Reconditioning dealers' expectations

A low supply of used vehicles has put the squeeze on auto dealers trying to scrape up inventory. But some in the industry have a possible solution for filling sparse lots — buying, reconditioning and selling lower-grade vehicles.

Normally, dealers prefer purchasing vehicles at auctions in the best condition. But used-vehicle prices have surged, forcing dealers to choose between spending more for a vehicle in good shape or fixing up one that's in a rougher state than desired.

Vehicles in poorer shape are those 2 to 4 years old with dents, scratches, bad brakes, torn seats and other wear. A number of dealers consider it risky or simply unprofitable to invest in them.

But dealerships with beefed-up reconditioning departments might find taking the plunge into more extensive work to be worth it, said Edward French, a proponent of reconditioning who has 47 years of experience in automotive retail.

"The guiding principle is to make the vehicle mechanically sound and cosmetically nice, not perfect," French told Automotive News. "So think of [it] as buying a house, but it may need new carpet."

French said he began exploring intensive reconditioning during the 2008 economic crisis. It has since become a focal point.

Reconditioning lower-grade vehicles was a key strategy at 500 Automotive Chevrolet-Buick-GMC in Clinton, Ind., where French was dealer principal until he sold the dealership last month. It has been renamed Pilson Chevrolet-Buick-GMC. Reconditioning such vehicles helped the store to go from losing nearly $50,000 each month to bringing in six-figure profits instead, French said.

French, who sits on the board of directors for used-vehicle retailer TruWorth Auto in Indianapolis, adhered to four reconditioning principles during his career:

1. Have a dedicated buyer for lower-grade vehicles. This person has to be knowledgeable about types of damage and the reconditioning costs it would take to get the vehicles ready to sell, French said.

2. Have a remarketer. This is someone with the authority to shepherd the vehicle through the reconditioning process and get it prepped for sale.

3. Don't have a pre-populated cost. There should not already be a reconditioning cost in the appraisal tool. "In other words ... every vehicle we appraise, we just put up $1,000 for reconditioning," French said. "You cannot do that with these types of lower-grade vehicles."

4. Have a unique reconditioning process for lower-grade vehicles. Those at 2.5 to 3.5 on the National Auto Auction Association vehicle condition grading scale should undergo a repair process different from what vehicles graded 4 to 5 go through, for example.

French said it's also an important rule of thumb for dealerships to be upfront about how they fix vehicles.

"The reason we sell them and have had success is ... if you are transparent on your website about the vehicle as its current condition after you've made some repairs, it appeals to a broader base of customers, especially with prices the way they are because they're priced very favorably," he said.

A lower-grade vehicle usually takes up to two more days to repair and get ready for sale than one in better condition, French noted. Five days may be added to the repair process if it needs major bodywork.

It's wise for dealers to create a separate time-to-line for lower-grade vehicles, according to an analysis from Rapid Recon, a company that markets software to manage the reconditioning process. "Time-to-line" is a metric used to help dealers track their reconditioning efficiency.

The key to making reconditioning lower-grade vehicles profitable is having a well-established process and ensuring customers actually want the finished cars, according to Curtis Sampson, a Rapid Recon new business development manager and former dealer principal.

This type of reconditioning is "just not in some dealers' wheelhouses" and might not be of interest to certain clientele, Sampson said.

And while opting to recondition vehicles in poorer shape may allow dealers to expand inventory, the process must be efficient to work well.

"We're definitely proponents of buying lower-grade condition vehicles, especially right now," said Shaun Olsen, one of the owners of Prestman Auto, a used-vehicle store in Salt Lake City. "It's extremely difficult to come across inventory in general, but even before this whole supply crunch, we actively sought out those vehicles because there's opportunity in that."

Olsen has found that waiting too long to recondition vehicles — especially those in poor shape — can mean losing money. It's vital to ensure the reconditioning process is systemized, he said.

"It's just efficiency," Olsen said. "How fast can you get that car reconned and online, even if you have to pay up? Even if you don't think you're saving money, you actually are."

Cox Automotive auction giant Manheim said that while it saw no material change in the average condition grade for vehicles sold, wholesale reconditioning spend per vehicle was up roughly 14 percent from May 2020 to April 2021. The number of vehicles undergoing such reconditioning was down 3 percent in that period.

But when it comes to retail reconditioning, the average spend per vehicle was up 54 percent, and the overall number of vehicles undergoing the process was up almost 150 percent from May 2020 to April 2021.

"So not only are more clients turning to Manheim for their retail reconditioning needs, but they're also requesting more reconditioning work be performed," the company noted.

John Hammer, president of KAR Global Inc.'s ADESA auction unit, said franchised dealers are filling gaps by selling more used cars, but it's difficult because the limited supply is so highly in demand.

"Everyone is fighting for the newer, lower-mileage inventory," Hammer said.