Definitive Guide to Sourcing More Profitable Wholesale Vehicles

Thank you for your interest in becoming a better, more profitable auction buyer. The fact that you’re seeking new insights to improve your wholesale sourcing efforts puts you ahead of other dealers who are content to do what they’ve always done at auctions and hope for better results.

As your recent auction experience likely attests, the wholesale marketplace is much different today. True, the physical auctions still function the same way — dealers arrive early to size up the merchandise, the cars move down the lanes and hit the block, the auctioneer starts to riff, your heart rate rises, and the bidding begins.

But if you look a little closer, there are key differences. Today’s auction buyers, whether in the lane physically or online, increasingly come armed with technology — mobile devices that help them build a specific buy list, evaluate the cars they know they need and may want to purchase, create bidding strategies for each unit, track available units across multiple lanes, and understand each unit’s retail profit potential every time the gavel goes their way.

In short, there’s been a steady shift toward efficient, smart and sophisticated auction-buying in recent years, due in no small part to increased competition among franchise and independent dealers to get the cars today’s customers want to buy. You could say that while the nature of the auction game hasn’t changed, the way you play the game has changed significantly.

That’s the purpose of this ebook — to offer you insights into the ways top-performing franchise and independent dealers have changed the way they source wholesale vehicles. In the following pages, you’ll discover five best practices to become a more effective and efficient buyer, and make more money than you used to on auction-purchased inventory.

Thank you again for being a student of the business and taking time to sharpen your wholesale sourcing game plan.

— Dale Pollak

Introduction from vAuto Founder Dale Pollak

Dale Pollak Founder, vAuto

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You could say that while the nature of the auction game hasn’t changed, the way you play the game has changed significantly.

“A lot of dealers look at their inventories and say, ‘I’m used to selling this many cars, so I need this many cars.’ They don’t pay as much attention as they should to the specific vehicles they really need for their inventories and markets. We’re a lot more disciplined. We know the colors, equipment and mileage that matter most for specific makes / models / model years, and how long it’ll take us to retail the unit if we acquire it. We’re very purposeful and laser-focused on potential profit. We believe our process provides competitive advantage.”

This comment comes from the used vehicle manager for a Penske Automotive store in the Southwest. It illustrates what could be described as rising reliance on market-based data and science among dealers to guide their wholesale sourcing efforts.

More and more, dealers don’t simply trust the instincts of a longtime buyer or manager, particularly when their desire to grow their used vehicle sales volumes necessitates taking their inventory beyond the handful of makes and models that traditionally perform well.

Know the Cars You Need, with Specificity

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These dealers and used vehicle managers typically invest in technology to help them identify the wholesale vehicles that make the most positive, profit-based impact on their dealerships. The tools deliver personalized streams of available inventory and provide three important insights about any wholesale vehicle:

1. The right characteristics: Nuance matters in today’s market, especially when internet-enabled buyers can easily compare cars and know if your car is really as distinct and special as you may claim it to be. The best tools allow you to make car-to-car competitive comparisons to understand whether color, condition, equipment, mileage, age or price will move the needle at retail in your market. Armed with these insights, dealers typically make fewer purchases for the wrong vehicles.

2. The retail turn time: Dealers have come to rely on assessing each vehicle’s market days supply metric to understand, right up front, how a potential auction vehicle will fare in their market due to competing units. This metric measures the relative supply/demand data for specific vehicles in a given market — the higher the number, the longer it can take to sell the vehicle.

Sometimes, if the market days supply is attractive enough, the dealers know a vehicle merits paying a little more than they might prefer to acquire it. “I’ll pay extra for a vehicle with a market days supply below 70,” says the used vehicle director at a three-store group in the Midwest. “I know I’ll make a little less on the front end, but I’ll sell the car quickly and pick up back-end and service gross. I’ll take that deal all day long.”

A recent study of top-performing dealers across the country shows that they average a market days supply of 69 for their overall inventories.

Know the Cars You Need, with Specificity (cont.)

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“ “I know I’ll make a little less on the

front end, but I’ll sell the car quickly and pick up back-end and service

gross. I’ll take that deal all day long.

3. Vehicle financials: It’s increasingly common for dealers to use a “retail-back” approach to determine how much they can pay for a particular auction vehicle. That is, they’ll assess the current retail market, the competing cars and prevailing retail prices, and then subtract their expected gross profit and related costs (e.g., buy fees, recondition, packs, transportation, etc.) to figure out how much they can pay and the potential profit.

Industry experts recommend that dealers strive to acquire wholesale inventory with a cost-to- market metric of 84 percent. This benchmark allows a 16 percent spread between the acquisition costs and prevailing retail prices.

The best wholesale sourcing tools do the cost-to-market calculations instantly for every vehicle, giving dealers an immediate view of the opportunity and risk inherent in any car before auction bidding begins.

Know the Cars You Need, with Specificity (cont.)

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An independent dealer outside Minneapolis recently shared that he’s cut his acquisition costs for cars at auction by about 10 percent in the past six months.

How? The dealer looks for specific units across a wider network of auction sources.

“In the past, I never really looked beyond our local auctions,” says the dealer, who retails about 80 units a month.

But, with the help of technology that shows him available vehicles across the country, he’s now buying vehicles from auctions he never previously considered.

“I bought a minivan from Phoenix the other day for 15 percent less than I could have acquired it here, even with transportation,” he says. “I used to think I didn’t need to go beyond my backyard, until I saw the cars.”

This example illustrates that reach brings richness when it comes to wholesale sourcing.

Expand Your Reach; Reap the Rewards

A recent survey asked 100 franchise and independent dealers how they’ve changed the way they source vehicles at auction.

The findings (see box, this page) suggest that an increasing number of dealers recognize that the local auctions they know and trust aren’t as productive or profitable as they used to be — and that online auctions offer the most efficient means to expand your wholesale sourcing reach and rewards.

How has your auction sourcing process changed in the last 12–18 months?

We’re going to more auctions than we used to.

We’re buying a few more cars online than we used to.

We don’t go to physical auctions; we only buy online. Our process hasn’t changed.

15% 31%26% 28%

3 Best Practice

“I get so impatient and tired of losing cars, I just buy them.”

So goes the reaction of many dealers and used vehicle managers to today’s auction-buying experience. It’s symptomatic of the increased competition in the lanes and online. It’s also a frame of mind that often results in over-paying for auction vehicles.

The key? Sticking to your game plan, even if it causes anxiety and heartburn. The fact is, used vehicle margins in today’s market are too thin for you to let emotions cloud a good investment decision.

An independent dealer in Texas proactively primes his buyers to view losing cars to other bidders as part and parcel of what it means to be a better auction buyer in today’s market — an approach you could call “failure-focused auction acquisitions.”

The dealer says, “Our motto is we need to look at four times the average amount of inventory other buyers will look at every day. We have to appraise three times as many vehicles as the average buyer, and we have to be unsuccessful at a three-times-greater rate. When we do this consistently, we’ve looked at quadruple the amount of cars and triple the number of appraisals, and we get the inventory we need.”

The dealer uses sourcing tools to “make my buyers more and more efficient so that they can do this every day and not kill themselves. The ultimate goal is that they spend their time not in searching for cars, but becoming the best buyers, so that when they know the right car and the right price, and where it’s located, they can get the car.”

Buy with Discipline, Not Regret

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“The fact is, used vehicle margins in today’s market are too thin for you to let emotions

cloud a good investment decision.

4 Best Practice Dealers are increasingly linking compensation for used vehicle buyers to the actual retail performance of the vehicles they acquire from auctions.

The compensation plans typically incorporate one or both of the following features:

1. Accountability to purchase parameters: Dealers use technology / tools to set minimum expectations for purchasing vehicles within the cost to market, front-end gross profit objective and other parameters they build into their auction purchase business plans. The buyers might receive a maximum bonus if their purchases reflect the parameters 95 percent of the time or more, with smaller, tiered bonus amounts paid when purchase histories reflect a lower rate of purchase parameter compliance.

2. Days to sale: Some dealers reward buyers when auction-purchased vehicles retail within the timelines they set for purchased units. Such bonus payments typically inspire collaboration between buyers and in-store managers to ensure pricing

decisions strike a balance between meeting gross profit and inventory turn objectives.

Hold Buyers Accountable

5 Best Practice

There is always a risk involved in acquiring a vehicle at auction. Maybe you missed a flaw during your appraisal. Maybe the condition report lacked the accuracy you expect. Maybe your buyer bought the wrong car, or the right car with the wrong color or equipment.

Whatever the case, today’s wholesale environment offers dealers options to mitigate the risk of buying vehicles from auctions. These include:

No-risk buying: Vendors like DealShield offer guarantees that give dealers the ability to return vehicles that don’t meet their expectations or perform as expected.

Arbitration: All auctions offer some type of arbitration to address problems with auction-purchased vehicles. Dealers say these services have improved over the years, as auctions increasingly focus on dealer purchase loyalty and preference.

Such services can help dealers minimize the number of problem cars entering their inventory. But once you own the car, it’s your job to protect the investment.

Protect and Manage Your Investment

5 Best Practice

An industry study of more than 7,000 dealer inventories shows that up to 70 percent of aged units (defined as vehicles more than 60 days old) started as auction purchases. This finding suggests that dealers could do a better job of treating auction purchases as what they are — an investment that’s generally more costly and risky than vehicles you take in on trade or get through other sources.

The most profitable dealers meet this challenge by creating pricing strategies that apply to auction purchases. Generally, these pricing strategies result in more competitive price positions from Day One, to help drive a faster retail sale and mitigate the risk of market exposure / volatility for their investment. In addition, some dealers apply a separate inventory turn benchmark to auction vehicles, striving to retail these vehicles within 30 days to maximize their profitability.

Protect and Manage Your Investment (cont.)

“ “Generally, these pricing strategies result in more

competitive price positions from Day One, to help drive a faster retail sale and mitigate the risk of market exposure / volatility for their investment.

Quick Summary on Sourcing More Profitable Wholesale Vehicles

1. Know the Cars You Need, with Specificity

2. Expand Your Reach; Reap the Rewards

3. Buy with Discipline, Not Regret

4. Hold Buyers Accountable

5. Protect and Manage Your Investment

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