Car Dealerships Enjoy Good Times; But Mind Those Costs

It’s been a good year so far.

The SAAR is running well ahead of 2014 and appears to be heading toward a year-end level nearing 17 million. Used-vehicle sales are brisk, with an expected year-end total of 37.4 million

The good news for new franchised dealers regarding used-vehicle sales is that they are up 3.6%. Private-party and independent dealer pre-owned vehicle sales are down, each by 1.6%.

Looking at the most recent information available from the National Automobile Dealers Assn.’s  Dealership Financial Profile, total sales are up 6.9%, total gross is up 5.9%, and pre-tax net is up 11.5%. Total expenses are up too, by 4.7%.

Within these operation numbers are a few key items. One of the more important numbers is the dealer floorplan interest expense. 

In 2014, this expense represented a credit of -0.14% of total sales (-$84 per new vehicle retailed). In 2015, the average dealer’s credit has increased to a credit of -0.19% of total sales, or -$123 PNVR. This trend is a testament to the focus on inventory aging and turn.

Another positive trend is dealership service and parts absorption, or how much the backend covers the entire store’s operating costs. 

Dealerships, on average, have increased their absorption from 55.1% in 2014 to 55.7% in 2015. This could represent an increase in fixed-operation gross, a reduction in expense or a combination of both. 

What is your absorption this year to date versus last year?  As a reminder, the formula is the fixed gross as a percentage of total dealership expense.

My experience has shown that many dealers tend to focus more on sales and gross profit than expense management. 

I would encourage you to take a few minutes and prepare a simple spreadsheet listing each category of expense and the total dealership gross for 2014 and 2015.  Divide each expense by the total gross by year and observe the results. If any categories appear to be out of line, you can dig more deeply to identify the cause.

An area to look at is personnel expense as a percentage of gross. I recommend that at minimum 55% of your personnel be categorized as direct revenue generators. 

An area which, in my opinion, isn’t receiving the required attention today is your new-vehicle floorplan interest expense. 

Granted, when most dealers are working in a net-credit situation, it is easy to pay less attention than may be required. 

Obviously we want to maximize the credits available and then install policies and procedures to turn them into a net profit.

The not-so-secret answer is your inventory turn. The less time a vehicle stays in your inventory, the less interest expenses will accrue. Pay heed to aging vehicles on the lot.

Ensure that they are ready to sell, prominently displayed and discussed often at sales meetings to keep them at the front of your sales team’s minds. These vehicles should always be offered first as an option when dealer trades are being made.

The important thing is that while new- and used-sales are good and the industry news is positive, we must not allow our attention to waiver from expense management and maximizing our potential net profit.

Good selling!

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