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Bruce Thompson

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Dealers! Get Serious about Buying Directly from the Consumer

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Ever wonder why CarMax is the largest seller of pre-owned vehicles, selling more than any other company?  They retail 160,000 used vehicles just about every quarter and make approximately $2,200 per unit front-end profit -- over $350M.  If you do the math on 153 locations, each store averages 348 unit sales per month and grosses right at $800,000. In addition to front-end retail profit, CarMax also makes $100M per quarter from their finance arm, CFA. How are they able to consistently retail 350 pre-owned vehicles every 90 days and maintain $2,200 per unit front-end profit? In my opinion, the secret is their primary source of inventory. While most dealers battle it out in the auction lanes across the country, CarMax buys a vast majority of their inventory directly from the consumer. In fact, they sell 100,000 wholesale vehicles at their own auctions and make about $1,000 per unit in wholesale profit.  That's $100M every quarter in wholesale profit. Which means just about every CarMax location makes $225,000 per month wholesaling vehicles.

 

The average franchised dealer in the U.S. loses or breaks even wholesaling vehicles. Imagine the ability to turn a consistently losing business unit into a $3,000,000 profit center!  Most dealers don't even think this way about wholesale because they've been conditioned to the contrary. Decades of consistent losses have given way to the common sentiment that wholesaling is a necessary sacrifice to power retail sales. While dealers have had their heads in the sand, CarMax has become the nation's largest used car retailer using consumer acquisition and wholesale profit as the catalyst.  

 

The reason CarMax can maintain their retail and wholesale gross profits is that they buy a large portion of their vehicles directly from the consumer for $1,000 less than what other dealers are paying at auction. This obviously gives them an incredible advantage. They can essentially market and sell a vehicle at the same price a competitor does, but make $1,000 more in profit. I have always said that profit is truly made at the point of acquisition, not liquidation.  If dealers would adopt this mentality, they would realize a fundamental paradigm shift in their business models that would lead to substantially higher profits.     

 

How then can dealers get there?

 

1) Dealers must create buying centers within their dealerships and even build satellite buying centers in their communities. The infrastructure is in place. However, the marketing, process and technology are not.  

 

2) Every vehicle has a value. Many dealers are not interested in making an offer if a vehicle is not appropriate for the retail lot. This is a huge mistake. Think about it...the average wholesale transaction for CarMax is $5,500.  If they average $1000 profit per wholesale unit, they are making a 20% profit in a matter of days.  You would be hard pressed to find better ROI. Especially with little or no risk. Dealers have the infrastructure and personnel in place to make it happen. They must adopt the mentality that every wholesale vehicle is more than likely a retail vehicle to an independent dealer.  Independent dealers love buying trades from franchise stores and franchise stores have the credibility and infrastructure to create a very valuable consumer acquisition channel.   

 

3) Marketing dollars need to be shifted to the wholesale opportunity. 65-70 percent of people that want to sell their vehicle also want to buy a replacement!  You are just attacking the market from a different angle. For transactions that do not result in a direct retail sale, you have acquired a needed inventory unit that will result in either a retail sale, or a wholesale transaction.  It’s a win in either case. Either proposition will translate into at least $1,000 in incremental profit. In addition, you are driving needed traffic through your doors every day.

 

4) "Pigs get fat and hogs get slaughtered." Don't get greedy and try to steal these vehicles from consumers.  Consumers today are educated and they have a pretty good idea of what their vehicles are worth. Obviously, you can devalue that expectation with communication. However, you cannot try to offer $4,000-$5,000 below wholesale values.  You'll get a bad reputation overnight and you will not be successful. Trying to take advantage of the consumer will only result in failure.  The wholesale target should be $1,000 per unit.  CarMax finds 100,000 people a quarter willing to sell at this price. So, you should be willing and able to do the same.  

 

5) You need Technology.  If you're going to beat CarMax at the game they’ve basically created, you need a better mousetrap. Cars.com, for example, will go live nationally in early 2016 with technology that will assist dealers in winning this game. It is a bonafide mobile bidding platform they will extend to dealers everywhere. Bids are submitted in real-time and consumers are notified instantly. Allowing a consumer to sell a vehicle in minutes versus a 2-3 hour process will give you the advantage you need.  Rather than having a "what's my vehicle worth?" widget powered by a wholesale book that gives the consumer a range, give him a solid bid in real-time.  

 

In the end, there’s a reason why CarMax has positioned itself as a go-to place for consumers looking to maximize their vehicle’s value when they’re ready to sell. The sad part is that dealerships perpetuate this perception by lowballing customer trade values in attempt to “steal” their trade and maximize potential profit. Or, even worse, by telling the customer IN THEIR SHOWROOM to go sell their vehicle to CarMax, then come back to buy the one they are interested in. It is pretty absurd to send your customer to your competitor for any reason. However, that is exactly what many dealers are doing. Guess who is the real beneficiary of that?

 

Change your mindset and stop losing valuable inventory acquisition opportunities. Capitalize on every interaction by leveraging technology to provide opportunities and additional profit to your dealership. Like the old saying goes… “If you can’t beat them, join them.”

Mark Hoffman
Well, there is a bit of a network effect at play with CarMax and their ability to source vehicles. They have the large amount of vehicles to attract consumers, making it easy to get the trade-ins. More trade-ins become more inventory which fuels the process. When 65-70% of consumers want a replacement, it's just a matter of convenience for them to go to one store where they can find the vehicle and get a fair price for their trade.
Tim Scholtes
AMAZING, the devil must be in the details. #4 suggestion, doesn't answer why sellers who are often in the market as buyers would be willing to accept the $1,000 under wholesale when they can consistently get wholesale or above for a clean vehicle as a trade. Does CarMax, separate the process? Into "Purchasing" your vehicle at one price and then showing that as a trade on any of their lots. Also, why do we see whole groups of buyers at the auction from CarMax, buying in mass. Please clarify what is the "vast majority" are purchased from consumers? What age? What Miles? What do they buy, 13 to 15's???
Bruce Thompson
Carmax only supplements inventory needs in auction lanes. They also seem to be the top bidder on any vehicle they determine a target. How can they do this and maintain a $2200 margin you might ask? They inventory balance and group trade to stores having the greatest need and fastest turn. If they buy a majority of their inventory from consumers at $1000 under auction prices they simply inventory adjust and balance COS across all units. Having scale and volume is obviously a huge benefit. The consumer may be able to get wholesale price in a trade-in scenario but there are thousands who simply wish to liquidate. CarMax wholesales 100,000 vehicles a quarter and makes right at $1000 per unit (http://investors.carmax.com/News-Releases/News-Releases-Details/2015/CarMax-Reports-Third-Quarter-Results/default.aspx). Whether they are buying directly or trading the wholesale numbers are consistently stable over the last several years. The average unit wholesaled is between $5000-6000 indicating it was an outright consumer purchase or trade; they don't buy $5000 units at auction. I agree the devil is in the details but the details tell a pretty clear story.

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