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An Area of Concern for Franchise Dealers

 

“But then I asked “How much is it per car?” And nobody knew the answer.”

Franchise automotive dealers pay hundreds of thousands of dollars per year in auction fees and to our surprise, we found that few actually knew how much these fees are affecting their bottom line. Fewer still had a line item on their financial statement for the expense. Which is amazing considering the average dealer spends $208,000 per year in auction fees.

In this short article, I will discuss the benefits of understanding the true cost of auction fees, expenses and management costs.

 

Vehicle Disposal Method

For decades now, dealers have elected to take their unwanted inventory to auction instead of wholesaling directly to local wholesale buyers. There is certainly some convenience and advantages to the practice; for one thing, it frees up lot space and exposes your cars to more buyers. But the convenience has its consequences including 3rd party costs (fees and expenses) and used car manager absence while he or she is away from your dealership at auction (see MAA Manager at auction for details on that topic)

 

Wholesale Accounting

For the most part, dealers account for auction fees in two ways:

 

  1. Dealers who don’t track it at all. In other words, they just log the net check that they receive from the auction against the cost of the car.

Most auctions provide a cost breakdown with the check is you ask for it, but most, by default do not. Possibly because it’s easier not to make it obvious how much the dealer is paying or just because the dealers are not asking. Either way, you should change your company accounting process to include a breakdown of your total auction expenses.

 

  1. Dealers who track it but don’t discuss the expense. I run into this situation a lot. It’s very typical for the accounting office to track expenses in great detail but no one is actually doing anything with the data. In many cases, the auction expense is hidden in some other total such as wholesale expense or in some cases charged against the cars as marketing or even goodwill.

 

The Info is there if you just ask:

“This was an example of how profitable groups sometimes don’t notice glaring expenses because the profit keeps rolling in masking the underlying issues.”

 

16873927 – a perplexed businessman

Recently I visited a large Midwest dealer group and was excited to hear that they did actually track auction expense. But then I asked, “How much is it per car?” And nobody knew the answer. The room actually became so quiet, I thought I would hear crickets. The used car manager from one of the stores said: “I think it’s $175 per car.”

I don’t know about you, but “I think” usually sets of alarms for me, that leads to a full forensic accounting of the item he is guessing about.

So I asked if we could have the office manager join us. They called down to the controller and after a moment she walked in the room and of course, she knew the answer immediately.

 

Smirking she said, “We pay between $195 and $325 per car depending on which auction we take it too. Manheim is way higher because they are further away and shipping is quite expensive”

Just to give you perspective, this dealer group was shipping 85 cars a week to wholesale auctions, that’s 4,420 per year and paying somewhere between $861,000 and $1,400,000 in auction expenses and the used car managers actually guessed at the answer.

This was an example of how profitable groups sometimes don’t notice glaring expenses because the profit keeps rolling in masking the underlying issues.

 

Now before you jump up and down and start yelling at your managers, it’s somewhat your fault for not making this an area of focus for your team.

 

A typical average size dealership will offload 6-15 cars per week at auction and a small dealer group may take as many as 45-75.

Let’s use 25 as a base number for the sake of this article, simply plug in your weekly count to assess the costs for your own group or single point.

Depending on how well you have negotiated with your local big box auction you will pay somewhere between $125 and $275 in sellers fees. You may also have been able to negotiate reduced transportation fees, we see them as low as zero to as much as $300

So let’s look at just the base expense 1st.

25 per week X $175 average fee + $50 Average Shipping = $5,625 per week or $292,000 per year.

 

Factoring Auction Sell Rate into the Equation:

“We actually paid $1,300 for the privilege of losing $5,500, that’s messed up.”

Everything I mentioned above assumes that you sell at 100% which the auctions never do, in fact, average auction sell rate is 55-67% so you may find that your wholesale manager takes the car to multiple auctions to get the unit sold.

There are other factors, including arbitration fees and arbitration losses when you lose the argument.

I spent some time with that accounting manager I mentioned above, she showed me an auction expense on one particular car that she had saved in her drawer as an example. (She was just waiting for someone to ask)

In the example, she gave me a late model diesel pickup, had over $1,300 in auction expenses, then the truck sold at a $5500 loss. She smirked up at me. “We actually paid $1,300 for the privilege of losing $5,500, that’s messed up.”

In this case, the truck was moved three times to three different auctions each time getting lower bids. And each time incurring expenses. The group paid for two vehicle details (cleanings), three “gassing” surcharges plus shipping, not to mention they had a seller’s rep at each one of the events which cost $100 per run.

This is an extreme example, I know we should never make a case on an extreme but you have to admit, it’s a compelling reason to get a handle on these expenses.

 

What can be done about auction expense?

You can only correct what you measure, so your starting point should be to get a handle on the “true” cost of your offsite auctions.

Look to cut costs by negotiating with your local auctions or better yet run your own auction. With the software available today, there are 100’s of dealers running electronic bid sale auctions online, you may be able to eliminate the expense entirely. (for more on running your own dealer auction click here)

 

 

About the Author:

Co-Founder / Writer / Serial Growth Hacker

Kevin Leigh co-founded Dealer Simplified, LLC, a company dedicated to simplifying automotive software. The goal of Dealer Simplified is to jump-start the profit centers in dealerships while keeping the processes and software simple and easy to understand and implement.

Kevin is also an accomplished author and is passionate about writing and blogging. His latest novel, “Gollup the Woods” was inspired by the stories he heard from his father on their many trips through the Irish countryside.

Kevin currently resides in Alden, New York with his wife Mary and their three boys. Leigh spends his spare time volunteering with various community organizations.