By Desiree Homer
With 2019 officially in the rearview mirror, you’ve probably had a good look at the data to review just how well your dealership performed last year. You’ll have reports, identifying your YTD metrics and probably comparing data to previous years. But, are you maximizing those numbers to anticipate change in 2020? What if you could interpret those statistics to adapt ahead of the curve? What if those ROI, market days supply, and appraisal to trade ratios could serve as a crystal ball to help you come out of the gate in January like a powerhouse in your market?
They can. Today, we’ll review a few refreshing ways to review your 2019 year-end stats, to help uncover how you can anticipate your best strategy for 2020.
Adapting to Change & Avoid Having to Catch Up
When you look at this year’s numbers, you hope to see growth year-over. But, what else can 2019’s stats tell you? If your 2019 paced about the same or even fell short of past years, it could be an indication that you’re playing catch up instead of trying to get ahead. If you spent your 2019 chasing 2018 goals, you might not see the results you had hoped to see. As you plan for a strategy for 2020, consider the processes, strategies, and market trends, not just the numbers themselves. It’s about embracing and adapting to change in order to anticipate trends and profit centers next year.
One of the metrics you visit every year-end is your used to new vehicle ratios. A good target might be 1:1, although most dealerships usually have a 2:1 or 3:1 reality. According to a recent Automotive News article, many dealers struggle with growth in this area. With the recent compression of the new vehicle profit margins, it’s evident that healthy used car revenue streams should be a primary goal. One dealership owner from Florida told AN that he recognized the profit shift from new to used back in 2009. To embrace that trend, he cited his teams do “a lot of training – and experimenting.” For his dealership, it worked. This FL dealership group landed on the list of top U.S. dealership groups ranked by used-vehicles sales. In 2018, he boasted a 1.42-to-1 ratio. Think of your used inventory as a potential revenue opportunity for more than just the profit margin on the sale. It can also bring profits for parts, service, and the F&I departments as well. The more used cars you sell, the more opportunity you have to grow across all of these areas. As you look at your ratios this year, what training and experimenting can you do to improve your used sales?
You can’t sell a pre-owned if it’s backed up in your service department for reconditioning. Some sources suggest an average timeline from initial trade-in to the lot should be within three to five days. If you’re experiencing longer wait times on average, it might be worth revisiting your current strategy. How your teams tackle the reconditioning process could be affecting how soon, and ready your used inventory is for new customers.
Market Days Supply (MDS)
You might be tracking your market days supply this year. If you’re not, you should be. This calculation, configured by dividing your current inventory by your average sales over the past 45 days, gives you an accurate picture of how desirable your stock is to potential buyers. A low MDS means you’re selling cars quickly but may have limited inventory available. A high MDS would indicate you have a wide selection of inventory but are selling at a slower rate. The goal is to find a balance. Some sources suggest a reasonable goal would be to have 60-90 for new vehicles. For your used vehicles, shoot for 60. The first step is understanding what your market days supply rate is. From there, you can adjust your strategy accordingly, whether it be focused on new or used inventory, to find your favorable balance.
Inventory Turn Rates
On average, you might have a 60-90 window for new and used inventory. If your goal is to shorten this timeline, it may be time to consider a new strategy. What if you developed a better way to inform and entice customers about each newly available model, the moment it was ready for a test drive? What if you could create an ‘introduction’ strategy across a variety of marketing platforms and social media to highlight freshly landed inventory? Imagine if your sales team were responsible for promoting the latest trade-in, or hot-off-the-truck vehicle. Generating awareness ongoing of available selection, in a variety of styles and price points, might help reduce the time those vehicles spend on your lot.
Managing Wholesale Revenue
As you review your wholesale strategies, you’ll consider both volume and profit. The metrics that are most important in managing your volume include pre-owned certified capabilities, state safety inspections as applicable, and whether or not the inventory is a brand your dealership can retail. On average, profits can be anywhere from $300-$1000 per vehicle. Managing your wholesale cars might not have you thinking immediate profits, but it can play a significant role in your dealership’s overall margins. Breaking even versus taking a loss on wholesale units can keep those margins in the black. What these metrics can also do is help you look at operational processes that could be costing you. Identify your volume trends, too. As consumers are driving their vehicles longer, you may see an increase in your wholesale volume. If you’re taking in more wholesale units than years past, you can plan for a streamlined cost-management strategy to help you breakeven and come out ahead in 2020.
Appraisal to Trade Rates
This metric, determined by your ratio of total appraised vehicles to the number of vehicles traded, is a pivotal indicator of how well your used department supports your new vehicle department. Your appraisal to trade rates will probably always be fluctuating as sales and vehicle values will vary. If you’re in the high 20% to low 30% range, consider yourself among the healthy average. If you see your appraisal rates dropping over the last two or three years, it could be an indication your market is experiencing a shift. Other contributing factors to lower ratios include packs and aging of used inventory. It may be helpful to take a deeper dive into your appraisal process itself. If you’re appraising early on in the sales negotiation process, you may be experiencing a lower ratio, simply because you’re appraising more than you’re trading. You can also strategize with your appraisal and sales teams directly, as they tend to be the individuals responsible for monitoring these metrics.
What You Can Learn Beyond Gross ROI
Gross ROI is typically a key metric for dealership owners. It provides a snapshot of your profitability and can often offer perspective into your strategy. It’s also a big one for goal setting, as you evaluate your ratios for your past and present years. You understand that selling a $10,000 vehicle with a profit margin of 10% may be a reasonable number. Some experts suggest your return should be within $2 and $3000 per car. You also understand that how long it took to sell that vehicle can have a significant impact on your GROI. Profit margins can be even lower with online sales due to intense competition. If you’re looking to grow your GROI, be targeted about where you strategize for solutions. Look for those areas that offer the broadest range of growth potential. You may not have much control over your online margins, but you can brainstorm for ideas on how to reduce your time to sell, as an example.
Variable Cost to Market
Another set of numbers you might be looking at right now involves your variable cost to market. The retail value of your inventory versus the associated costs will vary dealer to dealer, based on your metro or non-metro markets. The most profitable dealerships engage in best practices to reduce those costs. They also implement aggressive strategies for high-value acquisition of vehicles. It may be helpful for you to piece out your specific variable costs and look for ways to shorten the gap. Revisit your reconditioning process, pack, or transportation efforts. Put a magnifying glass to your how you acquire vehicles, as well. There may be an opportunity to make significant changes to your existing process, to see real cost to market improvements next year.
Seasonal Big Picture
It’s essential as you review your year-end metrics that you look to identify seasonal trends as well. Did you see critical pitfalls in any of the aforementioned data points at specific times of the year? Knowing when the numbers rose and fell can help you prepare for 2020. It can also help you with your particular market and buying trend perspectives. Diving into the numbers is one step, but being able to take a step back to review fluctuations, can be another measure. This can also help you create your goals and benchmarks for next year.
Evaluating with Annual Data, Making Changes with Daily Steps
When it’s time to sit down and carve out your goals and strategies for 2020, be sure to break down specific methods of attainment. Be precise about new process direction and include each of your departments in launching any significant changes. To you, you’re looking at the overarching growth and profitability of your dealership. To each individual team member, daily, weekly, and monthly goals speak to their duties specifically.
It’s that time of year, and for many dealership owners, the metrics can be overwhelming. Instead of comparing 2019 with 2018, and announcing a ‘let’s get these numbers up’ type of approach, think outside of the box. Look for trends, opportunities to improve processes, and create an easily attainable path to success. A fresh look on old stats can be the key to unlocking your dealership’s best growth potential in 2020.