As of mid-year 2018, used vehicle sales by new vehicle dealerships had exceeded $750M, according to NADA. The average dealership picked up a fraction of this amount—$9.6M, to be precise. Industry leader CarMax sold 721,512 used vehicles, taking home $14.3B in sales during its fiscal 2018 year. An added 409,000 vehicles were sold at CarMax wholesale auctions.
A couple of important takeaways from that data: first, CarMax currently leads the pre-owned vehicle industry. Second, it is leading with just under $15M in sales—less than 2% of the overall figure stated by NADA—as of the publication date of the company’s report. In other words, the largest player in the used-car market has become the frontrunner with under 2% of market share. That leaves in the neighborhood of $735M in revenue from pre-owned vehicles spread across the nation’s 16,794 franchised dealers—not to mention almost 11,000 licensed independent retailers. It is, to say the least, a highly fragmented market.
New vs. used
It’s also a highly lucrative market. Recent data shows that while used vehicles comprise a third or less of sales for dealerships, they account for about a quarter of the gross profit. Conversely, new vehicles bring in well over half the overall sales—and yet the resulting gross profit is only slightly above that of their used counterparts.
In other words, dealers can make almost double the profit from used vehicles that they will from brand-new models. A number of factors contribute to this: since dealers have considerably more leeway with pricing on used inventory, they can utilize reconditioning to increase vehicle value—and, of course, they are able to determine how much they’ll pay on trade-ins from consumers.
But not if customers aren’t bringing their used vehicles to the dealerships to trade.
Not so fast
According to recent AutoLoop analytics, customers are now holding on to their vehicles significantly longer before deciding to repurchase. An analysis of trade-in activity over 100,000 vehicle purchases showed that the average age of a trade-in one year ago was 5.1 years. But in 2017, the average age was 4.7 years, and in 2016, just 4.5. In fact, data indicates that the age of a trade-in vehicle is increasing by 6% each year.
In addition, consumers have more trade options than ever before—without the new vehicle dealer being involved. As a result, dealerships are seeing less and less of their most profitable inventory. And while vehicles are also sourced from auctions, individual trade-ins don’t carry the burden of auction fees, nor are they nearly as likely to be inventory that another dealer didn’t want.
Listening to the buyers
Let’s go back to the first takeaway. Currently, CarMax leads the used-vehicle industry, and its growth is continuous. After opening 15 new locations during fiscal 2018, the company ended the year with 188 used car stores. Another 15 are slated to open this year. Despite the impact from consumers trading less frequently now, CarMax still grew total revenues by 8% last year. What is the magic formula?
Surprisingly, it’s not that complicated. In the company’s own words, “CarMax continues to lead the industry by making the entire customer experience more simple and seamless.” The corporation’s annual report goes on to detail the many improved procedures, technologies, and offerings presently in the works, all aimed at reducing the complexity of the trade-in process and prioritizing transparency for every consumer. While the “customer experience” may sound like a worn-out cliché to many dealers, it doesn’t change the fact that today’s buyers do demand a different trade process, they want a transparent experience – and they can now choose companies that provide both. That means dealers should embrace that reality if they want to be successful.
Let’s be clear, consumers aren’t flocking to CarMax because they’re getting a premium price for their trades. The reason most customers choose CarMax is synonymous with the company’s goal: shoppers want buying a vehicle to be a simple, seamless, painless experience, and they would clearly rather sell their own vehicle for less, if need be, than face the potential hassles of haggling at a traditional dealer.
Check look-to-book ratios
It’s a fact that appraisal-to-delivery ratios are critical to raising profit. That is, when dealers increase appraisals, they’re generally able to buy and sell more units. Plus, they rely less on auctions, which helps reduce the cost per sale. Regularly measuring the look-to-book ratio is key, because a dealer appraising 20 vehicles and trading for 10 has a fairly healthy 50% look-to-book ratio—whereas a retailer that appraises 20 cars and only trades for 5 is clearly missing some sales opportunities.
In those cases, it’s worth looking at ways to improve appraisal effectiveness to close the sales gaps. And since creating the simplest, most transparent experience has proven to drive trades, the appraisal process will naturally be an integral part of that. With the right tool, dealers can easily deliver this experience to every customer.
For dealers using the Trade-In Valet solution, appraisals couldn’t be simpler. Customers fill out a quick, four-step appraisal form on the dealer’s website and within minutes, they get a guaranteed evaluation backed by the dealership. Because Trade-In Valet utilizes actual third-party appraisal experts that specialize in a particular segment, customers receive accurate, guaranteed cash offers in a fraction of the time—on their terms, before visiting the dealer.
Not only is it far simpler for customers, it’s also much easier for dealers. Evaluating trade-ins costs time and money, and the Trade-In Valet appraisal experts help retailers save both with fast, market-based pricing on every deal. That means fewer auction fees, less wholesale loss, and no frozen capital for dealerships, as well as smoother sales overall.
The real payoff, however, comes with the accrual of higher-quality inventory. By trading directly with customers rather than sourcing trades from auctions and wholesalers, dealers can build the pre-owned inventory they want while offsetting competitors and driving more gross profit per sale. As well, retailers can maximize this advantage even further by ensuring a competitive mix of new vehicles—and then leveraging those back into their pre-owned offerings at a later date.
End with an edge
Going into a potential purchase with an easy, straightforward appraisal is one of the best ways to convince customers that the rest of the purchase experience can be equally transparent. In fact, successfully alleviating their fears about getting “ripped off” on their existing vehicle is arguably the fastest – and most effective – method of building the trust necessary to close the sale. Since the appraisal is one of the most emotional and contentious phases of the car-buying process, by making it a positive experience, you can drive future service and sales opportunities as well as profitable referrals down the road. And Trade-In Valet is one of the only solutions in the market today that can provide this crucial ease and transparency, while giving consumers the hassle-free, straightforward experience they demand and deserve.
Insights | January 05, 2021