Change is inevitable. As with any industry, there are certain underlying forces behind the need to change and adapt. The used car retail industry is no exception. 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.
Below are the 3 forces behind the need to streamline your used car recon process and turn your vehicles faster.
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 cars is 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 increases, that cost is passed down to the buyers of the parts: the dealership.
Another economic factor to consider is labor. Labor is getting harder to find. Today, when you enlist a skilled worker, the cost to keep that individual increases over time. 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 are 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 car market reveals the importance to implement cost-saving systems at your dealership to mitigate losses and turn vehicles faster. But if that isn’t enough, look at the social forces impacting the profit margins of your used car recon department.
The Social Force:
Be aware of the following social 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, but many are also finding the need to lower them even further in order 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 from pricing vehicles to market, we increase profitability long term while reducing holding costs. 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 in many industries. We have been experiencing this change in our private lives, too, having been witness to many technological breakthroughs at the turn of the decade. 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 used car reconditioning process, is the ability to track recon costs in real-time and compare them to monthly forecasts. See our blog on Recon Estimates, to find out more about how we can help here. But many dealers, and by many we mean MANY, do not track the actual costs of recon. This can have huge implications for profits and workforce efficiency. A greater understanding of actual costs can put you in a better position to offer more on trade-ins and the like.
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 versus those that have been reluctant. If you wait too long, the forces of change might be too much for your dealership to overcome.