$50,000.

Over the past three years, the average dealer has generated about $50,000 in annual net income from their new vehicle operations including F&I, based on 2015 NADA Data. This amount roughly equals the average starting salary for an undergraduate accounting major.

Now, to be fair, the $50,000 reported in the financial statement does not tell the entire story.  

Dealers at many brands earn significant “below the line” aka stair-step money directly from their OEM for achieving aggressive sales targets. These programs place all of the risk on the dealer and create hyper competitive markets where dealers essentially fight to see who will lose the most money per sale. 

A General Manager at a Boston area dealership recently told me that he hasn’t stepped foot in a casino in more than eight years, but chasing the factory money feels just like his old gambling days.  “I can give away $40,000 and maybe make $80,000 or maybe lose all $40,000.”

Stair step programs, coupled with pricing transparency websites like True Car and Kbb.com, make  it tougher than ever for dealers to make gross in new cars.  A very well-known luxury name plate is currently averaging only $15 per new vehicle retailed! (That is not a typo) 

AutoNation CEO Mike Jackson recently bemoaned: “Growth Market + stair steps= tolerable, Plateau Market + stair steps = nightmare, Downturn Market + stair steps = catastrophe.”  

While Jackson has never been a big fan of stair step programs, he makes a relevant point. The record-breaking sales volumes over  the past few years have allowed new car dealers to get by on razor-thin margins. But what happens when sales slowdown, a scenario many analysts say is already underway?  

Dealers need to start looking inward at their operations and make these 3 key adjustments to lessen their financial reliance on factory money:

1. Increase New Car Sales and Margins with better SERVICE – Dealers who win customers over in their service departments with friendly employees, technology driven communication, and a healthy respect for their customer’s time set the stage for increasing new car sales.   Harvesting new car buyers from the service lane not only yields better trade-ins with lower acquisition costs, but also provides better front end margins because the dealer is not competing for the sale.  There are a number of good equity mining tools designed to identify customers who are great position to trade keys.  Smart Dealers are mastering this process and being rewarded for their effort.

2. Overhaul sales consultant pay plans:  Thin margins make it nearly impossible for a sales consultants to earn more than $150 minis.  I believe such “old school” pay plans have a lot to do with the persistently high rate of sales consultant turnover.  The 2016 NADA workforce study revealed that Dealers with the highest rates of employee retention significantly outperformed the average in terms of productivity and profitability.  The average sales consultant annual turnover is now at 67%.   Progressive dealers are monitoring turn over and adjusting pay plans to provide greater income stability, while still allowing for upside potential based on performance   

3. Recalibrate Marketing Efforts - Today’s new vehicle shopper only visits 1.6 stores before purchase—a reality that tells me the new car game is being won and lost online.  Last year, the average dealer spent about 25% of their marketing budget on digital marketing.  With shoppers spending 12-15 hours researching vehicles online and conventional media (TV, newspaper, and radio) more fragmented than ever, doesn’t it make sense to reallocate more dollars to digital?  Not only will dealers increase their odds of capturing customer eyeballs, but digital also provides real data to evaluate and fine tune marketing investments.  Margins are way too thin to be depending on traditional tactics by crossing fingers that a big radio buy and a Gorilla on the roof is going to drive traffic!!

Looking ahead, the path forward is clear – smart dealers will rely on their own operational efficiency and excellence to drive new vehicle sales and not be overly reliant on factory money.  The level of volume pressure at many brands has led to many unnatural activities, such as ridiculous levels of discounting, huge service loaner & rental car fleets and in some cases, reporting vehicles that have not really been sold. 

Unfortunately, many dealers are so reliant on the factory money that monitoring these activities has become more important than focusing on the true levers of their success: providing an excellent service experience, retaining their people and optimizing their marketing investments.