How independent dealers can beat the margin crunch with technology and tools | vAuto
After some very profitable years, many dealers are feeling the pinch of shrinking margins and rising costs. In a market that’s changed a lot in just two years, how are independent dealerships
supposed to stay ahead of these challenging trends? Unfortunately, the market is what it is, but what dealers can do is take a step back and look at other ways they can improve efficiency and gain more financial flexibility, freeing them up to see more dealership profitability, even when margins shrink. This post will explore some pain points commonly encountered by independent dealerships today, as well as some solutions dealers can use to overcome them.
CHALLENGE 1: DEALERS NEED INVENTORY
As customers’ purchasing power has dropped, dealerships have started focusing on older, less costly vehicles. At the same time, the auto industry has pulled back its production of new cars, meaning dealerships are having to compete more and more over fewer vehicles. That means independent dealerships are having a harder time acquiring the inventory they need, with the supply of used vehicles standing at just 45 days, a 3% drop from last year.1
The solution:
The first thing independent dealers should do is start thinking beyond their local auctions when it comes to sourcing used vehicles. Online auctions can be a great resource, with huge volumes of vehicles available. In fact, the sheer number of cars on some auction sites can present new problems if a dealer doesn’t have the right tools to quickly determine which vehicles are most likely to turn a profit for them. Products like vAuto’s Stockwave can help independent dealers look farther and wider for profitable vehicles, using live market data and a retail back pricing approach to ensure dealers understand exactly how much to pay for each car. With Stockwave and tools like it, it’s easy to find the cars you want and buy them for a price that’s right for your bottom line.
CHALLENGE 2: FLOORPLAN COSTS ARE HIGH
The price of acquiring used vehicles is climbing, and the resale value of those cars is shrinking: The value of used cars has fallen 11.3% over the last year alone.2 That squeezes independent dealers in several ways, but one of the worst is floorplan interest. With rising interest rates and declining margins from sales, dealers can see their profit evaporate fast as cars sit on the floor. Even dealers who are happy with their capital costs can face reduced profits if their floorplan partners can’t help them streamline away inefficiencies that are keeping cars from getting sold as quickly as possible.
The solution:
Independent dealers need lending partners that are flexible and agile, growing with the dealership and helping to manage their costs with an eye to future growth. With savvy floorplan financing, dealers are able to efficiently manage the acquisition and sales of used vehicles, more easily bridging the gap between buying a car for resale and realizing profit on it. Look for lenders who offer flexible financing and pricing, giving your dealership more options when it comes to avoiding margin compression. Partners like NextGear Capital are a great choice for independent dealers, with flexible, customizable lines of credit and tiered pricing plans that help dealers stay nimble, efficient, and profitable.
CHALLENGE 3: MARGINS ARE DISAPPEARING FASTER
Retail prices for used cars have dropped 5.9% just this year,3 and traffic and profitability have continued to decline from recent highs.4 Coupled with rising interest rates, that’s put a lot of pressure on independent dealers to move vehicles fast, before depreciation and floorplan fees eat up all their profit. But without accurate data and the tools to interpret it, pricing to sell can be a shot in the dark — and when going with the wrong number can mean cars sitting on the lot long enough to turn into losses, guessing isn’t good enough.
The solution:
That’s where data comes in — tools like vAuto’s Provision® use live market conditions and dealership data to price cars so they sell for a profit before the margin evaporates. Tools like Provision also work well with the retail back pricing strategies outlined above: By using market data to price used vehicles based on desired profit, independent dealers can avoid sinking money into cars that could wind up costing money when depreciation and floorplan costs are taken into account. When dealers are able to acquire and sell used vehicles for the right retail price, they can maximize their margins and lock in revenue before a vehicle's profit potential disappears.
DON’T GET SQUEEZED BY SHRINKING MARGINS
Ultimately, beating the margin crunch takes some flexibility and ingenuity. Independent dealers will have to think critically about the ways they handle key facets of their operation like inventory management, floorplan financing, and data analysis. But with the right technology and the right partners, dealers can get a competitive view of the market, properly appraise and price vehicles, and move them before depreciation eats into profit. That way, they can stay ahead of trends that put a damper on their bottom line and keep seeing profits, even when the competition isn’t.
To learn about how vAuto’s new innovations can support your inventory management strategy and profitability, request a demo today.
SOURCES:
1. Cox Automotive Auto Market Report: May 29th
2. “Wholesale Used-Vehicle Prices Increase in First Half of May.” Cox Automotive, May 2024, https://www.coxautoinc.com/market-insights/mid-may-2024-muvvi/
3. Pollak, Dale. “Are Your Used Vehicle Prices Right for the Current Market?” Like I See It, May 2024,
https://www.dalepollak.com/2024/05/are-your-used-vehicle-prices-right-for-the-current-market/
4. “U.S. Auto Dealer Sentiment Improves in Q1, but Current Market View Remains Weak as Profit Pressures Replace Inventory Woes.” Cox Automotive, March 2024, https://www.coxautoinc.com/news/q1-2024-cadsi/