Hunting for Gross Profits

September 10, 2019

By Mike Cavanaugh, Executive Vice President at MAX Digital

Hunting for profit is a pretty universal theme in business, but in the auto industry, especially on the retail front, it's got its own special set of challenges. Within Automotive, the retail sector has had the most compressed margins. A recent McKinsey study shows the gap in return between the S&P 500, automotive manufacturers and automotive retailers and notes that dealership stock returns have been performing weaker as a result of that margin pressure. It’s a great visual reminder that the margin pressure you have been feeling is real.

dealership stock returns mckinsey

Within retailing, the new car business just isn't what it used to be. In our 2019 Profit Study, 60% of dealers reported that new car profits were down over the past two years by an average of $170 per vehicle. Changes in consumer behavior and competitive challenges compound this pressure. So how do you continue to deliver the financial results you need for your dealership day in and day out?

There are three areas that I consistently pushed on as the COO of a large group, and a retail data strategy that helps them all. Let me start with that data strategy. If your organization doesn't have a specific person who is focused on continuous improvement of your consumer-facing data, you need to change that today. All the information for merchandising your vehicles continues to grow in importance. Your data supercharges everything.

Automotive merchandising data is your calling card, and it is where we spend most of our waking hours at MAX Digital (and our predecessor companies of FirstLook and INCISENT Labs) over the last 20 years. Our company was created to bring the power of retail analytics to Automotive, having no idea at the time that the analytical foundation built into FirstLook, and consistently improved at MAX Digital, would be the core driver of success for search, marketing, and sales in the information age. We were just ahead of our time.

A quick personal example. I have 2 kids, and they are both getting bigger. I need to upgrade to a larger SUV. This is my wife’s vehicle, so she’s been looking for a Ford Expedition. There are a few “must-haves” for her. Leather seats (kids stain things), Captains Chairs in the second row (kids fight), lane departure sensors, a backup camera (kids are distracting) and running boards (it’s a big truck). She must search for this vehicle while spending most of her time with a 2-year-old girl, so all the search is done on a mobile device. Where does she start her search? Google. When she lands on a dealership’s site, she looks for these specific options, first on the VDP with features and options, then on to the description. If she still can’t tell from there, she looks at the pictures. If she can’t tell from there, does she fill out a lead to ask? Does she call the dealership? No. She doesn’t have time for that, like many others today. So, she continues to look at other dealerships’ websites until she finds one that was properly merchandised. Now, how many Ford dealerships do you think missed her business? I live in Metro Detroit, where there are 31 Ford dealers, and I can tell you a lot of them did. If you don’t think you have a problem here, just check out your own website and see how well you can identify important features like these on your VDPs and photos.

So let’s assume you’ve got merchandising data covered. My number one place to dig in to gain profit is holding price on used vehicle sales. Notice I said hold. Put the best price you can out there and support it. We are in a no-haggle world now. You no longer have a choice. A price will be shared on your vehicle or one just like it, so you need to understand the value of your vehicles better than anyone else and share that openly with your customers and your sales team. You should focus on the operations for getting each vehicle record online as quickly as possible with a picture, a complete detailed factual description, and a price.

Don’t try to embellish, this is an informational battle. Plain language wins. It’s how people search and how people will judge whether or not they can trust you. More is more here. If you have done work on the car, let people know that. If they know the tires are new or even that an oil change has been done, that might tip them to purchase from you rather than another dealership or a private party where maintenance is in doubt. Know that they are going to compare everything your vehicle offers to the market, so make it easy for them.

I hear a lot of objections on sharing price with the implication that sharing price is going to drive lower profits, but everything we’ve seen would suggest it’s just the opposite. Below are the full year 2018 stats for CarMax, Carvana and the market.

Second quarter numbers shared by Carvana indicate they have topped their goal of $3,000 per vehicle in gross profit on a volume baseline that continues its hypergrowth. No-haggle pricing is clearly not a loss driver and it sets up a really positive dynamic in store. Your sales staff now just needs to demonstrate the value and deliver on exactly what was presented online. The shopper elected to come in, they are already indicating they like that SUV at the price noted, now all you need to do is to solidly support every bit of that value by arming your staff with merchandising tools that allow them to know as much as, or more than, your potential buyer.

The next place I turn to increase gross is collaboration on the trade. This has been one of the biggest wins for our clients over the last year. Ironically, by physically bringing the customer into the process and passing the iPad (and control) into their hands, they lower the value of their car.

What our dealers have reported is the on a 10-point scale, their customers typically rate their car as an “8” and that generates a 20% discount off the reference third party value and naturally delivers a lower valuation. Across the initial testing of MAX My Trade, we’ve seen some overwhelmingly positive results with a 47% increase in front end gross, at the same time that it has driven gains in customer satisfaction and close rates. Some of that success is the tool, but a lot of that success is the empowered, positive, transparent position you put your sales staff in. People behave better on both sides of the transaction when treated with respect and dignity. They get a chance to bond and they frankly come to a better economic outcome without that combative environment of the past.

The final area you should look to for profits is making your vendors work harder, all of us. I understand that as a vendor, I shouldn’t be saying that, but we have earned (and kept) most of our business in head-to-head road tests. We like the challenge. It makes us constantly improve and we know that at the end of the day our relationships are based on delivering results day in and day out. So, test your vendors on how they grow revenue. Run one store on one vendor and another store on another. When you find a winner, switch a store to the new vendor, but don’t turn off the old - so you can run a single store on two platforms to test results further. Prove who is better in driving total volume and revenue. Then use them.

Don’t forget the cost side. Volume and revenue gains are terrific, but not guaranteed. Cost savings drop directly to the bottom line and make you a hero in delivering that profit in margin-compressed times. The lowest cost is not always the goal you are looking for; it is total value delivery. In tests this year, MAX was able to demonstrate both a gain of over $400 per vehicle and deliver a savings of roughly $30K per store per year. That’s the trifecta win you need where revenue and volume are growing and costs are shrinking.

Within vendor management, in addition to the pure financial gains you should be pushing for, what are the softer benefits you can get? Can an agency partner stretch and deliver more thought leadership or testing for no additional cost? How can they expand their service delivery without expanding cost? Are there recommendations, partnership or support they can offer in the broader market that add value without added fees?

It’s tough out there. There is no easy way to deliver the results your organization is asking of you, but there is a way.

Mike Cavanaugh serves as the Executive Vice President at MAX Digital. He grew up working with his father at a dealership in Detroit, MI. He joined the United States Marine Corps, serving two tours in Iraq. When Mike returned to the automotive industry, he worked his way up from selling cars to managing dealerships in Metro Detroit. He spent 8 years working at one of the largest auto finance companies in the United States and served as the Chief Operating Officer of a 28-store dealership group with operations in nine states.