Separate Service Facility Could Aid Used-Car Profits

Even if a dealership already has a service facility, a separate shop devoted to older used vehicles might boost profits, says Ed Kovalchick.

He is a trainer, columnist, owner of the Last Chance Garage restoration service and founder of the Net Profit Group.

In his view, the goal is 100% absorption for fixed operations. That mean service and parts department profits cover the costs for the dealership’s vehicle-sales operations.

Because of low absorption numbers, it’s not uncommon to have an expense burden of $2,000 per retailed vehicle. Shrinkage in fixed gross profit over the next couple of years may push that expense burden past $3,000. Today, absorption rates in the 40% range are not rare.

Catering to the second- and third-owner market for service work is “plus business,” and “it is massive,” Kovalchick says at a recent National Remarketing Conference.

After all, 75% of vehicles on the road fall into this category, averaging over nine years old. Cars that have more than 50,000 or 60,000 miles on their odometers need a different approach to repair than the typical franchised dealer’s shop can provide, because new and late-model cars rule those service bays.

Franchised and independent used-car dealers “both need it,” Kovalchick insists, because they're losing repair orders “in droves.”

Some 75,000 registered independent shops now operate in the U.S., along with 35,000 that are unregistered. Kovalchick says most shops had a fine year in 2008 and expect even better results for 2009.

What do these independent shops offer?

Different operations for different cars.

Kovalchick notes that studies show customers prefer to purchase vehicles where they receive service. Entering the independent shop business can happen in several ways:

“It's amazing how little costs go into establishing this business,” Kovalchick says. Dealers need to contact local parts suppliers and line up sources of technical information (such as identifix.com, IATN.net, and JustAnswer.com). Mailing lists of second and third owners are available.

Staffing the shop could require hiring from outside, but suitable technicians and managers might already be employed at the dealership, possibly in another capacity.

People who actually worked in an independent shop are naturally prime candidates, he says. Another good prospect is the one who's been the “go-to guy” in the service lanes.

Kovalchick uses Craigslist to find suitable employees. He also recommends technicians who’ve worked at Firestone or Goodyear, which operate more like independent shops.

Every customer is important to the technicians who work on older models, he says “We make sure that person is front and center.”

At new-car dealerships, in contrast, customers are likely to abuse technicians, effectively blaming them for problems.

Owners of older vehicles differ sharply from those who purchased new or late-model vehicles. Older-car owners are “much less interested in the free shuttle,” for example.

Rural dealers are more like the independent shops, Kovalchick says, while city dealerships focus more on first-owners.