Most of us grew up in the industry where PUVR (or Per Used Vehicle Retail) was the key metric we were looking for to determine how successful we were on each vehicle we sold. As we all know, things have definitely changed since the Internet has become the primary way our customers begin their search for a used car.
For the last two years, I have had the privilege of teaching and coaching our NCM dealer-clients’ managers at the NCM Institute. Of all the great work we have the opportunity to do, there is nothing quite as satisfying as seeing the look on those used vehicle managers’ faces, often accompanied by their GM or GSM, about how money is actually made in the used vehicle department in today’s market.
As in every class, we begin with accountability management and leadership opportunities. Then we examine the dealership’s profit opportunities, using a 20 Group composite and the Profit Trend Analysis. We look to see if the dealership is profitable or not; whether it has sold more or less vehicles year over year; whether its PVR is greater or less year over year; and then, whether the all-important total departmental gross profit is greater or less year over year.
Then we have them work through a number of spreadsheets using their own dealerships’ numbers, to calculate their dollar day and unit day supply of inventory. We show them that their dollar and unit day’s supply need to be very similar, meaning they are selling what they are stocking. Day’s supply, ideally, is between 35-39 days. What we typically see is dollar day’s supply being higher than their unit day’s supply, meaning the lower cost of sale inventory dollars and units are turning faster, leaving the higher cost of sale inventory dollars and units to turn slower and becoming the root cause of aging issues. Then we have them calculate the turn rate of their inventories. As stated above, a 35-39 day’s supply or lower is what the best operators are achieving, which is 10-12 times turn per year. What we typically see in our classes is a 60 day’s supply, or a turn rate of 6 times a year. This is why aging issues are so pervasive in most used vehicle departments.
Next we have them calculate a number almost no one takes into consideration: Daily Holding Cost or Opportunity Cost. That is the cost the dealership has for each vehicle in stock, each and every day. This is done by taking the YTD total used vehicle departmental expense, subtracting the variable selling expenses (Sales, Sales Management & F&I Comp, Policy & Delivery Expense), then dividing that number by the number of month’s data they are working with. Then they multiply their average amount of retail units per month by a factor of 1.33, which gives them the equivalent of a 40 day’s supply of vehicles. That number is divided by the amount of days the used vehicle department is open for business. That number equals the one day cost to carry each vehicle.
The look on most managers’ faces at this point is priceless. We have seen some holding cost numbers as low as $19 per day and as high as $57 per day, with the average around $27-$35. Many managers initially believe lowering this number is the first thing they need to do. We tell them, assuming that all used vehicle departmental expenses are in line, the most important takeaway is to know this cost exists per day, per vehicle.
So what does this have to do with the Return on Investment (ROI) on each vehicle we sell? In order to know that, we need to know the net profit on each vehicle sold first. That is done by taking the gross profit of each deal and subtracting the daily holding cost, then multiplying by the amount of days to sell the vehicle. This is where our students begin to see that the amount of days we take to sell a vehicle has more effect on the net profit than the amount of the vehicle’s gross profit.
The calculation to determine the ROI on each used vehicle sold is: Deal net profit ÷ cost of sale x 360 ÷ days to sell = ROI.
EXAMPLE: $2,000 (deal net) divided by $12,000 (cost of sale) x 360 divided by 22 (days to sell) = 272% ROI. In class, to further prove the point, we experiment with changing the deal net up or down a bit to see the effect on the ROI, which is not much. Then we change the days to sell to more match their average turn rates, like 60+ days, and here is what we see. $2,200 ÷ $12,000 x 360 ÷ 60 = 1% ROI. The deal net was the same, but we took 60 instead of 22 days to sell. Sound familiar? But do your grosses or DEAL NET hold up when you sell a vehicle at 60 days? Usually, not. Are you also possibly paying big spiffs at that late date?
Now you know why ROI on each vehicle retail is more important that gross per vehicle retailed; and the days we take to sell them is more important than focusing just on front end gross. I often tell these managers as they are about to head home, “Go back and say, ‘Boss, I now know what my most important job is…to get the highest ROI on each vehicle we retail.’” This is perhaps the most important concept these managers learn, and it will make all the difference in their impact on their used vehicle departmental profitability.
There are so many other pieces to puzzle to ensure profitability. Put it all together with structured training through the NCM Institute!