Achieving Higher Dealership Profits by Knowing and Watching Costs: Part I
By Jim Eagan
Auto Dealer Alert, February 2006

You recently closed your 2005 books, printed your year-end financial statement, and, if you are like most dealers, you were disappointed with the year’s net profits or lack thereof. A frequent phrase we are hearing from dealers is "I worked harder for less money last year."

It is no secret that most automobile dealers within the Great Lakes region are currently facing very turbulent and challenging economic times. The headlines of newspapers contain little positive economic news and frequently display banners highlighting individual and corporate bankruptcies, layoffs, union concessions, retirees’ benefits in jeopardy, and rising gasoline/heating fuel costs.

On nearly a daily basis we speak with dealers. The predominant theme we are hearing is that the overall economic conditions in the car business are worse now than in 1974 or the early 1980s. This is shocking as well as threatening. Dealers are indicating that traffic and vehicle sales are significantly down, and they frequently attribute the causes to: financially tapped out customers, too much pull ahead business, customers waiting on the sidelines for a better deal, lack of manufacturer deals and marketing programs that work, and declining confidence levels causing buyers to wait to see whether they should even think about buying at this time, irrespective of the deal. Unfortunately, as families have less discretionary cash, service and body business is negatively impacted, as well. As is typically the result when departmental volume levels decline, so goes the dealership cash flow, profitability, and owners return on investment. Increasing manufacturer transfers of costs and rising interest rates further compound the negative trends.

It is during these times that dealers need to hold on to profits as best they can and, for many, just survive until the market turns around. It is very difficult, if not impossible, to individually sell your way out of a down market. It is normally more prudent to get your arms around feasible cost structure changes and adjust such costs to levels which make sense for what you are selling currently. This can be a painful process, but might be necessary for survival.

Every department has a gross level and an appropriate costs structure. The largest components of dealership costs (the "Big 3") are:

1. Employment costs — by far the largest expense category in any dealership (typically more than 60 percent and heavily influenced by headcount, pay plans, and fringe benefits)
2. Floor plan interest — influenced by market interest rates, inventory levels, selling rate, and the propensities of the dealership for ordering the right inventory units with minimal mistakes
3. Advertising expenses — influenced largely by personal preference, but subject to heightening when faced with either inventory mistakes or "hot" manufacturer incentive programs

The Big 3 expenses in relation to the grosses generated in each department can make or break a dealer’s month or year from a profitability and return-on-investment standpoint.

In this and in future Auto Dealer Alerts, we will summarize for you certain best practices with respect to selected Big 3 expenses and their influencing factors. For the remainder of this article, we will address dealership headcount matters. 

Given your volume of business, do you have too many employees?
The dealership headcount can be analyzed on a gross per employee per month basis. A good rule of thumb is that, on average, each employee should generate at least $6,500 per month. To determine your current average, take your December 2005 year-to-date dealership gross per your financial statement, divide it by 12, and then divide the result by the number of employees you have today. For example, if the 2005 total gross was $4,000,000 and the dealership currently has 70 employees, then average monthly gross per employee would be $4,761 ($4,000,000 divided by 12 = $333,333 divided by 70 employees = $4,761). If your average is less than $6,500, this may be indicative that the dealership has too many employees. If you feel the $6,500 guide is too high for your circumstances, check with available manufacturer or 20 group composites and see how your average stacks up to a group average, possibly more closely aligned to your franchise and market area. 

How many excess employees might you have?
To determine how overstaffed the dealership may be, again take your December 2005 year-to-date dealership gross, divide it by 12 and, then divide the result this time by $6,500. Compare the result to the number of employees the dealership has now. Using the facts in the example above, the potential overstaffing would be approximately 19 employees ($4,000,000 divided by 12 = $333,333 divided by $6,500 = 51.2; current employees of 70 minus 51 = 19).  

Has the dealership experienced headcount creep?
Headcount creep is the tendency for dealerships in periods of growing gross levels to add employees at a faster rate than the increases in gross. When a dealership experiences declines in departmental gross, which is more commonly the case now, a failure to decrease the headcount commensurate with the rate of gross decline, is frequently associated with decreased profits. Obviously, pay plans as well as employee productivity enter the picture, and we will discuss these more in future Auto Dealer Alerts. To analyze headcount creep, it is beneficial to summarize dealership grosses by department for a period of prior years (three to five). Next summarize on the schedule the average number of employees in the department for each year. After these numbers are amassed, interesting trends may be readily apparent. A further deep dive would be to compute, as we did above, the average gross per month per employee for each department.

Other "deeper dive" analysis techniques similar to the above are available with regard to assessing possible overstaffing on a departmental and functional position basis. Discussion of these more advanced methods is outside the scope of this article, but we would be happy to assist you in performing such analysis. 

Conclusion
If you were unsatisfied with your dealership’s 2005 profit results or are alarmed by how 2006 is starting, it is imperative that you act now. It is not too late to conduct a thorough "cost structure physical" on your dealership. Remember that paying out too much in costs will decrease your 2006 bottom line, dollar for dollar. We are happy to assist you in performing a review of your cost structure. Generally, such reviews can be done within a matter of days. If we can help, please call Jim Eagan at 800.544.0203, extension 3257, or you can e-mail jim.eagan@plantemoran.com.