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Shawn Clos

Shawn Clos President

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Make Your Pre-Owned Inventory Turn and Burn

Make Your Pre-Owned Inventory Turn and Burn

In today’s market the pre-owned inventory within your dealership must be bought, sold, advertised and managed better than ever before. Within this article I am going to give you some simple and progressive solutions and ideas to help you get 12 plus turns per year out of your pre-owned inventory and grow you’re front end gross averages to over 3K. So are you ready to make some money?

 

First, you have to get your mind right!! Understand that your inventory is an investment nothing more. Whether you floor plan or not you must understand that there is a “daily holding cost” for every vehicle that you have in stock and that cost starts the second that you receive it into your inventory. I have had dealers who brag about their gross averages being over 3K but thier average inventory age is over 90 days old. That 3K gross was more like a wash when you account for the time the vehicle was held in inventory. Once you understand and you look at your inventory with no emotion then you are ready to get your 12 plus turns per year and higher gross averages.

 

Here are some ideas when buying inventory from auctions.

  • Prior planning prevents poor gross profits. Do your homework. Know to the penny what you are willing to pay for the vehicle including auction fees and don’t go over that amount NO MATTER WHAT.
  • Know exactly what you are going to buy and stick to the game plan. DO NOT get emotional and purchase something without doing your homework first.
  • Check CarFax and stay away from every vehicle that has an accident on the report. There are plenty of vehicles with a clean history out there to buy.
  • I have always used a penny and a half for every mile on the ODO to help figure my upfront reconditioning expense. For example: 70,000 x 1.5 cents = $1050.00. You will be surprised how well this works. Make sure that you take this into account whenever buying a vehicle from an auction or trading a client out of their vehicle.

 

Here are some rules for trading for vehicles.

  • Understand that you have a client there and ready to trade you their vehicle for a new one today. So use the same mindset as above and know to the penny what you are willing to pay for the vehicle. Always appraise the vehicle just like you are purchasing it from the auction. If you are willing to pay the auction “X” amount then you should be willing to pay your client the same amount.
  • I am a believer of pinching the trade, be careful when pinching over $500. If you negotiate on 20's not 100’s is going to be very difficult pinching over $500 and still holding creditability with your client. Your management and sales staff must be well trained in how to negotiate with 20’s not 100’s.
  • In most cases clients who are trading their vehicle are your service, parts and collision clients as well. So do what you need to within reason to get the deal done.

 

When it comes down to putting a number on a vehicle there are a lot of tools that can help you with that or you can just look up auction history data through Manheim or SmartAuction. By looking at the auction data you will know what amount you can sell the vehicle for TODAY if you needed to.

 

 

You must get your inventory recondition process done in an average of 48 hours or less. How do you do this?

  • Have dedicated “C” Tech’s that do nothing but recondition your pre-owned inventory.
  • Have a dry erase board that will help you track your inventory through the reconditioning process. This will keep your reconditioning process in front of you all day every day.
  • Use inventory folders that will help you and your service advisor track the progress of each vehicle. "Email me and I will send you a great process that will help you track all of your pre-owned inventory daily by time in service, demo’s, show’s and reconditioning."
  • Make sure that your vehicles are in tip top shape prior to being introduced to the lot. I like to have sales consultants drive the vehicles for 10 miles to make sure everything is tip top. This also allows then to become familiar with each vehicle.

 

The moment that the vehicle enters your inventory I would want you to ask and find answers for the following five questions.

  • Is this vehicle a Core Inventory Vehicle?
  • What is the Market Day Supply of the vehicle?
  • Do we need to wholesale this vehicle immediately based upon questions 1 &2?
  • Based upon “Achievable Margin” & ACV how long are we holding this investment?
  • What is the most effective way to market this vehicle? IE: Standard 3rd Party Sites, Ebay, Craigslist, Social Media or Liner Ads.

 

Now that you have decided to keep your investment it’s time to price it. There are some vehicles that you will need to be very aggressive with and price less than 95% of the market and others that you can knock out of the park at over 120% of the market. I break my inventory down by stars, here is how it works:

 

 

1-Star is a vehicle that is AS-IS. These vehicles work very well for BHPH, Special Finance or cash buyers. These vehicles normally will ACV below $3000. The Achievable Margin on these vehicles is all over the board. You should make a great return on these because of the price points.

 

2-Star is a vehicle that has some miles on it but you are not scared to sell it to your mother. These also work well for BHPH, Special Finance and Cash Buyers. These vehicles are in most cases older than 6 years and have less than 120K on the ODO. The ACV on these vehicles is normally under 10K.

 

3-Star is a vehicle that there is a large market day supply. These vehicles are still under factory warranty. In most cases they are your typical Impala, Camry, Malibu, Fusion you get the point. A 3-Star vehicle is your greatest chance of loss so be careful when appraising these. These vehicles sometimes work okay for some Special Finance clients but with ALLY, Ford Credit and others getting more aggressive with these clients they will want them in a new vehicle with a short term lease.

 

4-Star is a vehicle that it is easier to replace the client than the vehicle. These vehicles are normally super low mile older than 5 years. For example 2005 Buick LeSabre Limited with less than 20K miles or a 2006 Volkswagen Jetta TDI with 30K miles. You can knock these out of the park every time. When stocking a lot I would always go after 4-Star vehicles, your clients love these.

 

If you stock your lot with a majority of 1,2 and 4 star vehicles your front end gross averages should be around 3K if your inventory is priced correctly and deals are desked properly. It doesn’t matter what market you’re in a 3K front end average is obtainable. I know of a dealer who I worked with that had an average over 3K in 2008 and was still able to turn their inventory every 30 days. If they could do it back then you can do it today.

 

Now that we have covered to Stars process let’s talk a little about how long you should hold your investments. Here are some simple rules based upon ACV and hold time that will help you turn more and virtually eliminate wholesale loss. Never ever hold any vehicle longer than 60 days unless it has an ACV below 8K. Here is a rule that will help you out based on ACV.

 

  • Vehicles ACV below $8000 hold for 60 days “In most cases you will sell these faster than any other price point.”
  • Vehicle ACV’s from $8000-1$6,000 hold for 45 days
  • Vehicle ACV’s From $16,000 to $24,000 hold for 30 days
  • Vehicles ACV above $24,000+ hold for no longer than 21 days

 

 

Within this article I have touched just the tip of the ice berg. There are some many variables that take an okay performing pre-owned department to an extraordinary pre-owned department. I have helped numerous dealers go from losing money in their pre-owned departments to making over 30% + net to gross. So if you are under water and need some help revamping your pre-owned department or you just have some questions on how to do something please feel free to email me at shawn.clos@dealerslice.com or call me directly at 419-706-5770. I would love nothing more than to help you turn your pre-owned department into a 30% + Net to Gross Monster!!

Bryan Armstrong
Thanks for the detailed breakdown. It's always been mind-boggling to me when someone will put less into a trade on the lot than they would pay for it at auction before transport or fees or when so much is invested that to "retail out"it's the only option. Great no-nonsense approach here. I like the 1.5 cents per mile formula. Thinking back to the last 10 cars I can remember it's amazingly accurate.
Shawn Clos
I appreciate the comments Bryan. Managing the pre-owned inventory seems so simple yet so many just go day in and day out with no plan. It is amazing how many could make so much more money yet are to scared to start making changes. People alway look at me like I'm an alien when I tell them that 3K gross averages on the front end are possible. Most dealers stock their inventory with 3-star vehicles and that is where the first mistake is made. Go after the 4-Star vehicles. In fact I just did some management training for a dealer in Indiana and they bought a 2008 GMC Envoy SLT off an online auction. This Envoy only had 5K miles. They used the picture off the internet auction site as the pre-book picture and sold the Envoy to a client from Michigan within 24 hours. Oh yea they made over $4600 on the front end and an additional $1700 on the back end. That is just one example of many that I have. More turns and higher gross averages can happen if the mind set is right and the right training and processes are put into place. Happy Selling!!
Jim Bell
Great layout Shawn. I have never heard of classifying your inventory by stars before. I know that we will classify, but not by ratings within the inventory. Definitely something that used car managers should take into consideration.
Shawn Clos
Thank you Jim, I'm a think out side the box kinda guy :) Happy Selling!!

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