Retail: Volume over Profits????

We can have both if we think differently.

Volume over profit was the right approach in the past because it proved to feed all profit centers of a dealership in normal times; however, in an appreciable market with the supply chain constraints like they are, we must think differently. For example, the amount of scrapped used vehicles minus the new vehicles added into the market is negative. With the latest from the OEMs, we are set for two more years of restricted new car supply. In a business model where acquisition is required for every sale to happen, we have to be very cautious in a continued volume over profit mentality.

There is no question this philosophy works tremendously well in a normal market to feed all profit centers by shaving a little front-end margin; however not when acquisition cost continues to rise, and it will for some time. This is a demand-driven phenomenon but NOT from consumers. The demand for used cars is driven by dealers, and it is driving the acquisition price up. This will not change until the new car supply-side changes significantly.

Why are dealers driving up the acquisition price? It is simple. The shortage of new car supply is driving dealer’s demand for used inventory to fill their lots. Consequently, the cost of acquisition is rising and will continue to stay high long after consumer demand softens. If consumers were driving this demand and the associated cost of acquisition, the retail price would be rising just as quickly. It is not.

Here is the good news. In this unique market, we still have the opportunity to feed other profit centers. We just have to think differently. We can grow our revenue through added reconditioning of older inventory acquired that we are retailing. We will also be servicing older inventories that are staying in garages longer and will need additional maintenance and repair. F&I is finding new areas of opportunity in the service department, in the leasing of used vehicles, and in additional extended warranties for the older cars being retailed. As an international economist, I see profit over volume with a sharp eye on servicing those aging vehicles as the winning strategy for the future.