3 Forces of Change in your Used Car Recon Department

Chris Slaydon

Change is inevitable. And as with any industry, there are certain underlying forces behind the need to change and adapt. The car dealership is no exception. Below are the 3 forces behind the need to streamline your used car recon process and turn your vehicles faster. Those that are the front-runners for change will position themselves for long-term success. While those that are hesitant may find themselves in an unfavorable situation.

 

The Economic Force:

The economics of all business is to grow revenue while reducing or mitigating costs. We are seeing in our industry the costs to recondition a car are going up. Inflation for parts is affecting our bottom line. Auto parts are made of steel and plastics and are affected by changes in prices of steel and oil in the open market. As prices to make the parts goes higher, that cost is passed down to the buyers of the parts, the dealership.

Another economic factor is to consider is labor. Labor is getting harder to find. When you do find good help the cost to keep that individual is increasing. According to the Bureau of Labor Statistics, we have seen a $3 per hour increase in labor cost in the last 10 years. This places considerable strain on used car margins.

Another economic development that is causing used car margins to get tighter is the influx of off-lease vehicles hitting the market. USA Today wrote an article in May of 2017 titled, “Off-lease used cars are flooding the market, pushing prices down.” The article explains how leasing practices 10 years ago is starting to affect the market now. “As a result, used-vehicle prices tumbled 7% during March compared with a year ago, according to NADA Guides Index.” The article goes on to say, “The organization expects them to fall 6% for the full year.”

The economic situation in the used-vehicle market is a major reason for the importance to do what you can do at your dealership to mitigate costs and turn vehicles faster. But if that wasn’t enough, let’s look at the social forces that are playing a role in why it matters to find a solution for your used-vehicle make ready.

 

The Social Force:

There are a few social forces that are taking place in the auto industry. Be aware of these forces in order to stay on top of the competition during this time of margin compression. Over the last few years, more and more dealers are getting competitive with pricing. Not only are dealers being “forced” by some economic forces to lower prices, many are finding the need to lower them further to stay competitive in their respective marketplaces.

In 2009, Dale Pollak introduced the idea of Velocity in the dealership. Velocity, as it applies to vehicle sales, is the maximization of effort. It is not a short-term tenant, it is a long-term path. As such, velocity wants to maximize long-term profitability by speeding up the acquisition of profit. This is why vehicle turn is so important. By increasing inventory turn rate by pricing vehicle to market, we increase profitability long term while reducing holding cost. As this practice continues to grow in dealerships, more and more cars will be priced to the market creating an even more competitive environment.

 

The Technology Force:

Technology has changed the game for many industries. We have been able to experience this change in our own worlds as we have witnessed many technological breakthroughs. In short, technology is making our lives easier. In an article written in Autodealer Today, Joseph Clementi states, “Technology within the dealership environment has the potential to improve satisfaction, training, communication and, most important, profitability.” So why not embrace it?

One of the biggest challenges we have seen in dealerships is their ability to communicate between departments. Technology has made communication easier and simply put, the better we can communicate the more likely we can get cars to the market faster. Imagine getting a text message to approve a work order while out at an auction or on the beach somewhere. Work can continue to move forward by connecting the different departments via technology.

Another benefit of technology as it applies to your reconditioning process is the ability to track actual recon costs and compare them to estimates. See our blog on Recon Estimates, to find out more about how we can help here. But many dealers, and by many I mean MANY, do not track the actual costs of recon. This can have huge implications on future deals for the dealership. A greater understanding of actual costs can put you in a better position to offer more on trade-ins and the like.

 

Conclusion:

As with any industry, there are underlying forces that are constantly driving change. The forces pointed out in this article are not mutually exclusive. There are other factors that might influence you and your dealership’s need to take action. We will see over the next 5 years the dealerships that have accepted the need for change vs. those that are reluctant. If you wait too long, the forces of change might be too much for your dealership to overcome.

 

Amanda Gordon

Great info, especially concerning the importance of turn. My question however is what should a dealer do that already has their vehicles priced to market and still isn't seeing a respectable turn rate?

Tori Zinger

Following, Amanda! I'd like to hear some ideas for this, too.

Michael  Pokora

Amanda, Tori here are some ideas to follow-up on Chris's great post.  Chris - forgive me for piggy-backing here but this is near and dear to my heart and you hit on some great stuff!

The first is as Chris points out is to track the cost of reconditioning, but the second is to have a benchmark cost for each vehicle category. It’s like flipping a house, you buy low, input the least amount possible and sell high as fast as possible. To do this successfully dealers need to ask themselves if they are marketing a commodity or a customized product. Are they pricing against any other 2009 Toyota Camry or are they taking extra care in reconditioning to market this specific Camry that has a condition and overhauls that are hard to come by? You can make money either way but you maximize your money when you have a strategy for your used vehicle department. When purchasing, sales and the used car department don’t talk it’s anyone guess as to the upside potential on a vehicle and you leave money on the table. The margin game here is as complex as any commodities market and I do think real-estate is a good starting comparison to conceptualize the process.

Another hugely important component is to set a standard for the quality of the final product. This not only helps you with the sale to the customer but also in determining whether or not to spend up on tires or for dent removal. You want to know if you can get the money back, the same way you wouldn’t invest in marble counters for a mobile home. Setting a standard for each vehicle will help you control cost once you begin to track them, to ensure margin preservation.

Lastly, you need a process for reconditioning vehicles. As a depreciating asset, you need to complete the recon process quickly which means understanding the available capacity for all areas of the work that needs to be done. I can’t tell you how often I’ve had vehicles “stuck in paint” or “stuck at a vendor” for thirty days or more. This kills the “velocity” you referenced. The important metric here is the lead time or the total time it takes for a raw vehicle to go from acquisition to the sales lot. A deeper dive would mean understanding all of the individual process cycle timesthat add up to the overall lead time. To really be at the master level you want to look at the value added time of each subprocess to determine how to “speed them up”. 

There is a ton of margin potential here for those who are willing to go deep into the economics and operating principals of vehicle reconditioning, but dealers don’t. It also happens to be one of my favorite subjects (geeks me out) to discuss as it gets so overlooked and simplified by dealerships!

Hope this helps, 

Michael

Chris Slaydon

Amanda,

 

There are a couple of things we look at when trying to figure out why turn rate isn't increasing even though you are market priced. So lets start at the beginning.

 

First thing is the recon process. What is your Speed To Market (100% frontline ready)? The Gold Standard is 48-72 hours, however if you are sub 5 days to get frontline ready then your doing some good things. Now, if you are higher than that then you need to figure out why. Lets take this analogy, look at your recon process as a water hose. If you turn on the water and it is barely coming out, what is the first thing you look for? Kinks in the hose! This is akin to process deviation, basically saying your process is out of whack in 1 or more areas. You cannot address anything until those kinks are out. Now, once you have those kinks out and you still have a slow flow then its time to add capacity. You can add capacity in several ways, it could be additional labor in the form of technicians, detailers, photographers, etc. Or it could be capital outlays for new bays, equipment, etc. We've seen huge improvements by just adding an additional vacuum station in detail. Point is, once you have a process down...capacity is the easiest thing to add!

 

Now, if you have good Speed To Market, and your are market priced but still have a slow turn then there are 2 areas we have to look at: Merchandising and Sales Process. 

 

Lets look at merchandising. The general flow is this...if you have HIGH SRPs but LOW VDPs then you usually have a photo or description problem. You're vehicle is showing up in search results but people are not clicking on it. Well if the price good on it (which it is because it's showing up in searches) then you need to look at how that vehicle is presented to the consumer. Odds are there is something wrong with it. 

 

Now lets take the flip side. What if your vehicle has High VDPs but Low SRPs? The first thing we look at in this situation is your Market Day Supply. Usually vehicles with high VDPs  and low SRPs have high market day supplies (MDS). In this case, even though you are market priced you make want to considering being more aggressive. For instance, lets say that a vehicle has a 100 MDS and there are 20 vehicles like it in your market. That means one vehicle is sold every 5 days. If you priced that vehicle where it ranks 10 out of 20 in the market, then theoretically it should sell in 50 days! And thats not considering the amount of new vehicles entering the market. So you can see that even if your market priced, depending on the MDS of that vehicle, you still will not have a good turn on it. One thing to note though, is if you have superior merchandising (high quality photos, great description, good branding, etc) then you can sell your vehicle faster than you are ranked. 

 

Lastly, if you have both High SRPs and High VDPs but leads are low, then there is something wrong with the vehicle generally. It might have some paint chips, dents, not detailed properly etc. 

 

The second issue is your sales process. Im not going to get into that on this thread just because its such an expansive topic. I will however state that if you have good STM, SRPs, VDPs,MDS, and leads then it is almost always a case of failed sales processes. 

 

 

I'll add one final note about marketing metrics. Sometime they will decide you. For instance if you look at your inventory and glance at the SRPs and VDPs then you will see that older units will have more of these compared to your younger units, this is natural since they are advertised longer. I recommend that you look at all you numbers on a per day basis. This will normalize older and younger units so you can see exactly which ones are problem children. Simply divid your SRPs, VDPs, and leads by the vehicles age to get SRPs per Day, VDPs per Day, and Leads per Day. Then start asking question first with SRPs/day. If a unit has lower than your inventory average SRPs per day...why? Look at it through a consumer's eye. Go thru each of your vehicles that way. Next do the VDPs, then leads. You can do this pretty easily by just exporting you inventory from your pricing tool into Excel. Looking at your inventory this way will open your eyes to what is really going on.

 

 

A little long winded but I hope this helps Amanda.

 

 

-Chris

 

 

Tori Zinger

Wowza! Thanks for that insight, Chris! You should repost this information as a blog post!

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