Page 10 - GIADA-June 2018-Final 062718

FINANCE

Three Pointers to Maximize Purchased

Unit Profitability

by Dale Pollak, Chairman and Founder of vAuto, Inc.

I’ve heard more complaints lately from able to acquire all the inventory they need 3. FOCUS ON FASTER SALES
dealers that it seems impossible to acquire from trade-ins. VELOCITY. Ideally, there shouldn’t really
wholesale inventory and make the front- be any difference in the number of days it
end gross profit they expect. Once dealers recognize this reality, they takes to sell purchased or trade-in units.
are better able to understand that it’s Time is money with every used vehicle and,
Indeed, if you compare the typical Cost to imperative to efficiently find the most given the Cost to Market disparity between
Market metrics for purchased and trade- profit-favorable vehicles at auction, and purchased and trade-in units, it’s even more
in units, you can see why some dealers are apply an appropriate amount of cost important that you retail auction vehicles as
complaining. discipline to acquire the most profit- efficiently and fast as you can.
favorable units. The dealers also know
The typical Cost to Market range for that, sometimes, it makes more sense to But here’s the reality in inventories across
auction-purchased units tends to run simply acquire the vehicle, rather than America: Purchased units typically take
between 85 percent and 90 percent (a walk away. longer to retail, and they often make up
ratio that includes the cost to acquire 70 percent to 80 percent of a dealer’s aged
the vehicle, buy/transportation fees and In such circumstances, even if a vehicle’s vehicles.
reconditioning estimates). Cost to Market parameters aren’t as
favorable as you’d like, the opportunity You can usually trace this problem back
Meanwhile, dealers who acquire a higher to retail the unit, and generate additional to the “pride trap” noted above. When
percentage of trade-in units (based on gross profit in service/F&I and potentially used vehicle managers are too proud of a
their look-to-book ratios) tend to bring secure another trade-in vehicle, can purchased unit, they’ll set an initial asking
in these vehicles at a Cost to Market range outweigh the inherently higher acquisition price higher than it should be, given
between 80 percent and 85 percent, or cost. competing units in the market and the
even less. unit’s initial Cost to Market ratio. Such
2. AVOID THE “PRIDE TRAP.” It’s not decisions make the vehicle less appealing
This Cost to Market disparity between uncommon for used vehicle managers to price-smart buyers, and slow its eventual
purchased and trade-in units can mean and buyers to come back from an retail sale.
as much, and sometimes more, than a 10 auction, feeling pretty proud of what
percent difference in the potential margin, they purchased. Such is the psychological Top-performing dealers mitigate this
or spread, between the cost to acquire the nature of the auction-buying format. temptation by striving to maintain at least
units and their prevailing retail asking Your bid is the winner! But, on the other 55 percent of their inventories under 30
prices. hand, your winning bid might also mean days of age. These dealers will also strive
you simply paid more than anyone else to to keep their days to sale average consistent
When dealers ask me for advice on how acquire the vehicle. across their purchased and trade-in units.
best to deal with this disparity, I’ll share Both types of oversight tend to drive more
three pointers: To test this dynamic, I’ll sometimes market-realistic pricing decisions that
compare the Cost to Market ratios for maximize every unit’s front-end gross
1. RECOGNIZE THE REALITY. The essentially identical vehicles a dealer profit potential and sales velocity.
Cost to Market differences shouldn’t acquired via auctions and trade-ins. The
surprise anyone. Since the dawn of the comparison typically reveals the Cost to Dealers who make these pointers part of
used vehicle business, dealers are more Market disparity noted above—the cost of their wholesale acquisition process tend
likely to acquire the most cost- and profit- the purchased unit runs about 10 percent to complain less about the high cost of
favorable inventory at the curb, rather higher than the trade-in. I’ll note that purchased units. Instead, they focus on
than the auction. But auction vehicles are this finding doesn’t necessarily suggest the age-old principle that “you make your
a necessity for most dealers if they want cause for pride. Rather, it’s a reflection of money when you acquire a vehicle” and
to maintain their retail sales volumes. You the wholesale market’s efficiency, and the manage each investment, regardless of
can’t sell the cars if you don’t have them, inherent advantage trade-in opportunities its source, to preserve and produce the
and it’s unlikely that most dealers will be offer dealers. maximum profit possible. n

8 | GIADA Independent Auto Dealer JUNE 2018