Today we will be talking about how buying a car from Carvana increases the overall traffic of customers that come into the Service Department.
Welcome to Service Drive Revolution! I’m Chris Collins and this is Mia Griggs, she’s down in beautiful sunny Los Angeles because she finished writing a training program for me. She’s been creating a BDC training program that is now up on our On Demand. Today we’ll be talking about how buying a car from Carvana is increasing customer visits to dealership service departments and analyzing the impacts of their company onto the Automotive Industry.
Let’s get right into this conversation, we have Aaron Bratcher, a Service Manager at a Chevy store in Indiana, who will share his perspective on this interesting topic.
We came onto Aaron because of a comment that he had posted on LinkedIn, which was very articulate. There’s the overtone of a polite midwest gentleman in the way that you wrote this, but it’s also punchy and delivers the message thoroughly.
It’s very diplomatic and on point right on the nose. We will have Aaron read what he wrote and then we can talk about it. This is what Aaron’s post says (you can read the article here).
After having him read his original post on LinkedIn, I asked him this, “What were some of the responses you got from that post?”
Aaron replied to my question and talked about one of his recent customers, he told us,
“I had a customer recently come in with a Silverado they purchased and on Carvana, when the vehicle was dropped off to the customer, check engine light was on. It had mechanical problems right when they received the car and the customer tried to pursue Carvana. Carvana basically told them that that’s the reason why you have an extended warranty that you get with the vehicle and insisted that they take it somewhere else.
Buying a car from Carvana has troubled many people.
It’s a silver rock extended warranty, which is hit or miss, but they did end up paying for the repairs. That’s great, but the customer still bought a vehicle that they had to automatically get repaired.”
Aaron goes in depth with the warranties that buying a car from Carvana provides and tells us that the extended warranties will only cover some of the parts labor. But then they’ll start cutting out, they could cut out shop supplies and some will even have literature saying that we don’t cover seals and gaskets.
The question that he poses is if you have a powertrain extended warranty and you don’t cover seals and gaskets, then what do you cover?
This was exactly Mia’s point earlier, she said that it’s a powertrain warranty, but it really does nothing because they say it’s a powertrain extended warranty, but it doesn’t cover oil leaks or seals or gas. What does it actually cover? Because that’s like the number one problem that customers have when faced with a failed powertrain.
This brings up a bigger conversation
Because we, the automotive industry, partially created Carvana. The automotive industry is not blame-free on this. Our hands are dirty too and we’ve had our failures, however, for the most part, it does show that I think our intentions were better.
Aaron replied to my thought and told me he believes that as an industry, we definitely did create Carvana because similar to Amazon, they saw a need and they filled it. He goes on and says that with the automotive industry, if buying a car from Carvana is filling that need. Then what is it that we are doing to try to be able to kind of cut Carvana out of it because they’re filling that need and that’s something that the auto industry is lacking there. They’re just not filling that specific need that every consumer out there is looking to do. Aaron concludes that this is where we really need to start changing the way that we’re doing our business because Carvana saw that need and that’s the reason why they filled it because the Automotive Industry let them.
This company saw a need and started allowing people the chance at buying a car from Carvana.
This brings me to my next point, Caravana definitely has an interesting model, however, CarMax had a different approach. CarMax had recon and they spent a lot of effort on the idea that they didn’t want the thing coming back in the first 90 days and so that was built into their model where at Carvana is of a horse trader, I believe that their system in recon is a very small part of their business model.
Mia Griggs agrees with me and tells us,
I believe CarMax leverages the marketplaces, their software and the way that they know if they’d taken an F-150 pickup in LA and it’s worth $2,000 more in Colorado, they will move them around and that’s how they’re picking up their gross in a lot of ways, by understanding the markets and then having AI that tells them where their best leverage is. The vending machine thing that Carvana does is cute, but it’s only cute as long as people aren’t getting stuck after the car arrives at your door.
Moreover, I was curious to see what Aaron had to say about all of this and asked him,
“Aaron, what do you think is gonna happen and how is this going to affect us in 5 years?
Aaron tells us,
“It is going to affect most of the industry, however, I believe it’s two fold. It’s going to rely on the dealers and if they’re willing to adjust and do things differently than the way that it used to work, which was a salesman and a handshake, but now you’ve got to be able to online. The Automotive Industry now has to consider everything that we can possibly do to succeed. One of the nice things about CarMax is that if you live in Minnesota and you see a vehicle that you like in Colorado, you can buy that vehicle and they’ll ship it to you. Additionally, Carvana is actually starting to recruit technicians in certain places.”
Aaron believes that they’re catching up to us because if they are not taking care of the customer, eventually nobody’s going to want to go there. He says if the food and your restaurant is bad, nobody is going to want to eat there. Aaron thinks that they see that as a long-term fix but they’re going to have to ramp up pretty quick and they’re going to have to try to compete with the dealers that really have more experience with the industry. He concludes that he thinks they may end up having more work and will be able to pay technicians more, which is a different battle because they’ll have some long-term success, but it’s just all going to depend on if they’re willing to actually satisfy the customers or not.
Those sorts of things are always fascinating to watch because in a sense, they already show the signs of a company that’s growing too fast. However, it doesn’t have the leadership to take care of the details that really matter in the end, like recruiting Technicians .
So if you’re going to scale that fast, it costs a lot of money to scale and grow that fast, additionally, it also requires a certain infrastructure, a certain ability to attract talent, and in a marketplace where Technicians are harder and harder to find, you would wonder if it wouldn’t be better just to add X amount of money to every extended warranty and actually let dealerships have the technicians do the work and just change the insurance on the back end of those extended warranties.
I say this because there’s a loss rate to those extended warranties and if you want them to break even, if you want to make a little bit money, if you’re charging $3,500 for them, you’re not taking in $1500 in profit, you’re taking in 500, but you’re playing the long-term game because the way they’re approaching this situation, I don’t see how they would scale Technicians and have the quality. You run the risk of hiring technicians and then having the issues you already have and not fixing them right.
To begin with, it’s just that if that vehicle that you had was, you know, with somebody who didn’t know how to fix it, it would just compound the problem.
Aaron replies to what I’ve said and tells us,
“Yeah. The other part of that is they’re trying to get all these used cars and they’re trying to sell all these used cars. If you have 500 new used cars and you only have 10 technicians while you’re fighting an uphill battle, you’re going to have to try to be able to fix all those cars. I mean they’re kind of working backwards a little bit. So it’s going to be a major uphill battle for them. If they’re actually going to start doing more of a repair center and sales, then they’re going to start actually getting into the real world of selling cars. I think it’s going to be an awakening for them. I think they’re going to be able to make a huge amount of money.”
From my perspective, I could be wrong, but I don’t perceive that they’re very disciplined in the buying. So it feels like they’re buying edgy used cars as much as getting lucky on ones that aren’t edgy, but there isn’t a real clear discipline there. And, you know, with a used car manager, a lot of times the discipline is what, what prevents all this, right? Like you’re not gonna buy something with the frame or flood damage or whatever it is, there’s discipline there. It creates issues on the backend.
Aaron tells us that his inventory manager was purging some vehicles at auction and how he got outbid by Carvana. He clarifies that,
“If it’s rolling down hill, they’re spending so much to be able to purchase these vehicles. Then they have to spend more money to recon the vehicles. If they do, then they have to spend more money. It’s going to pile on to where they’re going to have to, to make a profit. They’re going to have to sell the used cars that they have for more than what you could buy at another dealer for it.
People are going to start seeing that, you know, because, uh, people are not just looking at one specific place to buy cars now, because if you go online, you can see thousands of different vehicles right there. And so if they pick, if they see the same type of vehicle that they can see at Carvana and they see it somewhere else, $1,500 cheaper, I mean, what’s the point, everybody’s going to go for the price anyway.”
There are challenges and concerns with buying a car from Carvana…
I started thinking about how if they’re going to avoid certain states, they’ve avoided California, but I wonder if they will avoid states that have more consumer friendly laws. Laws that you have to recon to a certain degree and take it back in a certain amount of time. Because those laws are widely different by state. In some states you don’t even really have to recon. You can’t even turn a car over if it doesn’t have tires and brakes and Colorado’s like that. So they might avoid those states too. I’m curious to see what their plan is. I know some of the used car franchises avoid the states that have the more consumer friendly laws. Do you think you would take part in buying a car from Carvana soon?
Aaron explained that,
“There’s places in Texas that have some of the same laws that they adopted just like California with the emissions. If Carvana sells in Texas, but they can’t sell everywhere, because if you try to get your vehicle registered and the check engine lights on,you can’t..”
Let’s uh, play the question from a fine gentleman named Matthew who’s clearly in a pickle.
“Hello. My name is Matthew. I work at a Mercedes-Benz dealership and have watched your video on how to take care of booking more Technicians. Well, I’m a scenario right now to where it’s currently June 22nd, and I am scheduled out until mid July for services. For the last three months, a person above my service manager has been aware that I need more technicians. My question is, how do I stay on course to take care of my current customers? I’m backlog like crazy where a simple oil change is taking longer. I am just trying to get people in the shop because getting work has not been an issue. I get phone calls every day. So until I get more Technicians how do I better take care of the customer? How do I better execute that customer experience you’re always talking about”
We have two kinds of scenarios. Here is one where you are the manager, so you can fix it. On the other hand, he’s a victim to bad leadership. There’s really nothing he can do. I mean, you can suggest, but I’m sure the manager there would want more Technicians. They just don’t understand how to get them.
I feel like it’s one of those situations where we’re talking around the answer, but at the end of the day, the answer is hire technicians. This whole idea that it’s impossible to hire Technicians is crazy. Like I’ve been in scenarios where we’ve hired like 40 technicians in a very short period of time. We’ve never been in a marketplace in the US or Canada.
But the first thing is, you have to stop thinking that it’s hard and you have to figure out what it is. On our on-demand platform, we have a thing called Technician tree, which is a course on how to hire with ads, how to recruit, all that we just last week recorded kind of an update to that of. Christian and one of our coaches are just going through all the stuff that’s working, pulling up ads and going through things like why the placement of the ads is wrong, the way they’re written, the whole thing.
The other thing to understand is, if you understand profitability in a service department, you understand pricing strategies and how to sell more, you basically control your effective labor rate. Your ability to hire technicians is more dependent on your effective labor rate. If I’m talking to somebody with an $80 effective labor rate and technicians like diesel Techs in a Chevy or Ford or whatever shop making $40 an hour, my gross profit percentage on that is 50%. This is why buying a car from Carvana is still a question for many people.
It doesn’t even make sense.
So you gotta be able to have an effective labor rate that doesn’t drive customers away, but also you retain enough money to hire the best technicians in the marketplace. But there’s a certain point where nobody can compete with our clients because we can get the effective labor rate and the way we’re selling the work that makes the text more efficient, because we’re selling more customer pay work, where in most shops, they don’t have enough Technicians.
Over time, if you don’t have enough Technicians as a dealership, not an independent shop, you start doing more and more warranty work because you don’t have the ability to sell customer pay work because you’re shopping. You’re full of just warranty work. The Advisors are scared to sell more work because they can’t get done like this poor Matthew kid can’t get done. The work that came in three days ago, he’s not going to tell somebody they need a seven hour job.
We’ve yet to run into a scenario where we can’t hire Technicians, but you just got to think differently. I think the way that service managers come up, unfortunately, is through tribal knowledge. Your approach to hiring Technicians is what worked for 20 years, 10 years ago. But the market’s changed the way social media works, the way ads work, all of it has changed.
But what happens if you follow the way that you were taught through tribal knowledge?
You’re mostly going to be trading Technicians in your marketplace that are the ones that will leave for $2 more, they’re the wrong Technicians. You have to get really good at hiring technicians and you have to have a vast toolbox of things to throw at it. Because if you only have a screwdriver and you need a Crescent wrench, it’s going to be hard in this market because more Technicians are leaving our industry than are coming in, but the future is having the Technicians that’s going to drive your ROI count and everything.
Will buying a car from Carvana impact the industry positively?
Because if you have the quality and the production, you’ll be able to name your, you know, your price basically because the better technicians know that you could leave for $2 more an hour, but flag less time and so the better Technicians also want to know how much work you have, the part they want to know about the parts department there.
They’re asking a different type of question, how you recruit them is going to be completely different than the normal way of recruiting. If you want help with that, it’s on you.
I’m really sorry Matthew, the best thing in that situation is to make sure you tell customers the truth upfront.
Tell them we’re overbooked, tell them we’re shorthanded on technicians and plan. Just tell him, like I’ve been in that situation as an advisor where we were calling all our customers at two o’clock to tell him that it wasn’t even gonna make it in the shop. The best thing is to tell him right up and tell him the truth.
We’ll reach out to your manager, Matthew and we’ll try to get him into our program because if you’re booked out until July, you basically probably could double the sales of that department, which means, in my experience…
Do you think you are buying a car from Carvana anytime soon?
Most of the time in a Highline dealership, if you’re booked out that far, the service department probably isn’t making that much money. There’s a huge upside for the dealership too. So if you want us to offer our services, we will. But the best advice I could give you is just tell the truth as painful as it is. People appreciate knowing I’d rather have somebody blow up at me right up, than a day and a half later while I’m making excuses because the situation doesn’t get better.
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