Margin compression is in the news again. Heard at NADA: GMs are concerned about margin compression and their ability to earn a living.

We have been speaking about the persistence of margin compression throughout the pandemic years — and urged dealers in February 2022 to heed the signs and sharpen pre-COVID selling, inventory management and customer relationship skills.

A 2022 Bureau of Labor Statistics report reminds us that from the 2007 to 2009 recession — and through the onset of the pandemic in 2019 — “car and truck dealerships faced an economic shock and compressed profit margins on new vehicles.” Late last year, the Kerrigan OEM Survey noted that while new vehicle gross margins would remain above pre-COVID levels, “dealership earnings will still decline over the next 12 months.” CarEdge Data pointed out that February inventory supply ranged from two weeks to two years.

Margin compression affects every department of your dealership, notably used car reconditioning and used car appraisals. 

These two critical variable functions are integrated today. How do you manage margin compression here? With a focus on predictable outcomes.

Used Car Reconditioning

A reconditioning speed of three to five days, from acquisition to frontline readiness, is the efficiency gold standard. Faster reconditioning gets used cars frontline-ready in fewer days, reducing holding cost drain on sale margins.

Holding cost overhead today is around $50 per car per day (more for high-line vehicles), collecting from purchase to when you sell the car. A 10-day reconditioning average equals a $500 holding cost against sale margin. Reduce time-to-line speed by half, and holding costs are halved as well.

If you recon 150 cars a month, the monthly holding cost on those cars is $75,000 or $37,500, depending on how you manage recon’s ability to push back margin compression — a loss you can control predictably.

Other disciplines the recon shop can hone to fight margin compression include:

• Buy and trade cars smartly, considering all elements to make wise decisions. Buy or trade knowing these cars’ reconditioning costs, sale histories, aging data and sale-price points. Steer outcomes from these vantage points.

• Use recon intake detailing and mechanical inspection sheets so cars move forward today rather than tomorrow or Monday.

• Develop staff skills related to people handling and the sales-to-service handoff, and present visual reconditioning details that build value and confidence in your used cars and your dealership.

Used Car Appraisals

The latest revolution in strategic time-to-line vehicle reconditioning is how it gives auto dealership general managers the power to close the trade appraisal gap.

Predictable profit per vehicle is zero sales cost due to little or no disparity between estimated and actual reconditioning costs. Would the ability to narrow this gap to a few hundred dollars help push back margin compression?

Achieving consistency with trade appraisals has long proved difficult. This problem has been — and continues to be — a problem for used car profitability, particularly regarding mechanical repairs. If discovered too late, missed repair needs can kill any profit opportunity for reselling the trade.

When you acquire a vehicle to make a reasonable profit, I assert that your investment must not be “upside down.” 

A manager estimating $4,000 in recon who will spend $1,000 on that car is lowering the car’s value and hoping to steal a trade. Managers who estimate $800 for recon but spend $2,500 have a gross profit problem.

For example, my 10-year-old Buick Enclave is in perfect condition with 80,000 miles, but before I took it to one national retailer to appraise, I cleared the OBD-II trouble codes. Their appraisal did not notice these resets. Had it, they would know the car presented with $2,000 of engine and sensor repairs the dealer would pay to address to sell at retail.

Oversights and mistakes like this happen too often during the trade appraisal — and $500 to $1,000 of profit per trade is left on the table.

We realize that appraisal decisions are driven by market conditions, vehicle desirability and other factors that depend on several variables, including individual appraiser experience. Appraisals present risky blind spots that, if misunderstood or unknown, create upside-down deals from the start. Newer appraisal technology that provides vehicle system diagnostics detail, accurate recon parts and labor costs pulled from the recon system help narrow the appraisal gap and fight margin compression.