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.[PAGEBREAK]

When it comes to reconditioning used inventory, the most successful dealers have dedicated techs reporting to one advisor who reports to either a used-vehicle or inventory manager authorizing and writing the repair order.

When it comes to reconditioning used inventory, the most successful dealers have dedicated techs reporting to one advisor who reports to either a used-vehicle or inventory manager authorizing and writing the repair order.

Managers should prepare for this meeting by reviewing and bringing samples of internal repair orders and change orders, as well as a list of operation codes. Larger stores or groups will benefit from having a single-point reconditioning and vehicle prep operation, ideally operated as a profit center.

Additionally, be prepared to discuss the use of aftermarket parts on subprime inventory. There are suppliers in most markets that operate bonded warehouses that supply a wide range of competitively priced parts, accessories and tires based on volume. They even offer same-day delivery.

Dealing with subprime inventory will require a used manager with solid mechanical knowledge and an aptitude for both appraisal and reconditioning, as well as familiarity with state and local safety requirements. There are repairs, however, that will not be made to subprime vehicles that will be made to CPO or mainline vehicles. Menus should cover a basic inspection of a wholesale unit, a safety and diagnostic inspection for retail designation, and the application of OEM standards to CPO units and subprime inventory. They should also include pricing, merchandising and advertising.

4. Pricing, Merchandising and Advertising: Correctly pricing and repricing vehicles is a daily task. The inventory management tools outlined within can help. It is important, however, to be dialed into your local market. You should also monitor traffic on each of your vehicle detail pages (VDP). I strongly suggest that the dealer principal review pricing of every vehicle in inventory once a week — a daily task for the used-vehicle manager.

Merchandising ranges from how vehicles are displayed on your lot to how you market them online. While dealers are constantly finding and implementing new solutions, industry data continues to tell us that the majority of vehicles are purchased after customers have viewed VDPs. Make sure to include vehicle history and a comprehensive series of high-quality pictures and videos. Also make sure to include features, accessories and whether it is a used or CPO unit.

Review of your sales and lead sources should also be conducted on a monthly and rolling quarterly basis. Generate a report of all sales for the previous 90 days and review the quality of each transaction by lead source. Be sure to apply any fees you pay on a per-sale or per-lead basis and subtract them from your wash gross profit on each deal. This will provide you with a quick glance of the ROI each of your lead channels is delivering.

If you have difficulty generating reports from either the DMS or specialty systems, contact your vendor support staff. Most systems are easy to learn and use. Your in-house IT champion may be able to assist as well. I do recommend, however, that dealers learn how to do this. You will discover some insights that may surprise you. As a dealer, I loved surprises. It meant I had just acquired a valuable piece of information that I may have overlooked.

5. Sales Management and Coaching: Used managers have more time demands and require more skills than any manager in your dealership. We have looked at key areas of the used profit center, but we have yet to discuss selling. An initial recommendation is to review the time spent by your used management team on inventory and non-sales activities. The most successful dealerships maintain a consistent formula for managing their sales teams, often a team lead or sales coach for every six or seven salespeople.

The sales lead or process owner is solely responsible for working with sales staff and working deals, period. In smaller stores, this role may be combined with appraisals. Just be sure you don’t overload this position.

Staffing of your sales team is also critical and is even more so when dealing with subprime inventory. While CPO and new crossover sales may be easier for newer staff, mainline used requires a higher level of broad product knowledge. Special finance managers must be knowledgeable and prepared to discuss vehicle mechanical conditions or other issues in order to deliver compelling value propositions for inventory that may have higher mileage or blemishes not reconditioned at the same level as mainline used or CPO units. This further supports placement of this inventory apart or in a separate location from your mainline inventory.

6. Segment Performance and the Gross Rate of Return: Understanding the performance of each segment of your used-vehicle operations is often overlooked but fairly easy to calculate. “GRR” is not the sound you make when you have taken a wholesale bath. It refers to your gross rate of return.

Profitable used departments rely upon velocity, focusing on total gross and turn rates — metrics that will provide a clear view of how each segment is performing as well as direction on where you need to focus.

While it is possible to evaluate multiple segments, such as cars vs. trucks or by franchise brand vs. off-brand, I recommend that you begin by segmenting CPO, mainline used and subprime vehicles. This calculation will provide you with the total amount of return (in capital) per dollar of inventory you have invested over a 100-day period. The graphic on this page illustrates how to perform this calculation, which should be done monthly. Your goal is to analyze sales for both the month and rolling quarter to monitor trends and identify sales anomalies that may occur due to incentive programs or seasonal variation.

In our analyses, CPO tends to provide a higher GRR and subprime will often trend the highest.

When performing your analysis, be sure to include all incentives, packs and gross generated from a sale. You can generate a sales report for each segment using your DMS. CPO is particularly easy because OEMs provide a specific account for these transactions. For mainline and subprime vehicles, establish mileage and pricing parameters. When you complete this analysis, you can adjust days to turn (the length of time each vehicle was in inventory) up or down to see how improved turn rates can impact this metric. You can do the same with gross profit.

Ultimately, this high-level analysis of your used operations will give you a better handle on where you will need to focus this year. It will also further your understanding of the complexity of this part of your business. Let me know what you discover.

David Nathanson is the head of the retail advisory practice division at motormindz, an automotive consultancy specializing in automotive manufacturing, retail, fleet, marketing communications and technology. Email him at [email protected]

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