Car dealerships...
are excellent Covered Land Plays.
How dealers could defeat Carvana:
Put the customer first.
Unfortunately, most won’t.
Treat your customers well...
And they'll buy their cars from you forever.
Treat them like shit,
And you'll have to set up an entire response department for all the BBB complaints you'll get.
It's a lot harder to open up a car dealership nowadays.
Reason?
Most jurisdictions have enacted stringent zoning laws.
They prevent car dealers from proliferating.
If you ask me, it's bad for consumers.
If you're interested in opening up a car dealership:
Here is my one piece of advice:
Closely monitor your inventory floorplan.
Similar to real estate,
Bad use of leverage is the #1 killer of car dealerships.
How to solve 87% of customer issues:
Listen.
People want to be heard.
Evolution of the “internet sales” department at car dealerships:
2000: Non-existent
2010: Not important
2022: Life-blood of the business
Takeaway?
Customers don’t just walk-up anymore.
How to recruit employees
Silicon Valley: Lots of equity
Car dealers: Lots of cash
Car dealerships can be very lucrative:
If done right.
Average Profit per Vehicle Retailed:
$3,500
Average Customer Acquisition Cost:
$500
PVR:CAC: 7X
Rinse and repeat.
Who is a car dealership’s most profitable consumer?
The person with a 600-650 credit score.
Why?
Their credit isn’t good enough for them to have “buyer’s balls”,
But it’s also not bad enough to the point where the dealer can’t turn a profit.
Referral fees from auto finance companies:
Lenders pay dealers “customer referral fees”.
But those fees vary depending on a customer’s FICO score.
Good or great credit?
- Dealer gets $100-$800
Bad credit?
- Dealer gets $0 and may even pay the lender(!)
This is what car dealerships call a “bank fee”.
How do dealers fund their inventory?
Floor plans.
Fancy word for asset-backed lending.
Some big players in this space are Ally, NextGear and AFS.
How (most) dealerships compensate employees
Mom-and-pops:
10% base salary 90% commission
Corporates:
50% base salary 50% commission
Takeaway?
Join a mom-and-pop dealership if you want more risk / more reward.
Cars with hail damage - AKA "Hail Sales".
Yes, you can get these cars at an attractive price.
But similarly to SFR flips in the RE industry,
The value-add is typically priced in.
9/10 times, these cars are not worth it.
On Auto detailers:
I’ve worked with so many.
Unfortunately most come and go.
But the good ones stay and get the business.
Here’s how:
- Consistent quality
- Work after-hours
- Offer value-add services (e.g. Headlight buffing)
- Charge universal flat fee for a guaranteed volume
Most car buyers optimize for 1 of 3 things:
- Price
- Credit (financing)
- Value
As a dealer, you should pick 1 and focus on it relentlessly.
2 heavily-debated philosophies for operating a used-car dealership:
- High volume / Low margin
- High margin / Low volume
Pick one and optimize for it relentlessly.
- Disclaimer: This COVID market is definitely an exception
Used car auctions:
Car auctions value one thing and one thing only:
Supply.
They will bend over backwards to get more inventory through their lanes.
If the supply is there, demand will follow.
They're also evolving.
They’re no longer as important as they used to be.
Upstarts like CarOffer and ACV Auctions are (slowly) chipping away at their market share.’
My prediction:
Auctions will evolve into primarily vehicle servicing hubs over the next decade.
Government auctions:
Government vehicle auctions are very lucrative.
The cars come practically reconditioned and they don’t charge auction buyers fees.
Does my dealerships location matter?
A hill I'll die on:
Location is NOT important for a used car dealership.
Those days are over.
Customers don't just "walk up" anymore. Everything is driven by marketing, whether paid or organic.
“There’s an ass for every seat”
The saying “there’s an ass for every seat” is 100% true.
Every car will sell, eventually.