Service contract and body shop revenues make gains in 2000

Dealerships as a group sold more aftermarket products and made more money in every back shop department in 2000, mostly because of the volume of vehicles dealerships sold and serviced during last year's record setting retail automobile market.

These other profit centers will require even more attention from dealers if the predicted dip in automobile sales materializes, says an economist at the National Automobile Dealers Association, which tracks these figures.

Two areas, however, are of the most interest in 2000. They are the increase in body shop revenue and the increase in service contract penetration.

Total dealership body shop sales went up to $7.5 billion in 2000, compared to $7 billion in 1999 and $6.66 billion in 1998. This is significant because the number of dealerships that operate body shops continues to decline. An estimated 43% of dealerships had body shops in 2000, compared to 45% in 1999 and 51% in 1998.

“There are two conflicting factors here,” says NADA Economist Jason Altman. “Fewer and fewer dealerships have on-site body shops, but the prices are increasing. Also, those dealerships that have body shops are getting more business.”

In the mid-1980s, service contract penetration was over 30%. It still was more than 30% in 1990. But then vehicles started to improve in quality and manufacturer warranties were longer and more encompassing.

Extended warranties dipped to an all-time low in 1998 when it reached a mere 20.1% of new-vehicle deals. In 2000, service contract penetration is on the rise again as dealers try to counter their increasing floor plan costs and shrinking margins on new-vehicle sales.

Service contract penetration was 23.5% in 2000, up from 20.7% in 1999.

“I do know that dealers made a concerted effort to sell them last year,” says Mr. Altman. “There was an increased awareness of and attention paid to selling service contracts.”

Mr. Altman says that dealers should focus more on their other back shop operations in 2001, particularly the service and parts departments.

“Service departments are very important when sales drop off,” he says. “Last year's numbers won't reflect any focus on service and parts as a profit center. Dealers were too busy selling cars. This year, we'll see more focus on it because it's a good thing to do when you have slower sales.”

Last year's increase in service and parts revenue, says Mr. Altman, is a byproduct of the booming market.

Total service and parts revenue jumped to $73.43 billion in 2000, from $67.67 billion in 1999 and $63.66 billion in 1998.

Customer mechanical labor continues to be the biggest revenue source in the back shop at $13.51 billion. Wholesale parts revenue is the next-largest source with $12.18 billion in 2000.

Ironically, parts and labor revenue from warranty work continues to increase, despite the improvements in vehicle quality. Service labor revenue nudged up to $5.73 billion in 2000 from $5.4 billion the previous year. Warranty parts moved from $6.9 billion in 1999 to $7.65 billion in ’00.

Again, Mr. Altman credits the sheer volume of vehicles being sold for the increase in warranty revenue.