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Taking on Water

Da Man has a warning for dealerships that play those stair-step incentive games: Don’t get caught in the never-ending cycle of phantom profits.

August 5, 2015

It’s not a new problem, but the wholesale losses that have crept up on dealers in recent years have many of them caught up in a never-ending cycle of phantom profits, which disappear 60 days later when those trade-ins have to be disposed of at a loss because they didn’t sell.

Much of the blame for this epidemic can be directed at stair-step incentive programs that pressure new-car sales managers into selling vehicles at a loss. Compounding the problem are third-party sites that price vehicles unrealistically. And because of competitive pressures, dealers know they risk losing a sale to a competitor if they don’t make a deal. That’s when we start loading up the trades to make things work.

Yeah, we look good on our financial statement. Maybe we even hit our numbers and cash in on the manufacturer’s bonus. In the meantime, that trade-in is sitting there and no one is buying it. It’s not a loss yet, but everyone assumes it is worth what the dealer is in it for.

Sixty days in, and we’re facing another wholesale loss because our pre-owned manager still hasn’t moved it. He claims he can sell his way out of the situation, but he can’t. No bank is going to advance enough money to cover what the dealership is in it for.

My No. 1 rule is to take the short loss, because it’s only going to get worse. The real reason these situations arise is because the new-car manager is too weak to work the customer, so he pressures the pre-owned manager into making bad decisions.

So you say your store uses accounting to handle wholesale losses on your financial statement. You “bruise” your cars on the statement and adjust the value you are in the unit for by adding to the incoming inventory and deducting from aged units with a complex series of “packs.” What you’re really doing is stacking up hidden losses that are going to eventually catch up to you unless you keep increasing the packs, because bruising inventory only works if you never do it again.

Now here’s what you should be doing:

1. Put the right number on the car the first time: Stop bumping trades out of the ballpark in order to make that new-car deal. And if your used-car manager is holding back on appraisals, fire him or her. Remember, a used car depreciates once a week, whereas a new car theoretically depreciates once a year. So stop loading up a trade that depreciates every week in order to move a new unit at a future loss.  

2. Stop working the used-car manager: We all know most car deals come down to the monthly payment. But instead of getting cash down from your customers — which most salespeople suck at — you get the used-car manager to load up the trade in order to secure a low payment for the customer. This needs to stop, and new-car managers need to get better at managing salespeople to work the customer.

3. Use vAuto or another similar program to review what your buyer is buying: You’re insane if you’re not using these programs. I don’t advocate using them to price cars, but I strongly recommend using them to research “the buy” and then price the unit to turn the inventory at 60 days in.

These programs will prevent your store from getting stuck with the wrong inventory mix because your buyer only likes to buy a certain type of car. And remember, how you buy a car and what you’re in it for will determine the profit you make.

4. Start keeping and retailing those higher mileage units: Keep in mind that the average car is sold to four different owners before it is scrapped. Also keep in mind that the store that sold the vehicle last made more money on it than the first three dealerships combined. And that’s why I have been encouraging my clients to keep older units and retail them.

The best part is you don’t have to display these as-is units with your normal inventory. You also don’t have to be so quick wholesale them. Hey, they’re not losing any more value today than they’ll be worth next month. Just make sure to find a service contract company that will write a contract on these high-mileage cash cars.

If a dealership is losing big money, it’s usually in the used-car department. That’s my rant for this month. Unit next time.

Jim Ziegler is the president of Ziegler SuperSystems Inc. Email him at jim.ziegler@bobit.com. Don’t miss the Alpha Dawg’s two-day Profit Masters seminar on Sept. 8-9 at Industry Summit 2015.

Comments

  1. 1. Steve Alaimo [ September 06, 2015 @ 09:53AM ]

    This article is spot on the message, with good processes and consistent behavior a healthy used car department is the dealerships' best friend. Enter into the relationship of a trade-in or purchase with an exit strategy considering recon dollars, market pricing and a reasonable turn policy. Aside from economic or natural disaster a 60 day old unit should never lose thousands at the block, a sure sign of a flawed or weak decision making process. Used car managers' while having no intention of losing a deal over trade dollars should everyday educate staff members the "how to" of conveying true market value to their guest.

  2. 2. Steve Alaimo [ September 06, 2015 @ 09:53AM ]

    This article is spot on the message, with good processes and consistent behavior a healthy used car department is the dealerships' best friend. Enter into the relationship of a trade-in or purchase with an exit strategy considering recon dollars, market pricing and a reasonable turn policy. Aside from economic or natural disaster a 60 day old unit should never lose thousands at the block, a sure sign of a flawed or weak decision making process. Used car managers' while having no intention of losing a deal over trade dollars should everyday educate staff members the "how to" of conveying true market value to their guest.

  3. 3. Steve Alaimo [ September 06, 2015 @ 09:53AM ]

    This article is spot on the message, with good processes and consistent behavior a healthy used car department is the dealerships' best friend. Enter into the relationship of a trade-in or purchase with an exit strategy considering recon dollars, market pricing and a reasonable turn policy. Aside from economic or natural disaster a 60 day old unit should never lose thousands at the block, a sure sign of a flawed or weak decision making process. Used car managers' while having no intention of losing a deal over trade dollars should everyday educate staff members the "how to" of conveying true market value to their guest.

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Author Bio

Jim Ziegler

President & CEO of Ziegler SuperSystems

Jim 'Da Man' Ziegler joined the magazine in 2011 to deliver his On-the-Point message about the car business to dealer principals and store managers. He'll offer strategy advice on everything from sales and F&I to marketing in the digital age. Catch him every month at www.fi-magazine.com.

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