I received a note from a Midwest velocity dealer who ran into unexpected trouble during a recent meeting with his dealership managers and majority partner:
While we were reviewing last year’s numbers, the majority shareholder decides he wants to try to raise internal parts mark-up another 25 percent and add a $20/hour increase to our labor rate for used cars. I dug my heels in and hopefully managed to avoid the increases for now. It amazes me how much the business has changed and how dealers are not able to adjust to the new ways of doing business.
Unfortunately, this dealer isn’t alone. I’ve heard similar accounts of dealers or partners pushing for more profitability from their used vehicle operations. They mandate tradition-based, reflexive, “raise-our-prices” fixes that effectively undermine the “turn and earn” principles and processes the managers have worked hard to put in place—the same ones that often yield unprecedented profitability for the entire dealership. (The Midwest dealer’s store showed a nearly 12 percent increase in net income last year.)
On one level, I’m a little dumbstruck when I hear these stories. On another level, I empathize with the velocity stewards at these stores. It’s demoralizing and difficult to be told to do things that are both counter-intuitive and out of step with current market realities.
Here are three recommendations to help you push back if/when this scenario occurs at your dealership:
Show the price competition in your local market. A sampling of competitive sets should reveal the often negligible differences between your cars and others on the market. Use these comparisons to show how it’s difficult, if not impossible, to pass on any internal parts or labor mark-up increases to customers and expect to remain competitive.
Highlight the effects on average front-end margin potential. If you add costs to a car, its front-end gross profit potential will suffer in today’s price-competitive market. Period. This is why the best-performing velocity dealers aim to increase efficiencies and reduce, not increase, the costs required to acquire, recondition and retail used cars. The Midwest dealer estimates the partner’s mark-up and labor rate suggestions would shrink his front-end margin potential by a minimum of 2 percent, depending on the car (e.g., his current 84 percent Cost to Market ratio for his inventory would climb to 86 percent or higher).
Play hardball. This is a last-ditch tactic if the prior points fall flat. The idea: The used vehicle department shouldn’t give up its competitive advantage without something in return. If the dealer or partner wants to increase parts mark-ups and labor rates, the used vehicle department should get something back—perhaps a mandatory two- or three-day reduction in reconditioning turnaround times. It’s not much, to be sure, but it’s a slight hedge to ensure a velocity-focused department isn’t foiled further by an inconsistent supply of fresh cars.
Your thoughts? I’d welcome other ideas on this subject as I suspect the Midwest dealer is correct—he’s won the battle “for now” but the war isn’t really over.
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