Navigating Downward Pressure on Vehicle Gross Profits

Healthier vehicle inventories and stubbornly high interest rates are eroding what was once a profit center for franchised dealerships. For the first time since before the pandemic, floor planning has once again become a cost center instead of a source of profit. This flip from an asset to a liability, combined with downward pressure on new-vehicle gross profits, is challenging dealerships to find new strategies to cut costs without negatively affecting the customer experience.

During the pandemic-driven chip shortage, when vehicles were routinely sold before they ever hit dealership lots and interest rates were historically low, there was money to be made from floor planning. In 2020, the National Automobile Dealers Assn. said dealerships made an average profit of $108,395 on floor planning.  In contrast, when the Federal Reserve raised interest rates in 2018 to prevent a tight job market from causing inflation, floor planning cost the average dealership $55,164, according to NADA. That cost rose to an average of $82,979 the following year.

Enter 2024 and the profit picture for most dealerships has become even more challenging.  According to Zach Shefska, co-founder and CEO of CarEdge, one dealer reported that their inventory floor planning expenses jumped from $49,000 to $670,000 per month year-over-year as interest rates soared and manufacturers shipped more cars to their lots. While this example may be extreme, our estimates place the current average dealer floor plan expense closer to $70,000 per month, an 800% increase since 2020.

Compounding this bottom-line pain is new-vehicle margin compression as vehicle inventory levels push the purchasing power back to the consumer as dealers enter a more competitive market.

Such a rapid shift in profitability requires urgent and decisive action. Few dealerships or dealer groups can withstand this transition without strategies to reduce expenses elsewhere in their operations. The good news is that stores can reduce overhead while continuing to deliver healthy profits and delivering great customer experiences.

Get Back to Basics 

The heady days of taking vehicle orders mean sales skills may have fallen out of practice. Put your sales process and sales associates under renewed scrutiny and invest in modern retail training to help your sales teams elevate their skills to meet customers where they are in the process. Newer employees may have never worked in a competitive sales environment.

It’s time to bring back sales training with a focus on the current realities including how to sell EVs versus ICE, deal with negative equity trades and make sure they’re honoring the work the customer has done online before they show up in-store, so they don’t have to start the process over.  Combining in-store training with virtual AI-driven tools and adding gamification to engage younger staff members is a great place to start.

Leverage New Technology

Another opportunity is to leverage additional AI-driven technology like a digital voice assistant (DVA) to bring efficiency to your BDC and fixed operations. Properly integrated, a successful DVA can handle over 50% of your service calls with no human intervention, with appointment show rates exceeding 80%.  This can generate tremendous cost savings or free up staff to make revenue-producing outbound calls. It also ensures 100% of inbound phone calls are answered 24/7 in a consistent, professional manner to deliver a better customer experience. 

As AI is the hot topic in every industry right now, it’s prudent to vet vendors carefully and find a partner with deep retail expertise and established integration partners that will protect your customer data while delivering the best customer experience.

Combining best-in-class AI with a partner who also brings deep human intelligence is the key to a high-performing solution. Choosing the wrong solution, which produces poor results, can turn your team against technology and put your dealership at a significant disadvantage as the market continues to evolve. Dealers who embrace change and adopt technology will win the cost battle while delighting customers.

Prioritize On-Boarding

Finally, a clear and consistent onboarding process is a must for new employees. Contrary to what the past few years have told us, selling and servicing vehicles is hard work. Employee churn is inevitable. But when new hires are armed and equipped with the training and tools needed to be successful you can reduce churn and increase operational efficiencies that benefit bottom-line profits.

Increasing inventory levels, rising floor plan costs and margin compression are the latest twists in what continues to be a rapidly evolving automotive retail market. With increased scrutiny on training and judicious adoption of new technologies, this latest bump in the road will unleash the innovators and change agents who will shape the industry of tomorrow.    

Pat Reininger (pictured, above left) is CEO of Proactive Dealer Solutions.