As the automotive retail business model continues to evolve, the notion of ‘balance’ continues to be raised as a key consideration. Dealers are constantly reminded that they have to run a ‘balanced business’ and management theories such as portfolio management and cost-benefit analysis (which are based on a notion of balance) only serve to reinforce this concept.

But what does business balance look like for an automotive dealership, and why is it important?

Balance in a dealership is driven at a gross profit level – most notably, the relationship between gross profit and turnover and the gross profit contribution by department.

Typically overall gross profit levels in Australian dealerships range between 12 to 18% of sales, with the margins available in each department playing a significant role in driving this performance. Dealers at the top end of the scale i.e. 16-18 overall GP as a percentage of sales, rely on contributions from the back-end of the business, with service and parts contributing 65% and 25% respectively, while front-end orientated Dealers tend to achieve lower overall margins.
Given that around 80% of a dealership’s total sales revenue will come from the sale of new and used vehicles and that the available margins from these departments, will in all likelihood, be well below 10%, the importance of generating income from the remaining 20% is crucial.

The impact of this can be significant. Dealers who rely on new and used sales, and who do not cultivate a healthy parts and service contribution run the risk of not being able to generate enough overall income to cover their expenses.
This places pressure on overall profitability, and decreases the likelihood of being able to achieve a decent return on investment.

The importance of balancing departmental contributions is also exacerbated by a number of factors, including declining new vehicle margins, increasing reliance on Finance & Insurance, and the emergence of capped price servicing.

In an ideal world, dealerships should be looking to structure themselves in a manner that facilitates a balanced contribution from all departments. They should also be aware of how the business is changing over time. Growth trends should be closely monitored and any changes in turnover should be matched or exceeded by changes in gross profit.

In practical terms this means incentivising managers for improving departmental gross profit margins and for contributing to the overall growth of dealership gross profit. It also means keeping an eye on fixed ops absorption i.e. the extent to which the gross profit contributions from parts and service cover the fixed overheads of the dealership. By way of example, healthy, volume franchise Dealers should look to achieve an absorption level of around 70%.

There is no magic formula for running a successful dealership, but it starts with strong leadership, a solid business plan and a clear vision for where the dealership should be. In terms of building fixed ops contributions a real effort needs to be made to ensure that retail repair orders are growing, that customer retention figures are improving and that the mix of work that is being done, supports the overall strategy to improve dealership margin.

Finally, as the existing automotive retail business model continues to be put under pressure, there is little doubt that Dealers will have to draw on all their resources, across all departments, in order to come out in front. Balance will be crucial!

 

Greg Strydom
Head of Client Solutions – Sewells Group