Keys to Automobile Dealers Success and Profitability in 2009

We are all aware that the past years have been difficult for many in the dealership industry and many do not anticipate significant improvement in 2009.  However, this does not mean that most dealers can not be successful and profitable in 2009.  Furthermore, the dealers who can survive this year will face less competition in the future and will be extremely profitable as the economy improves.

The following recommendations will help ensure the success and profitability of your dealership in 2009: 

1.) Get Lean - The economic environment and the demand for the manufacturer’s product dramatically affect a dealer’s profitability.  Unfortunately, a dealer has very little control over either of these factors.  If both of these factors are working against you, you must get your store extremely lean to be able to survive or even thrive. 

Each dealership should develop a reasonable budget for 2009.  The starting point should be the gross profit in each department.  These should be realistic figures and they may be lower than goals you have for your department heads.  Once you arrive at the total gross profit that your store can produce, you must develop a cost and expense structure that can accommodate the amount of gross that you produce.

For example, if your store can produce $200,000 of gross profit on a monthly basis, you should be able to run your store with less than $200,000 in monthly expenses as long as your rent factor is reasonable.  All variable costs need to be reviewed for excesses.  The major variable expenses that you typically reduce are personnel, advertising, floor plan interest and data processing costs.

·Personnel costs - Successful dealers have cut their personnel expenses, especially in sales, by weeding out the underperforming sales personnel.  Keep in mind that 50% of your new customers will be working with your worst sales people.
·Advertising costs - Like many industries, the mass media industry is going through rapid changes.  As such, traditional forms of advertising through these mediums have become less effective.  Internet and email based marketing are becoming more effective and much cheaper. 
·Floor plan interest - Successful dealers need to run their stores with a sixty day supply of new and used vehicle inventory and spend less in advertising than they have in the past. 
·Data processing costs - These are significant costs to a dealership.  When your existing contracts expire, dealers should consider cheaper PC based systems.  These PC systems are typically 1/3 of the cost.  They also are month to month or annual contracts as opposed to 5 year deals.

2.) Focus on New Unit Sales - Let’s review the gross profit percentages by department:

New  vehicles    4% - 7%
Used retail      10% - 15%
Parts               30% - 35%
Service            60% - 70%

Although new vehicle gross profits continue to decline, the overall success of your store will continue to be driven by this department.  You should concentrate on moving new vehicles with less concern for their gross profits.  Many dealerships lose money in the new vehicle department and this is acceptable.  The reason, of course, is that new vehicle sales feed the other departments.  New sales produce trades that become retail used vehicles.  Also, new vehicle sales feed the service and parts department.   The focus should be to sell as many new vehicles as possible as these sales will feed the other more profitable departments.  It is imperative for all customers that purchase vehicles from your store to return to your store for service. 

Dealers with fixed absorption ratios in excess of 80% are still profitable in a poor economy as the parts and service department pay almost all of the expenses of the store.  For example, I have a client who sold only 6 new vehicles and 14 used vehicles in the month of December.  The variable gross profit was only $28,000.  Parts and Service produced $199,000 in gross profit for the month.  The total expenses for the month were approximately $210,000 resulting in a profit of $17,000.  This dealer will be able to survive in this economy as his profitability is not driven by his front end. 

3.) Financial Recordkeeping - Maintaining adequate books and records is necessary to assist dealers in their decision making process.  We recently talked to a dealer (not a client) who thought he generated approximately $250,000 in profit for the year.  Unbeknownst to the dealer, the statements had several errors and the company was actually in a break even situation.  Dealers need correct financial data on a monthly basis so that they can act accordingly.   If your CPA is making significant adjustments to your financial statements at year end, you should work with your CPA and train your office staff to make these entries on a monthly basis. (We have created a dealer checklist and a monthly office manager checklist to help you ensure accurate financial statements. 


For additional information regarding the automobile industry or Downey & Company, please email Paul McGovern at pmcgovern@downeycocpa.com.