Beyond The Trap- The Tide Is Turning
If you have read my blogs “Don’t Fall Into The Trap” or “Take Back Your Marketing” or the many comments I have made concerning this issue, you know that I have been against the large companies commoditizing approach they have been feeding dealer’s- And in particular I am referring to the small and medium size dealers- that you need change your business models and to sell more at a lower price to compete in today’s marketplace.
I am now starting to see a trend that is showing support for what I have been saying for a long time. I just read a white paper put out by firstLook which states that used car dealers and private party sales in April climbed 0.7 percent vs. year ago to 3,819,127 units. vs. 3,792,604,
Total Value of Used Cars sold, however, slipped 5.8 percent to $34.1 billion compared to last year's $36.2 billion because of lower transaction prices.
Transaction prices across all three channels were down 6.46 percent to $8,928 from $9,545. (Excludes aftermarket products, taxes, fees, etc.)
“• Buyers were kicking tires at five or six different dealerships years ago, and that’s now dropped to 1.8 in-person store visits.
• As the recession slammed down hard, used car supply waned and commoditizing of the used car industry was born. Many dealers have sold inventory as cheap as possible, turning them as fast as possible for tiny margins, then ran back to the auctions to scoop more supply.
• The “velocity only” approach hasn’t gone so well. Gross profits have been eroded.
It doesn’t have to be that way if you can access both the tools and philosophy necessary to turn cars while achieving high gross profits.”
“And anyone can stand in front of a room and tell you to price everything for dirt cheap and it will sell faster. The key is how you can achieve 85% Retail Sales Efficiency while maintaining high gross profits.
Some seemingly “progressive” thinkers have very simply stated that used cars are a commodity. The only way to be successful in today’s market is to sell cars really cheap at 96% of the market, turn them as fast as possible for tiny margins, and run back to the auction to scoop up more. And quite frankly…a lot of people drank that Kool-Aid. The hypothesis being that this approach will, allegedly, increase turn and volume, and with that volume you can make more money. A velocity only approach they call it.
Beyond being a gross oversimplification of the car business, the impact this has on the market is obvious – eroding gross profits. In fact, based on a recent dealer survey, this is the #1 concern for General Managers and Dealer Principals in 2013. “
The bottom line is…not all used cars are commodities, and we need to stop treating them that way. Just like in any retail business there are high margin products and low margin products. The key in the used car business is having the tools and philosophical approach necessary to identify the difference between the two."
Interestingly, a recent CarMax Consumer Study found that only 23% of people rank price as the most important factor in their buying decision. 77% rank VALUE (typically tied to some aspect of quality) as their top criteria.
I remember on one occasion at a dealership I was working at the used car Manager was telling the rep from Auto Trader that he wasn’t happy with the results he was getting. The Rep responded by telling the manager that he needed to lower his prices if he wanted better results.
That preowned manager did not listen to the rep and bucked the trend of lowering prices to compete online. - And guess what- average grosses in his department were much higher than the industry average and his total unit sales were improving. Number one that is why you have a “good” sales staff and “good” finance people for and number two you can always come down in price but I never heard a customer say a price was too low.
You can only add value by competing within your market area all of which can be done with offers in CPO, service i.e. loaner cars, shuttles; specials; events and by extracting the vast resources you already have to create campaigns and make in house adjustments that will capitalize on those campaigns.
By having the right people that can produce “creative campaigns” and the right staff you can turn the tide and sell the VALUE not the PRICE.
Comment
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Comment by Bill Cosgrove on May 13, 2013 at 7:01am
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Doug- you are right. It is wrong for anyone for whatever reason to delete ideas or information simply because they don't agree with a view.We all know what that leads to. My statement was a generalization and my intention was not to point fingers at anyone or group in particular but the act in general.
It appears that Cars.com only cease and desisted after being vetted and for the way they reacted. This in my judgement is the cause of the aftermath that followed.
I just hope that This chain of events gets everyone to stand up and take notice to the fact that putting to much control to in the hands of a few will always lead to arrogant and self-serving acts. This is what I see happening in the industry across the vertical.
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Hi Doug- I agree on your cost point but that is a statistic and we have to have a reference point for these discussions and research.
Having the right people and paying for that talent has been a mantra of mine for more years than I care to mention. I went back into sales (used only) because I was making a lot more than a lot of managers and as a matter of fact I was making a lot more back in the early eighties as a manager than a good deal of them make today.
I am standing on the same soapbox with everything your saying here. It all goes back to pay me now or you'll be paying later.
All this touchy feely talk that is out there now is great. Everyone likes a pat on the back now and then but money talks and and the real talent walks if it isn't enough.
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Comment by Doug Davis on May 10, 2013 at 12:27pm
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Bill, I think we agree more than we disagree.
I think that the $10,000 wholesale value is telling. In today's market, that figure is pretty low. Maybe not a sled but not a cream of the crop vehicle, either. We are splitting hairs.
This dealership’s compensation plan was the highest in the region which attracted the top talent in management and sales.
Bingo! If the average buyer only visits 1.8 (I have heard this figure might be as low as 1.3). How important is having great salespeople to close them? Most dealerships are patting themselves on the back if they close 30% of the customers on their sales log. That 30% target was set by NADA decades ago. Considering the 1.8 figure, is this relevant?
Velocity is a tool. I wouldn't hand my 4 year old grandson a power tool, It actually adds more time, difficulty and requires a better understanding than what many Used Car Managers want to deal with. It is far easier to initially price cars at 97% of the market and move on. Again, it is about people.
Dealerships that pay peanuts get monkeys. Anyone can manage a green pea. Look at marginal stores and you see marginal managers and green pea salespeople. Look at the emergence of BDCs. They go out and hire $9/hour phone operators and have them answering internet leads. I'm not against BDCs for long term follow-up but I don't want them replacing seasoned professions on initial contact.
Until dealerships raise their standards for closing ratios and evaluate their true cost of turnover, we will see more of the same.
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Thanks for your comments which I would like to respond to:
Buyers were kicking tires at five or six different dealerships years ago, and that’s now dropped to 1.8 in-person store visits.
Doug's- Comment This statistic tells us that people do their research, online, and set out to buy (not shop). They have made up their minds and are going to buy from the store of choice or go to the second one on their list. They are going to buy a car and you better shut them down when they come in.
Doug this actually provides the dealer with the opportunity to convert more customer visits. I had referred to your exact comment in a previous blog I published.
Total Value of Used Cars sold, however, slipped 5.8 percent to $34.1 billion compared to last year's $36.2 billion because of lower transaction prices.
Doug’s comment- People are holding on to their cars longer. This has more to do with the age and mileage of what they are selling than just simply dropping prices. The cars are worth less.
I am a believer in the velocity approach but I look at vehicles colors, mileage, equipment packages, units in area and other factors to determine the price. Not all vehicles are created equal.
Some cars are commodities. Look at the Mustang. It is one of the most searched vehicles which, at a glance, would make you think that you need these regardless of your franchise. What if you are on a 60 day turn and there is a 90 days Market supply? How would you price one of those?
Doug- I don’t see how your first point is relevant to the statement I made. The average wholesale price that dealers paid per unit sold was around $10,000.00 dollars. They are not selling the worthless trades that are traded in. No matter what the business model the turn of inventory is dependent on having the right manager who has the experience to have the right mix for his market area, what to keep, and how to work price, e.t. If the model isn’t working then either the model has to change or the management.
It has always been that what works for one won’t always work for the other. It is always easier to follow the herd than invent ways to get the best results by being different. However, that takes the right people with the acumen to go their own way.
I remember on one occasion at a dealership I was working at the used car Manager was telling the rep from Auto Trader that he wasn’t happy with the results he was getting. The Rep responded by telling the manager that he needed to lower his prices if he wanted better results.
Doug’s comment- Just yesterday, I attended a meeting where an AutoTrader rep was showing the dealer some statistics on their used vehicles and avoided discussing pricing. Looking at the spreadsheet, much of this dealer's inventory was priced at 124% of market and they were averaging 2 VDPs per unit over the previous month.
In a previous post I went on to say that the used (pre-owned) car manager I was referring to did not listen to the reps advice and was averaging some of the highest grosses in the region and Incrementally increasing monthly sales.
Doug’s comment- The dealer is appraising his cars based on auction values, adding a desired profit to arrive at their price. The result is obvious; nobody is clicking on their cars. If dealerships are only considering front gross profit, on how to drive their business, they are in serious trouble. Most dealerships are not market leaders. The difference has always been the people.
I agree that the online marketing of cars has changed the way they are marketed and sold but there are always avenues that you can take if you have the talent in management and sales. This dealership’s compensation plan was the highest in the region which attracted the top talent in management and sales.
By the way the used car manager’s back end grosses were consistently number one in the region.
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Bill, I enjoyed reading your article.
Buyers were kicking tires at five or six different dealerships years ago, and that’s now dropped to 1.8 in-person store visits.
This statistic tells us that people do their research, online, and set out to buy (not shop). They have made up their minds and are going to buy from the store of choice or go to the second one on their list. They are going to buy a car and you better shut them down when they come in.
Total Value of Used Cars sold, however, slipped 5.8 percent to $34.1 billion compared to last year's $36.2 billion because of lower transaction prices.
People are holding on to their cars longer. This has more to do with the age and mileage of what they are selling than just simply dropping prices. The cars are worth less.
I am a believer in the velocity approach but I look at vehicles colors, mileage, equipment packages, units in area and other factors to determine the price. Not all vehicles are created equal.
Some cars are commodities. Look at the Mustang. It is one of the most searched vehicles which, at a glance, would make you think that you need these regardless of your franchise. What if you are on a 60 day turn and there is a 90 days Market supply? How would you price one of those?
I remember on one occasion at a dealership I was working at the used car Manager was telling the rep from Auto Trader that he wasn’t happy with the results he was getting. The Rep responded by telling the manager that he needed to lower his prices if he wanted better results.
Just yesterday, I attended a meeting where an AutoTrader rep was showing the dealer some statistics on their used vehicles and avoided discussing pricing. Looking at the spreadsheet, much of this dealer's inventory was priced at 124% of market and they were averaging 2 VDPs per unit over the previous month.
The dealer is appraising his cars based on auction values, adding a desired profit to arrive at their price. The result is obvious, nobody is clicking on their cars.
If dealerships are only considering front gross profit, on how to drive their business, they are in serious trouble.
Most dealerships are not market leaders. The difference has always been the people.
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