In spite of tremendous competitive pressures on all dealers, the turbulence from the continuing saga of factory ownership, faulty distribution systems that make you want to "VOM"it, and shifting paradigms because of the publicly-held dealerships dealers nationwide will chalk up a banner year in 1999 both in sales and profits.
MPG indices through nine months of 1999 show an increase of Operating Profit at 29.0% over 1998 and 1998 was 20.4% ahead of 1997. Looking back over the past eight years, dealers in the top 20% of MPG's client base posted increases over the previous year seven out of eight years. What a phenomenal run!
The big question on everyone's mind is, "How long can this business cycle continue?" From a profit standpoint, there is no reason I can see in the immediate future for any decline in overall dealership profits. Let me explain my rationale for continuing profit increases, even if there are some general economic downside adjustments.
Dealers can enjoy continuing profit improvement if they change their focus a bit. Here are the actionable strategies to employ:
Used vehicle retail ratios continue to lag at .62 to 1 (62 used at retail per 100 new at retail). In our client base we see many dealers achieving a better than 1 to 1 ratio through effective marketing and advertising, through the realization that it takes at least 10 well-trained sales professionals to sell 100 used a month. It also demands 135% of expected sales in lot-ready inventory. The "Secondary Finance" and "Buy Here/Pay Here" segments can easily push a dealership over the top on this objective. "There's a lot of gold in them thar hills!"
The collision repair business is wide open for exploration. I just returned from speaking to the Utah Automobile Dealers Association and a client of mine in Utah just opened a huge state of the art collision repair center with all the bells and whistles. Guess what? Sixty days after the grand opening, it appears he did not build it big enough. An old buddy of mine in Detroit has had a similar experience
In most markets, you are clearly leaving 15% of your dealership's total gross profit objective out of the cash register, if you don't have a state of the art collision repair facility.
These facilities when properly equipped, aren't cheap BUT, bottom line profits will pay back your investment in two and a half to three years, if properly managed.
The advantages of these strategies, it seems to me, is the fact that both are not dependent on your new vehicle franchise(s) and have proven in the past to be recession-proof. Expanding in these areas now in times of great profit is a win-win situation.
Many of you are investing in business development centers, but the focus for most is on more new vehicle sales.
Why not focus on all the customers to whom you have sold new and used vehicles the past five to six years and get them coming back for service? The gross margin on service sales sure beats the heck out of 6.2% margin on new vehicles, which is the domestic margin we see. Don't get me wrong let's sell all the new vehicles we can, but most dealerships are far too dependent on new vehicle gross and if margins continue to diminish and/or new vehicles decrease, many dealers will see red ink, that is.
Expenses appear to be in control for most but should new vehicle gross drop off, I think you would find expenses are actually quite high and getting higher. (Do the math! Reduce your new vehicle gross contribution for 1999 by 25% and then recalculate your total expense as a percent of total gross, after making an adjustment in variable gross you'll quickly see what I mean.)
The culprit personnel expense! Now in good times is the time to prune your organizational tree of dead wood. Who in your dealership team would you not rehire? Then why keep them?-"Oh, they're a relative what difference should that make?"
Frankly, I can see another 25-30% increase in the profits of those dealerships that are willing to "mine" for the hidden gold which is there for the taking.
Last year was fantastic. Now is the time to consolidate your gains.