Secrets of the Successful Modern Wholesale Auction

‘Secrets of the Successful Modern Wholesale Auction’ is an interesting topic to me. I’ve been in the business long enough to see how the advancements in technology have changed both the retail and the wholesale side of the business is a very short amount of time. Even though trends indicate that the online auctions will continue to grow; the modern auction isn’t just an online marketplace for dealers to transact. The idea of a modern auction, in this sense, is the freedom and flexibility for dealers to wholesale inventory in any and all channels that make sense with their business model. In this workshop we will talk about the innovations in technology and how to leverage what’s out there while maintaining “old school” best practices and getting back to basics. I believe the most successful franchise dealers today take the time to learn about the tools and leverage them to their own benefit. That’s what this workshop is all about.

Amanda Savage

Manheim Online Solutions

THREE ENGINES, 1267 HORSEPOWER: 2011 FORD MUSTANG DELIVERS MORE OF EVERYTHING, INCLUDING ECONOMY

DEARBORN, Mich., Feb. 8, 2010 – For the 2011 model year, the legendary Ford Mustang once again flexes its muscles with three all-new, state-of-the-art powertrains delivering marked gains in both fuel economy and power.

The 2011 Mustang coupe and convertible arrive with a 305-horsepower 3.7-liter V-6 engine with Ford’s new advanced engine valvetrain technology – Twin Independent Variable Camshaft Timing (Ti-VCT) – as standard equipment. Performance-minded buyers opting for the Mustang GT are treated to an all-new 5.0-liter, 32-valve V-8 with Ti-VCT, good for 412 horsepower. And the no-compromises Shelby GT500 gets a Ford GT-based aluminum block for its 5.4-liter supercharged V-8, leading to lighter weight and 550 horsepower.

“These three new engines represent a quantum leap in rounding out a world-class Mustang powertrain portfolio,” said Derrick Kuzak, group vice president, Global Product Development. “Each represents Ford’s commitment to use technology to deliver the performance and fun-to-drive factor customers demand, while continuously improving fuel economy.”

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The Top Six Techniques for More Effective Used Vehicle Sourcing

Dale Pollak

Last year dealers experienced an unprecedented phenomenon: difficulty sourcing used cars. To be clear, there was no shortage of used cars but rather a tightening of supply and a wholesale market that rose faster than the corresponding retail market. The result was that dealers found it very difficult to buy used cars. It is likely that this condition will continue and even worsen this year.

There are, however, several strategies that dealers can use to ease the problem of sourcing used vehicles. First, dealers can and should expand the horizon of vehicles they will consider stocking. There are always segments of vehicles, in particular makes and models, which are available at more reasonable prices than others. Often, however, such vehicles are either not recognized as such or otherwise excluded due to the fact that they are not a vehicle that the dealership has sold in the past or is consistent with their new car franchise brand. By simply expanding the set of acceptable vehicles for consideration, dealers will have more choices and opportunities. The most current technology allows dealers to identify these types of vehicles as well as where they can be sourced. Remember that when you have market knowledge that is not commonly shared and you can act upon it that constitutes a true competitive advantage.

A second strategy that can be employed is to expand the sources of acquisition. Most dealers use a small number of local auctions. While these locations may continue to be useful, they do not provide dealers with the maximum number of choices and opportunities. This means that dealers may have to undertake the burden of traveling regionally or potentially even nationally to find the vehicles they want at the prices that are right. The technology of online purchasing can ease the burden of using distant auctions. Every dealer should invest the necessary time to properly identify and learn about the available tools to purchase vehicles online.

Having expanded the types of vehicles and number of auctions, there is still much more that a dealer can do to source vehicles more effectively. For example, the dealerships appraisal process and win rates (look to book) become critically important. Today, the appraisal process takes on the added dimension of importance as a sourcing mechanism as well as its traditional role as a deal maker. Dealerships should review their process of appraising, win rates, and even manager and sales person incentives for achieving superior performance. Remember that sales people become sourcing agents for the dealership every time they encounter a customer with a trade. Properly managing the appraisal process will result in both more sales as well as more trade-ins for reasonable prices.

There is still more. However, to go further requires challenging long standing dealership management practices. The first such approach is to reduce the amount of expected gross profit necessary to justify the acquisition of a vehicle. Most managers won’t justify the purchase of a vehicle unless they can foresee at least a $2,000 profit. Often, the wholesale going price of the vehicle is $500-$1,000 more than what the buyer thinks it needs to be. If they were to pull the trigger it would mean that the profit opportunity might only be $1,000-$1,500. But the choice is not between purchasing for an expected profit of $2,000 versus $1,000 but, rather, a choice between $1,000 and nothing. There are simply periods of times in markets that call for temporary adjustments in expectations and changes to traditional beliefs and practices.

Just to turn the temperature up even a bit more, I am going to further suggest that dealerships re-think the amount of their pack. Packs cause buyers to expect to purchase vehicles that allow them to make expected profit plus the pack amount. This creates an even greater perception that cars can not be purchased for reasonable dollars. Once again, there are moments in markets, and this is likely one of them, where adjustments to past practices should be considered to maximize the opportunity that exists.

Whether or not a dealership adopts any or all of these suggestions, it is a certainty that sourcing vehicles will continue to be of great importance to used vehicle operations. The amount of time necessary to identify the hottest vehicles, understand what price to pay, locate their sources of sale, and execute their procurement will be greater than ever. It is also a certainty that traditional used car managers have more than ever to do with fewer resources. This is an organizational problem that further impairs the dealership’s ability to source vehicles. I therefore recommend that dealerships provide used car managers with the assistance of stocking analysts. A stocking analyst can do much of the computer legwork of identifying vehicles and the locations where they can be sourced. They can even create appraisals in order to know how much can be paid for each vehicle. Such an individual doesn’t have to be highly compensated and may likely already be on the payroll. They simply need to have strong analytical ability and a general sensitivity to the used vehicle marketplace. Once the work of the stocking analyst has been performed, the traditional used car manager can review and approve the stocking plan and purchase recommendations prepared by the analyst. Such an approach facilitates aggressive sourcing and allows traditional used car managers to focus on all of the other critical tasks for which they are responsible

The bottom line is that the market is creating new challenges. Dealerships must respond with new thinking and solutions. There is no doubt that the new challenges in sourcing can be overcome – there just needs to be a willingness to do so.

You need to know what’s wrong.

Dale Pollak

What would happen at a dealership if a particular used car had many interested shoppers and multiple demo rides but still didn’t sell? The obvious answer is that someone would go out and carefully inspect the vehicle to determine what the heck was wrong with it. Perhaps it smelled like smoke, needed a wheel alignment or a tune up. There would likely be something that isn’t right about the vehicle and, most likely, if it was corrected, the vehicle would sell.

Now, what would happen if a particular vehicle got a lot of online shoppers looking at it, clicking through many times for complete details and photos, yet no one was taking the next step-- to print the page, a map to the dealership, or clicking to request additional information from the dealership? Would there be something likely wrong with how the vehicle is displayed on-line? Again, the obvious answer is yes, most likely.

The difference between these two scenarios, however, is that it’s highly unlikely that anyone at the dealership is actually aware of how much attention any given vehicle is attracting on the Internet. Unlike your physical display, your virtual display and their associated shoppers are largely “out of the view” of dealership personnel.

To be sure, every dealer has many vehicles that come up frequently in vehicle searches, get clicked on repeatedly for details and yet draw few, if any, customers willing to “take it to the next step.” I think that this phenomenon occurs all too often and goes unaddressed because no one at the dealership is evaluating their virtual lot in the same way that they evaluate their physical lot.

This is particularly disturbing because most major third party sites provide dealers with the ability to view the number of searches and detail views for each of their vehicles. Moreover, they also report the number of times that a shopper has “gone to the next level” to indicate purchase intent like printing the page, printing a map, or clicking to request more information. There are also inventory management tools that also report this activity.

I think it is imperative that every dealership begin to routinely access and track this relevant merchandising information to determine why certain vehicles get a lot of attention, but very little action. This can be easily done by sorting vehicles using the tools referenced above, high to low based on the number of detail page views. Highlight the vehicles that get a lot of detail page views but little or no page prints, map prints, and/or email requests for additional information. This is all measureable information that is critical to know in order to act upon. For example, perhaps the photos are poor or non-existent. Similarly, the description may be missing or fail to highlight what makes the vehicle unique. Taking corrective action quickly will certainly result in increased traffic and sales. Make no mistake – it is a given that if you take the time to evaluate and act on “what’s wrong” you’ll improve your online merchandising results.

As the snow and cold winter weather cover most of the great US of A, we can all look forward to a few warm and sunny Florida days as we attend NADA 2010 in Orlando!

I am also looking forward to the three workshops on inventory management I have been given the privilege of leading. We will discuss how, in this new retail and wholesale environment, we can use technology and information it provides to maximize gross and turn in our used vehicle operations.

Even if you don’t currently have or ever plan on having specialized inventory management software, after attending one of these workshops, you will walk away with the ability to better manage your used vehicle inventory. You will gain new insight on how to improve gross and turn with the use of a yellow pad!

Stay warm ‘till then!

Doug Hadden

Three conditions for success, and more: Dale Pollak

Three conditions for success, and more

Dale Pollak

Yesterday I participated in an Automotive News webinar with Tom Kontos, the Economist from Adesa Auto Auction. I have a few thoughts from the seminar that I’d like to share.

First, I concur with Tom Kontos’ prognosis that dealers will experience further tightening of used vehicle supplies in the coming year. Further, prices will continue to be strong. Obviously there will be some ebbs and flows throughout the year in specific segments based on fleet and lease maturities. There are also always risks of the unknown based on volatile factors such as oil prices, weather patterns and similar phenomenon’s. Further tightening of supply and continuing high wholesale prices will create stress for dealers in two respects. First, they will find it difficult to purchase vehicles for prices that allow for a traditional profit margin. This is because I don’t expect retail rates to rise equally with the wholesale increases. Banks are ever conscious of their LTV advances. So what does this mean for wholesale buyers of used cars?

It means that many buyers will return from auction without purchasing vehicles that they badly need. Their conclusion will be that prices are too high to make any money. This is largely based on their expectations of buying vehicles for prices that allow them to make traditional gross profits in addition to a traditional pack.

Alternatively, other dealers will buy vehicles and be wiling to accept less than traditional profit margins and perhaps less, if any dealer packs. While this alternative isn’t ideal, it does address the realities of the moment of the market. After all, what are your choices? Either you don’t buy, which I think will ultimately starve your operations for badly needed variable and fixed gross profit, or you buy with a willingness to temporarily accept lower margins. If this alternative strategy is adopted along with a high turn velocity mentality, it is possible to reclaim the loss margin through additional volume.

I don’t however, want to be casual about the statement that volume alone can compensate for lost margin. The difference between volume and velocity are three conditions that must be present in order to have volume with the prospect of profitability. So what are these conditions?

First, you have to have the ability to identify and source the right vehicles. Today, the right vehicles are not necessarily the vehicles of your new franchise brand or the ones that have performed well in the past. Such vehicles may no longer be right for today’s market and/or they may not be available for purchase at the right price. Rather, the right vehicles are the ones that your current market is craving with high demand and short supply (i.e. low market day’s supply). The marketing cost to attract buyers on such vehicles is much lower and these vehicles are much less sensitive to price competition pressure.

The second condition is to price vehicles properly. As I’ve stated many times in the past, this doesn’t mean all high or low, but “know” which ones can and should be priced high and dropped slowly if necessary and which ones should be priced low and dropped rapidly. Your ability to know depends on a physical assessment of the vehicle as well as its replaceability and its supply and demand. Simply stated, cars with high supply and low demand need to be priced aggressively from the start, while cars that have high demand and short supply will command generous gross profits without too much hindrance from competitive offerings.

The third necessary velocity condition is to own your vehicles right. You’ll never make any money in the used car business unless you own your cars right, and you can’t manage your cost of ownership unless you measure it. Today, dealers should not own their vehicles fully reconditioned for any more than 85% of cost to market (unit cost divided by average retail market asking price).

The next observation from yesterday’s seminar is that you must know the price at which you can sell a car in order to know how much to pay for it. In yesterday’s used car business the retail price was determined largely from the wholesale price, and today the retail price drives a proper wholesale valuation. If you know (and you should) what it will take to sell a car, simply back out your cost and your expected profit, and that represents the proper target acquisition price. If you have to pay over that amount to acquire the vehicle, then you must be prepared to accept less profit, otherwise don’t pull the trigger.

During yesterday’s call, someone asked whether recent events have caused me to reconsider this position on purchasing vehicles. The answer is absolutely not, and in fact I would like to hear from the individual that asked the question. I don’t know what recent conditions they’re referring to that may have caused me to reconsider.

The bottom line is that next year will be a challenging year from the standpoint of purchasing, valuing and pricing vehicles. I would strongly recommend that your dealership invest in technology and develop processes to ensure that the velocity conditions are created and maintained. If management is successful in creating the conditions favored by the market, then success becomes a natural and predictable outcome.