Don’t Let Expenses Gnaw Into Profits

In recent conversations, a few dealers have said their vehicle sales are good, but profitability has not increased at the same pace as deliveries.

I checked the NADA Industry Analysis’ Dealership Financial Profile to see what others were experiencing. While this information normally trails by 60 days, it presents a real overview of business conditions.  Here’s what I found:

The average dealership gross profit as a percent of sales is down 0.5% compared with the same period in 2012 (14.7% in 2012 versus 14.2% 2013 year to date).

While the gross is down, the total dealership expense as a percentage of sales is also down (12.4% in 2012 versus 12.1% so far in 2013). 

The average dealership net profit as a percentage of sales is 2.1% in 2013 versus 2.2% in 2012. In other words, yes, we have decreased our expense burden, but not at the same rate that gross has decreased.

Let’s discuss gross. We all are experiencing the challenges associated with generating gross profit. Much has been written about new-vehicle margin erosion. I can’t recommend any processes to change this. New cars aside, there are real gross opportunities in used vehicles, finance-and-insurance product penetration and sales and fixed operations.

One of the items I always track is the dealership parts and service absorption rate. The decline continues: 55% year to date versus 55.6% for the same period in 2012.

Not to overly simplify this, but if we can’t increase our gross profit, we must decrease our cost. We must maximize our efficiencies.

I know dealers are experts at reducing their costs. We don’t have to look far back into history to see how dealers right-sized their operations during late 2008 and throughout 2009.

While I’m not suggesting anything as drastic as that, dealers as they did back then should look at each expense and its percentage of gross. 

Many fixed costs have increased as a result of facility upgrades, and there isn’t anything we can do about that. But there are other areas where you can do something about selling and semi-fixed departmental expenses. First, we need to identify individual expenses. 

All dealership management systems have a 13- to15-month expense-trend analysis feature. By reviewing this report, you can quickly identify any increases and decreases in spending and create a spreadsheet that calculates the percentage each item represents as a percentage of gross.

Armed with the results of this monthly exercise, you can begin to make the adjustments necessary to correct out-of-line conditions.

Three big expense categories are personnel, floorplanning and advertising. The following are a few quick items that could potentially add to your expense burden. 

Overtime. This is an often-overlooked item you need to monitor weekly. It is an expense that has a way of increasing quickly if not tracked and addressed. Also look at your personnel turnover. In addition to all the other associated cost, turnover adds costs as it relates to employment taxes.

Floorplanning. It’s not necessarily just the physical level of your inventory that increases costs. While having the proper days’ supply is important, it’s a slow inventory turn rate that racks up costs. Monitor and act on aging inventory that exceeds 90 days.

Advertising. This always is a hot topic at dealer meetings. Much of today’s advertising cost is what’s paid to online lead providers. Dealers who do best in their advertising as a percentage of gross spend have a process that lets them assess the effectiveness, quality and results of leads.

Keep working on improving gross profits. But also take a hard look at each and every expense as it relates to gross.

Good selling!

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