Reducing Depreciation Costs With Employee Sales
The fleet industry is keen on the idea of employee sales, but, surprisingly, there are fleets that don’t pursue this alternative to wholesale, minimizing depreciation and maximizing resale dollars.
It has been said that, absent any other effort, a fleet manager could do a pretty good job at managing fleet expense by focusing on just two categories, fuel and depreciation. Now, these certainly aren’t the only areas to emphasize, but, with time and resources dear, focusing on these two largest expense categories isn’t a bad idea.
What can fleet managers do to minimize depreciation expense? There are actions at both ends of the depreciation cycle — acquisition and resale — as well as those that can be taken during time in service. Here, the concentration will be the backend, resale, and how selling vehicles to employees (and others) should be part of any successful fleet policy.
To begin, it is important to define what depreciation actually is. For leased fleets, some portion of each month’s lease payment is used to reduce the capitalized (original) cost; this is accrued over time, so that, when the vehicle is finally sold, the cap cost has been reduced to a point where the remaining balance fairly reflects the actual market value of the vehicle. Sometimes, this is referred to as “depreciation.”
But, this is an inaccurate label. The process of reducing the original cost during the service life of the vehicle is more properly called reserve for depreciation or, financially, amortization. These labels more accurately reflect what is taking place. For example, if the original cost of the vehicle is $20,000, a typical fleet terminal rental adjustment clause (TRAC) open-end lease will amortize that cost over 50 months or 2-percent-per-month. Thus, each month’s lease payment will include $400 ($20,000/50 = $400) to reserve against the actual depreciation of the asset. (For company-owned fleets, this reserve can take the same form or sometimes a company will use tax depreciation rates for accounting purposes).
Depreciation — the real thing — isn’t known until after the vehicle is sold. Vehicle (or any asset) depreciation is quite simply the difference between the original value and the proceeds of its sale. A $20,000 vehicle, if sold for $10,000, will show depreciation of $10,000. This is sometimes called actual depreciation, to distinguish it from the depreciation reserve described above.
Depreciation — whether the real thing or depreciation reserve — accounts for the large majority of a fleet’s fixed expense, sometimes as much as 70 percent or more. It can be managed in a number of ways (the latter of which is the concern here):
- Negotiating the original cost down to the lowest point possible.
- Keeping vehicles well maintained, resulting in the best-conditioned vehicle to be sold.
- Increasing resale proceeds.
- Selling vehicles.
The process is well known. About two months in advance, a driver will send in his or her new vehicle selection request. The fleet manager orders the vehicle from his or her supplier (lessor or fleet dealer). Six to eight weeks later, the new vehicle is delivered, the driver heads to the dealer to pick it up, and drops off the vehicle being replaced. The used vehicle is then picked up by the supplier and, usually, sold at auction. Now, this is not to say that every fleet vehicle is sold in this manner; however, it is safe to say this could describe the fate of most vehicles.
The advantages of this process are obvious; it’s pretty much hands off for the fleet manager, and it generally provides for a swift sale. And, it is done thousands of times every model-year.
While this standard practice may keep depreciation within acceptable limits, it isn’t the best way to minimize that fixed fleet expense.
Marketing to Employees
Selling out-of-service fleet units to employees is hardly a new concept; it has been used for decades. This is why it is surprising that many fleets don’t sell to employees. And, of those that do, many don’t use this option as aggressively as they could.
A successful employee sales program begins, like any other service, with targeted marketing. Too many employee sales programs begin and end with simply offering only the driver the opportunity to buy the vehicle when it is replaced. If he or she wants a price, one is provided. If not, it ends there. If a price is offered and accepted, then the driver is instructed to “send a check, and we’ll send you a title.” This is inefficient, and is a lazy way to build an employee program.
There are a number of specific processes in any successful employee sales program. In no particular order, they are:
- Ancillary programs and services.
- Procedures/paper flow.
Selling used vehicles isn’t just a matter of providing pricing and getting checks, if the primary purpose of such programs — minimizing depreciation — is to be achieved.
Setting a Price
It seems at first glance to be obvious; before selling vehicles to anyone, prices must be established. But, it isn’t as obvious or easy as one might believe.
Most consumers believe their own vehicle is worth more than it really is and that yours is worth less. It is the latter that is often the issue when providing pricing to employees for used fleet vehicles. Careful analysis of the various used-vehicle markets, along with proper communication, can avoid the issue. There are several values involved, and all but one are impacted by mileage, condition, and equipment:
Net book value: This is the previously described amount that the company is responsible for on the books. It is an accounting value only.
Auction value: This is the value for which vehicles of similar age, mileage, equipment, and condition are selling at auction.
Wholesale value: Same as auction value, only for prices paid in the direct sale, wholesale market.
Retail value: Same as auction and wholesale value, but at retail to end buyers.
There is another value, which can’t be definitively determined, and for which there really are no benchmarks: so-called “wholetail” pricing or pricing that falls somewhere between wholesale or auction and retail values.
Net book value isn’t really a very good option, as it may or may not reflect the true value of the vehicle in the open marketplace. If it does not, an employee may end up paying either much more or much less than the fair market value of the vehicle. If the former, the employee will be subsidizing the company vehicle program; if the latter, the company will be subsidizing the employee’s purchase. Neither is an attractive option. This leaves the fleet manager with one of the remaining three: wholesale, retail, or wholetail pricing.
There are a number of used-vehicle guides that can be used to establish the best pricing options. Most of them will provide for adjustments based upon condition, mileage, and equipment, so that pricing is usually a fairly accurate representation of what actual markets are paying for like vehicles.
Wholetail pricing is a popular pricing method; it allows the employee to purchase at a price lower than what they’d pay for a retail purchase (at a dealer, retail used-car lot, or private sale), and for the company to receive proceeds greater than the standard auction or wholesale proceeds can be. Both parties benefit.
“Wholetail” pricing can simply be a matter of splitting the difference between wholesale and retail values in a guide. For example, if the wholesale value is $8,000, and the retail value is $10,000, the vehicle will be priced to the employee at $9,000.
While establishing a pricing mechanism is important, equally crucial is fixing a firm choice to begin with; and to make it clear that there is no bargaining to be done, that all prices are firm.
Managing Ancillary Programs
For an employee sales program to be successful, it is important to make the process as seamless and complete as possible. This is where ancillary programs play an important role. There are three primary programs that should be used:
Merely providing a vehicle for sale leaves employees to secure the above (if needed) on his or her own. While this may be their ultimate choice, if the company provides employees the option of these programs, it can boost the number of sales, sometimes substantially.
There are banks, credit unions, and auto financing companies that will be happy to establish a financing/leasing package for employees purchasing company vehicles. There are also extended warranties available, geared toward the used-vehicle market, as well as both liability and physical damage insurance coverage. The goal here is to offer the buyer one-stop shopping when considering the purchase. The ability to finance or lease a car, insure it, and purchase warranty coverage all in one place will make selling and buying much easier for both parties. Your lessor or fleet service company may well have such programs available, in addition to full administration of the program.
Communicating with Buyers
The pricing mechanism has been chosen and the ancillary programs are in place: The next step will be to determine how the program will be communicated to employees, not just drivers. Drivers were, for a long time, the sole target market for an employee sales program. They still will be the most common purchaser; after all, they know the vehicle intimately. How it’s been maintained, what condition it’s in, and may have purchased extra equipment when it was new with an eye on buying the vehicle themselves. But, with the kinds of technology available to fleet managers today, that narrow market can now be extended to include all employees, which increases the potential number of buyers, and, thus, also maintains a level of competition that can be reflected in pricing.
A “virtual used-car lot” is not difficult to create and maintain. This can be accessed by all employees via the company Intranet site or provided by a fleet supplier. As vehicles come up for sale, they can be posted on the site, with photos, descriptions, and pricing, just like any regular used-vehicle advertising. If such a venue is created, it is a good idea to limit the amount of time a vehicle is posted on the site. Keep in mind that as long as a vehicle remains unsold, the company carries the vehicle and it’s cost on the books, and that costs money. Once the limit is reached, the vehicle can be removed and sold via auction or wholesale.
Most vehicles come up for sale when they are replaced under the normal fleet cycling policy (some may become available for other reasons, such as force reduction, etc.). When drivers submit new-vehicle orders, a price should be provided, along with monthly finance or lease payments, extended warranty costs, and insurance. Don’t merely ask the driver if he or she is interested in buying the vehicle; market it. Sell it. If the driver has no interest, he may have a friend, neighbor, or other family member who is.
Other communication outlets should be used to remind all employees the fleet has a number of clean, well-maintained vehicles for sale. A link on the company Intranet site, featuring a “vehicle of the week” is a good idea, with a click-through to the virtual lot. E-mail signatures can simply say something like “Need a car?” or “Only $179/month” with a photo, and a hotlink to the site. Whatever the means, get fleet vehicles out in front of as many potential buyers as possible on a regular basis. Marketing and selling fleet vehicles to employees is no different than selling used vehicles on the open market in a local newspaper or online.