The Massachusetts State Automobile Dealers Association reports new vehicle sales are down 4.4% for the period January 1, 2019 to April 30, 2019. Nationally, new vehicle sales are down by a slightly lower amount of 2.2%. Much of the decline is due to a poor start to the year with sales recovering in recent months.
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How does a dealer maintain profitability in a declining new vehicle sales market? The service and parts departments and used vehicle departments are critical to profitability in the current market environment. These departments have been neglected in recent years, while dealers have focused their attention on growing new vehicle sales. Focusing solely on a department that has experienced year over year declines in margins is not prudent. We all know that a dealer must satisfy the manufacturer sales requirements, but one might say that you need to sell new vehicles to feed your more profitable departments, the back end and used.
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The service and parts and used departments produce a significant portion of your monthly gross profit. The gross profit in the service department should range between 65% and 75%, while parts gross ranges between 30% and 40%. Also, used vehicle gross profit percentages are often two to three times those generated in the new vehicle department. In some cases, the gross profit in the new vehicle department is negative before F & I income.
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We have several clients that have always kept their focus on service and parts and used. These clients are maintaining profitability from prior years. New vehicle departments have sold a significant number of new units for the years 2014 to 2018, and those customers should be flowing to your more profitable service and parts operations. Strong back end management and customer service are the keys to keeping those customers coming back to your store. Make sure the service hours are convenient for your customers and try to reduce the wait time for appointments.
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The used vehicle department has also been overlooked in many stores. With the rise of new vehicle prices in recent years, many consumers are being priced out of that market. Do you have an adequate supply of desirable used vehicles for those customers?
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In conclusion, dealers that are committed to their service and parts and used vehicle departments are performing well in the current environment. Profits are still strong and growing for these dealers. In a robust economy, some dealers get distracted and lose focus on the service, parts and used sales departments.
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If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or at 800-849-6022.
