subprime segment — finance companies, auctions, remarketers and OEMs — are being pressured to assist in the absorption and resale of higher mileage, somewhat older models by providing special financing, incentives and revised, more detailed classification of vehicle-inspection guidelines.

Franchised dealers who sell high numbers of used vehicles have long understood the importance of this market and have realized substantial profits in the category as a result. While not all of these sales necessarily require subprime or “special” financing, managing this segment does require strict process and policy disciplines. The metrics are markedly different from the structure of your used operations and will determine the success you’re able to achieve in this segment, in conjunction with your mainline used and CPO inventory.

As previously noted, many dealers have shied away from this market. But many of the dealers who didn’t, including those who opted to market these vehicles independently of their broader used inventory — including standalone branding and off-site operations — have been very successful. Gross margins on vehicles in these channels track at twice that of the typical used unit, serving a market that has historically been consigned to independents and private-party sales.

The traditional rule of thumb is that 65% of all new-vehicle sales involve a trade-in. Our analysis, however, points to a number much closer to 80%. Missing those trades may directly impact the success of your new and CPO sales.

Dealers tend to use traditional metrics to gauge the performance of their used-vehicle operation, including used-to-new ratios, wholesale profit and loss, marketing expense per unit, reconditioning expense, gross per vehicle retailed, and, most importantly, inventory management from acquisition to retail or wholesale. But there are some additional processes and metrics which, if properly introduced, will yield success in all three used-vehicle categories.

Each topic could conceivably be a freestanding article, but I have focused on those critical factors which may provide insight into your business. These analyses should be prepared by your used-vehicle department manager and reviewed by the highest ranking operations executive in the dealership.

Performance Inspection
One thing that dilutes focus on the used department is that new and used management and sales personnel often share the same sales floor due to facility size. Also hindering a used-vehicle department’s ability to become a true profit center is who dealers select to lead the used-vehicle department, as a strong new-vehicle sales consultant or manager doesn’t always make for the best candidate. Our most successful dealer clients have revisited the skills necessary and developed a “hybrid” structure that separates vehicle inventory, reconditioning, merchandising and sales management.

Now when’s the last time you reviewed your used-vehicle manager’s processes? While there are multiple working components within the used department, let’s focus on six areas and one key element within each. This will provide direction on where attention may be needed. Be sure to monitor your management team’s ability to complete the assessments. And be sure to ask for documentation, as observations of assumed vs. actual behaviors can be very revealing.

1. Inventory Acquisition and Disposition: What do you know about your vehicle appraisal and acquisition process? And how many trades could you be missing? While many dealerships have purchased management software such as vAuto, Red Bumper, FirstLook or Dealertrack’s Inventory Solutions, recent in-dealership visits have uncovered that only some components of these systems are being used consistently.

The most successful stores maintain a consistent formula for managing their sales teams, often a team lead or sales coach for every six or seven salespeople.
The most successful stores maintain a consistent formula for managing their sales teams, often a team lead or sales coach for every six or seven salespeople.

Take a close look at the vehicles you are appraising in the dealership. What percentage of new-vehicle transactions involve a trade? If you are tracking anywhere below 65%, you are missing vehicles. Have you reviewed the number of trades to appraisals by appraiser, make, model and classification (CPO eligible, mainline used, economy or subprime)? In fact, you can tell right away if your inventory management application is being utilized properly if it can generate this report. If it can’t, then it’s not being used or data is not being entered as required.

Entries should also include vehicles that are appraised for direct purchase by the dealership and one-off wholesale purchases. You will discover that different appraisers will be biased in valuing certain makes and models. They may also be dependent on competitive dealers to “call” your vehicles or “friendly” wholesalers. That means your competition is getting these vehicles and the gross associated with the processing (which is fixed) and reselling the vehicle.

Is your dealership wholesaling for profit? If so, pull the wash on timing of those vehicles and the appraisals, as you may find there was a unit you would have retailed. A used manager in a large store I recently visited told me, “I’d rather wholesale for $800 instead of taking the risk of reconditioning, adding to the pack and then having it age out.” Clearly this manager didn’t see the big picture. If you have a strict inventory-turn policy in place, which requires a disciplined wholesale disposition process, how good is your management team at maintaining this process and compliance to the policy?

2. Access to Capital: Experian Automotive reports that the average dealership is using 10 or more retail financing sources. Who in the dealership is managing those relationships? Are you, the dealer, aware of these sources, the terms, conditions, recourse liability and those that have incurred regulatory scrutiny from the Consumer Financial Protection Bureau (CFPB)?

Your F&I manager may have close relationships with his or her buyers — sometimes too close — but only dealer involvement can prevent potential issues should one of your finance sources find itself the target of regulatory examination.

Relationships your store has with finance sources should reside with the dealer principal. And he or she should be prepared, with the help of the F&I team, to review each lender’s performance, including rates, underwriting guidelines, cashing of contracts and approval rate by tier. The support they are providing to your dealership in managing contract maturities should also be reviewed.

While you may have data in your DMS that will indicate the initial terms of a contract, the finance company will have the most current information on your customers and their status. This is important if you hope to regain customers with whom you may have lost contact.

Several captives are initiating maturity programs to assist dealerships on this front. Volkswagen and Audi have launched an application known as Maturity Manager and made it available to all their dealers who facilitate end-of-term transactions. Perhaps this is why they were both named top import captives this year. Other financial institutions are rolling out similar programs. So, have you assigned an individual whose sole responsibility is managing maturities? If you haven’t, you are losing valuable opportunities to obtain prime used-vehicle inventory. You’re also adversely affecting customer retention.

3. Reconditioning: Reconditioning is often an interdepartmental challenge. Simply put, the most successful dealers have dedicated reconditioning techs reporting to one service advisor (assuming appropriate volumes) who reports to either a used-vehicle or inventory manager authorizing work and writing the repair order (RO).

If you don’t have a reconditioning menu, you need to build one — and not just one, but menus that detail every reconditioning procedure. I also recommend staging a meeting between your used and fixed-operations management teams. All menu items should be at retail and should include pricing for the most common repair codes, definitions of scope, a change order process and service level requirement. This will eliminate internal conflicts and delays that encumber inventory.

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