New vehicle sales have buoyed the fortunes of auto dealers, reports Automotive News. Automotive dealer profits were much higher across the board in the first quarter of 2012. Experts predict that increased used vehicle sales are necessary to unleash ideal dealership profits.
Profit lies in trade-ins
Bryan DeBoer, chief operating officer of Lithia Motors Inc. dealership network, noted that larger auto dealers have a distinct advantage in the used car market.
“The biggest driver for used-car sales growth is the ability to procure used cars,” said DeBoer. “We, at the top of the food chain, have a big advantage over the independent car dealer who doesn’t take in the amount of trade-ins we do.”
Even Lithia dealerships have procurement troubles when it comes to used inventory, however. DeBoer noted that the company’s Medford, Ore., branch has a goal of 60 used vehicle sales per month, yet was only able to move 45 units in the first quarter.
“We have to open up our pipeline of used vehicles — meaning get them from the street,” he said.
How larger auto dealers fight to the top
Large automotive dealership chains have a number of tools to which smaller dealer networks may not have access. Access to more trade-ins during special new car sales helps, but large dealers also buy more cars online and from newspaper listings. Larger dealers are more likely to have powerful software that enables them to scrub databases in search of customers with equity in their vehicles. Such customers are generally more likely to consider a trade-in. Also, large auto dealers are more likely to have the staff to handle used vehicle reconditioning quickly, leading to quicker turnaround and resale.
More retail, less wholesale
Penske Automotive Group Inc. experienced a 27 percent jump in retail sales in the first quarter, notes Automotive News. This led to a 38 percent profit spike. CEO Roger Penske attributed this success to a company program called “Retail First.”
“Our initiative today is to recondition these used cars where they can be sold in retail rather than wholesale,” Penske says. “It gives us a new customer.”
The benefits of this strategy are obvious, when compared with wholesale. Penske reportedly pays $500 to $600 per used vehicle for restoration and safety improvements. Yet average gross margin per used vehicle sold retail is $2,043. Wholesale, the profit is a mere $150.
Vince Sheehy of Sheehy Auto Stores in Fairfax, Va., is a firm believer in the need for auto dealers to push retail sales.
“Wholesaling means someone else is going to retail it. We want more of those opportunities, but not anything that gets in the way of our reputation,” said Sheehy.
The power of equity location
Locating former customers with equity in their vehicles is a key to boosting trade-in numbers, notes Joe Herman, COO of Kuni Automotive dealership group. Using equity location software for two years has resulted in increased used car volume, revenue and gross profits. Procurement specialist positions have been created in order to capitalize.
“The dealers that can access inventories with some of those new Web tools can increase the size of their retail business because they can expand their reach beyond their physical location,” Herman said.