Are benchmarks a self-fulfilling prophecy?

Retail motor dealerships rely heavily on benchmarking to monitor performance. In fact, it’s not just the Dealers who use this tool, but also the manufacturers, financiers and accounting firms.

While industry benchmarks are an extremely useful tool, we have seen that the saturation and availability of benchmark data has ‘over-defined’ goal posts and as a result many fail to look past them and see what may be attainable.

In short, the achievement of benchmarks has become a self-fulfilling prophecy.

For example, if a dealership’s sales team knows the gross profit benchmark is $2,000 per retail unit sold, and the parts manager knows the gross profit benchmark is 23 per cent, and the general manager/dealer principal knows a net profit return on sales of two per cent is acceptable, then they may believe that anything better is outperforming the market.

Benchmarks have largely remained unchanged over the years, most likely because in BDO’s view, their very existence has influenced industry behaviour. Why would a Dealer suggest, much less create, a vision that net profit to sales of six per cent is achievable when all staff know two per cent is an accepted industry benchmark?

In addition, why has the net profit to sales return become the ultimate measure of performance? It is a reasonably reliable and quickly identifiable measure, but perhaps it should be used in conjunction with Return on Investment (ROI) and Return on Capital Employed (ROCE). This is especially true given the significant dealership investments in inventory, debtors, working capital and facilities.

For many Dealers there is a significant time investment in meetings dedicated to comparing actual performance to industry benchmarks. The reality is that BDO is yet to identify two Dealers who have an identical method of accounting for all forms of revenue and expenditure. A Dealer has the ability to influence their own performance against a set of benchmarks simply through accounting treatment.

Some of the more significant examples include:

  • New vehicle factory bonuses taken to either reduce Cost of Sales (COS) or increase other income
  • Pre-delivery taken to either increase COS or increase expenses
  • The timing at which the many different forms of holdback are taken to income
  • The approach to calculating provisions; including doubtful debts, demonstrator and used obsolescence and warranty
  • The use of loads/lot fees which potentially increase COS and inflate provisions or be periodically washed back through other income

Dealer performance comparison can become more distorted if you add into the mix commercial elements such as equity in stock, capital structure, commerciality of dealer principal remuneration, ownership structure and investment in facilities.

If one thing is certain, Dealers should know how to get the most out of business benchmarks, and truly understand the impact that benchmark setting can have on their business.

Mark Ward
Partner, Automotive – BDO

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