‘NEW MATH’ KEY TO COMBATTING MARGIN COMPRESSION

Dealers and used car managers needed to understand ‘the new math’ of used car sales if they wanted to combat margin compression and operate a profitable used car department, Dale Pollak, EVP & Founder, vAuto – Cox Automotive, said in his session at the AADA 2020 Moving Forward.

Speaking via video link from the United States, Mr Pollak said that in the years 2017/18/19 the US industry had delivered record or near-record volumes of used car sales. Yet half of Dealers had made a net loss, and the half with a net profit saw this trending down year on year.

“So that would raise the question what will happen in the industry when – not if, but when – our industry’s no longer selling or delivering record volumes of used vehicles. There certainly is something going on. There’s a problem,” he said.

“It isn’t entirely clear to me that this trend that has occurred in the US is quite as severe in Australia as it is here, but I suspect it is occurring and I think it’s only a matter of time before the margin compression causing this negative net outcome is at an equivalent basis in Australia.”

The ‘Cost to Market’ value of used cars, which in 2016 took around 60 days to reach 90% of the average retail asking price, was now reaching that point within 15 to 30 days, “a profound change”, according to Mr Pollak.

“The math of making money in the used car business has changed very, very dramatically, and not for the better,” he said.

The reason for the shift, which began in the US in mid-2016, was the growing reality that the used car game was an internet business, and thus highly price-sensitive, with more frequent price adjustments. With customers haggling on price and demanding extras, a used car might sell for 93% of the average retail price. For a Dealer who after 30 days had 90% ownership of that cost to market, it looks like a 3% gross front-end profit. But Mr Pollak argued that if Dealers factored in associated costs such as department expenses and commission, they would see they were actually making a net loss on the sale – what he termed the “gross deception”.

“It looks like we’re making a positive contribution to the department, and in fact we’re really not. If we ever thought that a vehicle wasn’t worthwhile keeping from a profit standpoint after 60 days, if we ever thought that 60 was the limit, now if and only if you understand that the math is changing, and the math has changed, now in the US we have to come to terms with the fact that a vehicle that is out of net profit contribution potential is a 30-day-old car,” he said.

“Unless you know where they point is you don’t really know that anything is wrong and you’re likely to keep doing the same thing that you’re doing. If you want to reverse the negative trends of net profitability, we have to reduce, or eliminate, the number of vehicles that we transact every month that detract from the bottom line, and by definition here in the US those are vehicles that have been in inventory for 30 days or more.”

Mr Pollak said it was vital dealerships understood what this ‘math’ looked like for them, and communicate it with their managers.

“Once we bring our people to that common point of understanding, what we have to do is implement a new strategy. It’s a very challenging strategy, one that I call ‘Balancing Your Used Vehicle Inventory Equation,” he said.
He challenged the old notion that the way to move more volume was to stock more inventory, because although holding more stock would result in greater volume, the stock that was unsold after 30 days would eventually sell at a net loss.

“No longer can we believe that we stock cars to sell cars. That’s what we’ve always believed. Today what we have to understand is we have to sell cars to earn the right to stock cars,” he said.

“Balance the equation means we have to keep track of our rolling 30-day sales and compare that every single day to the number of units we have in stock. The smaller the gap is between your rolling 30-day sales and your current inventory, the larger your net profit will be, the larger that gap is the larger your loss is going to be. The gap between your rolling 30-day sales and your net profit are completely correlated; highly, directly correlated.”

Mr Pollak said it was a difficult challenge to understand and adjust to the ‘new math’, but those that did would benefit from a clearer understanding of their true position.

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