Fixed Ops to the Rescue

We all know the story. By the end of the year, new-vehicle sales will have dropped at least 6 million units since the end of 2007.

That means your dealership is generating significantly less traffic. The shoppers that are coming in, you're having a tough time financing. Used-vehicle sales aren't much better.

Fewer sales mean less finance and insurance revenue. So how do you make money, or at least survive?

Fixed ops to the rescue — if you're smart.

There's a host of reasons you should be already relying on your back end operations. According to the National Automobile Dealers Assn. data, fixed operations generates only 12% of the revenue, but more than 46% of the average dealership's profit.

The revenue and profit share should increase significantly this year. More customers are holding onto their vehicles, meaning more vehicle repair and maintenance opportunities.

It's the one department that provides the best opportunity to move the needle this year.

Ron Joffe, the general manager for the Penske Automotive Group's Lexus Bridgewater store in New Jersey, implemented a plan to bring back customers who had not been in the dealership for the previous 365 days.

It was a one-month program that generated $24,000 in gross profit. Multiply that out by 12 months and that's $288,000 in additional gross profit.

“The largest piece of business that we don't get is customers who buy the car, but don't return for service,” Joffe says. “But our success really is based on continuing to hold onto existing customers.”

The secret was in reaching out to people already in the database. “It's very expensive to do if you don't use your database,” Joffe says. “We no longer advertise in mass media. It just doesn't work.”

Joffe handles all of the store's advertising, but he asks other people for their input. “I want to make sure I'm not advertising to myself,” he says.

He also buys a local paper whenever he travels to see what other dealers are advertising. “There's always someone smarter than you,” Joffe says.

The dealership also focuses on capturing service customers who bought cars at other stores by finding out where customers got their cars from and when their leases end. And then, he markets to them at the appropriate time.

A salesman also works the service department every day generating sales for the showroom.

Lexus Bridgewater also pays attention to their pre-owned customers. Typically, they're not as loyal, but for a dealership that treats them the same as new-car customers, the return can be fairly strong. It also is an avenue of service revenue most dealers ignore.

Lexus Bridgewater ranked 165th on this year's Ward's Dealer 500 (see chart beginning on page 16). It generated $13.9 million in fixed operations revenue in 2008. The dealership ranks first among the 53 Northeast Lexus dealerships in customer loyalty.

“We try to take away every reason for a customer to not do business with us,” Joffe says. “We've expanded our products we sell, including doing more with tires.”

Joffe, who has more than 30 years experience with fixed operations (for several years, he wrote the fixed ops column for Auto Exec magazine), studied the restaurant industry to get insight on how to manage his back end better.

“You look at the big chains, such as Applebee's, and the trick is to turn the tables over,” he says. “They get you seated and then get you out as fast as they can. It's the same way with the lifts. The quicker you turn the lift, the more money you make. And what keeps the lift from turning over? Parts.”

It's not about having the most parts, Joffe says, who keeps only $400,000 worth of parts inventory in stock. Instead, he focuses on having the best parts — the ones that sell the most. As a result, his obsolescence is less than $1,000. His parts and accessory profit averages about $600,000 a month.

“Most dealers don't tie the availability of parts to the efficiency of the service department,” he says.

The dealership just signed with XTime, an online service scheduling company. Joffe is monitoring the return on investment on the appointments people make online versus what's made over the phone or in person.

He's not sure what the result will be, but guesses the two will be similar.

Joffe is a rare general manager or dealer who really understands and cares how integral the service and parts departments are to the overall health of the dealership.

“Unfortunately, many dealers grew up in the front end, in the showroom, and know little about their fixed operations department,” says Mike Baker, vice president with the Bob Baker Automotive Group in San Diego, CA. “But that is where they should be putting their attention. Think about it. The last two years have been very hard on the variable operations when compared with fixed.”

The back end is not something a dealer can just turn his attention to one day and expect it to suddenly take off.

“The truth is, if you didn't have a good fixed operations before now, you probably aren't going to be able to get it where it needs to be in this environment,” says John Davis, a CPA and executive with Dixon Hughes PLLC, a dealership consulting firm. “It goes back to that piece of doing it right when times are good.”

Davis says his firm advises dealers to make sure the back end is working smoothly. And that requires having a great reputation in the community. “That's because you have to compete even harder today with independent shops to get that customer pay work,” he says.

Another key ingredient is making sure you have the right people. “You have to have people in the fixed operations side who know what they are doing,” Davis says.

Dealerships soon will have their pick of the litter, so to speak, with more than 3,000 dealerships closing in the next several months (that's additional to the 1,000 that closed in 2008).

“Where you used to get two prospective employees responding to an ad, now you'll have 10,” says Lee Kemp, a former Ford dealer, U.S. Olympic wrestling coach and founder of Hire the Winners, a firm that helps dealers hire the right employees.

A fairly recent trend dealers are beginning to jump on is the vehicle inspection process when customers bring the vehicle into the service department. It's a subject that's been talked about for years, but is one few dealerships have been successful mastering.

One reason is because it's difficult, without good technology to force the technician or service advisor to complete an inspection and then present the information properly to the customer.

One recent study found dealers were leaving nearly $20 billion in possible repair work on the table. An Automotive Aftermarket Industry Assn. study a few years ago estimated there is about $62 billion in potential repair work in cars currently on the road.

That number probably is increasing as more people are holding onto their vehicles longer.

Les Silver, the CEO and President of Mobile Productivity Inc., says vehicle inspections are an area most dealers are missing.

One of the firm's customers, Camelback Toyota, ranked 44th on this year's Ward's Dealer 500, last year increased its monthly profit $51,000 by implementing a consistent vehicle inspection process.

The Phoenix-based dealership services about 3,000 customer-pay vehicles a month. With the additional work generated by the process, the labor and parts gross jumped 14.7% -- good for $40,628 in additional profit.

The new process dispensed with handwritten invoices which often get dirty and can't be read by the customer, says Service Manager Rob Menasci. Customers now get a professional report that details work the vehicle needs.

Each technician and advisor follows the same process now, so it's consistent and measurable.

Silver says it's ironic that dealers often get criticized for upselling, when they should be doing more of it.

Dealers that successfully are vehicle inspections to add more profit are upfront with customers, letting them know they are doing the inspection — for free — in addition to fixing what the original problem.

It has to be a thorough inspection, also, not one that is a cursory glance at the vehicle.

MPi once was alone in vehicle inspections, but now, other companies are jumping on board.

Automatic Data Processing Inc.'s Dealer Services Group launched its solution at NADA in January. It's called Vehicle Inspection.

Chuck Cooper, senior product marketing manager and one of the brains behind the solution, says the return on investment for pilot dealers has been north of $9,000 a month.

“That's additional gross profit, just by enforcing the vehicle inspection,” he says.

The tool also has a “denied work” module, that lets the dealer see what money is leaving the store.

“It's amazing how much money is walking out of the dealership,” Cooper says.

The denied work information is automatically added into the dealer's customer-relationship tool. ADP admits the integration level is better for dealers using its CRM solution, Customer Touch.

Another product ADP is toying with automatically generates a fee code and amount on the invoice, incorporating various charges such as, state inspections, environmental fees, an emissions sticker, tire tax and tire disposal fees.

“Once this is set up, it's pure profit,” Cooper says. “I think this one is a sleeper.”

Another way to capture customer-pay work that might be leaving the dealership is to set aside a certain number of bays — if you the space available — dedicated to the quick services such as oil changes and tire rotations.

An added benefit is the opportunity to inspect the vehicle while it's on the lift while the other work is being done.

“You can't get rich off any one thing,” Joffe says. “But combined, all those things can add up.”