How to Cut Overhead

A respected dealer told me, “My dealership overhead is set up to sell so many monthly units. Based on what I'm seeing in my market, this volume may no longer be realistic or attainable.”

I told him, “It's obvious that if you can't attain the vehicle sales and gross required to be profitable with your current overhead, your only choice is to reduce your overhead to a level where you can obtain the desired net profit results based on a realistic volume and gross.”

Writing this column affords me the opportunity to come into contact with many interesting people, from those in the retail automotive business to those in other areas of business.

Mark Dixon Bunger of the Forrester Research Inc. wrote me a letter regarding a column I wrote on becoming more efficient in dealerships. He enclosed a copy of a most interesting report, “Making Auto Retail Lean” written by him, Joshua Walker and Esther Yuen.

They address inefficiencies in “the system,” including problems in advertising and promotion, sales staff productivity and the cost of carrying excess and wrong inventory.

After reading the report, I researched our database to try to identify areas that offer opportunities for improvement for our NCM dealer clients.

Consider the trends we are seeing today. In 2003, the retail volume, new car and used, was down 1.52% for the average client. On average, these clients during 2003, spent 43.3% of their total dealership gross on personnel expenses (wages and benefits), net advertising and floor plan interest. That's up from 42.2% in 2002.

Even though total dealership gross was up 1.6% in 2003, expenses increased 3.9%, not an enviable trend.

So what can we do?

First, let's look at inventory. Even though no one will ever publicly admit this, we know dealers are strongly coerced (versus forced) to buy inventory that doesn't turn quickly.

Sure, in most cases, we receive a credit to help offset the financial cost of stocking those units, but that small credit doesn't begin to cover other associated costs, such as minimum commissions and low grosses. It's a situation most of us choose to ignore because it's just the way it is.

I encourage each of you to take a strong look at your sales history, projected sales for a specific period and your historical carry-over units by make and model when planning for this summer's inventory. It will pay dividends to examine the need for and amount of each make and model you'll want to stock.

From an advertising expenditure standpoint, I remind you of the success many dealers have experienced by purifying their individual owner database for targeting marketing. The benefits are:

I have often addressed the subject of personnel productivity. It is essential we have measurements in place to continually raise the bar.

First, determine where you are, by department, today. For example, take your total service department gross and divide it by the number of personnel in the department. This is your starting point. Monitor the number monthly for improvement or decline. By breaking each department down in this manner and monitoring the monthly results, you will begin to see improvement.

Back to my conversation with the dealer. It's hard to reduce overhead. But by addressing the “big three” — advertising, employee productivity and inventory — and realizing the amount of total overhead reduction that's available by monitoring and managing those areas, the results can be immediate and meaningful.

Good selling!

Tony Noland ([email protected]) is the president and CEO of NCM Associates, Inc.