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Welcome to NCM's Up to Speed Blog

All or Nothing: The New Dealer Profitability Model

Joe Basil
Written By: Joe Basil
Posted on February 15, 2018

Over the last few decades, retail automotive dealers have proven extremely resilient when confronted with recessions, energy crises, stop sales, and a wide variety of other business disruptions. Up until the last five or six years, dealers have adjusted their business model to adapt to the rise and fall of new car sales. During those adjustment periods, new car gross averages and dealership profitability varied, to some degree, and during the downturns, top performing dealerships always managed to generate some profit. I have even seen the best operators in the business produce some record years during recessions. It is the adaptability, hard work, and open-mindedness to change that has allowed top dealerships to thrive and survive.

Two factors have had a major impact on the dealer profitability model, post-2008 recession. These factors are still at play today, a decade later, and many dealers are succeeding at adjusting to the impact on their business. Avoid becoming the one that loses.

#1: Internet and Digital Marketing

The expectation that every automotive dealer (and every business for that matter) should beef up their online presence has increased monumentally throughout the past ten years. This advertising medium offers great opportunities, but also has some constraints. The freedom that the web offers has brought all the third-party players out of the woodwork. These companies utilize our inventories for their gain, and sometimes it has a detrimental effect on our gross profit margins and profitability in new and used vehicle sales. However, employing a strong digital marketing strategy is vital. It may require a significant upfront cost, to secure the proper hardware, software, and personnel, but without it you’re sure to witness a shortage of customers touching tile at your dealership.

#2: Stairstep Incentive Programs

The second major factor is stairstep (or manufacture backend) incentive programs. When the market is rising, and everyone’s sales are increasing, these programs seem to work for most dealerships. But they’re just “ok”. There are some unintended consequences for these short-term fixes and they seem to be failing in the long run. During 2016, we saw the new car market begin to level off, and in 2017 the market was in a decline. Because of this decline, more dealers are not able to hit their objectives to earn their backend money. The simple fact is they have built inventory levels, expense structures, and the facilities to support higher volumes to achieve the backend bonus money.

However, more and more dealers are reporting that the objectives and goals the manufacturers are setting are based on unrealistic expectations. It is because of these expectations that dealerships are not achieving their goals. The result of this program on dealer profitability is that there are a lot of dealerships that are selling a lot of cars and making zero profit. The entire program has transformed into an all or none gain where you hit the objectives and have a respectable profit, or you sell a lot of cars and have little-to-no profit to show for your efforts.

How Do We Adjust to Find Profits?

Now the question is, how do you position your dealership to address these dynamics? Historically, dealers focused on fixed operations revenue to solve their problems. Most will look at how much of their dealership expense, excluding variable operations, could be covered by their service, body, and parts department gross profits. However, this is no longer an optimal plan.

In today's retail automotive world, we at NCM are seeing a different approach that is proving to be a more profitable and sustainable model. This will require you to focus on making all your departments, outside of new cars, including used vehicle and F&I, generate enough profit to cover all your dealership expenses. By doing so, you protect yourself against this "all or none" profitability model that the manufacturers have implemented.

If you are interested in learning more about this new profitability model, we would be happy to speak with you. Or, join one of our 20 Groups or register for a training course in the NCM Institute. Our goal is to help you succeed.

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