Dealers Either Love Consignments or Hate Them

When visiting dealerships throughout the country, I have discovered that dealers either love consignments or they hate them. Generally speaking, those who are against having consignments on their lot believe that they are a headache for various reasons. These “anti-consignment” dealers claim that there is no money in consignments because the customer is usually asking too much for their consigned unit, or they believe that the condition of the consigned unit will make it very hard to sell. Another reason for dealers not wanting consigned units on their lot is that they believe that these units will be competing against their own used inventory.   Finally, dealers don’t like the fact that the customer will be constantly checking up on the sales status of their consigned unit; the customer is constantly reminding the dealer that he or she has to make the monthly payment, so the dealer had better do something to sell the unit. Well, we disagree with “anti – consignment” dealers and we encourage each and every dealer to maximize their profits through participation in the consignment world.

First, let’s talk about the ABCs of doing business (i.e. – the cost of maintaining inventory).

Most dealers realize a net pre-tax profit of about 3% to 5% at the end of the year for their hard work at the dealership. Their entire combined gross profits from dealership sales (vehicles, service, parts, F & I) usually range from 15% to 22% depending on the efficiency of the dealership. This 15% to 22% GP margin now faces the task of paying for SG&A (selling, general, and administrative) expenses, which means that the 15-22% will now be reduced to 0-5% after all is said and done. Some expenses can be controlled while others cannot. A successful owner or GM has learned that expenses associated with new and used inventory must be controlled in order to achieve a profitable year. Consider the following expenses associated with inventory:

1. Interest paid to the Floor Plan Company
2. Loss of interest income because the dealership used its cash to buy used units
3. Insurance acquired to protect inventory on lot, especially for new units (required by floor plan companies)
4. Maintenance expenses paid to lot maintenance and detail personnel
5. Depreciation – all used units depreciate on a monthly basis and therefore have a lower ACV value the longer they are maintained in inventory (believe it or not, new units that remain unsold after 365 days will lose value also)

Now, let’s get back to the consignment world. Do you realize that each consignment unit on your lot means that you have no interest to pay, no loss of interest income, no maintenance expense (should be paid by the customer), and no depreciation? You talk about the American Dream – consignments are a wonderful opportunity to increase dealership profits. You can make money when the consigned unit sells on the front end, back end, administrative fees, and on the sale of parts and service. Not to mention the fact that now that the customer has sold his or her unit, they may possibly buy another unit from your dealership.