Consider the respective approaches of hypothetical Dealership A versus Dealership B. Assume that both dealerships own exactly the same used vehicle. After 45 days of inventory life, Dealership A says, “retail the car and lose $600.” Dealership B says, “are you out of your mind…there’s no way I’m retailing a vehicle after only 45 days and losing $600.” Dealership B does in fact, hang on to the car and ultimately retails it after 75 days and makes $600 front-end gross profit. The question is: which dealership made the wiser financial decision?
An enlightened analysis says that Dealership A made the wiser choice. This is for the obvious reason that the sale of the vehicle after 45 days allowed Dealership A, a chance at an F&I profit, the acquisition of a new customer and the opportunity to put another vehicle through the service department and likely repeat the process 1.5 to 2 times during the same period that Dealership B sold and processed one vehicle and one customer.
In spite of this irrefutable logic, few will behave as does Dealership A. Why does common practice defy financial prudence?
I believe that the problem for most dealerships is due to the fact that traditional used car management philosophy deems losses to be bad and to be avoided when at all possible. I further believe that a close correlate to this philosophy is the belief that “there is an ass for every seat.” In fact, in days gone by, there usually was somebody that would eventually come along and pay too much money if the dealer was willing to stick it out and wait. This, of course today, is seldom the case, but yet dealers continue to avoid losses as long as they can.
With the more enlightened shopper, I believe that it is time for dealers to realize that the “ass for every seat” assumption no longer supports the strategy of avoiding losses.
At some point, some amount of loss is worthwhile in order to redeploy the original investment capital for a more productive outcome. Unfortunately, I cannot yet say how much loss and at what period of time to be worthwhile, but I am sure that it is time for dealers to recognize and acknowledge the fact that some amount of loss creates an off-setting opportunity for gain as demonstrated in the Dealer A versus Dealer B example.
Another obstacle to understanding this point is the traditional construct of a dealership’s financial statement. All such financial statements independently measure the profitability of each department with the understanding that each department must stand on its own. While I believe that this construct was proper in previous times, it ignores the reality of today’s business. Dealership A above made a decision that negatively impacted the used vehicle department, but produced a positive effect for their F&I and mechanical/parts departments. This reality, however, is not recognized in the construct of our current dealership reporting structure. This fact discourages dealers from making the best financial decisions. Once again, I say that it is now time for our industry to reexamine new strategies for dealership financial accounting. This is consistent with the “wheel of fortune” concept that I described in my third book, Velocity Overdrive.
To summarize, today’s used car battle is different from the past. As our battlefield tactics and strategies have changed from those of Vietnam to Afghanistan, so too, must our battlefield tactics and strategies change to address the realities and challenges of today’s used car market.