New truth of used profitability

Industry

You don’t have to look too far into dealer financials to see that something’s amiss in the used-vehicle department.

The crux of the problem shows up in two telling line items — the number of used vehicles retailed and the average net-profit contribution each retail sale produces.

When dealers check these numbers, and compare them to years past, the review often reaches an unsettling conclusion. Despite retailing more used vehicles, dealers are making less money.

You see this troubling trend in the dealership financial data from the National Automobile Dealers Association.

In 2011, NADA reported that the average dealer retailed 568 used vehicles and earned an average retail net profit per used vehicle retailed of $203. In 2018, the average dealer retailed 700-plus used vehicles and earned $6 in average retail net profit.

In that seven-year period, I was struck when the retail net-profit figures went negative, to -$2 in 2017.

This marked shift in the net profitability of used vehicles spurred a team of data scientists and me to take a deeper look at the used-vehicle market itself.

We analyzed inventory and transaction data across the time in question. We discovered an important development that I now believe represents a new truth of used-vehicle profitability.

The team and I discovered that in the spring of 2016, the pace of depreciation or margin compression in used vehicles took off.

Up until this time, our research showed that it took about 60 days for a vehicle in a dealer’s inventory to reach a cost-to-market percentage of 90 percent or higher.

But then we found that, for a variety of factors, used vehicles in dealer inventories were reaching the 90 percent cost-to-market threshold in 30 days, and sometimes even sooner.

The primary takeaway from this finding is that, for all intents and purposes, the viable retail shelf life of most used vehicles is essentially half of what many dealers consider an appropriate amount of time to retail a vehicle.

Ever since this discovery, I’ve been working hard to help dealers recognize how the used-vehicle market has changed, and the steps they can take to improve their net-profit outcomes in their used-vehicle departments.

I caution dealers that the traditional “stock up to sell” strategy is no longer as effective given that the viable retail time frame for most used vehicles to make a meaningful net-profit contribution is now 30 days or less.

Consider: If dealers carry twice as many used vehicles as they retail in a 30-day period, some vehicles will ultimately and unfortunately end up as net losses after dealers retail the units, deduct sales commissions and allocate other expenses to the vehicles.

Instead, I encourage dealers to do two things. First, dealers should maintain their used-vehicle inventory levels in line with their rolling 30-day total of retail sales. If you’ve sold 75 vehicles in the last 30 days, you should have 75 vehicles in your inventory.

Second, dealers must learn to make peace with the truth about each used vehicle’s net profit and investment return potential from the moment you own it.

I fully understand that neither prescription is easy.

Each represents a dose of medicine that a lot of dealers find distasteful, particularly when we’ve all been taught that every “fresh” car deserves a shot at delivering gross.

But I’ve also seen firsthand that the medicine works, and I believe it will be especially useful for dealers who expect their used-vehicle departments to drive higher levels of sales performance and profitability in the year ahead.

I caution dealers that the traditional “stock up to sell” strategy is no longer as effective given that the viable retail time frame for most used vehicles to make a meaningful net-profit contribution is now 30 days or less.

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