Even as new-vehicle sales slow and margins tighten, dealers can turn to the used- vehicle department to find a "wheel of fortune" that can keep profits on the upswing across the dealership.
At least that's used-car guru Dale Pollak's take. For Pollak, a Cox Automotive executive vice president and founder of inventory management software provider vAuto, a successful used-vehicle operation begins "to change the way we think about making money in the dealership."
Not only are used vehicles an important profit center, but the used-vehicle department is often a catalyst that supports other parts of the dealership. Used-vehicle sales offer opportunities to build revenue and profits in the service department and the finance and insurance office, for example.
It's a winning formula that dealers are increasingly seeking to use.
"If you said, 'What's the most important part of the retail operation?' I'd tell you, 'It's the used-car sale,' " said David Hult, CEO of Asbury Automotive Group, the nation's seventh-largest new-vehicle retailer. "If you're a very strong dealer that does a good job with pre-owned, you can be more aggressive on new because you're taking in more trades. Your margins are higher on used. You're taking in more parts and service, and you have F&I. It moves all the needles in all those departments."
For instance, reconditioning trade-ins to get them retail ready helps boost the service shop business, Hult and other dealers say. And F&I managers can more easily sell service contracts and maintenance plans on vehicles that are out of warranty, so F&I profit per vehicle rises. Used vehicles also typically generate more gross profit per unit than new vehicles. Through the first eight months of 2018, average gross profit per used vehicle retailed at franchised new-vehicle dealerships was $2,377, compared with $1,949 per new vehicle, according to the National Automobile Dealers Association.
1 to 1
Those benefits make it worthwhile for retailers to bulk up their used-vehicle business. Used-vehicle experts encourage dealers to target a 1-to-1 used-to-new vehicle sales ratio. The dealership has much more operational control in the used- vehicle department vs. the new-vehicle department, Pollak said. New-vehicle profits often depend on meeting sales targets set by automakers and qualifying for per-vehicle factory bonus payments.
"In any business, to the extent that you can be self-reliant and not dependent on vagrancies or whims or disasters caused by others, I think you're a healthier business," Pollak said.
Karmala Sutton, used-car manager for Honda of Kenosha in Bristol, Wis., said dealers who achieve the 1-to-1 ratio are the "Yodas" of the business.
Pre-owned profit
| Since at least 2014, franchised new-vehicle dealerships have earned higher gross profit per vehicle retailed on used vehicles than on new, and the spread is growing. | |||
| Per used vehicle retailed | Per new vehicle retailed | Variance | |
| Through August | |||
| 2018 | $2,377 | $1,949 | 22% |
| 2017 | $2,337 | $1,959 | 19% |
| 2016 | $2,415 | $2,066 | 17% |
| 2015 | $2,444 | $2,152 | 14% |
| 2014 | $2,418 | $2,124 | 14% |
| Source: NADA | |||
"The people who do 1-to-1 are very good at what they do," she said. Honda of Kenosha is striving for that target but isn't there yet — its used-to-new sales ratio is 0.67 used vehicles for every new vehicle sold.
Still, the dealership itself is the service department's No. 1 customer because of reconditioning demand, she said. "When you keep all your business in-house," she said, "the house wins."
Following Pollak's wheel of fortune analogy, Sutton notes that a used-vehicle sale touches every department.
"When I take my car to the shop, I have my parts department [benefiting], technicians have work to do, the service department is receiving a vehicle to work on," Sutton said. "F&I gets … to provide customers with additional coverage on their vehicle."
Crucial opportunity
Dealers identified the used-vehicle business as a stimulant for growth years ago, said Alfred Khouri, general manager at DCH Millburn Audi in Maplewood, N.J. "Now it's becoming more and more of an opportunity that's crucial to our survival because of the thinning new-car margins that are almost nonexistent," he said.
As automakers seek to become more involved with car buyers, especially new-vehicle buyers, the used market offers retailers a chance for a more exclusive relationship with customers, added Khouri. His store is part of Lithia Motors Inc., ranked No. 4 on Automotive News' list of the top 150 dealership groups based in the U.S.
"For used-car buyers, that relationship is just you and the customer," he said. "There's no manufacturer in between."
Such exclusivity breeds a more direct relationship between the dealer and the customer and creates more loyalty to the store, Khouri said.
More than 60 percent of DCH Millburn Audi's new-vehicle sales are leases. But with used-vehicle sales, the store can shop many banks and credit unions, rather than limiting finance sources to the captive and the few banks that offer leases, he said.
"To the F&I department it's all about touches," said Khouri. Audi and other automakers offer a warranty that often lasts three to four years, which can limit F&I product sales on new vehicles.
But a used-vehicle buyer financing for five to seven years doesn't "want that extra unpredictable bill that might come. So you're looking more closely into an extended service contract," Khouri said.
AutoNation Inc., the country's largest new-vehicle retailer, has made used vehicles a big part of its brand extension strategy launched about six years ago as a way to offset shrinking new-car margins. Those extensions include AutoNation auctions, standalone used-vehicle stores and collision centers and branded F&I products, parts and accessories.
CEO Mike Jackson called dealership operations "an integrated virtual circle strategy."
Having more affordable parts to recondition its used-vehicle inventory gives AutoNation a more competitive offering for consumers, while high sales of branded F&I products bring customers into the service department, Jackson said. That builds AutoNation's fixed operations business.
"The only thing I can't control is the new-vehicle business," he said.
Stability through downturns
And the new-vehicle business won't change anytime soon, said Eric Flow, president of management services at Flow Automotive Cos. with dealerships in North Carolina and Virginia.
"Lament it or don't lament it, but it's not changing," Flow said. "In a world of increased transparency and a flattening SAAR and lots of supply coming out of manufacturers, there is never going to be new-car gross margin again in the way that it was."
With new vehicles, dealerships offering the same brand are selling a fairly homogeneous product, Flow said. But each used vehicle is different from the next, which can give one dealership an edge over another, he said.
A healthy used-vehicle business is also essential as the economy fluctuates, said Lithia Motors CEO Bryan DeBoer. A deep understanding of used vehicles will help dealerships succeed through those economic shifts.
"It allows you to take out any disparity that comes with a new-car brand. If you're between product cycles, it allows you to take out that fluctuation. It drives margins," DeBoer said. "It's a big part of our entire life cycle of consumers to bring them into the used-vehicle realm [and] to be a bridge to the new vehicle as well."
Strong used-vehicle operations also contribute to Lithia's reconditioning business with internal vehicle reconditioning making up nearly a quarter of the company's used-vehicle department's profitability, he said.
Savvy dealers recognize that the departments within a dealership can feed each other and boost overall store profits, with used being a major driver of that strategy.
From there, Pollak said, "it becomes a virtuous cycle."
Jackie Charniga and David Muller contributed to this report.