I would appreciate thoughts from anyone that uses money-back policies. How effective do you think they really are, how much do you charge the car, how much does it really cost?Dale - could you please forward me contact information on Dealers that are successful at implementing a return policy. If you have any sample language that they use that would be helpful also. Thanks for your help and support!

Today I received the below email from a new customer. Please read his message and my response. I welcome any input you might have on this subject.

Dale - upon return from my recent 20 group meeting, I sent an email to our GM's with a new plan to kick into gear and I would like your feed back as to whether this has been done, should be done or if we need to tweak it.

I will become responsible for all inventory over 90 days at all stores. I will take on the responsibility for the disposition of the old inventory (with the help of the store GM). Whatever loss or gain is realized with the disposition is put into a bucket during the month. At the end of the month, that amount (positive or negative......obviously it will be negative) will be:

A) spread evenly to all of the remaining used car inventory in stock at that store B) *or* we will begin adding an additional pack of between $300-$500 per fresh used unit purchased or traded for, those dollars are put into a separate bucket and then we balance out our losses at the end of each month from the dispositions during the month with those ‘pack' dollars accumulated.

I have to do something QUICKLY based on our dashboard and the fact we've been paying VAUTO, have gone through training and we are still stuck in the mud because of the manager's lack of ‘b**ls' to make things right and to realize they can't operate like it's the 1980's any longer. I think my strategy will get this kicked off very quickly (like today). Thoughts?

Thank you very much for your concern and personal attention. I agree that your personal involvement is absolutely necessary and will be beneficial. I would, however, like to make a few suggestions regarding your plan. First, I think that it is important for you to make a strategic decision as to how you want your pricing profile to look. For example, if you were using 15 day buckets, perhaps you would want the profile to look like 97%, 95%, 93%, 91% respectively. Once you decide and communicate the strategy, we can assist you with setting up the appropriate pricing plans within the vAuto system. You and your managers will be alerted on vehicles that are not priced consistent with the strategy plan. All vehicles that are not priced according to the plan should be discussed among you and your managers. Second, I urge you to consider an absolute drop-dead aging policy. A strict age policy is essential to the health and well being of any used car operation. You will certainly have some pain getting rid of the current aged vehicles, and never again should you have to do it. If a vehicle can't be sold within a specified period of time, it only means that someone failed to do the right thing quickly enough. All sorts of new focus and aggressiveness will come along with this no exception policy. Finally, regarding the pack, I would try and keep it to a minimum as much as possible. The reserve that it creates can be applied against the loss generated from the disposition of the aged inventory. Also, please note that I don't believe that reconditioned retail inventory needs to be taken back to the wholesale market. Every vehicle should be sold in the retail market, even if is it at a wholesale price (unless it's unsafe). You will undoubtedly endure some pain, both financial and emotional from your managers in implementing these disciplines. They are all worth it. Thank you

Every day I become more convinced that the ability to source used vehicles is and will continue to be the core competency of a successful used car operation. Simply waiting for trades or going to the local auction won't get the job done. As many of you know, I've been running stocking analyst training classes around the country. We performed one in Chicago last week and another yesterday and today in Charleston, South Carolina. These classes are well attended and the participants have given us tremendous feedback. Most importantly, these managers are going back to their dealerships and finding it much easier to identify and source vehicles that are right for their markets and their check books. Unfortunately, the effort required to do the work necessary is not feasible in traditionally managed dealerships. Used car managers at such dealerships are too busy and unfamiliar with the technique and tools necessary to get the job done. This is why I'm absolutely convinced that it requires a trained sourcing specialist. This morning, I was introduced to an interesting and novel approach by Don Elliott in Houston (three dealerships) and Dwaine Taylor of Murray, Kentucky (two dealerships). These two innovative dealers have started a separate company called Sun Star. The new entity started out as a centralized BDC serving their stores. They are now ready to expand Sun Star to include stocking analyst services for their dealerships. They have found, and I concur that marketing and stocking functions can be performed remotely and across multiple dealerships, even under separate ownership. This new cross enterprise approach makes a lot of sense to me in light of the current market challenges and needs. Specifically, they're able to get marketing and used vehicle sourcing functions performed by highly trained specialists under a shared cost environment. At some time in the future, they will consider opening their enterprise to other dealers who see the merit in their approach, and/or are not able to bear the expense on their own. This is the kind of stuff that gives me confidence in the future of our industry. Both Elliott and Taylor are in their mid to late 60s, but are thinking and acting like guys in their 20s. It's not necessarily the sort of thing that they would have hoped to be doing at this point in their career, but to their credit they're willing to embrace the new environment, be creative and succeed. Congratulations to these two guys and others that are willing to adapt and embrace the new environment.

Yesterday I had the privilege of spending time with Michael Lewis, the author of Liar’s Poker, Blind Side, Moneyball, and other fascinating books about business, sports and life. It was Lewis’s book Moneyball that inspired me to start vAuto. In Moneyball, Lewis describes how Billy Bean, General Manager of the Oakland A’s, managed to beat almost every opposing team, including the Yankees, with relatively unknown and low-paid ball players. The key to his success was building a team based on new measurements and metrics that he found more relevant in predicting success than those that had been traditionally used by major league baseball. My first book, Velocity: From the Front Line to the Bottom Line, launched the velocity movement to rethink and revise the metrics of used vehicle management based on the principles of supply, demand and price sensitivity. Although there were fundamental changes to the used car marketplace that triggered the need for new metrics (unlike in baseball where the game remained essentially the same), similar to baseball, the new metrics were and are often more relevant than those that had traditionally been accepted in driving success. At first the new velocity metrics were met with skepticism and doubt. However, the extraordinary success of a few early adopters caught the attention of the industry. Today, making decisions about what to stock, how much to pay and how to price with precise knowledge of the vehicle’s supply, demand and price sensitivity has moved to the forefront of industry recognition. Yet, there are still many that cling to the past ways of doing business. I asked Michael Lewis why it takes so long for new methods and metrics to be embraced. Lewis explained that it is a mistake to underestimate the monetary, personal and psychological investment that people and organizations make in maintaining the status quo. He pointed out that it took decades for major league baseball franchises to adopt parts, if not all of Billy Bean’s “sabermetrics” of player evaluation. He also pointed out that the “fattest rewards” go to those that adopt early at the expense of those who do not - a lesson also learned in the used car business. Interestingly, we also spent time discussing Lewis’s next book, The Big Short, which will be published in March of 2010. The Big Short reexamines Lewis’s Wall Street days at Salomon Brothers, which was the subject of Liar’s Poker. The Big Short describes the disdain that the old school instinct traders had for the wave of MIT and Harvard Business School graduates entering investment banking in the 1980s. Who was right and who was wrong when the old school instinct traders called foul on the über complex security instruments being ginned up by the new breed of young Wall Street bankers? According to Lewis, the old school traders couldn’t do the math to understand derivatives, let alone spell the word. However, if math and logic supported the new financial derivative instruments, why did the financial market train eventually explode and come off the track? Lewis stated the answer can be found in understanding the difference between the pretense of using mathematical models versus using the models in conjunction with the necessary financial incentives to ensure that they are properly and responsibly executed. This discussion reminded me of the multitude of supposedly data-driven software solutions that are now being marketed to the used car industry. As on Wall Street, there is a difference between “checking the box” on using data-driven software versus effectively utilizing accurate market based metrics and measurements. Perhaps we can again learn from Lewis’s analyses of problems and solutions.

All of the trade magazines have been reporting the continued escalation of wholesale used vehicle prices. In spite of these reports, I can’t help but question whether these trends will continue. I say this in light of what I perceive to be soft used vehicle retail activity throughout the entire country. With few exceptions, it seems that cash for clunkers has zapped the vitality out of the previously robust used car market.

To this extent, I asked Rich Kelley of the Germain Group in Columbus, Ohio and Cary Donovan of the Sam Swope Group in Louisville, Kentucky to assess the current and future state of the used vehicle wholesale marketplace. What follows is their assessment. While there are no guarantees of the future, the views of these two highly attuned used vehicle directors represent a realistic and reliable forecast.

From Rich Kelley:

I have felt a softening for the few weeks primarily in what I refer to as filler units. Retail sales have been slowing since the end of August and many dealers have units that they shouldn’t have, but bought out of desperation a month or two ago. Clean, low mile or mileage appropriate vehicles are still short and everyone still has a need for these vehicles. However with inventories filling out many can’t buy more until they move their stale inventory. I have bought more cars this past 30 days at auction than I have the past 90 paying only a little more than I should or on the money. Where I was missing them by $1,000 or $2,000 many times when I quit the next bid buys them. Once sales settle in to the season levels and everyone gets their inventory adjusted it will probably get tougher, mostly likely in November.  I don’t know about other dealers but we are in position to buy vehicles at the current market for the first time in many years without the heavy excess inventory we have had in the past. My guess is that more dealers are leaner than years past, some by design, others because the market has driven them there.

From Cary Donovan:

I have definitely experienced a lighter than normal demand in retail activity in both traditional traffic and virtual shoppers beginning around the 15^th of September. My experience on the wholesale acquisition front is also the same on the high volume generic units. The rental car companies and some financial institutions continue the weekly weighing of inventory with what I’m seeing to be very low conversion rates. The low mileage low days supply inventory is still bringing primo dollars. My thoughts on the direction we are headed in the 4^th quarter of 2009 will be the Operators that truly understand how to engineer inventories and control aging will stay in front of the current challenging curve. Let’s not forget there are a lot of wind down dealers along with an additional 350 Saturn facilities with bonus dollar that are looking for a survival plan and the perceived quick fix is to be a used car super store. This should continue to keep wholesale prices relatively strong thru the year as they attempt to stock up.

For most dealers, getting cars displayed on their physical and virtual front lines is a linear process. Typically, a vehicle moves through the traditional physical reconditioning and retailing phases, and once complete, photos, descriptions and pricing are sent to the internet. I’ve come to realize that this practice is extremely slow and inefficient. We should recognize that there are in fact two front lines, one physical and one virtual. There is absolutely no justification whatsoever to wait for the vehicle to be physically prepared in order for it to be sent to the front virtual line. Therefore, vehicles should move to the physical and virtual front line simultaneously on parallel tracks. Initial pictures from the auction, appraisal or stock photos can be used with a banner or caption saying, “coming soon”.  The price of the vehicle should not depend at all on the reconditioning cost as it must be placed appropriately in the market. If your reconditioning costs end up being higher than you thought, then you paid too much money, and that is something that occurred in the past and should not affect the asking price. Velocity dealerships today have vehicles on line, fully marketed with photos, descriptions and prices within hours of their acquisition at the auction or curb. These dealers typically get anywhere from 5 to 14 extra selling days as compared to their traditional competitors that wait for the car to be physically prepared before the process begins for on-line marketing. Every day of exposure represents opportunity and should not be squandered.

What follows is a note that I received from a dealer who wishes to remain anonymous. I applaud him for the willingness to share his story, as well as his tenacity to survive. I have very strong feelings about how we as dealers allow this sort of thing to occur, and I’ll be writing more about it in the near future. In the meantime, take a few minutes, read the following and reflect. Dale, I am writing this to you in hopes that it can help others in the same or similar situation see clear to another day. Seven years ago I was a 4.5% Chevrolet dealer selling around 70 new and 35 used units per month, at or near the top of my 20 Group, 300% sales effective, 80% absorbed, and fully convinced it was because of my great skills and leadership. I owned my building (with a 65% debt to equity mortgage), owned my used, had $1mm in my offset account, and was sitting very comfortably for age 36. So what does every arrogant car dealer do when the market is handing out success like ice cream? Why, buy another dealership of course! So I purchased a Chrysler/Jeep/Dodge dealership close to my Chevrolet dealership (you know, economy of scale and all) for ALL THE MONEY, mortgage the blue-sky ($2mm) at 6% with the previous dealer, tap my cash in my Chevrolet store to capitalize it, and proceed to turn one 4.5% dealership in to 2 dealerships doing 2% combined! Oh yeah, I set up flooring with Chrysler Financial because ‘you should always be loyal to the manufacturer’ after all. Fast forward to January 2009, GMAC calls the note on my building because ‘they are getting out of the real estate business’, CFC turns the screws up on flooring due to ‘my ratios being out of tolerance’ and send me a forbearance letter along with a recap agreement. March 2009 comes along and sales are in the toilet, used cars are out of control because I cannot afford the losses liquidation would force, and rumor of Bankruptcy for BOTH of my manufacturers is looming. Flooring pressure from both GMAC and CFC mounts; I am discovering there is no ‘appetite’ for financing ANY car dealership, let alone a GM or Chrysler. The banks that will be honest tell me even at 40% equity they could not get a domestic dealership past their credit committees, I am burning cash at a record rate and aging continues to burden. With April comes spring and the bankruptcy of Chrysler. This news arrives with the bonus that CFC is going away and GMAC will take over as the flooring arm of ‘the new Chrysler’. I am starting the feel (not look) like George Clooney in ‘The Perfect Storm’, engines at full power and climbing the mother of all waves! May, the beginning of the spring selling season, and GM files bankruptcy. Come mid-month we receive the news; we will all learn our fate for both dealerships via overnight mail! It seems to me the franchise ‘ticket’ I held and was protected by my state laws was now worthless. Being now only 200% sales effective, 90% CSI, and Five Star Elite I am still worried; did I take enough inventory when asked? Did I shake the right hands; did I ask too many questions in Dealer meetings? I toy with the idea of waiting on the roof of each store with a hunting rifle to shoot the tires out of any arriving FedEx trucks but that does not seem like the right thing to do. I also receive my 10th and 11th turndown letter from banks regarding my mortgage. What, they might take my franchises? Time to get in to gear; after all I have bills to pay and the future ahead of me. I do a pro-forma, gutting my New Vehicle expenses out, reducing headcount associated with New, and analyze what I do best and what the needs are. Used has always been the back-bone of a New Vehicle franchise, my fixed are strong, and I have facilities. If they take my franchises I will make it selling and servicing Used Vehicles in my community. A glimpse at a future with no manufacturer, no flooring, no warranty, and no charades; I can make this work. June and I get ‘the good letter’ from both GM and Chrysler, why am I feeling disappointed? Shouldn’t I be dancing in the street? Maybe it is the fact that GMAC has made clear that if I do not get them off the real estate mortgage, recapitalize both dealerships, and put $500k in an offset account at both I will not have flooring. Time to make some sale inquiries for both dealerships; that is right, they are Chevrolet and Chrysler, not much appetite for those right now. Meantime I park my tail on the Sales desk and work vAuto like there is no tomorrow (and there may not be), I start working the proxy bids, Smartauction, and other dealers. We catch the wave of a returning used car market and stay disciplined with 45 day supply or less, 80% cost to market or less, and watching the rBook. Keep every trade we can that will be recon safe and turn that cash over. Roll from a 4.1 turn to 10 turn in 30 days and blow through 90-day plus units at a record pace. I am now starting to remember why I got into this business, to sell cars and have fun! July, Cash for Clunkers (but not for Dealers) hits and we clean out many of the ‘old age’ new. No good news on the mortgage but I am hopeful that increased sales and revenue will make some banks feel better. After all I am the eternal optimist, I am a car dealer! August brings the ‘Final Demand’ from GMAC; no mortgage, no flooring. Sale of building and its assets is the only option (barring a miracle of course, I am looking for Doug Flutie somewhere). Still spinning used, still working vAuto, and still having fun. Everyday I have a pit in my stomach but everyday I arrive ready to do what I do best. August 15th I make my decision to terminate my franchises. I send an email to my closest business mentors laying out my options. All agree that termination, liquidation, and a sale of my building and its assets are the right thing. One mentor asks me ‘what are you going to do next?’, seems I forget about that part being caught up in ‘making everyone whole’, ‘doing right by my employees’, and ‘not being a car dealer anymore’. What am I going to do? I broke down the answer to that poignant question in 3 parts: What does the next 20 years of the car business look like? What am I good at? What do I enjoy doing? For the sake of time and space I won’t go through all the gyrations, this is what I came up with: The next 20 years of the ‘NEW CAR’ business includes less dealers, lower margins, more capital, less warranty work, and even less control of your franchise. I love buying and selling cars. I love servicing cars. I love owning my own business. I love good employees. I love customers. I have a passion for used cars and since vAuto I have tremendous confidence in turning them. I dust off my contingency plan from May, it looks better than ever. The plan is formed; I will set a business plan for a Used Vehicle dealership that can offer maintenance service, tires, wheels, and details. I can use the Service and detail area to feed the Used business at a $20 less effective labor rate! I get to take the best parts of both Dealerships, combine them into one tightly run Dealership, and start to enjoy life again. All this with no flooring, no control from manufacturer, no expense attributed to new vehicle sales, and best of all no more selling cars for little or no margin. On August 30th my wife and I sat with our young children and let them know what is going to happen. August 31st I send my termination notice to both GM and Chrysler; I also send an email to my closest friends telling them my plans. The next day I address my employees with my intentions and set about calling my closest Dealer friends, all of whom wish me luck and offer whatever help they can. The last week has been tough, maybe the toughest in business ever; I have 45 days of winding down my franchises and getting my ‘new’ business off the ground ahead of me. I am full of enthusiasm and grounded by the plan. My whole life I have been successful and I refuse to be defined by what has happened; I am not without fault, but I am not embarrassed, I am just disappointed. In the end the only thing I have lost is the one thing that is easiest to replace, money. What I never lost was the love of my family, my friends, my health, my character, my integrity, my good name, or my sense of humor. I believe that being a ‘failed Dealer’ may suit me after all! Regards, Back in Control

A few minutes ago, I was asked to speak to a group of highly respected dealers, all of whom share a common concern. They asked me to speak on the issue of whether it is wise to forego their high turn in light of the fact that they can not replace the inventory for the same money. Let’s examine this issue. What if you ran a fruit stand, but instead of the items on your shelf rotting as time went buy, they grew more ripe and delicious. Would you raise your prices ever so slightly every day as the fruit became more juicy? The answer might be yes if there was a steady demand for fruit and you were the only fruit vendor in town. Under such conditions, sacrificing present profit in favor of greater future returns would be a rational strategy. But let’s think about a few possible scenarios. First, what if fruit demand in the fall historically declined, then you might find yourself with excess supply. As the supply of the fruit increases relative to the demand, it’s inherent value declines while your original cost does not. So we can conclude that hanging on to the inventory in spite of its increasing value is risky in light of uncertainty in demand. Second, what if you are not the only fruit provider and at least one other seller in your market decided not to increase their margins but rather sell the items for the prevailing market amount and then replace it with new merchandise, albeit at a slightly higher cost? At this point, the items being offered for sale by both vendors would be priced roughly the same. The difference, however, would be that one vendor will have made two sales in the same period of time that the vendor has made one. Therefore, the strategy of slowing turn by raising prices simply reallocates present demand in favor of others rather than retaining it for future gain. Finally, consider the perfect storm scenario where other sellers in your market are willing to let the stuff go for the regular price and there are also declines in demand. You, the proud owner of large quantities of fruit will get a very sour bite of the apple.

Recently I've been thinking a lot about the issue of reconditioning. There is no doubt that we're in a new market that is characterized by a high degree of price competition, and as a result, margin compression. This fact has caused me to reconsider how much reconditioning should be performed and how it should be charged. I continue to believe that it's important to have a used car standing tall. There is, however, a significant gray area about what defines "standing tall". In my dealership days the used car manager made the big decisions with respect to what got done in our shop. After the vehicle made it to the lot, however, there was a whole array of regular vendors that performed additional services, such as dent removal, glass and upholstery work and other such cosmetic repairs. Because these vendors were regulars, and sometimes even friends, they basically had license to do what they deemed necessary. They would regularly present PO's to me to sign after they did the work. This didn't present a problem because I knew that they really did the work and it probably helped the car sell faster and for more money. Today however, I'm certain that I wouldn't sign any of those PO's after the fact, but would rather insist on inspecting the vehicle prior to approval. I think that we can no longer be lax or overly generous in favor of these service providers. The cost of reconditioning is more critical than ever, and every single dollar matters. Also, as I previously have written, the practice of charging the used car department retail is absolutely driving used car operations into the ground. Every single day I talk to used car managers that complain about their inability to buy vehicles for prices that allows them to make a fair profit. Implicit in their considerations is the $800 - $1,500 of retail reconditioning costs that will be charged to the vehicle's ACV. As a result, these vehicles don't get purchased and sales are inevitably lost. In other words, they've missed the opportunity to buy and sell a car that would have generated some internal profit for the service department (albeit less), a front- and back-end gross profit and likely a long term service relationship. All of this opportunity was missed because of a retail reconditioning policy that probably amounted to less than $500 of incremental revenue (the difference between cost + something and retail door rate) on a typical vehicle. So, in order to funnel an additional $500 to the service department, we probably passed up $2,000 or more in the transaction related to the vehicle that we should have bought but didn't. The smartest dealers are prepared to revisit their retail reconditioning policies. In fact, the smartest dealers are examining novel approaches, such as the following one from Andy Wright of Lehigh Valley Acura Honda. Do any of your clients pay their clean up people a flat rate per car that they clean and prep for the lot? Currently, I am paying guys hourly to do this job. I am looking to increase their production/performance and I have toyed with the idea of making them flat rate. I would be very interested in hearing from anyone with respect to Andy's question or my thoughts.

Over the past 6 months I’ve spent much of my time investigating and documenting the connection between online merchandising and used vehicle operational results. Specifically, what are the precise conditions that must exist for success in both the traditional used car environment as well as the virtual one. Many of my friends and readers have contributed their metrics to me in connection with this effort. For those that have participated, I will contact you in the near future to present an overview of my findings. I’ll have some very meaningful insights to share with you, ones that will help you be more successful. There is, however, one profoundly simple observation that I would like to share with everyone at this time. I think that it’s well understood that the number of times that your vehicles appear in internet vehicle searches has a relationship to the number of vehicles in your inventory. In other words, the simple size of your inventory matters to how many times vehicles are seen, and this directly relates to traffic. Therefore, dealers with larger inventories have more exposure and more opportunities. This fact exists in both the physical and virtual realm. Notwithstanding this fact, there is something that every dealership can do to increase their exposure with their existing quantity of inventory. Consider a dealer that stocks 100 vehicles. If they sell 75 a month (non velocity car dealer), then they probably need to acquire at least 15 vehicles per week. While most dealerships would claim that it takes 3-5 days to get a vehicle reconditioned and ready for sale, both on the lot and internet, for most dealerships the actual number is 7-10 days. This is true at least for their internet display, when you consider photos, pricing, descriptions and presence on all relevant sites. There are some dealers that I know, like Bill Pearson of Finish Line Ford and John Chalfant of Edmark Superstore that have their vehicles on line with photos, descriptions and prices within minutes of their acquisition. In fact, it often takes 5-7 days before some of these vehicles arrive at the dealership, get serviced and placed on the lot for sale. They have essentially decoupled the process of internet display from the physical counterpart. The effect of doing this creates much more exposure of inventory and consequently more leads per dollar spent on the internet. Taking our above example, if a dealership purchases 15 cars this week on Monday and has them all properly listed on the internet by Monday evening they will have 2 more weeks of exposure compared to the same dealers that waits for the vehicles to be physically delivered later that week and ultimately posted on the internet approximately 1 week later. The difference of getting vehicles out there 14 days earlier (minus 7 vs. plus 7) amounts to a 30% greater exposure without spending any additional money It simply comes down to priority and speed of their virtual merchandising. This is at least one of many factors under a dealer’s control that accounts for the differences and performance between average performers and superstars. You may wonder how guys like Pearson and Chalfant arrive at prices for vehicles not yet transported and reconditioned, and how they get photos of vehicles not yet present. They have effectively dealt with these and many other issues that continue to stifle a more rapid response from dealers that employ conventional practices. When you learn their philosophy and methodology for overcoming such obstacles, you begin to realize that past experience and philosophy are holding dealers back from obtaining their true potential. By the way, last month Pearson retailed 325 used cars from a Ford store in Peoria, Illinois and already has 110 out so far this month. Chalfant retailed about 350 used cars last month from his GM store in Idaho.