The Market Remains Uncertain but Your Margins Don’t Have to Be

Henry Ford famously said, “Don’t find fault, find a remedy.” This is exactly what dealerships have been doing since post-World War II when they first encountered margin compression. It was around this time that the U.S. auto market experienced an inundation of foreign-made vehicles and tightening governmental regulations. The result was fiercer competition between OEMs and ultimately their dealers, leading to new-vehicle pricing policies that cut into dealerships’ gross profit per vehicle. Despite the hit to their margins, dealerships found new and innovative ways to make money by reimagining outdated practices.

Though its form and function have changed, the issue of rising margin compression continued to make headlines through the end of 2019. Per NADA dealership financial data, the average gross as a percent of selling price on new cars dropped from 7.3% in 2011 to 5.5% in 2019.

Then March 2020 happened. Just a couple months into the new decade, the COVID-19 pandemic brought much of the world to a screeching halt. Factories suspended production, multiple states/cities declared stay-at-home orders and the retail market was effectively put on pause. However, when sales started back up again, pent-up demand and limited inventory supply combined to create highly favorable market conditions for many dealerships. In a recent article, Brian Finkelmeyer, senior director of new car solutions at Cox Automotive, notes, “I spoke with a Chrysler-Dodge-Jeep dealer in New York who told me he sold 111 new vehicles in August, despite starting the month with 51 on the ground. That’s an 85% sell-through rate. And if that’s not impressive enough, he also told me his front-end gross (not including F&I) was up $1,400 per vehicle from a year ago.”

The pandemic has changed the competitive question in the marketplace from one of ‘who has the lowest advertised price’ to ‘who is managing and moving their inventory most efficiently’. The result? For the first time since the advent of the internet, dealerships are winning back some bargaining power. However, margin improvement for vehicle sales may be a fragile condition. Recent vAuto data suggests that while dealer inventories remain historically low, they have started to grow again. As implications of the pandemic continue to shake out, what comes next for dealerships’ new and used car operations remains uncertain.

Fortunately, there are some best practices dealerships can adopt now to protect profitability for the future, regardless of how market conditions change over the next several months.

1. Focus on the Data

Because the DMS touches nearly every aspect of a dealership’s operations, it offers the perfect place to monitor margin changes. When leveraged properly, the DMS can help you uncover the seemingly small and insignificant details that may explain the root causes of profitability challenges. DMS technology that provides ongoing support through a performance management partner – an experienced industry professional who has seen the ups and downs of the market before – can also help you hone in on the right insights and maximize the capabilities of your tools to meet your dealership’s unique needs.

2. Take Proactive Steps to Explore New Opportunities for Revenue

The truth is that selling more vehicles alone won’t be enough for most dealerships to fight off any reemerging effects of margin compression. Other sources of revenue as well as keeping an eye on consumer trends and preferences will also be essential to preserving profit. 

• Fixed Ops: One of the concepts Ford introduced post WWII was Fixed Absorption. The idea was (and is) that if a dealer maximized the % of total operating costs covered by parts and service profits, that they could feel better about the risk of buying and selling more cars. It’s still true today that making a sale is just half the battle. Retaining the customer after the fact is just as important and can help you maintain a steady stream of business even when other sources of profits start to slow. 

Today’s car owners expect a convenient and seamless customer experience – something that is even more critical now as social distancing remains essential. In fact, 69% of consumers are likely to select one dealership over another based on the availability of service pick-up and delivery. And dealerships who provide pick-up and delivery options, and then communicate via text with pictures and video about additional service recommendations, are seeing a $200 uplift in average RO’s.

• F&I Sales: F&I sales are a reliable force for protecting your bottom line even during uncertain times. Notably, dealerships retain more profit per dollar through F&I sales such as maintenance plans and other services than on car sales.
• Digital Retailing: According to a recent Cox Automotive report, consumer interest in finalizing a deal online has risen by more than 73%. Dealerships can expect this shift online to continue into the ‘next normal,’ as today’s more informed, tech-savvy consumers are here to stay and continue to want to do more of the car buying process online than ever before. 

3. Find More Efficient Ways of Doing Business

In order to compete in today’s environment, dealerships must shift their approach from ‘sell more’ to ‘sell more efficiently.’ This can be done by making minor process improvements across your operation, including through cost and expense control, modern technology and employee training. 

• Cost and Expense Control: Time is money and holding costs are proof of that. On average, a dealership pays a holding cost of $32 per day, per vehicle that sits idle on their lot. By re-examining your current reconditioning process, you can identify bottlenecks that need to be addressed and areas that require streamlining in order to get cars frontline ready faster.  
• Modern Technology: With the right, modern DMS, your dealership can actually help counter shrinking margins by connecting the dots across your operations as well as other software solutions for reduced waste and duplicate work, resulting in better, faster, smarter inventory turn. 
• Employee Training: Your employees can have a significant influence over your margins. Therefore, hiring the right people and leveraging easy-to-use technology to manage HR and ongoing training will be essential to boosting efficiency and profitability. It will also be important to take into consideration how the accelerated shift to digital will influence the skill sets you need to hire for in the future. For example, according to the 2020 Cox Automotive COVID-19 Dealer Impact Study, 56% of franchise dealers reported plans to place greater emphasis on hiring individuals with digital/tech-savvy skill sets in the future. Dealers should consider strongly the DMS tools voted easiest to learn and easiest to use by the team members who use the software everyday.

Dealerships have proven their resiliency time and time again over the past several decades. Now is no different. By taking proactive steps to buffer margins now in order to reduce the need for a remedy later, your dealership can find new ways to adapt and endure to ensure efficiency and profitability for the long-term.

Did you enjoy this article from David Foutz? Please share your thoughts, comments, or questions regarding this topic with host Jim Fitzpatrick at jfitzpatrick@cbtnews.com.