Run With the Big-Dog Auto Dealers

In 2014, the average dealership net profit as a percentage of sales was unchanged from 2.4%, according to the National Automobile Dealers Assn.

As a reminder, new vehicle sales increased in 2014 by 1 million units or 5.8%.  According to the latest data available from NYU’s Stern School of Business, the net margin in the auto and truck sector they follow is 3.16%.    

I’m often asked by people outside the industry why, when compared with other industries, the net as a percentage of sales is, on average, so low for auto retailing.

What would attract the interest which prompts investments from such notables as Warren Buffett, Bill Gates and Eddie Lambert? 

What potential do they see, or what do they know the average dealer doesn’t? What tools do they have in their arsenal, or what advantages will they have? What actions will they be able to incorporate that will differ from that of the previous dealers’ and increase this net to sales metric?

Before getting into that, we must first consider the initial gross-profit margins.  When asked their opinion of the No.1 issue facing the new-vehicle franchise industry today, most educated persons will answer margin deterioration. 

It’s no secret front-end gross profit and the gross profits as a percentage of sales continue to decrease. That’s coupled with the impending/expected/potential decrease in net finance and insurance income and the pressure from outside competition on accessory sales. 

There is no question about the impact the Internet is having on gross profits. As much as I would like to think differently, I would suggest that little customer loyalty to a dealership exists.

Dealers who post on their website prices that are sometimes $1,000 and more below their net cost are doing a tremendous disservice to the industry and, in time, will be affected by their actions. While some manufacturers are trying to limit these actions, they probably won’t succeed.

In addition to the cited issues that affect new- and used-vehicle sales, there is increasing competitive pressure from independents and national auto centers. 

Mechanical service is the first item that comes to mind, but we also are seeing the larger independents grow in the collision-repair industry, which will impact franchised dealers’ ability to sell their services at a fair labor rate and parts at a fair margin. 

Never doubt for a moment the impact insurance companies have on the collision business and, with the direct repair agreement carrot dangling, dealers either have to play by the insurance company rules or get out of the collision business.   

As for current big investors such as Warren Buffett and potential big ones such as George Soros, the thought is that larger groups can create better efficiencies. But that applies only to the expense side of the business.

Retail cars and trucks are sold one unit at a time. Other than using standard processes on individual transactions, there isn’t anything large groups can do to raise their gross profits per vehicle retailed.

By virtue of their size and financial resources, they can potentially invest a higher dollar amount in a trade-in, but this would affect primarily volume, and PVR grosses would remain stable, if not decrease eventually. 

So, these companies must focus on expense management while creating efficiencies. Areas where efficiencies are available in no particular order include: the costs of funds for new and used inventory, the cost of leads, the fees associated with inventory-listing services, the cost of certain employee benefits and the ability to self-insure where applicable, bulk oil and other fluids for service, tire-supplier discounts, miscellaneous materials and paint and supply costs, mechanical service lifts.

The other savings these groups will or currently take advantage of are their routine expenses. Due to their size and the amount of business publicly traded groups represent, suppliers will be much more likely to command discounts not typically available to individuals or small dealer groups.

The last item of leverage is consolidated functions and jobs across dealership lines. For example, one accounts payable and receivable person, one warranty administrator and so on for multiple dealerships.   

If I’ve learned nothing else during my years working with the publicly traded companies, it’s that “The Street” has a very unforgiving nature and grows impatient quickly when sales and net profit don’t grow to enhance shareholder value.

So, what does all of this mean for the average dealer? Create each and every efficiency possible in your operations.  Don’t overstaff. Maximize productivity

Look at each expense and determine if you require the product or service. If you do, what steps can be taken to reduce the cost. Control the amount of new-vehicle inventory you stock at any one time. Stay focused on reducing inventory aging and increasing inventory turn.    

As noted, the average net percentage of sales was 2.4% for dealers last year. This is the all-dealer average that includes dealers from all franchises. I have personally worked with domestic and import dealers who had nets that exceed 5%. A few luxury stories are even higher.

The common trait of higher-profit dealers is that their organizations are process driven. No detail escapes their attention.

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