Times are changing. That’s true for the entire auto industry. And it’s no different for the reconditioning segment.
Auto Remarketing spoke with a collection of recon and auction leaders to get the pulse on today’s challenges and opportunities in the segment.
The year kicked off with acquisitions, including Vehlo’s purchase of Velocity Automotive and Rapid Recon, as well as SolutionWorks purchasing Streamline Recon.
AutoNation announced late last year it would purchase mobile car care provider RepairSmith for $190 million, a deal that closed in January. The purchase gives the company another channel to provide after-sales services to its existing customers and introduce the AutoNation name to new customers.
Inventory, vehicle age, transparency, & speed
Inventory efficiencies continue to be a focus for dealers and wholesalers. And the recon business isn’t immune to the impacts of the trend. The ripples from the effect of low inventory and high prices for used vehicles today goes far beyond the dealer lot and auction lanes.
Ed Gilley, senior VP of operations at CARS Recon, says his focus is on prices.
“The high prices of used vehicles has really kind of hampered reconditioning as a whole,” Gilley said.
As a result, there’s many in the market that don’t see the need to fully recondition vehicles.
“They can get the return on the car they need without doing any extraordinary reconditioning,” he said.
“They do things that are obvious, like bumper repairs and some headlight restoration because it’s just so glaring on the car,” said Gilley. “But they’ve switched over from doing the majority of what was considered a full detail, because they’re not seeing a value difference when they sell
However, there is a bit of a price softening expected for used vehicles in 2023 as a result of slowly improving inventory levels. But it’s going to take a minute for the trend of cutting corners on recon to disappear. But it will happen, the CARS team reassures.
Ron Hope, CEO and chairman of the board at CARS said, “I don’t think there’s a lot of people in the industry that would argue against the idea that a properly reconditioned vehicle is normally going to sell faster and for more money.”
For Mike Black, CEO of Dent Wizard, the declining inventory trends for zero- to 5-year-old units still pose a challenge.
But there is a positive trend counteracting. The industry is starting to see aging and higher mileage units being remarketed. These vehicles can require more significant repairs and recon than the lightly pre-owned units franchised dealers and dealers group have stocked in the past.
Recon companies also have to contend with continued inflation pressure on parts and cost pressures across almost all categories.
Passing on appropriate pricing increases for products and services can be a delicate endeavor.
“None of us want to pay more, however, some higher inflationary costs must be passed onto clients,” said Black.
The speed by which customers expect to get vehicles front-line or retail ready is also both a challenge and an opportunity. Supply chains have been broken, and waiting for parts is a reality of the business.
Kyle Bailey, CEO and founding partner for NuVinAir, a recon company that specializes in removing odors from pre-owned vehicles, also weighed in on the state of his industry.
For him, consistency across recon processes is key. His goal is to work to standardize vehicle cleanliness, and this can apply to all facets of the recon business.
“There is this sense of reconditioning needs, and the evolving pressure that’s happening right now...what I see in the changes that have really happened, especially post-COVID, is there’s an amplified demand by the customer that expects a cleaner, like-new vehicle when they get inside
the cabin,” said Bailey.
During COVID, many potential customers wouldn’t even get in a used vehicle because they were scared that there was a chance of contracting the virus from past owners, or others who had been in the car since the point of sale.
“I think the fear around getting sick by getting in a vehicle has somewhat subsided, but the demand and the pressure to have a clean or odor-free vehicle has continued to elevate,” Bailey said.
Bailey said the desire for a clean odor-free vehicle might become even more important as cannabis legalization gains steam — now cigarette smoke has a new companion.
But ultimately, despite changes and challenges in the recon industry, “the work is still the work,” said Black. At the end of the day, cosmetic damage must be repaired.
“The ROI for reconditioning provides great value for our customers,” said Black. “Further, having a product that is appealing to consumers is critical for turn times and driving unit sales. The customers that prioritize reconditioning will continue to see better gross margins and turn times.
“We look forward to a more normalized market,” said Black.
Expected loosening inventory and normalized pricing in the future might just bring the auto market closer to that “normal.”
The tides are turning
The days of bringing a car on the lot, throwing it on the frontline with minimum recon and making $3-5 K on the vehicle without trying are over, warned Anthony Greenhalgh, VP, marketing and sales operations at Rapid Recon.
Inventory levels are inching back up and making their way toward pre-COVID levels. This is putting downward pressure on used prices and revenue per vehicle sale.
How will this impact recon?
“Dealers are really expense-conscious right now, and they are looking for ways to remove obstacles that slow their team down, so they can be efficient with fewer people — because headcount is the biggest expense,” said Greenhalgh. “They are getting really smart about their recon services.”
But we are seeing inventory levels coming up a bit, and this is already having an impact on grosses for used-car sales. It will take a while for dealers to adjust to normalized pricing in the market — especially those that entered the market post-COVID.
“We’re talking today about it leveling back out, and anybody that’s been in the car business for the last two years look at this as almost as if it’s a recession in the car business when it’s really not,” Greenhalgh said.
So those in the industry are looking for ways to cut expenses and hold on to some of that net gross, because they’ve really become accustomed to a high-gross per individual vehicle sale.
Greenhalgh said he certainly doesn’t advise cutting corners when it comes to recon.
Transparency is key in today’s dealerships, and transparency requires quality — and quick — reconditioning services.
“Because inventory is still a little bit short, it’s important we get those through recon quickly and on the lots. The sales team needs to know where those cars are in the process, because they’re selling them while they’re in the reconditioning process today,” said Greenhalgh.
The days of waiting to sell a car until it’s on the front line are over.
“If dealers are still operating like this, they are far beyond the trend,” Greenhalgh said.
In the past, Greenhalgh said salespeople would throw a car to recon and close their eyes and say a prayer.
“It’s still unfortunately a pretty big part of how some dealers recondition cars,” he said.” It’s not sustainable. There’s just not enough people to pick up the pieces when you manage that way.”
Since inventory is low and demand is high, when dealers get the vehicles they need, the pressure to push the product through recon and get it ready to sell has really enhanced.
“So, what might have taken three to four days, now there’s intense pressure to get that done faster. It’s pretty aggressive, really,” Black from Dent Wizard said.
We are in the middle of a big pickup in demand for what Black calls “lightly owned used vehicles,” but there are not enough to go around.
Dealers across the board are now reconditioning and selling higher-mileage used vehicles that they might have wholesaled in the past.
“But today, a 70,000-mile Toyota or Nissan or a car in general, they’re not worn out at 70,000 miles. There’s a lot of life in that vehicle,” said Black.
And dealers are investing in reconditioning for these older vehicles.
Black said, “There’s certainly more revenue opportunities. And in terms of profit, I think that really just depends on how much labor is involved.”
These are the vehicles that used to fuel the small, independent dealer sales — not the franchised rooftops and big dealer group names.
“So when you realize that maybe 30% of the vehicles that would have gone through wholesale didn’t — those people have to be hurting for inventory,” said Black. “So yes, vehicles that may be 10 years or older with 130,000 or over miles on it — there may be a market for that.”
Software utilization smooths recon process
As more and more of these older vehicles head to the recon department, running an efficient shop with a focus on transparency and quality is key.
Software utilization is helping recon departments achieve this, although adoption has been slow across the business.
Software systems for recon in the dealership helps dealers understand how quickly they’re getting cars through the recon process, and sheds light on cycle times.
These programs are most often designed in partnership with clients to ensure the product addresses pain points in recon.
Back in the day, recon services for dealers weren’t the smooth-running machines they are today.
“It was like the wild, wild west,” Greenhalgh said. “It was...just close your eyes and pray. Those days are gone.”
The birth of digital solutions really pushed the recon industry forward, recon leaders agree.
“The way it works today is that the parts department, the technician and the service advisor are all notified at exactly the same time when approval comes in. We no longer have to wait for an advisor to check her or his email, only for the parts counter to find out we missed the cut-off
and the part won’t be here for two days,” Greenhalgh said.
“The technology that we have today makes everything instant, and it removes a ton of non-value added time. And that’s where the industry needs to be focused today...removing non-value added time,” he said.