Shrinking used car dealership margins are a theme that is replaying throughout 2024. The culprits—stretched budgets for consumers and rising costs for auto dealers. While used car demand remains strong, these compressed margins, combined with the focus on new car sales and diverse revenue streams, are keeping dealers up at night. However, where there are challenges in the business model, there are also opportunities. In this playbook, we will explore the factors driving these changes and offer strategies for turning tight margins into profitable outcomes.
What factors influence the profit margin of a used car dealer?
Factors influencing profit margin for used car dealers include the car’s purchase price, repair costs, marketing expenses, sales volume, negotiation skills, and market demand. Efficient management of these factors can significantly impact a dealer’s profit margin in the competitive used car market.
Understanding Used Car Margin Compression in 2024
Since the beginning of 2023, the prices for used cars have been on a steady decline. In fact, Chief Economist Jonathan Smoke, in a Cox Automotive Auto Market Report, notes a 5.9% drop in prices since January 2024. This type of sustained retail softening hasn’t happened in quite some time.
Why are we seeing this prolonged decline in the price of used vehicles? The reason is two-fold. First, consumer budgets are stretched thin. With limited cash and higher interest rates, buyers are highly cost-conscious and actively searching for deals, forcing dealers to lower prices on used cars. Additionally, attractive new car incentives and rebates, such as zero percent APR offers, are enticing potential used car buyers towards new vehicles. With more affordable new cars, the used car market is feeling the pressure.
To compound the problem of declining used car prices, dealers are facing higher costs for labor and repair services, along with rising floor plan interest rates.
Turning Lemons into Lemonade: Transforming Margin Compression into Opportunity
The squeeze on margins presents a significant challenge, with some industry forecasts predicting a 20-30% compression in net profit margins and gross profit margin in 2024. Based on data from the National Automobile Dealers Association (NADA), by the end of July, Automotive News reported that the average gross profit per used vehicle at the average dealership fell to $1,264 year-to-date, down a startling 21 percent from the same period in 2023.
While these conditions are challenging, they also open the door for innovative solutions, including financing for accessories for vehicles. In order to meet consumer demand without shrinking margins, independent dealerships need to find a great way to reduce the all-in cost of the car, factoring in the MSRP. In the next section, we will look at practical approaches to navigate tight margins and turn them into opportunities for growth.
The Simple Answer to Combatting Used Car Margin Compression
With the challenge of tightening margins looming, how can you make an impact on your dealership’s profitability? One answer is in the reconditioning process. By reducing the time it takes to get vehicles frontline-ready without sacrificing quality, you can significantly boost your bottom line.
Let’s look at an example:
Consider Joe’s dealership, where the current reconditioning timeline is 7 days with a holding cost of $50 per unit. With a monthly throughput of 75 vehicles, Joe’s annual holding costs amount to $315,000 a year.
Here’s the breakdown:
7 days x $50 holding cost/unit x 75 units=$26,250 a month or $315,000 a year
6 days x $50 holding cost/unit x 75 units=$22,500 a month or $270,000 a year
5 days x $50 holding cost/unit x 75 units=$18,750 month or $225,000 a year
4 days x $50 holding cost/unit x 75 units=$15,000 a month or $180,000 a year
By shortening the reconditioning time from 7 to 6 days, Joe saves $45,000 a year. This is a savings that can directly impact margins. Every day that is saved in the reconditioning process adds value.
The Cost of Delays
A backlog of cars waiting for reconditioning equates to lost revenue in vehicle sales. Yet, achieving efficiencies in reconditioning is possible. According to Cox Automotive, top-performing dealers complete reconditioning within 24 hours or less. When done strategically, reconditioning can add thousands of dollars to a used car’s value. Effective reconditioning should increase the selling price by at least twice the total reconditioning costs while also reducing cycle time. Although a used car dealer may incur upfront costs, the return on investment can be significant. While many dealers recognize the importance of reconditioning, they often struggle to maximize its value.
Turning Reconditioning into a Competitive Advantage
Reconditioning plays an important role in transforming an average used car into a high-value asset that attracts more buyers, commands a higher selling price, and accelerates the sales process. Effective reconditioning goes beyond cosmetic enhancements and minor repairs; it involves a strategic balance of cost, speed, and quality to maximize profitability. By mastering these elements, dealerships can leverage reconditioning as a distinct competitive advantage.
Here’s how you can turn reconditioning into a powerhouse for your dealership:
Key Strategies for Effective Reconditioning
Know Your Budget
Accurately appraise a vehicle’s condition when purchasing and make sure to factor potential repairs into the cost. Understand whether your dealership prefers minor detailing or substantial repairs to enhance value. Having a clear grasp of repair costs and your dealership’s reconditioning philosophy from the start is critical.
Establish Reconditioning Standards
Develop and enforce consistent reconditioning standards across your dealership. Standardizing repair quality and setting financial thresholds for various repair types based on vehicle mileage and age will help establish uniformity. This approach fosters consistent outcomes and helps maintain quality across all vehicles.
If you have established standards, are you reviewing them yearly? Additionally, review each vendor in your reconditioning process to make certain you are getting peak performance and recognizing efficiencies from each.
Create a Standardized Checklist for Inspections
Implement a comprehensive checklist covering all aspects of vehicle reconditioning, including mechanical systems, safety features, exterior, and interior issues. Train your staff on using this checklist to maintain consistency and accuracy. Regularly review and update the checklist to reflect best practices and evolving standards.
Structure Your Workflow
Design a streamlined workflow for reconditioning, outlining clear steps and timelines from initial inspection to final detailing. Efficient workflow management minimizes downtime and ensures a smooth transition between tasks. Hiring and training a capable team is essential for maintaining communication and adherence to your process.
Establish Metrics
Utilize key performance metrics to monitor and improve your reconditioning process:
– Average Days in Recon: Measures the time taken for a vehicle to progress through reconditioning, from initial inspection to frontline ready. This includes all stages such as inspection, service, parts acquisition, body work, detailing, and photography.
– Time to Line: Tracks the total time from vehicle acquisition until it is frontline ready.
Regularly analyze these metrics to identify areas for improvement and enhance operational efficiency.
Identify Replacement Parts Early
Conduct a preliminary inspection of vehicles to identify any parts that need replacement and might require lead time. Early identification of these components helps minimize delays and ensures a smoother reconditioning process.
Overcoming Internal Limitations
Dealerships with limited resources, time constraints, or inadequate staffing may struggle to maintain consistent reconditioning quality. This can negatively impact customer satisfaction and the dealership’s reputation. To address these challenges, consider partnering with a third-party vendor.
Partnering with a Third Party Vendor
A third-party reconditioning partner can offer several advantages, including faster turn times, specialized expertise, and reduced overhead costs. When selecting a partner, evaluate the following:
– Consultation and Standardized Processes :Select a vendor who can offer consultation and adhere to standardized processes, ensuring consistent quality and cost-effective results.
– On-Site Services: Prefer vendors who can operate on-site at your dealership, facilitating better inventory tracking and quicker vehicle turnover.
– Full Staff and Cross-Training: Verify that the vendor has a well-trained staff capable of handling various tasks and providing backup when needed.
– One-Stop Solution: Opt for a vendor offering a comprehensive solution that covers all reconditioning needs, avoiding the complications of managing multiple vendors.
–Industry Expertise: Ensure the vendor is an industry leader with proven expertise in reconditioning offering the latest processes, training, and tools.
By implementing these digital marketing strategies and considerations, dealerships can transform car sales reconditioning from a routine process into a powerful competitive advantage, driving enhanced customer satisfaction and increased profitability. With margins continuing to compress throughout 2024, reassessing and optimizing your reconditioning process could reveal valuable efficiencies. Now might be the perfect time to optimize your reconditioning process to help drive profitability and ensure your dealership’s success in 2024 and beyond.
If you are ready to evaluate your reconditioning process, get in touch with a member of our sales team at Dent Wizard (800-Dent-Wiz). We are here to help you establish standards and get the most from each stage of your reconditioning process.