Benchmarking: Data Integrity A Key Weakness

As dealership profitability declines, Dealers are coming under increased scrutiny from manufacturers and financiers, who routinely compare actual performance to industry benchmarks.

Using benchmarks to measure performance should assist in drawing accurate conclusions; however BDO is concerned that the integrity of the data is compromised and is resulting in the creation of flawed industry benchmarks.

Quite simply, industry profitability is being overstated and this is reducing the negotiating position of Dealers with various stakeholders, including:

  • Manufacturers on matters such as volume targets and facility investment
  • Financiers on matters such as borrowing terms
  • Government on matters of public policy relative to the industry
  • Consumers on matters of price

Unfortunately, stakeholders’ attention is rarely drawn to the return for risk relationship of operating a retail motor dealership. What’s more, stakeholders should be encouraged to consider individual performance against a range of benchmarks, rather than common current practice, which is too focused on single benchmarks in isolation.

There’s no doubt that the use of benchmarks to compare individual performance against competitors is a useful management tool. By contrast, the process of comparing individual performance is counter-productive in cases where the benchmark data is flawed.

Industry benchmarking has merit because Dealers have:

a)    Common revenue streams, including new vehicles, used vehicles, parts, service, finance and insurance (the sales)
b)    Similar suppliers, including manufacturers, which results in consistency of costs within a franchise for new vehicles and parts – the cost of sales (COS)
c)    Operations conducted under franchise arrangements, imposing similar requirements on facilities (arguably), inventory holding, reporting, equity participation and sales representation, which then reflects in rent, interest and employee costs (the expenses)

That said, whilst the benefits are there, industry benchmarking can be detrimental when the compilation of the data used to derive the benchmarks is flawed. This is because:

a)    Ownership structures vary: public companies have greater liquidity of shares, which reduces shareholder risk, which may factor in the strategic decision-making of public company management by comparison to their private counterparts
b)    Funding structures vary: Dealers have extremes in the mix of debt versus capital. Consider a young Dealer, heavily geared on working capital, including inventory, compared to a more mature Dealer who has significant working capital acquired through the retention of profits in the business over many years. Consider further related party loans where some are subject to interest repayments and others are not
c)    Non-core business activities which often attach a motor dealership are likely to have different risk/return relationships  – an example includes hire car businesses
d)    Investment choices vary, including alternatives to lease, or invest in facilities
e)    Geographic variances: metro versus regional locations often deliver contrasting results in vehicle grosses and volume incentives
f)    The lack of integrity of the data being reported

The operational, structural, funding and geographic differences outlined above may be recognisable. Unfortunately, Dealers and industry stakeholders using benchmarks to assess financial performance will not be able to discern the differences attributable to the last point regarding data integrity.

The integrity of this data is being challenged as a result of:

a)    Inconsistency in accounting treatment between Dealers. Despite some attempt to achieve consistency, some clear examples of inconsistency include:
–     new vehicle factory bonuses can either reduce Cost of Sales or increase Other Income
–    pre-delivery can increase Cost of Sales or expenses
–    the wide variety of load structures can artificially inflate the Cost of Sale on vehicles and, it will also artificially inflate other income, provisions, or another area of the Dealers’ choosing
–    the timing of income recognition, relative to the different forms of holdback and factory bonuses
–    the approach to calculating provisions, including doubtful debts, demonstrator and used obsolescence, warranty and employee entitlements
–    the treatment of various supplier incentives received as a reward for loyalty and/or volume
b)    The failure to normalise significant one-off income or expense items and/or the non-commercial arrangements. Consider examples such as one-off insurance payouts for storm damage and non-commercial arrangements in respect to rent, owner salaries and interest on related party loans
c)    The subjective nature of allocation of income and expenses to specific franchises within multi-franchised dealerships. Most often the benchmarking exercise comes at the direction of a manufacturer, who measure Dealer performance within their  franchise, in isolation to ‘other’ franchises.

In BDO’s view, any allocation process of income and expenses between franchises is extremely subjective. Even greater cause for concern is the risk that the outcome  can be influenced by mpredetermined instruction on the allocation process.

Whilst the merits of compiling data for benchmarking are clear, there are significant issues regarding the integrity of the data on which the benchmarks are calculated. Decisions are being based on poor data and too much emphasis is now being placed on information which is inconsistent with the current trading environment.

Mark Ward
Partner, Automotive – BDO

Leave a Reply

Your email address will not be published. Required fields are marked *