Auto Dealership Boom: Where Should you Focus Profits?
What To Do With Your Profits?
If your dealership was among those with a profitable 2021, you might be wondering if it will continue; are there things on the back burner that we need to resurface; or should we open another location?
In this article, we look at each of those questions and provide some insights, suggestions, and guidance.
The Outlook Is Bright – For Now
Many dealership owners may be feeling like they are on cloud nine when it comes to profits. But are they—really?
Rich Germain, Germain Automotive Partnership has 10 Central Ohio dealerships and says, “It looks like we’re out of business,” said Rick Germain. “But things are much better than what it looks like.” He claims that consumers are “getting [vehicles] right off the truck.”
“Sales have been depressed since the spring [of 2021], but consumer appetite for new vehicles continues to run high, which will only serve to build up deferred demand next year and beyond,” said Jessica Caldwell, Edmunds’ executive director of insights.
The Truth About Cars writes, “Moving into 2022, NADA anticipates new-vehicle sales of 15.4 million units. This represents an increase of 3.4 percent from 2021 and is fairly close to what’s being estimated by IHS Markit (15.5 million) and a glut of other outlets.”
Does that mean you should plan current and future budgets on the numbers you’ve seen in 2021? Probably not.
“The worse habits are created in the best time,” Justin Ward, Senior Dealership Advisor, Brady Ware
“When you’re making record-breaking profits,” he added, “You’re creating bad habits all across the dealership. Instead of doing the job 100 percent the right way, people stop focusing on the details, which increases missed opportunities.”
What should you be doing instead?
“We know there are no cars. If you’re not maximizing profits on the back office, you could be missing out,” Justin said in a recent interview.
“For example, now is the time to re-evaluate your F&I process and personnel,” he added. “That re-focus alone identifies how to realize the highest potential profit from each customer, rather than just pushing them through.”
Take Stock
Sure, used-car inventory may have been your bread and butter for the past 12 – 24 months. But did you create a unique online buying opportunity for those buyers? If not, consider doing that this year in preparation for continued used-car and online purchases.
Also, having fewer vehicles on the lot makes inventory management a lot easier and saves the dealership money. The money you might have spent on inventory should be re-allocated to other areas of the dealership, including increasing internal controls, training programs for the parts and service teams, and dealership enhancements, such as a cost segregation study or remodel.
If you’re experiencing issues with inventory management, here are five things you can do now to put stronger internal controls in place:
- Develop better procedures and oversight
- Install software to help you keep track of inventory
- Conduct more frequent inventory counts
- Request additional forecasting from your accounting team
- Improve the ordering processes based on turnover and delivery times
Financial and Business Planning
If you haven’t looked at your financial plan since the beginning of the pandemic, now’s the time to do it. Here’s what to include for a five-year period.
- Income Statement/Profit & Loss Statement
- Balance Sheets
- Cash Flow Statement
Remember to include the following in your balance sheet and cash flow statements:
- Location build-out including design fees, construction, etc.
- Cost of equipment like computer hardware/software, service bay equipment, etc.
- Cost of maintaining supplies
- Payroll or salaries paid to staff
- Business insurance
- Taxes and permits
- Legal expenses
Having a good handle on past activities helps you to formulate a future plan, whether that’s for a merger or acquisition or for dealership renovations.
Revenue Generating Opportunities
Even though the new car buying experience has dwindled, that doesn’t mean your dealership cannot look to other areas to gain profit, such as:
Parts: With new cars in high demand, consumers are looking for increased service to help keep their existing vehicles on the road longer. One way you can cash in on this trend is to offer parts online.
Accessory Sales: Strengthen customer loyalty at your dealership by offering accessories to go with new car purchases, or to revamp and repair older cars. It’s a nice way to improve customer retention and bring new customers to your dealership.
Think nationally versus locally: With the parts market booming, think of adding a digital marketing aspect to your monthly ad budget to increase exposure for your brand, generate leads for parts/accessories, and boost the dealership’s online clout—also known as SEO or search engine ranking.
Dealership Consolidation
Have you been evaluating your dealership’s ability to compete with a larger operation? Maybe you’ve been toying with the idea of a merger or acquisition. If so, you are not alone.
According to Cox Automotive research, “59% of dealers expect the consolidation or acquisition trend to continue in the year ahead.”
Our team believes that being in a position to showcase your strengths, speak to your history, and paint an accurate financial and growth picture will help sellers be at the top of a buyer list. It also typically leads to more interested buyers and a higher valuation for the business owner.
If this is on your to-do list, read our “Guide to Dealership Valuation.” Understanding the keys to dealership valuation can help you proactively increase the value of your dealership before its sale, merger, or acquisition.
There’s a lot that you can be doing now to take your dealership to the next level. We are here to help you. Give us a call to discuss your plans and to help you handle the potentially messy curves ahead.
