We had an interesting business development meeting recently when the subject of used car margins came up; when we qualified this further it became apparent that across the group concerned, used car margins had been declining and as a consequence they were then looking in the wrong operational areas of their business to try and remedy the situation.
For sure there were undoubtedly operational areas within the businesses concerned, that when run more effectively, would return more profit but there was one glaring problem that no one within the senior management team had thought of; their used car stock acquisition programmes.
At this point we wrote a statement on their boardroom wall in 12 inch high letters; “You Make Your Money When You Buy!”
Unfortunately, when we began to dig deeper, it became apparent that this group had become a “Busy Fool” in terms of their used car retailing activities, running around chasing volumes of used car stock because first and foremost used car spaces had to be filled; after all there’s no profit in empty spaces! And this had resulted in those responsible for used car stock acquisition heading to the easy watering hole of used car stock acquisition, where everyone else who hasn’t been trained in how to acquire more profitable used car stock goes, the auction!
Now the Automotive Sector has a baffling relationship with the auction companies, something we have covered in many articles, most recently in our article; Your All Auction Policy?,,,,, I Bet It Seemed Like A Good Idea At The Time? But when it comes to used car stock acquisition it is fascinating to see how defensive those running franchised dealerships get, especially when it comes to their vaulted “All Auction Stock Disposal Policy” which we call the “Let’s Give Our Competitors A Business For Free Policy!”
So during the discussions and explanation that followed, we asked those in the room to explore the following logic, during the qualification process listed below, bearing in mind that this will probably resonate with most of our readership base;
Our Question: Ok, so let’s not waste time today discussing in forensic detail the rationale behind your All Auction Disposal Policy, but can we ask you two questions; why you made the decision to have an All Auction Disposal Policy and why it is still being adhered to?
Managing Director’s Answer: Well because we no longer lose money in the trade, in fact the auctions result in us trading at a healthy profit when it comes to trade part exchanges; I have no doubt that the auctions enable us to return the maximum value for trade part exchanges, invariably over the perceived trade value.
Our Question: So you have no doubt that the auctions return the absolute highest price available, apart from retailing the car yourselves?
Managing Director’s Answer: Absolutely! Sometimes more than we could return by retailing some cars, because of the unforeseen levels of preparation required for retail!
Our Question: OK, thank you for that and can we leave the wider trading ramifications aside for now and just stick with your used car stock acquisition programmes; how much of your used car stock comes from auction purchasing?
Managing Director’s Answer: Well I don’t know! (This is worrying but let’s leave this for now) But if I had to put a percentage on it I would say between 50 and 60% of our used car stock comes from auctions; how else are we supposed to feed such a successful used car business? (This is a moot point by the way, the reason we are there is because they aren’t successful; not in terms of profit, and profit is the only game in town!)
Our Last Question: OK, thank you for being so candid; in finishing and before ascertaining whether we will be a good fit, in terms of working together, let us ask you all reflect on that statement and can we ask you one more question, just so we have clarity? You called us in today for an exploratory meeting because the money men, (your accountant and more worryingly, your backers), are questioning why there is little return on the investment in your used car stock holding, and because used car profitability is “Tanking!” Does anyone think that the fact that you are acquiring at least 50 – 60% of used car stock from auctions, (an establishment that you have already confirmed returns the highest prices for stock), might have something to do with this lack of profit?
Managing Director’s Answer: None; silence and the reflective nodding of heads!
We then went on to discuss the folly of expecting to make increased profits from used car stock acquired from auction houses; for sure it is far easier for Used Car Managers and Buyers to sit at their desk and bid online at auctions, but the folly in this strategy is astounding, and for 2 reasons;
Market Reality: In the internet age market knowledge is freely available to consumers, they can log on to any used car website and research the used car market, and let’s not forget the retail price of any used car is set by the market; so why would any customer want to pay more for the same car from your business, when compared to one of your competitors?
The answer is of course that they don’t; so you know your ceiling price for retail, therefore it should be easy to work backwards and know your likely margin before the hammer goes down during the online auction, but yet people still go over this price because there’s no money in empty display spaces; and this is true, but there is less money in overpriced used car stock!
Operational Reality: Now I can assure you all that we have tested this theory to destruction, for many brands and for many business models and our market research is thus; there is no money to be made by a franchised dealer from retailing cars purchased from auction houses! The main reason for this is that auction houses are where all the untrained and habitually lazy buyers go for their used car stock; and because of this there is then a feeding frenzy to buy cars because these businesses have no other option, when it comes to acquiring used car stock!
On top of this the descriptions provided by the auction houses, those that you are buying from, are woeful; we have spent hours appraising stock at auctions and assessing profit margins and it is an inconvenient truth that the preparation standards required of your manufacturers approved used car programme will render every car we have ever appraised, none profit making!
And yet it goes on! When we asked whether the owners of this business had ever investigated how vast sums of their money were being invested, invariably they had not, in fact they had never been to the auction houses supplying vast volumes of their used car stock holding! In this instance we would ask why not? If those responsible for the growth of your pension were losing you money, you would want to know where your pension pot was being invested, of that we are sure, yet most pay no interest in how millions of pounds are being invested in an asset class that only has a 60 day window of profitability.
So in conclusion; yes there were many operational enhancements that could increase profitability, but these will not make up for the major flaw in their used car business; having no effective programme of used car stock acquisition, therefore resorting to the lazy option, (the auctions), and paying too much money for used car stock.
Even the best run used car businesses can’t make money if they are paying the highest prices for their used car stock, and that is what you are doing when you purchase used car stock from auctions! So this business was not as profitable as was required, because there was a fatal flaw in their processes for acquiring used car stock; and worse than this is that the situation would not have changed, because no one was looking at this as “The” major flaw in their used car business.
If you make your money when you buy, (and you do), the only way you can improve margins is by buying used car stock at under market value. The first thing we say to those joining our Used Car Stock Acquisition Master Class and Mentoring Programme, or indeed any of our used car programmes, is that when it comes to retail used car stock, you must develop the skills and initiatives that enable you to acquire the used car stock you require, as cheaply as possible and below market value.
Until those owning and/or those responsible for running franchised dealerships grasp this, they will continue to be in a “Race To The Bottom” when it comes to used car margins. Used car stock acquisition initiatives lie at the foundations of profitability for all used car businesses and not everyone can be winners moving forward.
Those wishing to explore our full range of used car business development and personnel training services, and how we can help you to make more money from retailing used cars, need only contact Andrew Banning at ajb@autoformance.com or Malcolm Thomas at mgt@autoformance.com in the first instance, in order to arrange a no obligation exploratory discussion.
Alternatively please feel free to call me on 0044 7796 260261.
For more information about our services please visit our website at www.autoformance.com We look forward to hearing from you.
Andrew Banning.
Used Car Business Development Director.
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