Back in 2008 and 2009, absorption was top of mind at many dealerships that were simply looking to survive. Those that had their total dealership expenses covered by the revenue from their parts, service, body shop, and used vehicle departments were the ones guaranteed to survive the economic downturn. Even though we’re nowhere near another "Great Recession," the current automotive landscape is seeing a slow-down. While many pundits are sounding alarms, the market still recorded 17.25 million new vehicles in 2017. That’s a far cry from the 10-11 million we experienced a decade ago, and it was one of the top five all-time years for new car sales.
Then why are we talking about absorption after such a great sales year? What you and many dealers might not be considering is the inevitable upturn of expenses, and that you need a plan to combat it.
At NCM we frequently look at the Big 3 in dealership expenses: personnel, advertising, and interest. You’ve all seen the recent increase in your floor plan rate, and I am sure many of you have seen rising new vehicle inventory levels because of factory pressure to stock more. Do you know if your expenses are causing you unnecessary risk? Here are some suggestions of what to look for.
When you are looking to control personnel expenses, it is important to look at your gross-per-employee metric to see where improvements can be made. This is calculated by taking your total dealership gross divided by total employee count. Once you have this figure, check to make sure that it’s over $10,000. If you are currently under this benchmark, you need to reevaluate your operation.
Another metric you can assess is your percentage of productive employees versus non-productive employees. A productive employee is anyone on your staff who generates gross in your business. These will be your salespeople, F&I Managers, service writers, technicians, front and back parts counter personnel, etc. Your non-productive employees (and don’t take this personally) would be your general manager, owner, BDC personnel who are not selling, etc. They still work for the dealership and are valuable employees, but they’re not directly producing gross. The benchmark for this ratio is to be over 50% in productive employees.
Advertising is an ongoing concern, and I’m sure you are ever-improving in this area. Due to the enormity of this expense, many dealers are constantly aware of what they are spending and what they are getting in return from their investment. If you have not audited your advertising expenses in a while, I would suggest working with your marketing director to ensure you are comfortable with the budget and the measurable results. There are a lot of great articles that help dealers determine if budget and results are in line with industry norms, such as this one.
When it comes to floor plan rate and vehicle interest, the solution is simple. The faster you can move your inventory, the lower your interest expense will be. If your new vehicles become stagnant, you need to work on your used vehicle and/or fixed ops gross to balance out the loss you’re experiencing on sluggish inventory. One benchmark goal I recommend, to combat this loss, is achieving a total fixed ops gross at or above 75% of the total store expense. If you are below this figure, make the changes necessary to get there.
Solutions & Suggestions
I want to share a form we use in my 20 Groups. It is a Service Department Profit Planner. This form will allow you to see what is needed to battle your expense issues daily.
Let’s also take a quick look at capacity. If you feel this is an issue you are facing, there are certainly solutions beyond adding additional service bays. For example: you have 24 hours in a day. Perhaps switching personnel hours into three 13-hour shifts, or two back-to-back 8-hour shifts would be more profitable? Being creative with these hours can deliver great results AND might provide a more suitable schedule for your employees.
Maybe the two 8-hour shifts would keep your employees out of your city's traffic jams and relieve some time clock stress. Maybe you have a few night owls on your team who would enjoy the cooler evenings to get their work done. Maybe you have a few employees with small children, and switching their schedules a bit would allow them to spend more time at home. Remember, the entire shop doesn't need to be on these schedules for it to work. Four guys could share two bays and be on either the three 13-hour shifts or the two 8-hour shifts. Happy employees make for happy customers, more productive hours, and better use of your facilities! This, in turn, will help increase your absorption percentage.
If you are lacking customers, it’s time to evaluate your fixed operations. In our 20 Groups, we look at year-over-year increases in customer-pay repair order counts as a measurement of long-term dealership success. If your team isn't capitalizing on the constant increase in customers your sales team provides, you may have a serious problem.
NCM can help. The above suggestions, and the many additional ideas we’ve gleaned over the years from our most successful dealers, were all generated in NCM 20 Groups. If you need help reaching your store's true potential, give us a call at 800-756-2620. A 20 Group is a great place to start.