A Disturbing Trendline in Used Vehicle ROI

Across the country, most dealers have seen their used vehicle gross profits decline this year to essentially land where they were in 2019, before the pandemic.

Back then, the front-end gross profit average for public dealer groups was about $1,430. Today, the front-end gross profit average for public dealer groups through the third quarter runs about $1,600.

Some might see these numbers and think: Well, that’s not so bad. It’s five years later, and the data shows the groups are making more gross on a per-car basis.

But this quick assessment only scratches the surface. Yes, the gross profit in pure dollars might look better, but are dealers today realizing a richer Return on Investment for used vehicles than they did in 2019?

To answer this question, I asked CoPilot, Microsoft’s generative Artificial Intelligence tool, to help paint the comparative ROI picture in used vehicles in 2019 compared to today. I primed CoPilot with a couple data points that are necessary to calculate ROI—the average cost of investment, the average amount of time it takes to sell the investment and the gross profit the sale of the investment produced.

For the average cost of investment, I used Manheim’s average MMR for 2019 ($12,848) and its current year to date average ($18,928) as proxies. (Note: The average investment cost for many dealers currently runs closer to $25,000; the MMR average doesn’t capture any additional costs dealers typically ascribe to individual vehicles.) For the time it takes to sell an investment, I used 45 days. I drew the gross profit averages from public dealer group financials. Here’s what CoPilot produced:

2019: The annualized ROI for a $12,848 investment that sold in 45 days and generated $1,432 in front gross is 135.6 percent.

2024: The annualized ROI for for a $18,928 investment that sold in 45 days and generated $1,600 in gross profit is 82.9 percent.

This decline in used vehicle ROI signals a disturbing trend: Dealers must pay ever-higher amounts to acquire and retail used vehicles, while the front-end gross profit averages they achieve for selling these higher-cost investments isn’t significantly different. We can also reasonably presume that the average used vehicle investment cost in the future will be higher, and the ROI you achieve will be lower, assuming you do nothing different.

As I’ve shared this portrait of used vehicle ROI in decline with dealers, it often catches them by surprise. Many judge the strength and success of their used vehicle departments based on the average gross they produce and the number of vehicles they sell. They don’t consider ROI as they manage each retail used vehicle investment to its sale. They don’t judge an individual used vehicle deal based on the ROI it produced. They don’t evaluate ROI as they assess the financial performance of their used vehicle departments.

I consider the near-total absence of ROI awareness among dealers as a significant problem and opportunity. It’s a problem if you don’t do anything different in the way you acquire, manage and retail vehicles. Over time, as investment costs grow and market conditions put pressure on gross profits, some dealers will find themselves exactly where they were in 2019—moving a lot of used vehicles but not making any money.

The opportunity rests with tackling the ROI trend head-on. If you understand how to manage each used vehicle to achieve its optimal ROI outcome, you’re doing everything you can to proactively maximize the money you make for each investment and the used vehicle department. That’s exactly why the vAuto team and I developed ProfitTime GPS and the ROI-focused Variable Management strategy it supports.

My next book, Invested, goes into greater detail on how dealers can seize their own ROI opportunity. The book will be available at the upcoming NADA convention in New Orleans.

In the meantime, I’d encourage dealers to evaluate how your used vehicle ROI has changed over time. While your numbers might be different than those I’ve shared here, I think you’ll agree that the analysis and findings are cause for concern and perhaps a catalyst to find a new way forward.

The post A Disturbing Trendline in Used Vehicle ROI appeared first on Dale Pollak.