Advantage: Independent

By: Jeff Hatch

July 09, 2016

With NIADA CPO and the Internet Creating a Level Playing Field, Independent Dealers’ Low Overhead Gives Them an Edge in the Used Car Market
 
Last year was one of the best retail sales years in car business history. And looking forward, sales in 2016 and beyond should benefit from the wave of full employment, low interest rates and low fuel prices to continue knocking down strong years. So where does the independent operator fit into this sales boom? How do owners in this segment of the market maximize their dealership value? 
 
As new car franchises hit record numbers, the trend creates opportunities for independent sales organizations. But the question is: How can you capitalize on those opportunities when they are presented?
 
The Internet allows independent dealers, no matter how small, to compete on an even playing field with mega-franchises. 
 
It is important to know that new car franchises look for one-to-one new-to-used sales. They’re currently running at about .02-to-one used-to-new, according to NADA data. 

With used car prices at an all-time high, according to Edmunds.com, and new car dealers renewing their efforts to conquest used car customers, independent operators needs to be prepared for the future — not only to gain market share, but to keep what they have.  
 
On the Internet, the small operation is the same size as the largest dealer. If an independent operator takes advantage of his opportunities while diminishing his competition’s added value, the independent dealership can compete very well with new vehicle showrooms. 
 
When looking at how to best capture a percentage of sales generated from the big-box retailers, it is always wise to examine the advantages and disadvantages of your position versus local new car dealerships. 
 
The biggest and most obvious difference is the facility. New car franchises are required by their OEMs to meet certain specifications in order to remain a franchisee. 
 
Those cathedrals to car sales look great and attract customers, but in the final analysis add nothing to the value of the vehicle purchased. In addition to that zero value, the future and present state of the auto industry relies heavily on Internet sales, which makes these structures almost obsolete. 
 
The costs of building and maintaining the facilities at most franchise lots are astronomical. And because the new car business is so competitive, the franchise stores’ profits from their new vehicle departments are minimal. That means the costs must be paid for through used car sales, the service department and increasingly higher profits in service contracts. 
 
The overhead advantage works in favor of the independent used car dealer.
 
This is the best news for independent dealers. A small lot can be just as spectacular as the largest franchise on the web. 
 
If the independent dealer can get his message out to customers, he has a chance to take one or two new vehicle customers and some used customers from a larger dealership. 
 
One very important statistic to keep in mind is that a new car purchaser will consider a used vehicle instead 59 percent of the time – if the used vehicle is certified. 
 
That creates an opportunity for a used car dealer to capture new car business. 
 
It means if the new car market consists of 1,000 people per month in your area, 590 of them would look at a good certified pre-owned vehicle. Attracting 1 percent of those customers through the Internet translates to six vehicle sales a month. 
 
The great change that the Internet has brought is a larger marketplace and a greater opportunity for used vehicle operations to cash in.
 
Unfortunately for new car franchises, the Internet really serves to drive profits down in the new vehicle world because of the competitive advantage it gives the customer. 
 
A new vehicle at one lot is no different than the one down the street. Customers can locate and negotiate its purchase at multiple lots, pitting one franchise dealer against the other and putting the customer in a power position. 
 
Not so with used vehicles. They are all different because of miles and vehicle condition, which makes location a much more important factor in the shopping experience. 
 
That is why eBay retailers like NIADA president Frank Fuzy of Century Motors of South Florida can get customers from all over the country. The shopping those customers do is powered by the way a vehicle looks and the way it is described on the Internet. 
 
If a vehicle is clean and in front-row-ready condition — featured with an appealing background, shown from all angles inside and out, badged with vehicle certification, and presented with a limited warranty and an explanation of the meaning of CPO — an independent with the smallest lot will be able to compete for a customer’s attention against the largest retailers.
 
Many small operations don’t put the effort into the photos they post on the Internet. They need to realize it is the equivalent of the showroom of the ’60s and ’70s and should be thought of as a display case. 
 
Large dealer groups put a huge emphasis on their web display in their marketing efforts, making sure that the vehicles and the ambience of the background appeals to visiting customers. 
 
Typically, social media is where customers first see a CPO program’s commitment to quality. If customers don’t feel the program meets a high standard, they will not feel safe doing business with that dealership.
 
Participating in CPO programs offered by organizations like NIADA announces your commitment to integrity and allows your website to display certified units, which shows your commitment to the customer and the industry. 
 
But simply being a member of such a program is not enough. You need to broadcast what that membership means so customers become informed enough to tell the difference between an NIADA member and other car lots. 
 
Another thing to keep in mind is new vehicle dealerships really have little advantage in inventory. They might carry more units than a smaller store, but independents should be able to be more responsive to the customer’s needs. 
 
Everybody pays the same price for automobiles. Whether it’s purchased at the auction, traded in for a new vehicle or bought wholesale, a car is worth what it’s worth. 
 
The real advantage for a dealer is the ability to have vehicles certified by a national source. Usually, that means a factory certification program administered by a manufacturer that has invested millions of dollars into creating a certified market. In doing so, it has created a niche in the customer base for people who have a prejudice toward buying a vehicle that is certified and will not look at anything else. 
 
Certified vehicles now make up 65 percent of the used vehicles sold by franchise dealers. That means any car lot that does not have some certification program is only going to be a viable alternative to 35 percent of the used vehicle market. 
 
So how do you certify your vehicles? 
 
There are really three ways — through the factory, a dealer-branded program or a third-party program. 
 
Factory dealerships are strongly encouraged to certify every vehicle through their OEM’s programs. While those are very good certifications, there is no proof customers put any more credibility in those programs than they assign to third-party or dealer-branded programs. 
 
Customers know they want certified even though they may not be fully aware of what that means. What customers are really looking for is tangible evidence that the certification is meaningful and that there is a credible program behind it. 
 
Factories have spent millions making customers aware of certification and the value of a certified vehicle. They have even tried to tie certifications to new vehicle franchises. 
 
But that can work to an independent dealer’s advantage.
 
Factory programs are very specific as to what is certifiable, making their certified vehicles cost more in reconditioning than the average trade-in. And OEM programs get into distinguishing between vehicles with or without matching tires or if they have factory-installed floor mats, when customers really just care about the vehicles being mechanically sound.
 
A customer might not be buying a certified vehicle because the program has a limited warranty attached, but a limited warranty offers proof, from the customer’s point of view, that the certified vehicle should command a higher price. 
 
Customers feel if the entity issuing the certification is also backing it with a limited warranty, that entity must believe in the certification process.
 
To be a credible certification program, there has to be reputable company paying the bills for customer repairs. A strong financial backer, along with coverage that protects customers from the fear of buying someone else’s problem, offers the peace of mind customers are looking for when they decide to purchase a certified vehicle.
 
Factory stores are forced or strongly encouraged to go with factory-backed certification programs. But recently, more and more progressive dealers like Huntington Honda in Long Island, N.Y., have elected to venture off with their own dealer-branded programs. 
 
Groups like this have seen how the high costs of factory programs have limited their profits without providing a significant benefit over other nationally recognized programs. 
 
The best known and most respected of the nationally recognized certification programs outside of the OEM brands is the NIADA Certified Pre-Owned Program. 
 
Frank Fuzy credits the NIADA CPO program for giving him the credibility that has helped him sell vehicles on eBay. 
 
Frank is the king of eBay sales – he sells more cars on eBay using the program than any other dealership. At the 2015 NIADA Convention and Expo, Fuzy said he hopes more stores don’t start using the NIADA CPO program because he competes nationally on the Internet and believes the program gives him an advantage he doesn’t want to give up. 
 
Teaming with NIADA removes the biggest advantage a new car franchise has. Statistics show that 65 percent of all people buy a car where they get it repaired. So when your customers are using your warranty, you can direct them to the service department where you want them to have their repairs completed. 
 
The NIADA CPO Program allows independents to bring customers into their service area, creating another profit center as the warranty pays for retail parts and labor. 
 
The greatest equalizer in the history of the car business is the Internet. When automobiles are presented on the Internet with NIADA CPO certification and a limited warranty, they stand out from the fog and clutter of vehicles advertised on the social media outlets. 
 
The dealer or independent operator who knows how to take advantage of the social media setting will be able to excel in the new environment we find ourselves in. 
 
For example, when Fuzy advertises on the Internet that he certifies his vehicles with the NIADA CPO program, he gains an advantage in several ways. 
 
First, his organization is saying it has an agreement with a national organization that was founded on ethical business practices. Plus the program is backed by Warrantech, a wholly owned subsidiary of AmTrust Financial, which is A+ rated and accredited by the Better Business Bureau. 
 
That gives Fuzy’s customers peace of mind and an affordable program that provides rental vehicle benefits, towing and trip interruption coverage equal to or better than most megastores.
 
Using a program like NIADA’s allows an independent broker to take advantage of the cost of maintaining the lot he has as opposed to a new car franchise’s Taj Mahal.
 
Simultaneously, it allows for more gross profit and faster turn of inventory while alleviating the risk that a customer assumes. 
 
Risk is what drives the used vehicle industry. The more risk a customer is willing to accept, the less the vehicle will cost. A 12-year-old vehicle with 100,000 miles is much less expensive to purchase than a new vehicle because of the risk in ownership. 
 
That risk is mostly due to repair costs, which can be offset with a CPO program like the one offered by NIADA. 
 
Many experts foresee a golden age in vehicle sales over the next 10 years, with predictions that average annual new vehicle sales will reach 17.5 million. Sales of that volume would make it the best sales period in the history of the auto industry. 
 
Independent used vehicle operations that take the time to position themselves at the top of the pyramid and are prepared to take a portion of new car franchises’ business will find this a very profitable period. 
 
By partnering with the right organizations and following through with what you promise, you can use the next 10 years to establish your dealership as a dominant force in the market.
 
ABOUT THE AUTHOR: William Carr is a regional training manager for Warrantech Automotive, Inc., and a longtime auto industry veteran in sales, management and training. For more information on the NIADA CPO program, visit www.niadacertified.com/dealers. 
 
This article originally appeared in the July 2016 edition of Used Car Dealer magazine and can be found online at: http://www.usedcardealermagazine.com/i/698409-jul-2016/30 

Filed Under: AmTrust, automotive, certified, CPO, dealers, independent, NIADA, pre-owned, Warrantech