Lessons from a junkyard: A story about the auto industry then, now, and later.
Me: “Uncle John, why do you like selling cars so much?”
Uncle John: “Well TyIer, I can buy virtually any car, at any price, and make about $3,000 every time. It’s a very simple business to be in”.
This was a conversation between my uncle John Riley and I when I was 8. John lived in Willard, Utah. If you’ve never been to Utah odds are you’ve never even heard of the small town of Willard. At the time Willard was only home to about 1,500 people, but that didn’t stop Uncle John from making a living off of flipping cars. Willard was truly one of those towns where everyone was on first name basis and you could get away with anything. Not that I would know from first-hand experience. John, together with his wife, Janet, made a living off of buying cars from the local auction, fixing them up, and reselling them through their junkyard/car lot for about $3,000 more than they bought it for. That was then.
Fast forward 14 years. I was in college looking to make a little money on the side and decided to take a page out of Uncle John’s book. I blew all of my savings and bought my first car. A 2006 Audi A4. I thought this car was the best thing since sliced bread. 0–60 in like 9 seconds, but hey, it felt fast compared to the 1992 Ford Explorer I drove in high school. I negotiated an amazing deal with the seller and noticed (while working for the largest classifieds and media outlet in Utah, KSL) that I could turn a profit. I sold my first car 10 days later. I stashed some of the money away and spent the rest on another car. The same thing happened. 4 days later I sold my second car. This process would repeat itself nearly 20 times over the next 3 months. My process of buying and selling cars was something I could do in my sleep. It was so easy anyone could do it. I was constantly trying to come up with ways that I could make it my little side hustle more efficient. Could I hire people to find the best cars? Maybe I hire mechanics to inspect the cars before I bought them? Hiring people wasn’t the answer. Instead, I created some software that allowed me to create specific criteria, analyzed the value of any car uploaded to KSL, and sent a text message to my phone anytime a car met that criteria. I spent all of my free time sitting at the same gas station in Salt Lake City waiting for KSL text messages. I had two computers. One computer running at home powering the text messages and one in my car to upload photos of new cars I acquired. Over the next 6 months, I would often buy two cars a day.
I remember one day bumping into a dealer friend of a friend and asking him if he would find value in the software I had. After a few minutes of convincing, he agreed to give it a try. Over the next 30 days, I had licensed the rights to my technology to over 20 dealers in Utah. As I started to understand each of their businesses better, I started to realize that there was a major problem that was creeping into the car industry. That guaranteed $3,000 margin per car that dealers used to make was shrinking rapidly. Car dealers across the country were all trying to answer the same question. Is there a better way to acquire inventory? If you were a car dealer something had to give. Changes needed to be made or you risked losing your dealership.
Over the past 10 years, more and more companies have brought new solutions to the market to attempt to solve the problem. Those dealers who took advantage of new technologies have likely combatted the margin compression over the past decade. For those who didn’t embrace technology, it’s more than likely they are no longer in the game.
Even with new innovations in technology, and more and more players attempting to bring solutions into the market every day, there is still a long way to go. The industry giants are combating the problem with their own solutions, and other conflicts of interest. If you are in the space you know what I’m talking about.
2 years ago to this day I knew that there had to be a better way. I studied the market intensely for the upcoming year to try and understand the many nuances between dealerships, vendors, suppliers, and the general health of the industry. I felt confused wondering why an industry this big was so far behind the curve. I wondered why an industry this big was still using antiquated systems, old methodologies, popcorn machines, and expensive TV ads. None of it made sense to me. I interviewed dozens of dealer principals and found consistency in their answers. “This is how we’ve done it for the past X years. We were successful with this in 1999, so we’ve just stuck with it” they would say. Time after time. I would hear this, try not to show my disgust, and do a mental facepalm.
These conversations were validation to me that there was a massive opportunity in the automotive space. As margins continued to shrink, how would dealerships combat this problem? The solution was clear to me, but we needed to test our hypothesis before sharing it with the world. I was determined to nail it before introducing the solution to dealerships. The natural next step for me was to open my own dealership. A year later I opened Auto Hall, an independent car dealership in Phoenix Arizona. It was here, right within our own walls that we would test whether or not our concept actually worked. We couldn’t have chosen a more expensive way to test our technology, but the knowledge we gained by testing it out in our own environment allowed us to create the perfect technology. You can’t put a price tag on what we learned over the last year. Within a short 6 months, Auto Hall became the #1 used car dealer in our market. This was due to our ability to acquire the right inventory at the right price and then sell it accordingly. Not only did we perfect the velocity model, but did it with a front end gross margin of $1540. We have started testing our acquisition model with a handful of groups across the US and have seen even better results. As we continue to aggressively analyze every market across the country, we will form patterns that suggest the best market for any given car. We partnered with a number of large inventory providers and based on a variety of data sets, we can predict with a high level of certainty which cars will sell the fastest at the highest profit margin.
Back in the good ol’ days, Uncle John could buy based on gut and experience. We live in a very different world today. A world where data enables business leaders to make smarter decisions based on data. A recent study with HBR it showed that “Data drives 73% of all business decisions that are made today”. Based on historical trends, by 2021 over 90% of business decisions will be made through a reliant source of data. As dealerships continue to strive for a better way to acquire the right inventory, they need to use reliable data to power those decisions. Gut buying is dead.
At Drivably, our mission is to perfect the analysis, selection, and delivery of wholesale inventory worldwide. Imagine a time where you set the # and the best cars appear right in front of you. Every month, every week, every day. At Drivably we are making that world a reality for dealerships across North America.