The perception of not being able to source hot vehicles for the right money is understandable but wrong.  The reason that it’s understandable is that we never knew how good we had it.  When the market delivered 17 million new cars, dealers stood on their lots and people threw trade-ins at them.  If they didn’t get enough of the right trade-ins, dealers went to their local auctions where the fleet, lease, rental and manufacturers dumped large quantities of vehicles upon them.  How hard did dealers really need to work?  Basically if they showed up on their lot or at the auction with common sense and a check book, they bought cars.

 

Today, however, the flow of trade-ins on the used car lot and vehicles at the auction has been substantially reduced.  Once these two common means of sourcing vehicles have been taken away, the perception of not being able to buy a car is completely understandable. 

 

The conclusion that it can’t be done however, is dead wrong.  Hot vehicles can be sourced and purchased for the right money all day long, but it requires a different approach and strategy.  The first step of the new strategy is to broaden the consideration set of vehicles that you’re willing to sell.  If you continue to limit yourself to the types of vehicles that are consistent with your new car franchise and/or past sales history, you’re putting a lot of pressure on yourself to compete in a narrow arena.  Give yourself a break, and expand the consideration set.  Second, you must have a technology that allows you to identify what are the hottest vehicles for sale in your market.  What defines a hot vehicle however, should be based on the time tested principles of supply and demand.  There are always vehicles that have high demand and short supply, and these are the ones, irrespective of their brand or lack of history, that should be included in the expanded consideration set.  Third, identify the vehicles in the larger set with high demand and short supply that surprise you.  If high demand and short supply vehicles on that expanded list surprises you, chances are they are not top of mind of every other used car buyer in the country.  Such vehicles won’t necessarily be easy to buy, but will most certainly be easier to buy than the commonly understood hot vehicles.    When you have knowledge about your market that is not commonly shared with your competitors and you can act on it, that’s true advantage. 

 

Once such vehicles are identified, there is a new strategy for determining how much you can afford to pay.   Start by looking at the traditional valuation sources like auction data, NADA and Black Book.  While this will not be your valuation methodology, it gives you a sense of what your traditional competitors are likely to be thinking.  For your purposes, you’ll start by pinpointing the exact price at which you’ll need to advertise your target vehicle for retail purchase.  This will be done by assessing the identical competing vehicles currently in the market.  Once you’ve set the retail price for the vehicle that you haven’t even purchased, then you back out your reconditioning, related costs and the minimal front end gross profit that you’re willing to make.  What’s left over represents the maximum amount that you can justify paying.  This top down approach applied to vehicles that are not commonly understood to be hot by your competitors will frequently produce a value that you’re able to pay that is well above the price derived from traditional valuation sources.

 

Now that you’ve determined the hot cars and the amount that you can pay, once again you need to turn to technology to see where those vehicles are offered for sale.  Be prepared to use on-line auction platforms and/or buyers on the road.  These hot vehicles will often not be available in your backyard.  Finally, because this approach takes more time and effort than traditional sourcing, it is wise to designate an appropriate stocking analyst to do the research and legwork on behalf of the used car manager.  Using these strategies and technologies, the used car manager and stocking analyst will source an endless supply of hot cars for the right money.

If you know who Robert Hollenshead is, it’s only because you’re a hard core used car manager. If you don’t know who he is, you will very soon. Hollenshead is the largest customer of the Manheim auction in Pennsylvania. He is an extraordinary wholesaler that prides himself on being a buyer for any car, anywhere, at any moment. In short, he is a wholesaler’s wholesaler. Hollenshead recently started a company called Buy Book Technologies. If you know the old saying that “the book doesn’t buy a car”, this one actually does. Buy Book Technologies is the engine behind AutoTrader’s new Trade In Market Place. The Trade In Market Place is a program that AutoTrader is rolling out across the country where both consumers and dealers can get a firm buy figure for any vehicle. Although this product is not currently available in all markets, it will be soon. It is definitely a paradigm changing product, and one to watch closely.

I’ve asked members of our data department to analyze the effect of Toyota’s recent troubles on the used vehicle market.  I expect to have the results posted shortly.

The preliminary analysis, however, definitely shows that Toyota’s market day’s supply began decreasing in November and December, and that rate has really picked up in January.  Unfortunately the decrease in day’s supply, however, does not represent faster retail movement, but rather vehicles being removed from the market for sale.  I’ll have more detail on this matter soon.

I think it’s worthy to note that Toyota’s recent problems support the general premise that dealers should diversify their inventory.  This strategy is analogist to diversification in an investment portfolio.  No matter how solid a given brand or investment vehicle may be, it is unwise to have too much concentration in any single sector.

For the past several years, I've been making a case for a new method of used car management that I call "Velocity." The basis for needing a new strategy for making money in used cars is that fact that the Internet has transformed the used car market into an efficient market. In an efficient market, buyers and sellers have relatively equal knowledge of choices and alternatives. With the Internet providing shoppers the ability to see every vehicle in the market and how they are priced, why should we believe that we will get lucky as often as we used to? Do we believe that better negotiating tactics will overcome customer's knowledge of identical choices and alternatives? Do we think that blowing up more balloons in the showroom or putting a bigger gorilla on the roof will make the difference? Simply stated, the business has changed, average front end grosses will not be what they once were, and we need to change the way we are operating to remain profitable. The need for such a profound change is very difficult for many dealers to embrace. Instead, many continue to price vehicles in the hopes of capturing the large grosses of the past. In reality, this is the worst possible strategy to achieve profitability in today's used car marketplace. Once and only once a dealer comes to terms with the reality that the old front end grosses of the past will not return, the only remaining question to be answered is how the lost profits will be replaced. The obvious answer is that they can only be made up with additional volume. Achieving additional volume, however, requires a dealer to stop pricing every vehicle with a large mark-up in an attempt to recapture the large gross profits of the past. To do so is like shutting the oxygen off to a patient that is in desperate need. The correct approach is the Velocity method of management which advocates opening the valves wide by pricing vehicles at or close to their true transaction point. Under these conditions, traffic and sales immediately increase and used car operations experience a vitality and vibrancy that had been long lost. In order to successfully implement the Velocity strategy, dealers must have new technology and information to make better decisions. Specifically, they must know which cars can be priced high and reduced slowly if necessary, and which vehicles need to be priced low and reduced quickly if necessary. To know this difference, is a "must have" for a Velocity dealer. The technique that Velocity dealers use has two steps. First, the Velocity dealer takes special care to know the individual physical qualities of each and every vehicle. Some vehicles are special, some ordinary, some replaceable, and some simply one-of-a-kind. Such qualities certainly matter in making the pricing decision. After the physical qualities of the vehicles are assessed, the second remaining consideration for knowing which vehicles should be priced high and which should be priced low is an understanding of their current supply and demand. Vehicles with high demand and short supply can be priced with thousands of dollars of mark-up while vehicles with high supply and low demand need to be priced aggressively for a quick sale and a possible finance opportunity. Equally important, the Velocity dealer must change the negotiating culture of their showroom to support their new pricing strategy. The sales people need to recognize that an approach more oriented to volume than extraordinarily high average gross is needed. Therefore, Sales Managers must fully comprehend that the dealership's vehicles are priced to sell, not to negotiate. To this extent, documentation replaces negotiation in the showroom experience. Information is powerful and the Velocity dealer can use their superior knowledge about each and every competitive vehicle in their market to demonstrate to the customer that the offered price is truly a great value. The move from a traditional used car model to a "Velocity" model is a journey. Habits and practices that were successful in the past need to be replaced with new ones. The good news is that today, many hundreds of dealers are making the Velocity journey. These dealers have found value in networking with one another. Their shared experiences, challenges and successes help them navigate and serve to reinforce the rewards. The growing community of Velocity dealers is enjoying the rich rewards that are still available to those that are willing to adopt the necessary new strategies and tactics.

Over the past two days I’ve received numerous inquiries regarding the effect of the recall on used Toyota values.  The initial information that I received suggested that the problem could be resolved in a 30-45 day time span.  This conclusion was based on the fact that Toyota has the capacity to produce 200,000 new gas pedal assemblies per day. At that rate, repair kits would begin to enter the market rapidly.

The latest news that I’ve heard is that the NHTSA is currently reviewing the gas pedal assembly solution.  If approved, and there should be some word on this very soon, the problem will be temporary. If, however the problem is determined to be larger and the acceleration module has to be replaced, as NHTSA is currently analyzing, then this is a very different situation.  Based on a limited amount of information that I’ve obtained, the acceleration module component cannot be rapidly manufactured, and may take as long as 12-18 months to correct the problem on existing customers’ vehicles.  This sort of delay will have a much greater impact on the value of used Toyota vehicles.  The bottom line is to watch very carefully for the imminent announcement from the NHTSA as to whether they approve the gas pedal assembly solution, or whether it will require replacement of the accelerator module.

 

I would appreciate any additional information that you have, or as it may become available.

The chairman of a major international media company recently asked me if I believed that a dealer’s personal image still mattered given the dynamics of today’s Internet driven market place.  The question was of interest to the CEO because decades earlier he had sold classified advertising to a start-up automobile dealer that eventually went on to achieve great success, both professionally and personally.

The question resonated with me because my father is Len Pollak and, in his home town of Gary, Indiana, almost everyone knew his name and the name of his dealership, Len Pollak Buick.  His name appeared on the back of thousands of vehicles in town, in newspapers, bill boards, bus banners, city benches and a multitude of other high visibility locations.  My father was also involved in dozens of community organizations, both civic and charitable.  In short, the names Len Pollak and Len Pollak Buick were institutions in Gary, Indiana from 1960-1980.  Even today, on my occasional trips back to the old ‘hood, people still stop and ask me about my father. 

I think that the question about the value of a dealers’ personal brand image is also a relevant question for all automobile dealers to consider in light of the large investments they make in developing brand images for their dealership. But, wait a minute-- is the assumption that dealers are making large investments in building brand images for their dealerships still accurate?  Well, they certainly make large investments in advertising and marketing in both traditional and on-line media.  But does that guarantee that these investments are creating a meaningful “brand image”?  If you consider the brand images “the low priced leader”, “discount king” or “mega dealer” then the answer is maybe not.

This is not the type of personal branding that made my father’s business a success and was the subject of the chairman’s question.  Today there are still many dealerships around the country that maintain and work hard on developing similar personal dealer brand images in their community.  The question today is how much does that really matter and does it warrant investment at the cost of other branding opportunities?   I think that a positive personal image is always a benefit to any business.  It is certainly important, if not obligatory for a business owner to return value and service to their community.  These are immutable truths of business, past, present and future.

However, while automobile shoppers continue to be concerned about getting a good vehicle for a great price, I believe that they draw conclusions based on different data today.  In the past, the personality of the dealer and his or her popularity in the community signaled the fact that they offered reliable transportation for a fair value.  The implication was that they could not have achieved such prominence if these basic values were not present.  Under such circumstances, dealers could effectively bolster their image through personal brand marketing.  

Today, the question of what constitutes reliable transportation and fair prices are validated through other means, and arguably from the perspective of consumers, ones that are more reliable and trustworthy.  For example, there are a multitude of third-party web sites that review and rate both new and used automobiles.  There is a burgeoning community of social media sites that allow consumers to reference information about a vehicle’s reliability, operating costs as well as dealership sales and service experiences.  Companies like CARFAX provide consumers with additional third-party information about a vehicle’s history.  Most of these heavily used, trusted sources were not available in the years between 1960 and 1980.  As such, dealer investments and personal brand image building were important and necessary.

In pondering my response to the chairman, I couldn’t help but reflect on my father and his reputation in Gary, Indiana.  I knew that the response that I was about to give was sad, but nevertheless, truthful.  I do not think that a dealer’s personal brand image means as much to automobile buyers as it did in the past.  Rather, a dealership’s reputation and brand is created by their processes as opposed to their personalities.  The Internet has conditioned today’s shoppers to get what they want, when they want it, the way the want it.  These are the needs of the automobile shopper and those dealerships that create brands that address these needs will prevail over those that pursue lower priorities.  The large investments in brand advertising need to focus on effective messaging that differentiate processes and properly address these new priorities.

Cliff, thank you so much for the review.

Pollak Publishes New Book by Cliff Banks

The other day, I was talking with Mark Thomas, a fourth generation dealer in Pennsylvania when he mentioned the word “velocity.”

In the automotive retail industry, that word has become synonymous with Dale Pollak, founder and chairman of vAuto Inc. When you use the word “velocity” in this business, you’re immediately identified as being a disciple of Pollak’s. More than 2,000 dealers currently use vAuto’s software to help determine which used vehicles to stock and how to price them. Dealers I talk to swear by Pollak’s thinking. vAuto was not the first company to offer such a product. That was American Auto Exchange, started by Bruce Thompson several years ago. Now it’s AAX and owned by DealerTrack. There’s also FirstLook, founded by Pat Ryan. All three men, and their companies, helped redefine our thinking about the used car business. When you talk about game-changing ideas and software, these three companies nailed it. But Pollak has become the visionary and leading evangelist for how dealers need to view their used car operations. This is where “velocity” comes into play. That was the title of his first book (Velocity: From the Front Line to the Bottom Line) written a couple of years ago (by the way, it sold 10,000 copies). It might be the best book ever written about the automotive retail business. We say first book, because Pollak has just released his second book, Velocity 2.0: Paint, Pixels & Profitability. The book introduces ROI-based management metrics and processes dealers can use to operate more efficient and profitable used vehicle departments. Velocity 2.0 begins with the recognition that today’s used vehicle marketplace is more challenging and volatile than it’s ever been – a tough reality driven by the power of the Internet and a troubled economy. The book offers a playbook of best practices to help dealers overcome obstacles and outpace their competition. If you’re using vAuto, AAX or FirstLook, or considering one of them, Pollak’s books are a must read. They’ll change everything you thought you knew about the used car business.

Velocity 2.0: Paint, Pixels, & Profitability is available at Amazon.com or on vAuto’s website.

Thanks to Tom Kontos of Adesa Auto Auction, here is the breakdown of US used retail car sales in 2009: 

Franchised: 12,819,758

Independent:  11,712,216

Private: 10,959,787

Total:  35,491,761

I’m curious if anyone has these same numbers for 2008.  Are they up or down by category and in total?

Tommy Gibbs, thank you for forwarding this information to me.

2008                 2009           Sales Difference         % Difference

Franchised          13,189,892      12,819,758            -370,134                       -2.89 Independent        11,741,997       11,712,216             -29,781                       -0.25 Private                11,597,516       10,959,787            -637,729                      -5.82 Total                   36,529,405       35,491,761         -1,037,644                      -2.92 I'm curious what your thoughts are as to why private party/casual sales got hurt the worst in '09.  Do you think that these people were simply too buried to get out without the help of a dealer?  The fact that independents were almost unchanged probably lends credence to Tommy Gibbs' theory that lower price point units represent more stable and solid results.  I'd be interested in any other thoughts that you might have.    

Over the course of the past two years, I’ve written frequently about the success of Finishline Ford in Peoria, Illinois.  Over the weekend I got a call from dealer Bill Pearson of Finishline Ford, and he was anxious to tell me about his success in the past year.  According to Bill, Finishline Ford ended the year of 2009 with over 3200 used retail sales. This week, they are opening across the street a warehouse type facility dedicated to used vehicle sales.  Bill believes that this investment will further increase production.

 December’s results at Finishline Ford were particularly strong.  Used retail units were well over 300 (also a record net profit) and his total SRPs for December were approximately 1.25 million, with 62,000 VDPs.  The last week of the month yielded 12,500 VDPs, with Christmas day alone accounting for about half of the weekly total.    It is no coincidence that Finishline Ford’s extraordinary sales success is accompanied by an equally impressive performance in SRPs and VDPs on AutoTrader. 

 I’ve written extensively on the subject of the relationship between SRPs, VDPs and sales in my new book Velocity 2.0:  Paint, Pixels and Profitability.  I’ve also included recent postings on this subject, because I understand the fact that dealers will not achieve significant sales results without also achieving significant results in the areas of SRPs and VDPs.  Importantly, the factors that drive SRPs and VDPs are under the dealer’s control but they are largely ignored.  Every dealer should track SRPs and VDPs week-to-week if not day-to-day because they are the leading indicators of sales success. 

A couple weeks ago vAuto announced the release of our new Life Cycle Management system.  I thought it would be helpful to share a bit about the thinking and design that went into this new system.  In particular, what is its relevance.  I would appreciate your input and suggestions after you read this posting. 

For many years clients have requested that we create a suite of tools that helps them publish vehicle listings and photos to the internet.  In addition, they have requested tools to create various window stickers and vehicle descriptions. For a long time, we resisted creating such tools because there are many fine companies that all ready offer tools that do these very things.  So what was the justification behind so many dealer requests?  Well, as I listen to you, I heard two things.  First, there is a general drum beat from dealers to reduce the number of tools that they need to use.  Underlying this reoccurring theme is the need for convenience, time efficiency and accountability.  I found it increasingly difficult to ignore these factors.  As always, however, when and if we create tools, we strive to do so in such a way so as to improve the state of the art for the given functionality.  How did we attempt to advance the process of managing your dealerhship’s physical and virtual presence?   

Well, the answer begins with the recognition that vAuto’s live market technology has the ability to see every vehicle listing in America, in its complete form and substance.  We also time and date stamp the moment that we first see the vehicle listing appear, changes made, and precisely when the vehicle listing no longer appears on each site.  This technology first allowed us to create our Merchandising tool that we call “Virtual View”.  With our Virtual View product, dealers were able to see  for the first time how their vehicles appear, or in some cases didn’t appear, in the virtual realm as clearly as they could see how tall their vehicles were standing on their physical lot.  Prior to the introduction of our new tool suite, we could only report the errors, inconsistencies and incompleteness of vehicle listings. The next logical step was to create a set of integrated tools that allowed dealers to take control of how their vehicles appear and importantly do so with complete visibility and accountability.  Taking control and providing dealers with the ability to manage the process just seemed to be the next logical step.    But, as they say, “wait, there’s more”!   

The more, the big idea, the one that advances the state of the art for managing on-line presence, is the new Life Cycle Management component of our tool suite.   So what is Life Cycle Management all about?  

Well, it should be clear that every vehicle in stock must move through many milestones in order to quickly get to both the physical and virtual front lines.  It’s also understood that frequently vehicles move too slowly, get hung up, mysteriously disappear and then reappear without explanation.  At any given time, cars are in the shop too long, take too long in detail and body shop.  They don’t get prices, photos and window stickers in a prompt manner, and as if all of this isn’t challenging enough, once it’s all complete, it is assumed that all of the information appears on all of the required sites on the internet in a timely, complete and correct form.  Well, as those of you who have been using our Merchandising Virtual View tool know all too well, that is a big and often incorrect assumption.  The train makes a lot of stops and often doesn’t make it to the destination on time or at all. 

The result of this condition is dysfunction, inefficiency and leaks of profit. That’s right, when vehicles don’t move swiftly through the process and to the virtual and physical displays, time and money is lost.  Until now, there has been no other integrated system that allows dealers to perform all required acts and have complete visibility and accountability for the entire process.  Imagine how powerful it would be to be able to see an assembly line containing your dealerships milestones for each and every vehicle.  The assembly line graphically shows red, yellow and green indicating which milestones have been achieved in their required period of time.  Moreover the system will alert managers about vehicles that have either exceeded, or are at risk of exceeding the allowable time specified for each phase of milestone performance.  Dealerships and their enterprises can view performance of getting vehicles through milestones in a timely manner.  Users can track and see where glitches are occurring and over time whether or not improvement is occurring.   

So what I think is the big advancement in the art of managing vehicles is the ability for the first time to manage, track and view critical performance milestones in real time.  Performance that really matters for the purpose of creating more efficient and profitable operations.  This was the thinking behind the creation of this new suite of tools.  As we roll the new system out, I’ll be very eager to receive your feedback and suggestions as to what we can do to make the system even more valuable.  Please let me know your thoughts.