In this edition we discuss the issue that dealers more than ever are concerned over their profitability in 2017. What is your dealerships true potential, what actions need to be in place and how do you unlock potential, where do you start?
As we are heading into 2017, one of the things I'm hearing from dealers more than ever is concern over their profitability in 2017.
It's not so much that the market has tanked or that consumer sentiment has really fallen, it's just that everything has become a little bit harder in the last few months and with a few headwinds heading our way, many dealers are trying to get ahead of the game and get their business "profit ready" in 2017.
Rather than recreate the wheel I have taken one of my newsletters from 12 months ago and have refreshed it for today's market.
All of the messages are as relevant today as they were back then, it's probably a good time to rehear some of them.
History has taught us to develop good habits in good times, then when times change the good habits are already there.
This month's newsletter is focused on looking at your dealerships true potential and then building an action and implementation plan to unlock this potential and maximising your bottom line.
So where do we start?
When the results aren't quite hitting expectations and the dealership is off budget, it's often hard to work out exactly what the "lost opportunity" is in the business.
The first part of the process is to work out your "2017 opportunity", this is a process we call Dealership Optimisation and it always yields an unexpected result.
There is a simple formula developed off what we know about dealer performance behaviour and is embodied within the benchmarks we all know so dearly. Quite quickly this will show us what our potential opportunity is.
The purpose of this exercise is very simple, if I structured my dealership to operate at the benchmark gross profit orientation what would it look like.
Stretching the dealership to target
Detailed below is an example for a fictional (but more normal than you think) dealer.
|Existing Dealer||Target Opportunity (stretched to benchmark)|
|Gross/Month||GP Orientation||Should be (benchmark)||Target Gross/Month|
|Net Profit Increase Potential||96%|
What did we do?
Firstly work out your average gross profit orientation for your dealership based on your monthly gross profit results (use the last quarter if this is representative).
Identify your dominant department (the highest above benchmark contribution), in the example above it is NEW CARS, which at a 49 percent contribution to gross is well above the other departments. Note, new cars is dominant 90 percent of the time as most dealers have maximised their new car opportunity as it is driven by a 3rd party. The other departments require comparable levels of attention and planning to create growth.
Make your dominant department the "anchor department" for your exercise, in this case we say "we have maximised our new car opportunity, let’s focus on bringing all the other departments up to comparable performance levels".
We then follow a 4 step process to work out our optimised opportunity:
As can be seen from the above exercise, if we focused on maximising the opportunities available in the 4 departments that aren't performing to benchmark contribution we can increase the profit from this dealership by 96 percent without selling an extra new car.
So how do we do it?
In 2017 I think it will be imperative to start the year with a "fresh set of eyes" on your dealerships performance. Over the last 5 years the market has guaranteed us a certain level of success, this isn’t the case this year, so starting the year with a clear financial plan (as opposed to a budget) backed by a series of tangible actions and activities that capture our lost opportunity will see a much improved result.
Over the years I have worked with a number of dealers who have been able to achieve this goal and applied the same process in my own dealerships.
Two things are required:
Quantify the action plan in reality it is simple. Below is the quantification of the above optimisation. Do your optimisation and then do your own quantification.
Remember, today this is easier, we sell the new cars, the trades exist (am I seeing them and if not how do I get to). You also don't need real estate, used cars are sold over the internet, you just need to stock them.
At a parts to labour ratio of 80c, $60,000 of the parts increase will flow from growing service, 50 more used cars a month will also have its impact on internals, the rest is a matter of trade (if you do it), better accessory sales process and better service upsell.
The $90,000 per month of gross here will be an extra $80,000 per month of labour sales and $50,000 per month of other service items (oils, grease, additives). This is an additional 30 hours of labour per day (about 4 full time techs). In most good workshops this will be 3 new techs and 1 tech worth of unapplied time that currently exists. The other service items will flow from the extra labour sold, plus a good review of your existing upsell process in relation to these items.
The dealership was $1,200 PVR, which is pretty much benchmark for a good "shearing" dealership operation, the extra income will come from the used car volume. So nothing more is required than delivering on the used car action plan.
Spend the time, get this right and stick to it and you will achieve the goal.
If you understand what you aren't doing well, you will quickly work out your action plan to identify what you are doing well.
Below are some thought provokers.
Used cars target to increase volume from 30 to 80 per month.
Over a couple of years we were able to push our used car volume across our three sales sites by about 80 percent, but this was from a very low base. With a bit more time and greater kick in of our CRM processes (to get the stock) I think we would have had a 200 percent increase within time.
Not enough customers.
Implementation is the key monitoring and measurement
To get this right, your stretch target needs to be your budget and your action plan needs to become your dealership playbook.
This means you need to get the management team fully behind and believing.
To achieve this you need to:
The key to success is implementation and follow up. This will only come from personally owning the action plans and checking the outcomes yourself on a daily basis.
Once the team (including your managers) realise that this isn’t a fad and going away, you will find it will become part of the DNA, once the success starts coming and the non-believers are converted, you will find that the new actions/ activities will be part of your operational DNA.
It's not always easy to know where to start, what actions and activities will create the desired financial change and more importantly the implementation.
It's no surprise that a lot of the work our team is doing at the moment revolves around Optimisation Reviews and Implementation.
If you'd like to find out more please feel free to contact KPMG’s Motor Industry Services team (PDF 298KB).