A common discussion with dealers focuses on the pressure on their margins.  Whether it be in vehicle sales or fixed operations, margins are under fire for various reasons. 

While preparing for a conference call on service department profitability, I reviewed the most recent National Automobile Dealers Assn.’s average dealership financial profile.

I looked at service and parts absorption trends so I could use that information in my opening remarks for the call on how dealers can improve service-department productivity, efficiency and profitability. 

I found that the average dealership absorption has declined 2.5% in year-to-date 2012 compared with year-ago. Accordingly, the variable departments are under more pressure to produce gross if the dealership is to remain at the same level. 

This piqued my curiosity, so I looked at the complete profile to compare year-to-year average dealership performance. Here is what I found:

In 2012, total dealership dollar sales are up 9.6%  and total gross as a percent of sales is down 0.5%.

Here is a rundown of department sales contribution as a percentage of total sales:

  • New-vehicle department (54.9% of total sales) up 1.4%.
  • Gross per new-vehicle retailed down 0.21% or $50.
  • Used-vehicle department (32.9% of total sales)  down 0.2%
  • Gross per used-vehicle retailed down 0.64% or $57.
  • Service and parts department (12.2% of total sales) down 1.2%.

The good news is that the average dealer’s net profit as a percentage of total sales is up 0.1% to 2.6% compared with the prior year. How could this be, considering the numbers noted above? 

The answer: Total dealership expenses as a percentage of total sales are down 0.6% in 2012.

During the call, we discussed the common challenges dealers are facing today in terms of growing their service-department traffic and revenue. 

Most dealers are facing the same issues, such as warranty revenue dropping and competition in the local marketplace increasing. 

If you measure the work mix in most dealership shops today, you will see a high percentage of it is maintenance-related, typically requiring a discounted labor rate in order to be competitive. 

In addition to the challenges noted above, there are, in many dealerships, situations where the available technicians are over qualified for the work required. It obviously impacts our margins if a top-paid master mechanic is doing simple service work. 

I’m not suggesting anything that would limit technicians’ ability to earn a fair wage, but at the same time, I don’t need to note the consequences that occur if dealerships aren’t profitable. 

In some cases, I’m seeing dealerships employ variable pay scales for technicians based on the skill level required for the operation. 

While this practice may be considered controversial by some, many of the dealers who are employing this practice will tell you it has been a win-win.  It allows the dealership to maintain margins and the technicians to flag more hours.

Another practice that appears to help dealers capture more work and be more competitive is for service advisors to offer customers a good-better-best option as it relates to parts, with OEM parts being classified as the best. 

This process also helps the service advisor establish a trusted position with their customers.

I recently had a dealer share the fact that part of his growth in service this year stems from his service manager’s pay plan that measures same-store customer-pay sales for a period. This pay component maintains the manager’s focus on growing his traffic and repair order count on a monthly basis compared with year-ago.

I encourage you to focus your attention on your fixed-coverage percentage. Take the steps to increase departmental gross while controlling expenses.

Good selling.

Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.