As regular readers might know, I’ve been anxious to see the 2019 year-end dealership financials from the National Automobile Dealers Association (NADA).
My desire to see the year-end report owes to my ongoing concern that dealers are losing money in their used vehicle departments even as they retail higher numbers of more expensive vehicles. As some may recall, I was floored when NADA reported that the average retail net profit per used vehicle retailed ran -$2 in 2017.
I’m delighted to report that the 2019 year-end Dealership Financial Profile from NADA offers a less bleak picture.
NADA reports that the average retail net profit per used vehicle climbed to $14 in 2019, more than doubling the $6 in average retail net profit per used vehicle retailed that dealers achieved in 2018.
That’s the good news.
Now, let’s take a closer look at the bad news.
First, the $14 in average retail net profit per used vehicle retailed includes F&I income. Hence, it’s not really a true picture of whether dealers are selling cars, and making money, in their used vehicle departments themselves.
Second, if you separate the respective gross profit generated in the F&I and used vehicle departments, it’s like a tale of two cities.
Here’s a quick a look at each, and a take-away:
F&I Gross: In 2019, NADA’s financial data suggests dealers averaged a 75 percent penetration rate in F&I, up nearly 2 percent from 2018. In addition, the average dealer achieved an average of $1,421 in F&I gross on the vehicles that included F&I income—an increase of $55/vehicle from 2018’s total.
The F&I gains are all good. The reflect the fact that dealers are doing a better job presenting financing and insurance products to buyers, whether it’s online or in the showroom. And, better still, more buyers are saying “yes” when given the option to purchase, thanks at least in part to their desire to purchase and protect CPO vehicles.
Used vehicle gross: In 2019, NADA’s financial data says dealers sold an average of 15 more vehicles in 2019 compared to 2018 (735 vs 720, respectively). The average selling price also grew an average of $508/car.
Unfortunately, the front-end gross profit dealers earned from the sale of more expensive vehicles went the other direction. It diminished an average of $35/retail unit, to $952 in 2019 compared to $987 in 2018.
As I consider the tale-of-two-cities trend in F&I and used vehicle front-end gross profit, I have to ask why F&I seems to be doing just fine, while the actual sale of a used vehicle continues to be profit-troubling proposition for many dealers? And, if NADA reported the net profit of the used vehicle department on its own, what would that look like?
Fortunately, I get good answers to these questions every day.
For example, there are dozens of dealers for whom the ongoing decline in front-end gross profit reflected in the NADA numbers has been reversed. These are dealers, like the Honda dealer I wrote about last week, who are seeing front-end gross profits increase rather than decline.
What’s the difference? The dealers are forgoing a calendar- or days-in-inventory-based strategy for managing their used vehicle inventories and, instead, working to maximize each vehicle’s net profit or return on investment.
These dealers are recognizing each vehicle’s investment potential from the moment they own a vehicle, and acting accordingly.
If it’s a poor investment, the car doesn’t get a standard mark-up and X number of days on the lot to perform. Instead, it’s priced to move fast so the dealer can redeploy the investment in a more profit-productive vehicle.
If it’s a good or great investment, the dealers are pricing the vehicle with an understanding that their investment has earned the right to deliver a positive return, and the asking price reflects this reality.
The shift to an investment value-based inventory management strategy also has profound and positive implications for the net profit the dealers achieve in their used vehicle department.
In the past year or two, many of these dealers have moved from either losing, or making less and less, net profit in their used vehicle departments to setting new records for departmental net profitability.
Perhaps a primary take-away for dealers should be this: If your own financials show the same tale of two cities in F&I and used vehicles as NADA, it’s time to take a closer look at the used vehicle side of the house.
Then, ask yourself, “How can I do a better job managing each used vehicle to deliver its net profit or investment return potential?”
The post NADA Dealership Financials: Good News, Bad News in Used Vehicles appeared first on Dale Pollak.