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Analysis: The factors that are critical to dealers’ level of profits

What are the factors affecting dealers' used car margins over recent months?

To help identify these, where better to start than with the dealer networks who are working hard to retain every profit opportunity available?

We asked whether used vehicle profit margins were dir-ectly relative to either the type of vehicle or its benchmark value. The answer may surprise some. Only 20% of dealers we questioned agreed that retained vehicle profit margins are linked to the actual vehicle itself or the cost of it.

A much more significant 55% attributed the level of profit primarily to the actual ‘sales process’ and how that is managed within the business. The remaining 25% put shrinking profits down to either preparation costs increasing or changed customer profile.

The economic circumstances of many consumers will have an impact and one dealer reported that customers were ’skimping’ on servicing costs and routine maintenance to save money. This means an increasing number of part-exchange cars coming through the doors have missed routine services. In some cases, two or three-year-old cars have not had any servicing since the initial PDI.

This view is supported by many dealers, who complain that the problem is not confined to private cars and that a significant minority of cars from other remarketing sources and suppliers are also missing important service history.
All of this impacts on dealers in a number of ways. One of them was very noticeable near the beginning of this
year, when there was very strong competition for those few cars that could really be described as ‘clean’, forcing dealers to pay what many saw as over the odds for reasonable stock. Not only is a more expensive trade price likely to put pressure on a final margin, so too will the increased preparation costs.

Improving the offer

There may be some good news for dealers in these statistics, though. Trade values and preparation costs are out of their hands, but 55% believe the most critical factor is the sales process and that is something over which they do have influence.

Our graph below demonstrates that during the previous 12 months, the margins between average selling price and the CAP Clean values have been relatively level, with some increases and decreases from certain sectors such as the city car where we have previously written about the increased penetration from more prestige manufacturers.

We are all familiar with statements from inside and outside the dealership, such as “poor quality sales advisers and weak management”, plus observations like “when demand is greater than supply, retailers still discount the first offer to the customer”. But it is a frightening fact that only 5% of customers buy at the first offer from the retailer.

Regardless of whether you are a dealer selling just 20 cars or more than 100 per month, every £100 per unit can make a huge difference to the business. There are always improvements that can be made, support that can be requested and systems that will help, but overall, since the 1980s, not much has changed in the motor trade. In the end, the fact remains that it is people, price, process, promotion and product that drives profit.

Compete on more than price alone

Competition to appear in the search engines as the cheapest is here to stay for many and this has doubtless taken a massive toll on profit per unit. Nor can dealers do anything to avoid the consumer continuing to be better informed – in some cases more so than the professional.

But there are businesses that manage better than others in this area so it is clearly possible to compete on more than just price. It may require harder work, but it is also possible to manage the problem of sourcing cars more smartly and paying the right price, rather than just jumping into a bidding war for stock.

These are some of the things the 55% who rightly recognise process as key are already tackling.

by Philip Nothard, CAP retail and consumer valuation editor

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  • - 12/09/2012 09:03

    Price is important to the consumer, but rationalising and adding emotion to the buying decision is far more important. Or else, we would all use the cheapest phone, the cheapest TV and the cheapest sofa. And all drive Kia Picantos. Dealers selling largely identical cars by largely identical methods and identicit company images and "values" in a race for the cheapest price are making a mistake. Far more important is to add emotional value to the sale (either tangible or intangible). If a customer is extremely happy with the car transaction and feels warm inside, price becomes far less important. There are so many aspects to a sale apart from the price and a lot of the time - by poor process, communication, management and experience, the customer will revert to the price as the only justification for buying the car. At that stage, it has gone badly wrong. So many sales methods irritate customers. These methods need surgery. Just get rid of them. Everyone has roughly the same cars at the same prices, so you need to differentiate. Getting to the top of search engines is an example of where dealers lack creativity and intelligence. Throwing money at it, and discounting prices is a recipe for disaster. So is subjugating control to a 3rd party like AutoTrader. That's long term disaster. For instance, my advertising spend and Google spend is £NIL. Customers need to be encouraged by far more than price and the usual asinine claptrap about the cars and the most blatant "CHEAP CAR" Google listing. Dealers should use far more intelligence to make people WANT to click, WANT to talk and WANT to transact. Give customers the control they want and they become happy chappies. Cutting overheads and increasing efficiency and avoiding mistakes is another way of building in profit. Yet few dealers take the Ryanair/LINGsCARS approach to costs. Dealers spend like it is Christmas. Using the web efficiently means an awful lot of overhead can be slashed, while adding emotional value and happiness. But dealers still insist on traditional face-to-face and phone contact with traditional salesmen, and go no further than using email as a 21st century option. This is very poor. Yet dealer spend is big (mainly on sh1te) and many dealer group resources are massive. In my case just two people can manage 300 concurrent customers and with use of technology, an intelligent adult communication sausage machine, good systems backed by multimedia (eg video communication), entertainment (while waiting for new cars for weeks/months), lightning fast responses (current time 2 mins 46 seconds), full written transcripts of conversations, easy methods of document upload and completion, etc etc, (which delight customers) still provide a service the customers regard as the best sales experience they have ever had (never mind best CAR sales experience). When I have the head of retail at Matalan telling me it is "transformational, best sales experience ever", something is right. There is so much more that can be done, but so few dealers do it. Car buying is an emotional experience, so why not deploy emotion? It is free. It's no good just moaning about margins. Ling LINGsCARS

  • jimreidvehicle - 12/09/2012 09:41

    Firstly, I would like to congratulate Philip from CAP for such a well written article and how true the article is. Yes price is important, but regardless of how cheap you are, the web will allow your customer to find the same or similar car cheaper elsewhere and the love telling people about it, however once there is a fault with that car who do they turn to, the place they purchased from all 400 miles away? We offer a local service for local people, and therefore don't need to be Top of Google's "used car 2 search nationwide that saves spend on SEO, obviously helping cost's and profit's! These local people then tell more local people to deal with us, and this "bird dog" approach is FREE, also you will only have customers referring their friends and family to you if you are doing the job right! So yes, price is important, but "value for money" is what customers want, not the cheapest, the best for the money they are prepared to spend and they are willing to spend that bit more if you make them feel comfortable with the sales process and ultimately deliver the promise's you have made during this process to the after-sales situation. If we sell a car that is still under manufacturer's warranty, our promise to our customers is , that as long as that car is under warranty , if there is a problem with it or if it requires are-call then we will take the car to the Franchise Dealer to get fixed under warranty and in the mean time we supply a Loan Car completely FREE of charge and insured for their use! NOW THAT IS CUSTOMER CARE! and customer's once they know about this are prepared to pay a wee bit more to give them peace of mind and hassle free ownership. We also make the process easy, fun and understand the emotion that is involved in buying a car, not only this but we have utmost respect for what every customer is spending, let it be £2000 or £20000 (none of us in the trade should ever forget this) I agree with Philip that apart from technology, advertising and the better product not much has changed in the Motortrade since the 80's, which is quite unbelievable but true. To show that our business model works we have sold more cars in the first 8 months of this year compared with previous years, we also have sold more extended warranties (which get a FREE loan car too),had the largest finance penetration and had the largest % of repeat and referral customers to date and not to forget we have retained more PROFIT! So we must be doing something right!

  • UmeshSamani - 12/09/2012 10:30

    UMESH SAMANI Excellent article and good responses. Too many dealers are simply trying to sell on price hence we hear of so many dealers going bust. As Jim said a lot of it is back to basics respect your customers, treat them ‘like how you like to be treated’ I’ve always said I’m NOT the cheapest and never will be I provide good old fashioned service and back up. I Have a good reputation locally for providing High quality , handpicked , genuine cars with outstanding back up service. Jim your business model definitely works – The impressive results and having seen and experienced the way you look after customers speaks for its self. You clearly know what YOUR customers want and provide it.