The Automotive Oxymoron: Shrinking Grosses and Growing Expenses

Written By: GEORGE NANCE

POSTED ON June 13, 2019

Shrinking grosses and growing expenses. Discussion surrounding these two topics takes place at every 20 Group meeting or in-dealership consulting visit that I have been a part of. It doesn’t take a genius to realize that this formula is a fast lane for failure. If you are seeing a trend of growing expenses and shrinking grosses, you must immediately address this situation with the utmost focus, tact, and control.

Unfortunately, it is far too often that these discussions sound a lot like this:

“My grosses are declining but my expenses are climbing, what should I do?”
“Where do I make cuts or reductions?”
“Let’s try advertising through another medium”
“Let’s bring on additional staff for the BDC”
Or my personal favorite, “Let’s try the special “sky blue and pink tile” that the manufacturer insists we use in the latest facility upgrade!”

While this conversation is happening, the cost of doing business is ever increasing. Wages are up, insurance costs are up, benefits for those hard to find employees are up, cost for specialty equipment is up, and costs to rebuild or upgrade facilities are (you guessed it), all up!

Grosses are declining because today’s consumer has unparalleled access to information with the click of a finger or swipe of a screen. That doesn’t mean we cannot hold margin, but we must know what that margin needs to be. We can’t hope to make it up with below the line bonus dollars, as it is these hopes that end up costing us real profits.

How to Address Your Grosses and Expenses

Once you know your gross margin amount, and where it’s coming from (i.e. front-end gross or back-end gross, incentives or pack), you can put together a process that directly addresses your issues in all the following areas:

Personnel Expenses: I suggest using the following acronym; P.O.P.P. (Product of Pay Plan). Build every pay plan for every income-generating associate with that in mind. Keep it simple, measurable, and make sure you pay for performance while gaining R.O.I. for the business.

Next, have each department manager build an organizational chart showing who does what, who is in charge of who, and how they are performing. If one area is overstaffed, have that conversation with the manager. One of my favorite questions for this exercise is “would they work for you if your name was on the building?” That quickly gets the honesty flowing.

Inventory: In the current market, you can no longer take everything that your manufacturer throws at you. You need to be strategic, and have a plan developed for the units you plan to stock. Ask yourself, when do you traditionally sell the most units (is it monthly, seasonally)? What models and trim levels move the fastest in your store? What is the markets day supply, and what is your mix of new to pre-owned vehicles?

New Vehicles: The manufacturer does the majority of the advertising for your new vehicle sales and leasing, and you should capitalize on their efforts. Share the data with your staff and ask them what they are hearing and seeing. This will help you know what the market demand and focus is for your specific store which is critical input to track and measure. What your customers are searching for is what you need to stock.

Another great exercise is to take your total gross and divide it by your boarding cost. Here is an example:
$2,500.00 in Gross (F&B) divided by a Boarding Cost of $55.00
$2,500.00/55.00 = 45 days
That equals a 45 day supply before you LOSE MONEY, no matter what you sell the vehicle for!
Pre-Owned Vehicles: It’s great to know what price your competition is asking, but it’s even better to know at what price they are selling, both quickly and profitably. One way to do this is by pricing your inventory by what’s being searched for or “counting the clicks.” The large big-box stores capitalize on this data and stock their lots accordingly. Why can’t you do the same? Be intimate with your market and use the same digital tools that your customers do when they are shopping. Knowing your market’s average sale price, average payment, and average APR are all more important than filling the holes in the display area with boat anchors

Next, establish a hard days-to-turn strategy with your used vehicle team. To start, you need to know what you are doing today and reestablish your goals slowly.

For example, if you are at 100 days today, then in three months the goal will be to have it down to a hard 75 days. Three months later, the goal will be to lower it to 60 days. By utilizing this method, you will finally be able to set your goal for a hard 45 days and be able to monitor it daily!

Finally, I would also suggest performing the same Gross/Boarding Cost exercise as above on Pre-Owned Gross. The results may be sobering.

Advertising: Social media and other forms of digital advertising all show the best R.O.I. in the market right now. Yet there are still dealers that invest heavily in television, radio, and newspaper ads that are not cost effective and almost impossible to measure their success.

I see dealers using social media (with some of the very best successes on Facebook) to advertise social events at their store. Themes such as pets, food, ladies night, and even disposal of environmentally un-friendly products at dealers that have the ability to do so safely all drive a lot of people to the dealership. All for a lot less than a television commercial or radio ad.

Vendors: Customers are not shy in asking dealers for discounts, and we as competitive businessmen and women must do the same with our vendors. Take the time to review all the contract terms and look to maximize these terms for the best price.

Ask your trusted associates for input as well. How many times have we heard “I know a guy” after just purchasing a service.
Stay in your local market whenever possible and again discuss the agreement with any relevant department associates. Not only will you probably have better negotiation talks, but you may also find they have better customer service than a vendor out of state.
Review the invoices of contracts that you’ve negotiated from time to time. One of the most frequently abused items is weekly uniform charges. Over the course of a 5-year contract, chances are that the original contracted prices have increased because of personnel changes on both the vendor and the dealer. No one will alert you to this price change unless you check the agreement.
Have a semi-annual review of vendor charges by department. Look at every invoice that was presented with the respective-responsible department manager. More than once I’ve seen or heard a manager say, “we dropped them 6 months ago” and yet are still on their billing cycle due to poor communication.

Forecasting: I can’t stress enough how proper planning of expenses benefits a dealer’s bottom line. One specific example I love to share is a family dealer group I have worked with for years. They take the time to break down and forecast the expenses for personnel, variable, and semi-fixed expenses by using NCM Benchmarks as a measurement to the percent of gross.

In other words, if the benchmark for an expense is 8.5%, they will take the average dollars in gross generated as that percentage and establish what the spend should be for the expense. If the manager wants to spend more money, all he or she needs to do is generate more gross. This is a very good exercise to follow when forecasting by department, especially if the department manager is paid off the gross they are responsible for generating.

Are you seeing expenses rise in certain areas of your dealership? Have any success stories on driving more gross? Let us know in the comments below!

For some additional reading on the topic of expenses, we highly suggest taking a look at the following articles from our automotive experts!