Match Your Costs to Sales

How do you react if you find yourself in the situation described below?

For years, I've operated a dealership that consistently enjoyed strong new- and used-vehicle sales and grosses.

I've “pushed the needle” on inventory because interest rates were low and we've turned our inventory quickly enough where the manufacturer's wholesale program allowed me to have a credit in the floor plan expense account.

If an out-of-line inventory condition occurred, no problem, we could sell ourselves back into line because we were confident the manufacturer would put large incentives on high days' supply vehicle lines. They always have.

To take advantage of the market and maximize my used-vehicle operation, I purchased program cars. After all, there was a good supply, they provided good grosses and I could floor plan them.

Sport/utility vehicles sold well. They represented a large part of my new-vehicle volume and were factoring in as a larger part of my used-vehicle inventory and sales. Gross profits on SUVs were good.

To hit the numbers and provide a high level of service to my customers, I increased personnel in the variable operations. As a result of continuing new- and used-sales increases, I added staff in the fixed operations to handle the increased units in operation.

Due factors beyond our control, the price of gasoline jumps significantly. This doesn't seem to be a problem because, the media remind us, even though fuel prices are higher, we are paying less than previously as a percentage of our individual incomes.

One day, we hear the Fed is considering raising interest rates to stem the possibility of a high inflation rate. Economists tell us to prepare for a series of increases over the next 18 months.

As if interest rate and fuel price increases weren't enough, our employee benefit costs increase by double-digit amounts each year. Yet business remains good and these external factors don't seem to be impacting us, thanks to incentives.

So, let's fast forward to what some of us may be experiencing today.

The price of fuel is considerably higher than the $1.89 per gallon average in June of 2004. Our floor-plan interest rate is 2% higher today than 12 months ago and our benefit costs are also higher. For many franchises, inventory is at near-historical high levels.

And many of our best-selling models are not selling at year-ago rates.

Unfortunately, many dealers have not made operational adjustments quickly enough. Consequently, their expenses are at year-ago levels while sales and grosses are not. This situation can be reversed. But it requires immediate and firm action.

As one dealer says, “I don't have to down-size my operation, I have to right-size it. I have to get my dealership profitable based on the business we are doing today.”

Starting with a blank sheet of paper, look at your operation today as if you were just beginning business.

Note your anticipated monthly sales volume based on your most recent six-month experience and your forecasted volume for the next six months.

Using these numbers along with those of your fixed operation, determine the level of staffing needs to reach those numbers.

Look at each individual expense, including advertising, and determine if it is an essential item. If so, does it need to continue at the same dollar level?

The sky isn't falling. Auto dealers are survivors. We will adjust. I believe we will be better operators for having experienced these challenges. Many industries have been forced to right size.

It's our time.

Good selling!

Tony Noland is the president and CEO of NCM Associates Inc. He's at [email protected].