DETROIT — Dale Pollak likens himself to a doctor who has a prescription to fix used-vehicle departments. The remedy does not go down easy.
“It’s going to be really, really, really distasteful,” Pollak tells dealers. “It’s going to be hard for you to take this medicine.”
But take the medicine they must, if they want to be profitable in what the vAuto founder is calling “the new truth of used-vehicle profitability.”
Pollak, who also pioneered the widely used method of velocity inventory management — in which inventory is supposed to be turned as quickly as possible — has been evangelizing a new approach. So far, dealers seem slow to catch on, but eventually they’ll have no choice, he said.
Pollak spoke with Automotive News here about this and what he says is a “hole in the used-vehicle universe,” which he also details in Gross Deception, a new book.
The title refers to dealers being deceived not only by a flawed view of vehicle-inventory time but by a perception of vehicles’ front-end gross profit as a measure of their net profit or return-on-investment contribution.
To alleviate the pain of relatively new market realities, Pollak’s cure calls in part for a rolling, 30-day total retail sales count to dictate how much inventory should be bought; rather than dealers stocking up on cars to sell, they should sell to stock up.
Many dealers instead have a 2:1 stock-to-sell ratio as part of a widely used best practice.
Pollak said he’s now found that just more than half of the vehicles dealers acquire hold little, if any, margin potential on day one.
He began to realize there was a problem a few years back when dealers increasingly came to him and said the velocity method was not resulting in the profits they had come to expect — even as they were selling more used cars and trucks.
Pollak and colleagues began to dig into the issue. They came across some alarming data from the National Automobile Dealers Association: Dealers’ average retail net profit per used vehicle had dropped from $203 in 2011 to $65 in 2016. Then, in 2017, the figure fell to -$2. Also around that time, he found that most vehicles lost their profit potential in only about 30 days, instead of 60.
Pollak said a solution to all of this is to forget about calendar time when selling vehicles. He has helped create Provision ProfitTime, Cox Automotive software that launched in 2018 that rates vehicles based on their potential profitability.
The software uses an algorithm that weighs three factors — and not necessarily equally:
1. The cost the dealer acquired the vehicle for.
2. The vehicle’s demand vs. supply.
3. Its availability in the retail market.
The software then assigns a platinum, gold, silver or bronze rating to the vehicles.
Dealers should be pricing platinum vehicles higher, relative to their average selling price, and discounting bronze ones to get rid of them as quickly as possible. But most of the dealers Pollak has been meeting with have been doing the opposite, he said.
Pollak said about 700 dealers signed up for ProfitTime last year, including some Penske Automotive Group stores. “I don’t think there’s more than 200 dealers that have un-inverted that pricing profile,” he said. “That’s the bad news. The good news is the ones that have and balanced the [inventory] equation are experiencing hard-to-believe outcomes.”
So if it’s the clear answer, why not convert all vAuto software customers over to ProfitTime? It’s a fair question, Pollak said.
“But here’s the problem: I can’t believe that if I just give them new software, they’ll behave differently, because they won’t,” Pollak said. “They have to understand why they need to do something different.”
Then, even if dealers understand that, the journey is very difficult, he said. When dealers are asked to make decisions based on “profit time” rather than just calendar time, it typically calls for a 180-degree change in an approach to vehicle inventory they’ve maintained for years.
Pollak acknowledged that he played a large role in shifting inventory-management habits of dealers, beginning more than a decade ago with his velocity method. He said the method was not wrong — it worked for a while — but certainly is not the way dealers should be doing things any longer. The next transition may take another 10 years to take hold.
“This is going to be at least a decade of industry transition, but they’re all going to do it. I have no question,” Pollak said. “They’re all going to do it. Because it’s fundamentally right. It’s fundamentally rational. And what they’re doing today isn’t working.”