Used Car Reconditioning: Profit Center or Expense?

How the big box stores treat recon 0:00

Steve Shaw: And we're back! Dave Rogers, what's on your mind?

Dave Rogers: How you doing there, Mr. Shaw? A pleasure to see you again, my friend.

Steve Shaw: It is good to see you. I'm back in civilization again, so it's good to be seen.

Dave Rogers: What's on my mind? Let's see. I think we talked about this once before, but I wrote a little note here that says "reconditioning." I think you had some outside-the-box thoughts on it, and you're a little educated on the ways of the world. So let's talk about reconditioning.

Steve Shaw: Recon. Wow, that's a great topic for today. What did I just read? Used car prices are going up. Sheesh. A while ago I did a research project, so my numbers might be a little off, but what was interesting to me, doing this research project for an auto group, was that we were looking at the difference between

car dealers and the big box used car people. It's probably not a revelation, but it was to me and to the people inside the store. As a new car dealer, we look at used car recon as a profit center in our stores. And what I found fascinating was that CarMax and Carvana, the big box

players, don't look at used car recon as a profit center. We're often charging retail rates. If you're one of the publics, you charge retail rates to your used car department. That's just how it goes. And I'll use a deflated number, but the big box is charging itself 50 bucks an hour. So what does that do to us as a retailer?

Dave Rogers: Well, it's one of the reasons why every used car manager listening to this knows those are the players out there paying 2,000 over MMR at the auction. That's been going on for a while. When I was a GM at a Nissan store ten years ago,

Carvana had a seat at the table at the closed bid sales for Nissan, because they had a Nissan new car dealer, and they were buying everything. One time the guy at Manheim online made a sarcastic comment like, "Welcome to the CarMax auction lane, exclusively by Nissan," because they would buy all these cars. But for new car dealerships,

for those keeping score at home, we have at least four profit centers: new cars, used cars, service and parts. Maybe a body shop, so five profit centers overall if you have a body shop. And we do accounting differently. Each one is a standalone profit center. So your service department is

going to record its income, its sales, its revenue, cost of sale and expenses, and at the end of the month you hope to see a return on investment. When you get to Carvana,

they had centralized recon, last time I checked, when they were recruiting at one of the schools I was at. They were trying to hire for a reconditioning center they had in the next state over. They were hiring kids out of school, with overnight shifts and everything, and there was no retail service center for that dealership. I think CarMax does have service bays, but I don't know if they turn it into a profit center.

Their profit center is selling used cars. That's their business model.

Retail rates and what a car can carry 3:57

Steve Shaw: It was amazing. The numbers were post-COVID, and I'm saying 50 bucks an hour, but they're not charging themselves $200 an hour for labor. That's something I hadn't thought about: because of that, they can buy the car for more and sell it for less. So I think it's certainly worth looking at how we do things. We certainly want recon to be a huge profit center for the dealership. We want our service department to be profitable, and it goes into our fixed coverage. But you made a comment one time: what's best for the business? We are car dealers. We sell cars. So I think you're right. We've got to look at what's best for our

business right now to keep our business open.

Dave Rogers: Listen, it's a tough dilemma and a tough choice, because you're paying top dollar for the car. Hopefully you have

good habits in place, you're buying out of your service drive and you're not overpaying at the auction. But one note on the big boxes: they also do accounting differently. When they buy the car, the reconditioning doesn't go to the cost of the car. It goes below the line to an expense. So it's not a real apples-to-apples comparison. Then back to the dealer: yes, we charge retail to the used car department

for reconditioning. What does that mean? If an alignment is 149 retail, we charge 149 retail. We don't charge 1.4 hours times a $200 door rate. We don't overcharge them. But on repairs and non-competitive items, yes, they pay retail. That's just the way our organization is. I'm not saying it's right or wrong. It's just the way we do it. But I've worked in places...

Steve Shaw: It is what it is. But we are competing in the same space, so you could say a big box might have an unfair advantage in some cases. I know some auto groups have recon centers where they send cars off site, but they're still making a profit on that vehicle, or still making a profit in their recon center.

And I think we do some other crazy things at the dealership, from a turnaround time perspective, and even in how much we put into a car. How much can a dealer put into a car and still be competitive?

Dave Rogers: I don't know what the number is. Average recon is maybe $1,600 to $1,800 on a regular volume brand car, and probably $2,500 to $2,600 on a premium car. Maybe more sometimes.

Some of this stuff is self-inflicted. I can go on my maintenance rant again, which I love to do every chance I get. When you sell the new car and basically tell the customer to neglect it for four years by changing the oil once a year and doing the minimum requirements, you can't complain about the car you get back in four years. That's one thing. But listen, I've worked at dealerships where we charged $50 an hour and cost plus 25% on parts. That was the markup.

I think there are still dealers out there who do that. They don't necessarily charge retail. I guess it depends on where you want to put your money. In the old days, before vAuto and all these other programs, when you didn't really have a market value for cars, we all knew the used car department sold from cost up.

Nobody could tell you what a car was worth. You couldn't see the competitive set. You couldn't see what was out there. So it was a little different back then. If recon was $2,000, the dealer principal got his $2,000, and we knew the front end was going to sell the car and make another three grand. It was going to happen no matter what. You don't have that anymore, because now you have programs like vAuto. Anybody who's been paying attention knows

it's been a race to the bottom for years. Their program is designed for the dealership to lose money. That's what it's designed for. And there's visibility. You have internet shoppers now, which you didn't have years ago. So there's a squeeze on the used car department. I get the thought you're bringing up, because it's a tough battle. It really is.

Turn recon in 24 to 48 hours 8:56

Steve Shaw: Well, let's just say, hypothetically, all things being equal, this is how it's done in most stores, and it's not going to change. We're not going to revolutionize the industry because we think it should be one way. So that begs the question: how do we lower that cost to the front end? Or

how do we get that car through our shop in an expeditious manner, so whatever they have to put into it, it's back on the lot as a front-line-ready car in three days?

Dave Rogers: I think that's the second part of the equation. If you're going to pay retail, then they deserve the same experience. That car should be turned in 24 to 48 hours. That's what I believe, and that's what I used to push when I was running the store. A couple of times

they were just slow. They weren't making a priority out of it. So I used to penalize my shop. I said, if it's there 72 hours, you're going to knock 10% off. If it's there another 24 hours, we're going to knock 20% off. The longer it stayed, the cheaper it got. That was it.

It was amazing how the cars didn't stay two or three days anymore without some kind of exception, like bodywork or waiting for a part. If you're going to pay retail, you deserve to get that car in 24 to 48 hours, because speed kills when it comes to used cars. I heard a while ago that after 15 or 20 days on your lot, you start losing money on that car.

Dedicated recon teams and inspection tools 10:36

Steve Shaw: All I know is I'm not a fan of recon going through the main shop. Too many stores say, "We'll use it as filler," or "I'm going to get some gravy." No. There have to be dedicated people to make it happen, which allows for a great process. I saw a store once where, when the car went through the appraisal process,

it was getting a quick inspection. I guess that's what UVeye is all about now: driving it through the UVeye machine, so you get a pretty good cost analysis in six minutes, or whatever it takes for the machine to work. That would be a great tool. That's the second time it's been brought up recently. Do we have UVeye in our stores? It's a great tool,

so we know what we're taking in on trade.

Dave Rogers: Listen, anything like that, anything with cameras or AI that can pick up the dents and dings, because that's the other killer of recon. You put the car in the shop and let a technician look at it, and he's looking at the car from a mechanic's point of view, not a sales point of view. You know as well as I do that the visual and the cosmetics

are what the customer will notice when they come to look at the car. The customer is going to see whether the console lid has scratches on it. Your technician might not even notice that. The sill plate is all scuffed up when you open the door, and a customer might notice that. It's those little things. We put $1,500 of mechanical work into it, and now we've got to put another $1,000 of cosmetic work into it. That's why I think we sometimes get it backwards. It should be the other way around. Let's look at the cosmetics first and see what it

is. And I read something very recently

about CarMax. They have AI technology that looks at the car and the reconditioning and a bunch of factors, and determines right away whether they should wholesale it or retail it based on what the car needs. They're building a database of these vehicles. They probably know that when they get your Jeep Wagoneer back, they're going to want to wholesale it, because it's got all kinds of electrical issues.

I was just reading that recently. I skimmed an article. I think Dave Speciac or somebody wrote it, about how many cars are going right to auction because it's just too much to recon them. And that's CarMax.

Steve Shaw: Well, I'm not pimping out UVeye, but I know Hertz right now, in some locations, I think even Fort Lauderdale, has you as the consumer drive the rental back through the UVeye machine, and if it's got a dent or a ding or a scratch, they just bill you. That's a great tool for that. And I've seen the product where they're checking for codes.

Dave Rogers: Yeah, the little scanners in the drive-through. I forget what they call them, but they check for codes.

Steve Shaw: I think anything that protects our dealer is a great tool for the process. But from a service perspective, as a manager and as a consultant, if I'm in a store working on these processes, we have to look at that car ASAP and turn it around in 24 to 48 hours, three days max if there's body, dent, ding or scratch work.

It's got to be that three-day thing. And I think that can be done if the process is designed appropriately. It's not going to the main shop. It's going to my recon department, those recon people have a standard they have to achieve, and there's a rigorous process to make it happen. I'd love to have a couple of dealers come on and talk about their process, but I'd suggest that in most cases right now

we don't do that.

Dave Rogers: I battle with my guys in the stores all the time about having a dedicated team or a dedicated process. Even in the main shop, if you don't have the room or the off-site space or the bays for it, bring them in early and let them rack up the used cars. Every morning, somebody should be racking up a used car,

writing down everything that's needed, doing the inspection, getting the car back outside, handing the inspection in, and then going to sell the work to the used car manager during the day. Pull the parts, get it all ready to go, and at three o'clock in the afternoon, bring it back in and get it done. You can do that, and the tech is getting five, six hours on a ticket. They can have a nice day if they do it the right way. Or, like you said,

a dedicated recon service center, just banging them out like a machine. There have been places that tried that. AutoNation tried it in the early 2000s, opening up recon centers that just did that. I think a lot of big companies do it if they have the space and the bays. But it needs to be bulletproof. And the other thing people don't talk about much is the owner's reinsurance program.

You need to make sure these cars are tight. You don't want to be looking at a problem 30, 60, 90, 120 days down the road where the owner takes it in the shorts. Now you've got a bad reputation, you're going to lose the customer, and you're causing financial hardship to the ownership. It's another piece of the puzzle people need to pay attention to.

Set a recon budget and get out of the way 16:22

Steve Shaw: That's true. You brought up the used car manager. We do a time management class, and I was having a great discussion with a used car service advisor, one guy dedicated to doing that. He said, "Half the time I can't find my used car manager. I don't know where he's at. He's at the auction, he's over here, he's over there, and I have to chase him down. I'm running around with repair orders, and I've got cars on the lift." I've said this before: set an appointment. I have a standing appointment with my used car manager at 10 a.m.,

5 p.m., whatever the time is, every day. And this is one of my favorite things: I love talking about having a budget. A lot of guys will say their average cost on used car recon is two grand, just for round numbers. So we make a budget, and I'd lower that number, say to 1,400. If it's less than that, just fix the car,

so it gets done. Why chase a used car manager? In my world, with our support tickets, which we have very few of, I tell everybody, "Don't email me, don't talk to me, because I'm the roadblock." The used car manager can be the roadblock, so take him out of it. When he's not the roadblock, the answer is, "Fix it, it's done." That saves an hour, a minute, a day out of the technician's life.

Dave Rogers: I had that in my stores. If it was under $800, just do it. And that was just mechanical: oil change, rotation, whatever it was. I had a friend years ago who worked for a dealer group that put a number on every car. I think it was 1,500 bucks. Every RO they closed, they closed to a schedule.

If it was above or below $1,500, it was what it was. Every month, every quarter, every six months, whatever, they'd evaluate how much in credits and how much in debits they had and whether the number was right. That was just for mechanical repairs. It didn't include cosmetic, glass or tires. That went right to the vehicle, because you should have seen that when you were doing the appraisal on the car. If you don't see

a hole in the windshield, shame on you. But that's what they used to do. He used to complain here and there, but he never had to go check with anybody. I know there were plenty of ROs jacked up to get to that 1,500 bucks. I know he wouldn't discount one to get there, but there were plenty of ROs jacked up.

Shout out to my old friend Travis, rest in peace, my bud. He was a piece of work when it came to that program.

Design a process that works without you 19:16

Steve Shaw: I'm all about that flow, that process. And this takes us down a different road: why do people design a process with themselves in the middle of it? I don't want any process that has to do with me whatsoever, because I'm the roadblock. My process has to work when I'm not there.

Dave Rogers: Right. You're a manager. You're supposed to make a process that works without you. Isn't that the goal?

Steve Shaw: People say they can't go to training because the manager can't leave the store. Well, then you're not doing your job right, because the process should be designed without you. You should be overseeing it, making sure everything is good and helping with the outliers. But on a general basis, the process should just roll right on through.

Dave Rogers: I think that's going to be our next podcast or two: process. Because I think most people have no idea how to make a process or evaluate a process. They're just not capable of doing it.

What airlines teach about bad process 20:21

Steve Shaw: Well, I want to talk about the airline industry, because I'm sure nobody in the airline industry is ISO certified and decided how to make a process work the way a car comes in and drives back out. I love the flow of things. For some reason, at the airport, they can't design a process for boarding an airplane that actually works.

Dave Rogers: You mean just getting on the plane in a reasonable fashion?

Steve Shaw: They call you up to the gate. "Okay, group one." Everybody makes a mad dash, and group two is behind them, then group three, and next thing you know everybody's standing in the aisle. And I'm OJ Simpson running through the airport trying to get to the gate, and the whole of gate B is congested. Southwest tried having you line up in the order you board.

Now Southwest recently screwed that up. I don't think people think it all the way through. Bringing it back to the used car arena: we take a car in, and there should be a deadline. I'm sure the sales manager has it, and the GM or the dealer has it, but it's not communicated all the way to the back, so the service manager knows that car needs to be on the lot in two days.

Design your process to make that happen, however it has to be.

Dave Rogers: I agree 100%. It goes back to making the process. With the airlines, if they really wanted to board the planes right, they'd load from back to front. That would be more logical. Or no carry-ons. Instead of charging you $50 for checked luggage, they should charge you $50 for your carry-on. Then more people would check their bags, and it would be faster to load the plane and get the hell out of there, because what takes forever is people trying to find a place for their carry-ons.

Steve Shaw: Hey, if we're going to stick with the airlines, there needs to be a TSA line that says, "I don't know what I'm doing," or "I'm stupid and I'm going to go over here." And there needs to be a line dedicated to business travelers. If you're a business traveler, you should be able to go right through. And they screwed that up too. TSA totally screwed up TSA PreCheck and now the CLEAR lane. Now everybody has PreCheck, and instead of having PreCheck at every gate,

they've got one PreCheck lane. What did you do? You screwed everybody. You screwed the whole program up.

Dave Rogers: Messed the whole thing up. Again, we don't know how to make a process.

Steve Shaw: It's not "how do I make this process work?" I remember doing a process at a Ford store, an express lane process. We built the whole thing, how the cars would flow from the write-up to the bay and from the bay back to the drive,

and we blew the customers' minds. "I can't believe this was done so fast." The guy had barely had a chance to have his first cup of coffee, and the car was getting pulled back onto the drive, because the process was so well written. I love talking about quarter time, getting that multi-point inspection back to the customer in fifteen minutes. If I had to guess, less than 10% of the stores in the world could get a multi-point back to their customer

in fifteen minutes. It's not because the techs aren't good. It's not because of anything other than the process. It's the fault of the process. It's just not designed to make it happen.

Dave Rogers: Well, they don't design it that way, and they don't manage it. If you go back to the used cars, there probably was a process, whether it was written down or not. And if it's not written down, it doesn't count. I'm sure somebody along the line said, "Listen, we need this car through the shop and back front-line ready in 48 hours." I'm sure somebody has said that once or more in the car business.

Steve Shaw: Yeah, today.

Dave Rogers: Now,

did they work out the bugs on how to do it? Did they really plan the process, or did they just set the vision and walk away? I'm not going to be the judge of that. But that's where it takes skill. I agree with you about quarter time on the multi-point. It's very difficult only because people just don't do it. It's not impossible. They don't make it a priority, or everyone has their own idea and wants to reinvent the wheel. That's the other problem we have.

"I think I should drain the oil first and take a tire off before I do this." No. Give me the goddamn multi-point, then do all that stuff. Same thing with the used car inspection. Put it on the lift, take a wheel off, look the car over and check everything out. And if you've got to get the car out of there,

Steve Shaw: There's only one way it works.

Dave Rogers: give the ticket to parts, have them get the parts, or get it to whoever needs to approve the estimate, let them pull all the parts, and then bring the car back in when everything's ready to go. Why leave it on the lift with one wheel off, trying to find the used car manager to get an approval? That's stupid. A waste of time.

Shop utilization: recon at night 25:30

Steve Shaw: Waiting on parts for a 1977 LTD that we're never going to find. And the other thing: we talk about small stores, where maybe I don't have the bays or the ability to have my own recon center. Well, there's a thing called shop utilization. We talk about stall utilization, but if we talked about shop utilization...

there's a building there twenty-four hours a day, and we're open eight, ten, twelve hours max. You could double your production in those off hours. Who's thinking about running recon from 7 p.m. to 7 a.m.? What would be wrong with having that happen every night? And PDIs.

Dave Rogers: Right. I've seen places with overnight shifts, and I know it can be done. But it's a commitment to hire somebody to watch the guys at night. I've seen it before and heard of it before.

Today, I think everyone's tiptoeing around the technician shortage, the "nobody wants to work" bit, and nobody wants to have those difficult conversations. So what do they do? They let the used cars pile up in the shop and hope nobody comes screaming about a car, or they get it done when there's a customer who wants to look at it, and that becomes the top of the list. That's the dispatch by desperation I mentioned a while ago.

Steve Shaw: Well, it's funny. I live in Podunk, outside of Tampa. I'd bet that if I put up an ad for a night shift guy, there's probably a guy right now who would like to make some extra money working nights. There are probably people around here who would rather work nights than days. But you're right, it's a commitment.

And it's work. Remember that four-letter word we talked about? It's work for the manager to come up with these ideas, and it might require some coordination. There are challenges that go along with these funky schedules. But is the money worth it? Is it worth thinking those things through?

Dave Rogers: I agree. The first dealership I worked at had a team that did nothing but that. I think they worked from noon to whatever time at night, four days a week. We weren't even open Saturdays at the time. They worked nights and did used cars, PDIs and some customer holdover work. That was back in the '80s. But it takes commitment. It takes work. Here we go again.

Steve Shaw: I'm a total fan of used cars at night, used cars wherever, PDIs, get all that stuff out of there. That's got nothing to do with your customer pay. I had a guy locally where we were setting up an express at a small Nissan store, and they had just bought a parts store across the street, so they wanted to set up the express across the street. I said, "Hey, time out. What if we set up the main shop across the street,

and made the original dealership the express?" We all sat down and put our heads together, and all of a sudden it was, "Yeah, let's move the Nissan diesel trucks over here, and let's move the repairs across the street, because who cares particularly how long that takes." We designed this process with the dealer, and it was amazing to watch. Why would I add five minutes going across the street for express when the guy could pull into the first bay? Once people start hearing these things...

But it did require work. It required effort, and it was a commitment from that general manager to say, "That's the ticket right there." Then he spearheaded it and held his people accountable. Super cool.

Dave Rogers: That's cool. That's what we need to hear.

Steve Shaw: That's what we need: to hear from the GMs, "This is how it's going to be done."

Dave Rogers: You've got to get their buy-in, their approval. And that's part of the "it's always been done this way" thing. That used to make the hair on the back of my neck stand up. You go to a new place, a new job, and they say, "Well, that's the way he's always done it." And I'd say, "Well, I wouldn't be here if he was that good. So how about we change the way we do things?"

Steve Shaw: Yeah. That's what the last twelve managers said.

Dave Rogers: Exactly.

GM tip: treat recon as a profit center 30:10

Steve Shaw: Awesome. Well, why don't you give us a GM tip of the day for used car recon?

Dave Rogers: I wrote down a note a while ago for one of my GM tips: recon is a great thing. I know a lot of GMs come from sales. They're trained to hate the service department and the shop as a sales manager and as a salesman. Then you become the general manager and get paid off the whole nut, and you've got to start thinking,

"I've got all this gross profit being generated in the back end of the business. I shouldn't favor them. I shouldn't like them. But geez, there might be something there." What I'd say is that you've got to look at this with a fair view. If you need to modify or change, think outside the box. I agree with Steve: I think you should have a separate used car department, a separate team

that doesn't do retail work. Completely separate. I know it's tough, but I think that's the right decision, even if it's one or two guys. You've got to look at it like a profit center. And sometimes you might need to be the tiebreaker. If a used car needs some help and you need to shave a little off the service RO, that's what the GM is there for. Put your referee hat on, put your whistle on, call a timeout and make a ruling on the field. That's my tip of the day.

Steve Shaw: There you go. Awesome, man. I love it. It was good talking to you, and we'll take your comments. Recon: is it profit or burden? That's the title. Recon: Profit or Burden?

Dave Rogers: Ooh, I like it. Perfect.

Steve Shaw: Catch up with you later.

Dave Rogers: Amen.