Reconditioning as a Profit Center
Do you include Reconditioning gross profit when you are evaluating the success of your Used Vehicle department? Should you? In our experience, most dealers are salespeople at heart. Their main focus is on Sales and while Fixed Ops is “important” to most, very few dealers have an office in the Service department. So when evaluating the success of a Used Vehicle department, it is no surprise that most operators will track retail gross as it relates to the deal (front-end and F&I gross). If reconditioning ever comes into the equation, it is usually as a cost that hinders gross profit as opposed to a profit center. Let’s try to look objectively at the reconditioning process and see if this makes sense:
Imagine you get a trade-in that is a little rough around the edges. It is a model line that sells well in your market but there is a lot of work to put into it. Plus, you probably had to step up on the trade to make the deal work so there is very little wiggle room.
What do you do? Step up and do the reconditioning, aware that you may not make much money selling the vehicle? Or do you just cut your losses and wholesale the unit right away? If you decide to recondition the vehicle, do you set your retail price according to the money you have in the unit and your gross target? Most of you reading know what the right answer is, but the majority of you do not actually do what you know is right. Why? Because it’s hard. Not TOO hard, just hard. But that is not a good excuse, so let’s look at the different steps where things break down in this process.
1) You paid too much in the first place. You did it “to make the deal work”, which is OK if you worked the deal hard, but you handcuffed your future self to feed your present self. Why would you ever pay more than the fair market value for a vehicle? If you have to step up to make a deal work, you should be stepping down on the front-end gross. If you are over allowing on the trade-in, you make your Used Vehicle department look incompetent when it is really your New Vehicle department that can’t hold gross. Either that or you didn’t end up buying the unit because there were too many question marks. Rather than put it on the hoist and get an accurate idea of what you are looking at, you sent the customer packing, robbing the whole store of multiple profit opportunities. If you are under allowing on the trade in and unwilling to “step up” you aren’t even in the game….
2) Assuming you did buy the unit (albeit for too much), you decided to wholesale the vehicle. You did this because you knew it would be a headache in the long run so you wanted to save yourself the trouble. At least you are aware of your shortcomings. But in doing so, you probably lost money on the deal and gave gross profit to someone else (do you think your wholesaler doesn’t make money on the “junk” you sell them?). And remember, you are the one complaining that there is no good inventory to stock on your UV lot these days.
3) Let’s say you did decide to retail the unit. Good for you! But here’s what you probably did – you probably put as little recon into the vehicle as possible. This way you can still get your $2500 front-end gross that you need to make yourself sleep at night. Assuming you were priced well enough to generate interest online, almost every customer that comes in to see the vehicle will know that you didn’t do the necessary repairs to the vehicle and it will sit there for months, irritating you more and more every day. Either that or you will end up dropping your pants to move it, meaning no one made money.
So what should you have done? Well, it’s not our place to tell you how to run your business. So whatever you chose is the right answer because it’s your business. What we can tell you is how our more profitable UV operators (who are almost always our more profitable overall operators) would do.
First, they would cost the trade-in according to the market. If they have to “step up” on the trade, they will show that to the customer but ultimately take it off the new unit. This will allow them to make honest, smart decisions on their used inventory. It will also make everyone work the deal as hard as possible.
Second, they would do the reconditioning necessary to make the vehicle Retail Ready. Not everyone has the same definition of Retail Ready and it often changes depending on the mileage and age of the unit. But it rarely means skimping on the unit to make the numbers work. These dealers will recognize that gross profit from Fixed Ops is the same as gross profit from Sales. If they can make $3500 gross on reconditioning a unit and break even on the sale, guess what? They still made $3500! Plus they get a shot at F&I, potentially picking up another trade and a new customer in the process.
Finally, they would price the vehicle to sell as quickly as possible. UV losses come from improper acquisition (discussed above) and poor pricing policies relating to aged inventory (discussed in a previous post). Your customers don’t care what you have in the unit, don’t price as if they do.
Think of this: There is a customer that comes to your Service department on a daily basis. They do anything you tell them to do (which would only be things they needed to do since you are honest people). Every time they come to your store, you give them a list of what needs to be done to the vehicle to be Retail Ready, and they do it without asking a question. What a great customer! At stores that get the value of reconditioning, this is their UV department.
A key thing to recognize with this mentality is that your managers will likely fight you every step of the way if you try to implement this mindset. Why? Because they are protecting their paycheck since you are very likely paying them on their department’s profitability alone. Your UV manager could care less if you and the Fixed managers make $3500 in reconditioning; they don’t see a cent of that. Unless of course, you change their pay plan to focus on dealership profitability. Then, the UV manager would be happy to load up on reconditioning if they know they can sell a Retail Ready unit in today’s market. Moreover, that initial “stepping up” to make the deal happen probably would not have been as painful. Since the New Vehicle manager also gets paid on Used Vehicle profitability, they probably would work the deal harder to protect that future opportunity.
Long story short, there is a lot of money in Used and Recon, and there are still so many stores that don’t recognize their opportunity. Don’t take it from us – just look at your Used Vehicle and Fixed profitability on its own and ask yourself: Am I leaving [a lot] of money on the table? If you are like the majority of the stores out there, the answer is an emphatic YES!