*This article previously appeared in the Reynolds and Reynolds FUEL monthly newsletter*
By Brooks Fiesinger
If you pick up a report listing the most successful dealerships nationwide, nearly each one would identify success based on revenue. When I sit down with a general manager and ask how they’re doing, the first thing they say to me is almost always, “we sold X dollars of cars this month!” I look at the whiteboard and see a revenue target, a count of how many cars were sold and maybe – just maybe – a gross profit figure mentioned somewhere.
Revenue as a whole is overrated. At first glance this comment is going to be met with eye rolling and a sigh because, “everyone knows it”. However, it is a core issue that must be addressed. A dealer will only improve what they measure.
Revenues are up at dealerships across the board, but the cause for concern is in diminished vehicle margins. When profitability is purely coming from increased volume it is more important than ever to measure margins.
Without revenue, it is impossible to have profit. But, revenue itself doesn’t pay employees, owners, or provide for expansion. In fact, even gross profit isn’t the ideal target of an automotive dealership. Gross profit is only taking into account the cost of goods sold. Rather, net profit is what matters; taking all the revenue and subtracting all expenses.
Each dealership should ask themselves this: would I rather have $60 million dollars in revenue and be published as a top dealer in the nation, with $120,000 in net profit? Or, would I rather see $30 million dollars in revenue, still be recognized as a dealer leader, and walk home with $260,000 in net profit?
Many of the top volume dealers in the nation see tremendous revenues in extremely low margin products and operations, but neglect high margin profit segments, such as F&I offices and fixed operations. Dealerships consumed with revenues treat them all the same, focusing on quantity over quality.
Aftermarket accessories are something that frequently gets overlooked in a dealership. Few dealerships recognize the potential for dealership-wide profit accessories can offer. Take a spoiler for example. Traditionally, a $750 spoiler may net only $120. On the other hand, a $550 F&I product offers $149 in gross to the F&I office. This makes the spoiler seem like a second-tier sell. However, at the enterprise level, a $750 spoiler may only net $120 in the F&I office, but the $630 cost isn’t going to an outside company; it’s going to the service department. After $220 installation and paint (at a profit of $170 to the service department), the $410 service department cost goes to parts. Parts has a $196.80 cost on the product, netting $213.20.
From a comprehensive level, which is more appealing: (A) an F&I product which offers $149 to the dealership or (B) a spoiler which offers $503.20 to the dealership?
In a study of aftermarket accessories, the comprehensive profit margin averaged 57% and could be as high as 88.2%. Compare this to F&I products such as extended service contracts which average only 45%.
From this viewpoint, it’s evident dealerships make the most of what’s important when looking at how much of the revenues flow into net profit. When focusing on profit as opposed to revenue, dealerships can preserve much more of what counts at the end of the day: what goes into their pockets.
Want to learn more about creating a new profit center in your dealership with accessories? Download our latest accessories trend report.
About the Author
Brooks Fiesinger is the Senior Product Planning Manager for Reynolds and Reynolds, leading analytics and intelligence products. Brooks has years of expertise in the automotive industry, both in academic research and practice. He is passionate about educating others and helping them succeed.