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Bryant Gibby

Bryant Gibby Used car manager

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         The very first lesson I was taught as a young, naïve used car manager was turn is king. I was told that I needed to view each used vehicle as an individual stack of cash or investment and the quicker I could turn that stack of cash, the more profitable my department would be. The logic made complete sense at the time because I, like everyone else, understood that a car is a depreciating asset and you don’t want to sit on your investment too long and let it depreciate too much.  Also, the shop makes more money, we make more pack, we make more doc fees, and we make more back-end money.  So all I needed to do was to stay on top of my pricing and so long as my cars were reconditioned and advertised properly, I would succeed. Sounds easy right?

           

Any car guy knows that the best time to sell a used car and maximize profit is to sell it in the first 30 days. We also know that you are doing a good if you can sell 60% of your used inventory in the first 30 days. What’s the best strategy with the remaining 40% of your inventory then? Should you go to a 45 day turn and sell the remaining 40% in the next 15 days? Is a 60 day turn better? 90 days? Should I even care about how quick they turn knowing that I will eventually sell them if I’m ok with taking a huge loss?

 

I work at a bottom line pricing dealership. We have been running on a fairly strict 90 day turn policy the last couple of years and we are trying to transition to a 60 day turn policy. As we have started to make the transition, I have noticed that I do a lot more discounts than I used to and we are taking skinnier deals as a result.  A shorter turn policy would make complete sense in a normal depreciating market, but does it make senses in today’s market?  Everyone that knows anything about used cars understands how volatile the market has been and how crazy thing have gotten at the auctions over the last couple of years.

 

The concept of turning your inventory quickly makes complete sense to me if I can go replace that same care for cheaper than my current cost at the auction. We all know that that isn’t the case most of the times. So, back to my original question. Do you really want to follow a 60 or 90 day turn policy and “drop your pants” so fast knowing you are in a very unpredictable market? Or, is it better to keep your pants on and try to put more emphasis on gross and less on turn?  It’s a tough call for sure! I would love to get some insight and hear what you guys think. What is working for you?

 

 

Jeremy Alicandri
This is a great question – especially when considering the wholesale/auction fluctuations we’ve seen recently….Many of the publically traded auto groups utilize a 60-day policy - or the used car managers will face doomsday. My group just hired consultants from MSX International - specifically on this topic. The ultimate conclusion was that while certain units (e.g. convertibles for the summer) will warrant a different policy, the 60-day standard makes the most sense. A 60-day policy forces the used car manager to put together an efficient remarketing plan and processes. A proactive used car manager can pull off the 60-day turn seamlessly. However, in fairness, each dealer's situation is unique. We happen to be approaching the summer and do not want to give away our convertibles. After struggling with our policies, we are going to exceed 60 days on certain convertible units as we feel higher grosses await us. In this particular situation, we found a common sense and fiscally pragmatic approach to address a fateful demand change. However, for the other 98% of the time, I believe in the 60 day standard.
Steve Devereaux
The one thing that hasn't been addressed is the floorplan. I think the benefits of turning your inventory quickly is extremely good for the F&I and service operations as well. Does your pay plan take those things into account? How exactly do your 60 and 90 days policies work? Is it that no vehicle is allowed to be over 90 days and what happens if one does reach that age? Thanks.
Bryant Gibby
Thanks Jeremy! I completely agree. We have decided on a 60 day turn policy and implemented it a couple of weeks ago, so we will see how it goes. Thanks again for your insight.
Philip Moore
Depreciation isn't really the prime motivator for quicker turn. What you are really losing is opportunity. Think about it like this. Your particular trade area, generally a 15-minute drive radius from your dealership, is going to account for 80% of your sales. The people in that trade area have a consistent set of personal preferences, so will demonstrate pretty consistent buying habits. This is the premise that Wal-Mart uses to determine where they build stores, and Chili's uses to determine where to build restaurants. Individuals may not be predictable, but groups of individuals like everyone who lives within a 15-minute drive of your store demonstrate very predictable buying patterns. If you believe Chili's and Wal-Mart know what they're doing, the implication is that you will have some inventory that is a better match for the preferences of your trade area and those vehicles will turn faster. So if some types of vehicles will consistently sell faster from your lot than others... 1) you should know what they are 2) you should make room for them on your lot by getting rid of slower selling vehicles. Here's a little example of the opportunity cost of a slow turning vehicle. If your average turn for your whole inventory is 50 days and your average gross is $2000, then each space on your lot (literal or virtual) is turning 7.3 times per year (365/50) and making you $14,600 gross profit (7.3 x $2K). If your current marketing and inventory practices are producing $14,600 gross profit per unit space per year, then every day each space is worth $40 of potential gross ($14,600/365). So on day 51, you are losing $40 of potential gross on the next car you would have put in that space which would have sold in 50 days. If you're handy in Excel, you can draw a little graph to see how much the lost potential eats away at the gross on any vehicle that exceeds your average turn. In this example, Day 51 = $1960, Day 52 = $1920, Day 90 = $400.
Dale Pollak
Bryant, The answer is an emphatic yes, keep the inventory turning. The answer is also yes, go for the gross, but go for the total gross, not the average. If you can’t replace the car for the same money, don’t worry about it, there are plenty of hot cars that you can buy right. There are only so many days in the month, months in the year and your job as a sales manager is to maximize the return on the given amount of capital you have to work with. Trust me when I tell you that you have very little control over what the car is going to sell for. What it’s going to sell for is a function of the marketplace as seen through the eyes of the shopper on the internet. You’ll fool nobody with higher prices. If you want to concentrate on holding gross, don’t do it by raising your prices, but rather limiting the amount of negotiation that you do once your customer arrives at your store. You should measure and manage the amount of discount from asking price to selling price on every deal and per sales person. It is here and only here that you can and should try and manage the average. Also, don’t fool yourself into believing that cars really appreciate. Although some cars may in fact rise a bit from week to week, no one is so good as to know which ones, how much, and for how long. The responsibility of a sales manager is to sell, not to collect or to speculate. Yes, this means that once in a while you might miss an opportunity to catch somebody sleeping, but when it’s all said and done trying to fool the market on a consistent basis is a losing strategy. The only reliable outcome is to go from money to metal, from money to metal as fast and as many times as you can. Apply your desire to make more money in other worthy areas, such as limiting the amount of negotiation and finding ways to get your vehicles through the reconditioning process and to the physical and virtual front lines faster. These challenges represent fruitful endeavors worthy of your concern and management. Dale

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