OPTIMISING YOUR FORECOURT. Your guide to maximising stock turn, addressing overage stock and driving maximum profit. Brought to you by Auto Trader.

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1 OPTIMISING YOUR FORECOURT Your guide to maximising stock turn, addressing overage stock and driving maximum profit. Brought to you by Auto Trader.

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3 Managing an efficient forecourt For ultimate success (maximum profit), focusing on running an efficient forecourt which maximises the number of vehicles you can sell in a year at the best possible margin, is absolutely critical. This best practice guide will explore some of the ways you can start to do this by: focusing on your days to turn and the impact that it has on stock turn selecting the right, desirable stock, pricing it to the retail market having a robust strategy around disposing of those vehicles - that are costing you every day they sit on your forecourt. What is days to turn? Days to turn is the number of days it takes to turnover your forecourt (to sell all the vehicles on your forecourt). Days to turn = total days to sell vehicles on forecourt number of vehicles 1 Example: You sold three cars in January, which took 54 days, 62 days and 21 days to sell. So the days to turn is ( ) 3 = 46 How it helps Let s say you usually sell your vehicles in 30 days and you have a vehicle in stock for 90 days, it has effectively already failed to sell three times. Now say you are averaging 1,000 margin per vehicle, then that one vehicle alone has already cost you the opportunity to make a 3,000 margin. As the days go by and your stock is kept on the forecourt, you need to consider all the associated costs of stocking: i.e. depreciation, fixed costs to manage your forecourt and advertising costs etc. All of these costs are estimated to be between at least 6-13 per day per vehicle. Why is it so important to sell your vehicles quickly? Because every additional day you keep them on your forecourt you face paying all the associated costs of stocking them - and these costs impact your profits. Or is it your margins? What s the difference between margin and profit? Margin is the difference between the selling and buying price (after any internal costs such as preparation costs and/or house charges). Margin is not impacted by time passing because you think that sooner or later you ll sell that vehicle and hopefully, the margin will cover what the car owes you (the price you bought it for). However, as the days go by, the costs of keeping that car on your forecourt add up and even if eventually you sell it, you may still have made a loss overall. That is why the quicker you sell the car, the better! Margin = selling price buying price 3 1. Based on cars removed from Auto Trader website

4 Managing an efficient forecourt Profit = margin - cost of keeping stock Profit is the margin you are able to make from your sale minus the cost of keeping that vehicle on your forecourt until it s sold, things like: depreciation, fixed costs to manage your forecourt and advertising costs. Imagine you sell two vehicles and you make 2,000 margin on each. Vehicle A sells in 30 days and vehicle B in 100. You can see that because of the higher costs of keeping vehicle B on your forecourt for longer, profit is lower even if your margin stays the same. Therefore, not only will the profit for vehicle A be higher, but you ll have the advantage of selling it quicker, which will free up forecourt space for you to sell more cars, quickly. Margin 2,000 2,000 Cost per day Days to turn Cost to keep car until sold Profit Table 1. Vehicle B will make you less profit VEHICLE A ,820 VEHICLE B ,400 You can influence your days to turn by: Table 2. Which scenario would you prefer? buying the right vehicles based on local supply and demand pricing to the market considering alternative stock sources such as part-exchanges to avoid the delays experienced when buying from auction disposing of overage or undesirable stock quickly and simply to the trade. Explaining stock turn Days to turn is often confused with stock turn. Indeed, there is a very tight link between the two concepts. Stock turn (or stock turnover) is the number of times you can turn your forecourt in a year. Stock turn = 365 / days to turn Stock turn is really about how you make the total forecourt profitable in a year: quickly converting your inventory to sales means that you sell more stock and this has a positive influence on your cash flow and profits. Knowing that your stock is likely to turn quickly, you could decide to purchase it at a higher price or sell it cheaper. Selling price 3,000 3,000 Buying price Margin No. of vehicles on forecourt Stock turn Total margin SCENARIO A 1,000 2, ,000 SCENARIO B 1,000 2, ,000 Looking at scenario B in table 2, your forecourt would turn six times quicker than in scenario A, and you ll make higher margins. 4

5 Managing an efficient forecourt Buy at a higher price: This isn t an approach many people automatically consider but it could result in significantly more margin. In the example below, Stock Z is 5,000 more expensive than Stock X, but it will turn three times faster. It means that you d make 15,000 margin three times in a year, giving you 45,000 of margin per year compared to Stock X which would sell once, giving you a margin of 20,000. Buying Stock Z at a higher price gives you the opportunity to make 45,000, which is 25,000 more margin than you could expect buying Stock X - 45,000 20,000 = 25,000. Sell at a lower price: In the example below, you d make less margin on Stock Z compared to Stock X per single sale, but Stock Z will turn three times in the same year. It means that at the end of the year you ll have made 30,000 margin, 10,000 more than you could have made buying Stock X - 30,000 20,000 = 10,000. STOCK X STOCK Z STOCK X STOCK Z Selling price 30,000 30,000 Selling price 30,000 20,000 Buying price 10,000 15,000 Buying price 10,000 10,000 Margin per sale 20,000 15,000 Margin per sale 20,000 10,000 Stock turn 1 3 Stock turn 1 3 Margin per year 20,000 45,000 Margin per year 20,000 30,000 Table 3. You could buy at a higher price and still make high margins per year Table 4. You could make lower margins per sale and still make higher margins per year In both cases, with Stock Z your margin per sale would be lower than Stock X, but you d make higher margins overall per year. When it comes to forecourt management, making sure you stock vehicles with the highest stock turn means that you are able to make your cash work harder and maximise your return on investment. A high stock turn on its own doesn t always mean that you are managing your forecourt in the most effective way. If you are turning only new stock and the old stock continues to age, this represents a problem for your business. How you buy, and then how you price, is critical to determine how quickly you will sell. You need to find the sweet spot in the selling price where you sell quickly but don t sacrifice too much margin. The more you know about your local market, the easier it becomes to make informed decisions. Auto Trader developed i-control, a data powered software that can help you identify the best stock to buy, that will sell quickly in your area, and advise you on how to manage your pricing in order to constantly maximise your margins. 5

6 Overage policy What is it? Overage policy is a strategy to help you manage days to turn and to lower your costs on each individual car you hold, with the aim of ensuring quick stock turn to maximise profit. How it helps Having already defined days to turn as the number of days it takes to turnover your forecourt, you could calculate that your days to turn was for example 36 days, and then feeling satisfied for a 10 times stock turn. However, if this has been calculated based on you selling 10 vehicles in the previous month, and you hold 50 cars in stock, the figure fails to account for the remaining stock that becomes overage. But why is overage an issue for your business? As we ve seen, keeping stock on your forecourt costs at least 6 profit loss per day, per car! So, the aim is to turn every single car as quickly as possible. Overage is a common problem for retailers, that s why many businesses follow an overage policy. The majority of franchised dealerships have an overage policy which may be different depending on the brand. Vehicles are usually considered overage after 30 or more days on a forecourt. In some big groups, unsold stock must be sent to a central location after 90 days to be sold through non-retail channels. This is because they know that selling to trade for a lower margin is better than keeping costly overage stock on their forecourts (which erodes profits). High levels of overage stock represent a serious forecourt inefficiency and a risk for the overall health of your business. Instead of holding on to the same vehicles for a long time, you could advertise your stock to both the retail and trade market at the same time and maximise your chances to sell your vehicles. As we ve seen in the stock turn section, selling at a lower price but earlier, allows you to maximise profits. Table 5 (below) shows the impact of keeping overage stock (190 average days in stock). The true total cost comes from the sum of all stocking costs and the lost opportunity cost. In the same period this retailer could have sold 67 cars making 750 profit per unit ( 49,875 in total). Table 5. Example of how overage stock impacts your business Current Forecourt Forecourt size Average profit per unit Stocking cost per day Average days to turn Stocking Cost Cost to stock: (190 days at 6/day) Lost Opportunity Cost Could have sold: (on average, in same period) At average profit per unit) Lost Profit Opportunity 22, , Unsold vehicle on forecourt Count of aged vehicles Average days in stock True Total Cost What if I wait another 30 days? Additional Cost 73,815 11,655 I need to get rid of overage stock as soon as possible From day 0 to 15, I make sure the car is placed on the market in the right way and at the right price. From 15 to 30, I start asking myself, why is it not selling? I check if the pictures on my ad are nice enough, if the ad is viewed and if all the specs are clear. From 30 to 65 days, I look at competitors prices and apply the right changes to my pricing in order to increase desirability and improve my price position. We have our own overage policy and after 65 days cars are considered a cost. That is why I need to get rid of overage stock as soon as possible. Matt Craig Sales Manager at Pentagon Scunthorpe was rounded to 67. The next 30 days additional cost is based on the total of the further depreciation and the further lost profit opportunity. 6

7 Desirability The first step to becoming a digital retailer is to buy the right stock that will sell quickly at the right price. The aim is to reduce the time stock is on your forecourt and to have a Plan B in case the vehicle becomes overage. Our vision of an efficient and profitable forecourt goes through three key concepts: desirability, retail back pricing strategy, and disposing of overage vehicles to the trade. How to make sure you are buying the right stock? The right stock is: 1. in demand in your area Potential customers are looking for it today (it is not always what has sold well in the past). 2. under supplied in your area Your competitors are not stocking enough of these cars to meet the customer demand. 3. likely to sell faster without heavy price reductions High stock turn, low days to turn. All three key elements above give you a powerful indicator called desirability. Desirability is a rating between one and five stars that measures local consumer demand, local supply and stock turn. Local demand Local Supply Speed of Sale Desirability = Local demand + Local supply + Speed of sale 3 3. Speed of sale describes how quickly a car will sell, the quicker this is the higher your stock turn will be and the lower your days to turn will be. Desirability helps you decide what stock to buy Knowing what sells in your area, what your competitors are stocking and stock turn insight for specific derivatives and plates, means you can identify the right stock for your forecourt. If you then price your vehicles right, you ll sell them quickly in your market. If you knew a vehicle would sell quickly, was in demand and had little competition in the market, (that is, your competitors aren t stocking enough of them) you would always want that vehicle on your forecourt! 7

8 Buying the right stock How to make sure you are buying the right stock High desirability vehicles are likely to sell quicker and allow better opportunities for stronger margins. To sell quickly, these vehicles still need to be advertised to a high quality with good images and priced in-line with local competition. Low desirability indicates that in your region supply and demand are not as favourable for the car being checked as other derivatives and plates. This means the car is more likely to take longer to sell and cost you more money to stock (higher days to turn), usually being less profitable. Based on this insight, you might decide to price the car slightly under market to entice people from outside your local area. Regionality Regionality is one of the major influencers of desirability: different cars sell better in different parts of the country at different times of the year. This is often because there is a misbalance between local supply and consumer demand. Knowing that cars below 1.5 stars desirability take almost 60% longer to sell than cars over 4.5 stars will help you to make informed decisions on purchasing stock and your cars will sell faster than your competitors. Desirability, which is one of i-control s main features, is a powerful measure designed to help you choose stock that will perform well on your forecourt, based on local demand, local supply, potential margin and speed of sale. You ll always be on top of market changes and ready to take advantage of every opportunity of profit. I sold it quickly and made a good margin I use desirability to establish the retail price and the margin I expect. If I know I am about to buy a desirable car, I will look for more margin. If the car is not very desirable, I know I will need to be more aggressive and set a lower retail price to sell it more quickly. To give you an idea, I had an opportunity to buy a Skoda Octavia in part exchange; it was beige with beige interior, not the most desirable car. I appraised it on i-control, setting the retail price to obtain a good response rate and I managed to buy it cheaper than the price recommended by CAP. I sold it quickly and made a good margin. If I hadn t used i-control, I would have paid the CAP price and made very little margin on that car. Matthew Bavin, Used Cars Manager at Pentagon Lincoln 8

9 Retail-back pricing strategy What is Retail-back? Knowing the price your potential buyers are likely to pay for a car, gives you an indication on how much you should pay for every single vehicle. The retail back pricing strategy helps you to make sure you are buying stock at the right price. Knowing the final retail price, you are able to subtract your costs and expected margin to arrive at your ideal buying price. The retail back strategy goes hand-in-hand with desirability. For a highly desirable vehicle you may be ready to spend more money, because you know that it is likely to sell quickly. The opposite is also true, knowing that the vehicle you are about to buy is not very desirable means that you ll need to buy it for a lower price, or simply avoid buying it! It s one thing to meet the market on price, however, the challenge is to keep up with it. Given the volatility, it s important to have sight of where the market is heading on any given day and then price to the market. The days of setting a price, leaving it for 30, 40 or 50 days and then applying big discounts are long gone. Adjusting your retail price more frequently and using a little and often approach will dramatically improve your chance of sale. Overage stock disposal What happens if you are stuck with a vehicle for longer than 30 days? Let s say you bought stock that turned out to be wrong for your market and now you are stuck with it. You have tried everything, updating your pictures, reviewing your pricing, but nothing has helped sell it. Now you know how dangerous it is for your business to keep stock unsold on your forecourt for a long period of time, what should you do? Share your ad with over 4,500 potential trade buyers You could advertise your vehicles to the retail and the trade market at the same time. This means you get to see if anyone else in the trade wants your retail-ready stock without missing any opportunity to retail it yourself. Testing the trade market s response helps you maximise every chance to sell your stock. If you can t manage to sell a specific vehicle, it doesn t mean that someone else won t be able to sell it in another region. You ll have avoided the cost of stocking that vehicle and you ll have freed up space and money for another vehicle that will sell faster. 9

10 What are the key outtakes? There are six main factors that will contribute to success in today s digital marketplace, so it s worth thinking about: 1. your days to turn (and stock turn) 2. the difference between margin and profit 3. your overage strategy 4. whether you are buying the right cars 5. pricing your cars based on the retail market 6. using the trade to dispose of overage cars. To discuss anything you ve read in this document or to understand how Auto Trader can help you further with its stock efficiency platforms, please speak to your Account Manager or contact us on: Tel:

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