Motor Industry Services Alert – February 2017

Motor Industry Services Alert – February 2017

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?

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National Leader, Motor Industry Services, KPMG Enterprise

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Locking in your profit for 2017?

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?

Starting with the end in mind!

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.

Stretching the dealership

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
New $250,000 49% 30% $250,000
Used $75,000 15% 25% $208,000
Parts $70,000 14% 20% $166,600
Service $120,000 23% 25% $208,400
Total $515,000 100% 100% $833,000
F&I $156,000 30% 26% $219,600
Gross $671,000 130% 126% $1,052,600
Net Profit $134,200 20% 25% $263,150
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:

  1. Firstly reconstruct the dealerships gross profit orientation as if new cars remains the same and assumes its rightful place at 30 percent of total gross (as opposed to 49 percent)
  2. Start by calculating total dealership gross before F&I by taking the new car gross ($250,000) and dividing this by 30 percent
  3. This gives you $833,000. This is a key numbe as it now shows you how much gross (pre F&I) you can make if you optimise all 4 departments in the business.
  4. Using the $833,000 as the total dealership gross, you then work out the gross for the balance of the departments (used, service and parts) and then work out F&I as a percent of total gross.

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:

  1. A rock solid action plan that is detailed, realistic and driven into the business
  2. A complete belief that it can be achieved, everyone in your business and outside will tell you it can't be done and will get you off task. People hate change and have trouble visualising success, if you can see it, you will achieve it.

Action Plan – first steps

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.


Used cars

  • Current volume 30 per month at $2500 per car
  • Target volume 80 per month at $2500 per car.

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.


Parts

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.


Service

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.


F&I

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.

Action Plan – next steps

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.


Supply

  • Do I measure and incent valuations by sales consultant? the higher the valuation percent of total customers seen, the higher the commission percent
  • Do we work the trade in as hard as the sale? we need to stock, we spend 2 hours selling the car we should spend at least an hour winning the trade over the private market
  • Do we wholesale retailable cars, do you review this weekly? you would be surprised as they take the quick wholesale earn and you lose the retail gross, F&I and service.

Selling

  • Are we quick to market 3-5 day reco turnaround? aggressive pricing from day 1 on the internet and quick to drop prices to clear stock. Remember selling the used cars will drive F&I and service success and this is the end game.
  • Are we real estate fixated or are we working the internet like it's our display, photo numbers, photo quality, fit the mission descriptions rather than list of specs? are we really measuring enquiry (views v leads etc?), are we using GTS wisely or just to clear old stock.


People

  • Do you have an 80 a month UCM or the honest 30 units a month person? the latter won't sell you 80 cars but you won't need to spend much time in used cars
  • Do you have dedicated sales people? if not you won't deliver on the outcome, cross selling always errs to the new car sale, it's easier
  • Does your UCM set the price of a trade or does the NCM march them up to their disadvantage? over allowance was invented to allow the UCM to stick to his price and give the NCM the option to discount the new car. I find many dealers today don’t use it and it costs them used car business.

Over a couple of years we were able to push our used car volume across our 3 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.


Service

Not enough customers.

  • Does everyone have a reason to come back to me for service (new and used) a free 5 year Mechanical Protection Plan (Harrier National), if not why would they come back?
  • If they do have one at delivery are its features, benefits and obligations fully explained so they are very motivated to keep their 5 year MPP active?
  • What is my handover on delivery process, is it water tight 100 percent of the time and does every customer walk away with a first service date?
  • Do I have a very clearly constructed follow up process? 1 month EDM, 1 week phone call and 1 day SMS
  • Do I follow up all recalcitrant customers who don’t book and show up for service very quickly after they are lapsed?
  • If I have a long service interval (12 months) do I offer a free 6 month safety check so they definitely come back to me and not Ultratune?
  • Do I have a clearly defined “out of manufacturer’s warranty” service schedule, log book and pricing so they know we are very keen to keep their business?
  • Am I open for my customers convenience, every Saturday, Thursday night or am I giving them a reason to go elsewhere?


Manpower/Facility constraints

  • Techs love overtime, am I giving them enough?
  • Have we moved to multi shifting so we have the facility productive 14 hours per day (we pay rent for 24 hours)?
  • Have we maximised wait jobs and multi manning (express bays) to increase RO throughput and reduce congestion at peak periods?
  • Do we offer Saturday service? a win/win for all concerned
  • Do we use timed service intervals (15 min slots) to reduce congestion and maximise upsell opportunities?
  • Do we ask the customer about drop off and reuniting times or do we drive the agenda and disengage them?
  • Do we email invoices to customers in advance to get early sign off and early identification of issues to reduce congestion at reuniting?
  • Do we take credit card details on arrival to avoid payment time issues at reuniting?


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:

  1. Over communicate, they need to hear it daily, weekly and at every one-on-one and group meeting. They need to believe (as you do) it can be done if we work to the plan
  2. Reward them based on achievement, both monetary and process based. Celebrate successful implementation of the action plan and reward the financial outcome from this occurring.
  3. Seek their feedback, find out what is working well and what isn’t. Don’t accept negativity, but all plans need some form of flexibility
  4. Communicate this to your broader team, once the management team is on board, let the whole team know the target and plan in your monthly CEO/DP report, give regular update and give verbal feedback as you walk the dealership and talk to people
  5. Become the leader of the implementation team, spend the time on the floor daily and ensure all of the actions and activities are actually happening. Don’t just accept reports. See the appointments being moved by 15 mins, review autogate and question the leads, review the daily valuation and ask why we didn’t get the trades. Ask the sales consultants with low trade valuation percent’s why they aren’t trading more and review their test drive logs. Watch the service handovers on delivery. Nothing gets more attention than the boss on the floor making sure we are getting better each day.

Conclusion

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).

Motor Industry Services Alert

The KPMG Motor Industry Services Alert is a monthly newsletter covers insights and best practice information for Australia's automotive industry.

 
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