Recently, a research department of a prominent university requested extensive data from us to show what happens to large dealerships, or more specifically a large chain of dealerships, during a "downturning economy" or a recession. They had been commissioned by one of the publicly held companies to do the study.
An interesting question, since none of the publicly held companies have experienced this and many dealers who have less than 17 or 18 years tenure have not experienced a real recession. Frankly, business has been so good for everyone, dealers perhaps have forgotten what to do when the going gets tough-even the old timers.
Putting proactive strategies in place to prepare for the low end of the economic cycle during the peak times we are now experiencing is a win-win strategy. Done right, you can improve profits significantly today and assure a steady, positive cash flow and a reasonable return on sales, equity, and assets in the worst of times.
Here are MPG's "Seven Habits for
Continuing Profitability"
1. There needs to be a conscious effort to make the dealership much less dependent on the new vehicle volume and gross. This does not mean selling fewer new vehicles or taking lower grosses, but when your dealership's new vehicle gross exceeds 30% of the total gross generated by the store, you may experience hard times during a recession. I have been in the business since 1950 and have lived through many economic cycles. New vehicle gross typically will drop 25 to 35% at the low end of the cycle. This would be devastating to many high-volume operators.
Take your year-end 1998 financial statement and do this calculation: Reduce new vehicle gross profit 33.3% and adjust your variable expense accordingly. How does this affect the dealership's bottom line? How would you make up this gross differential quickly? The answer: You cannot do it quickly! The strategies need to start now! You must strengthen your other departments, closely manage your expenses and maximize your human asset return (HAR). This takes time and expertise.
2. Your retail used vehicle volume today should be on a 1:1 ratio with retail new vehicle volume, minimum! Is your inventory diverse enough in years, makes, models, and pricing to allow this type of sales opportunity? Are you marketing and advertising sufficiently? Do you have the sales power to accomplish this sales goal? Your average salesperson will deliver ten units a month. Are you adequately staffed? Do you have sufficient display space? Inventory should equal 135% of expected sales. That is "on the lot" inventory.
3. A focused effort to increase mechanical service and customer parts sales must be in place to achieve a minimum 75% absorption on fixed coverage. Increased wholesale parts sales seldom help, and without good receivables control, your cash flow will suffer. Dealers must retain the customer's business after the warranty. There is more gross available on this side of the deal than when the vehicle was sold, but most dealers lose it! In a recession, it's vital. Why lose it now?
4. If a dealer does not have a body shop, that dealer is clearly leaving 15% of a dealership's available gross profit "on the table." And most dealers who have one have not made the technological changes necessary for maximum profitability. Believe it or not, this department has experienced the necessity for change more than any other. It's a different business than it was five years ago, and you either make the changes or lose!
5. Human Asset Return (HAR)-Review every employee position now. Do you absolutely need each position, or could some job functions be combined? Consider adding a Director of Human Resources/Training. Properly implemented, this position can actually reduce your overall personnel expense, while increasing employee productivity.
Review every employee with your managers. Ask the question, "If we were interviewing this person today, would we hire him/her?" In a recession, we are forced to make logical employee decisions of the mind...not of the heart. Good employee decisions are "mind decisions."
6. Scrutinize every single expense account with each of the managers.
Do we need it? Can we do without it? Will it make a profit for us? Can we buy it cheaper?
Have a "Payables Party" monthly about the 10th of the month to which all managers are invited in order to review all the checks written to vendors. The theme: "Where can we reduce expenses to the minimum?"
7. Every dealership should, on an annual basis, do a new pro-forma balance sheet (MPG provides a one-day consulting service to accomplish this). It asks and answers the question, "If we started our business today and had the ideal balance sheet, what would it look like?" The CFO or comptroller is then charged with and incentivized to achieve pro-forma balance sheet performance.
Every dealer is entitled to a minimum annual 20% return on assets, given the inherent risks of our business. In a good year it may be 30%; in a recession, it might be 8%. The sad fact is that right now, in the best of times, the national average is less than 10%. If you focus on these steps and use return on assets (ROA) forecasting methodology, you can achieve at least a 20% return annually.
Bob Dilmore is Chairman and CEO of Management Performance Group.