A Book Review
by David Ruggles and comments in italic by Mike Smitka
Dale Pollak’s third book, “Velocity Overdrive,” is another winner and is must reading for dealers and any student of the auto business. That includes auto manufacturer executives.
Dale’s ability to put into words the changes the industry has been experiencing has helped hundreds, if not thousands, of auto dealers, both new and used. He has rightfully pointed out that the delivery of information via the Internet has brought “efficient market” economic principles to the pre-owned business in particular, compressing available “spread.” New data driven management methods that are based on rapid inventory turn at lower, but real world gross profit for the specific market, actually produce considerably higher total gross profit through higher velocity, a concept difficult for some to grasp. In some areas of retail the benefits of sacrificing margine to increase inventory turns is commonsense. Automotive retailing is catching on: Daily, market realities are making believers out of skeptics.
My favorite chapters include 8, “Dealership Department Silos,” and 14, “The Extra Mile in Reconditioning.” In these chapters Pollak dares to challenge long and stubbornly held beliefs that the pre-owned department exists to be pillaged by the fixed operations departments. After all, it was thought, sales people and managers sell from their cost, not based on any kind of rational retail market value. And gross profit booked by charging retail prices for internal reconditioning, or “retail recon,” is retained regardless of what happens to the used vehicle, they thought. There are dealers who have followed this “retail recon” policy for another reason. They would rather pay management compensation based on fixed operations rates than sales manager rates. The Internet has changed all of that. Dealers still in denial on the issue especially need to read this book!!
In my mind, the idea that “you can’t manage what you can’t measure” has cost dealers a lot of money. What one could have gotten, should have gotten, but didn’t get, is never quantified. In “econo speak” that means “opportunity costs,” or opportunities unrealized. Figuring opportunity costs is hard, sloppy comparisons and the failure to dig up relevant data abound. There's less excuse for the following common errors in our internet world: Trade-ins under bid and/or units wholesaled instead of retailed because of “retail recon” cost money that can’t be totaled. And many dealers remain oblivious of this fact. My own piece on this blog on the issue can be found here.
The pre-owned business has long been a combination of art and science. The science side has become more important than ever although some old dogs like me might think things have gone overboard in some cases. For example, I’m not thrilled about managers failing to walk around a vehicle and actually drive it before hanging a number on a trade-in because they are relying on an appraisal tool. But then neither is Pollak. Some managers think all they need is their technology driven appraisal tools.
As far as science is concerned, Pollak has already conceived and implemented the most essential and highly used technology tools in use in the industry. His company, vAuto, now offers a new technology tool called Provision®, an inventory management tool. It distills market data into management metrics that dealers and used vehicle managers use to easily and quickly understand the risk and rewards inherent in every vehicle.
Looking forward, Dale dedicates a chapter to trends that will result in further margin compression for dealers. Younger buyers are more internet enabled then older ones and they have different values than older generations. They don’t think in terms of the value a dealer relationship offers them. They tend to be ruthless in their pursuit of the best price, using the internet to obtain it. Unfortunately, in the middle of this generational driven trend OEMs are pressuring dealers to build ever more expensive facilities in an era when consumers are less willing to pay for them. Increasing fixed costs when margins are falling does not lead to a happy ending. Pollak cites Glenn Mercer’s comprehensive study on the subject on behalf of the National Automobile Association (here on the NADA site).
This book is well worth the investment even if a dealer only reads the chapter, “A Peek Inside Dale’s Crystal Ball.” Dealers who ignore Dale’s advice do so at their own peril. Increasingly, the “efficient market” that is the auto business will tend to leave only the leanest operations standing. For a Dealer in search of significant ROI, buy the book and read it.
A sensible policy for a developing country is to import used cars. That ends up using less foreign exchange than importing knocked-down (KD) parts kits. However, it doesn't create the highly visible jobs of a car plant. It also is subject to false invoicing, since it's hard to find an objective standard to make sure importers aren't evading taxes or using artificially high prices to surreptitiously transfer funds overseas. (Many developing countries have foreign exchange controls and a black market for foreign currency.)
Japan has long exported used cars, as domestic regulations encouraged owners to scrap vehicles by their 10th year, even if they were low mileage. That's one reason their brands are well-known in Southeast Asia, and why jeepney makers in the Philippines favor Japanese engines – the lack of a good used car market in Japan makes good used engines cheap. Now the "sha-ken" regulations eased circa 1994, but the used car market remains "thin" so plenty still get exported.