Too often management focuses just on "New" and loses out on the real dollars to be pocketed in "Used."
A well-run used-vehicle department should make a significant contribution to a dealership's profitability, CSI, and community reputation. Too often, however, this "less-than-glamorous" department fails to contribute its fair share to the store's overall profitability and causes injury to a dealership's CSI and reputation as well. Frequently, that happens because the department is left to manage itself and is not put under the same scrutiny as others.  Too often, too, its own managers claim they can't be treated and measured like other departments. But the fact is, a successful used-vehicle department must be closely monitored to ensure positive results. Without exception!

All measurements in a used-vehicle department, whether they are calculated or based on non-financial information, can be tied back to inventory in some manner. If one follows the flow of pre-owned  inventory within the dealership, measurements can be made at each stage of the inventory receipt and sales process.

Sourcing of inventory
One of the most consistent sources of inventory is customer trade-ins. The decisions made by staff at the time a vehicle arrives as a trade are critical to the future revenue that vehicle may produce.  As soon as it is known that a customer wants to trade against a new purchase, the Used Car Manager should be notified. It is his or her responsibility to place a realistic value on the vehicle; that can only be done by giving the car a thorough check and a test drive. The process should be formalized and dated with all vehicle deficiencies written down for the customer. Doing so will also serve as a reality check to help customers realize that their trade may not be worth as much as they had anticipated. 

The Used Car Manager should also initiate a list of potential reconditioning work that may be required before resale. If the expected reconditioning costs are more than the dealership allows, the vehicle may immediately be designated as wholesale or "as is" stock. A vehicle history check is also critical to ensure that all vehicle liens are identified and to ensure that any accidents are known and documented. Lastly, the appraised value should have a time limit and be subject to a final re-check when the customer returns to complete the purchase and turn the vehicle over to the dealership. 

The appraised trade-in value for the vehicle must be unbiased, because the appraiser is also ultimately responsible for the selling price of the used vehicle. If he or she is consistently pressured into giving a new-car customer a higher than market trade-in value, then the used- car grosses will ultimately suffer. Post-appraisal comparisons to current auction and used-vehicle guide values will highlight these issues.       

When the vehicle officially arrives as a trade-in, it should be rechecked to ensure that the appraisal given is still valid and all keys and documentation have been turned over. At this point you should already know if the vehicle is to be sold to wholesalers, kept as retail inventory or, if applicable, put into an "as is" area of the lot.  If the piece is to be wholesaled, bids should be requested and the wholesale transaction completed as soon as possible. You can usually speed up the process by using an on-line service, thus turning metal into cash faster. The sooner it is sold and removed from the lot, the less likely it will incur a loss-on-sale and the dealership will be able to make use of the increased cash flow.

If the piece is to be kept for retail sale, it should be cleaned and prepared for display. Reconditioning can be done then or after it is sold.  While it may be expensive to recondition vehicles before they are sold, they may be harder to sell if it is not done.  Each vehicle should be reviewed individually to determine how it will best be marketed and to manage the return on investment in the vehicle.

Sorting inventory - retail or wholesale
When determining which cars should be kept and which should be retailed, there are many factors to take into consideration:

Condition of vehicle - appearance, kilometres, cost of reconditioning to make it attractive to buyers, etc.

Vehicle brand and type - does it match your customer market demands?  It may be a great retail piece, but not for your store. If the vehicle is not one that your customers would want, it should be wholesaled quickly to get a fair value; otherwise it may have to be dumped at a loss in the future. Each piece you have on the lot has a target buyer; knowing your buyers will speed up your inventory turns and increase your profits.

Seasonal factors - As for all consumer goods, there is some seasonality of vehicles. Caution should be exercised when appraising out-of-season or end-of-season vehicles, such as sports cars or convertibles, as their value may drop quickly leaving a loss on eventual sale.

Another area of concern may be the wholesale bids you are receiving. To ensure that you are getting the highest possible prices, make the bidding competitive. If you review your wholesale records and find that you are consistently selling to only a few buyers, that may be cause for concern.  One way to avoid having favourite wholesale buyers is to use one of the on-line auto auctions. If that increases your profit by $200 per vehicle wholesaled, it becomes a material amount when compounded over a year.  

Even the best used-car managers sometimes make a mistake.  Have preset parameters to determine when a retail piece is no longer salable and will become a wholesale piece. Once a decision is made, move the piece out quickly. Review the used-vehicle aging weekly and make sure that as inventory ages there is a plan to get rid of it at the best price. A $500 loss today can quickly become a $1000 loss next week.  

Used-vehicle lot displays
When visiting a dealership, it is often immediately obvious which areas are designated as the New and Used vehicle areas. The Used area is usually harder to find, poorly lit and not as well kept. Yet those vehicles can generate large profits for the dealership. By making the lot, and the cars displayed on the lot, clean, bright and attractive, buyers will be more likely to stay longer to view the cars. There is also an unconscious assumption by buyers that clean looking vehicles are in better running shape than dirty unkempt vehicles.  Real Estate salespersons know that a buyer's first impression can make or break a sale. Dealerships should follow the lead and make sure their inventory shines and says, "Buy Me!"

To keep your lot attractive and interesting, inventory should be moved regularly and always displayed with the vehicle front facing the prospective buyer. Vehicle specification sheets should be clearly visible and accurate. Full disclosure implies honesty. Make sure any advertising is clear and matches the vehicle specifications exactly or it could be a costly mistake. All vehicles should be clean, inside and out, gassed up, and always ready for a test drive.  

Sales staff
Once the customer is on the lot and looking, it is up to your sales staff to guide him or her through the buying process. Having knowledgeable and well-presented staff can enhance the process. There is an abundance of material available for readers on how to hire and train good sales staff. We won't try to delve into this topic here; suffice to say that a good used-car salesperson can be a huge asset to a dealership, and not all sales staff can sell used cars. It is a specialty!

Post-sale statistics
Once a sale has been completed there are still post-sale activities that can affect the used-vehicle department profits. Review the used-car policy accounts each month and look for patterns. Are policy expenses being incurred more often on certain brands or makes or on specific salesperson's sales? Are sales staff being paid on an inflated gross profit by having the customer return the vehicle for policy repairs that should have been completed as reconditioning, thus reducing the original vehicle gross profit? Factor that data into your data on sales to get the true gross profit on vehicles.

The above suggestions are not intended to be a complete list of issues to watch when managing a used vehicle department, but by measuring and monitoring your results should start to improve.  You will also begin to determine what additional data may be relevant to your dealership.         

Putting a focus on used cars all the time, not just in bad times, makes a lot of sense; dollars too!

Chuck Seguin is VP Business Management at TSi Auto Solutions Inc. and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Joanna Beck is a Business Management Analyst at TSI Auto Solutions Inc. and can be contacted at jbeck@tsiauto solutions.com

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