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Josh Blick

Josh Blick Dir, Implementation & Learning

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How to Insulate Your Dealership From the Next Sales Downturn

What is profit? Quite simply, it's the difference between what you spend and what you make. Most dealers, when they think about profit, immediately think about how they can make more. They strategize how to increase revenue, increase gross margins, increase sales or increase customer pay ROs.  

However, spending less is an important part of creating profit. Dealers know this too. When times are tough, they've had to go through their operating expenses, line by line, and find areas to cut.  

But what about when times aren't tough? The last few years have been good for dealerships. As a result, many dealers have become a little lackadaisical when it comes to expenses. When times are good, they don't believe they have to cut. And they're right: they're still making plenty of profit.  

But as we all know the economy is cyclical. There are good times and bad times. If you don't prepare for the bad times during the good times, the effect can be tumultuous. During bad times sales plummet, employees are laid off and expenses have to be slashed to the point where it can compromise your ability to recover or even survive. 

It doesn't have to be this way.  

What if, during the good times, dealers focused on increasing sales while simultaneously reducing expenses? Not slashing expenses; but managing them in a way that insulates their dealerships from the economic boom-bust cycle. 

Analytics can help. Discovering and fixing inefficiencies today will protect you when sales begin to slow. Instead of having to react to a slowdown with drastic measures, you will be prepared to proactively implement a plan that mitigates the negative effects on your business. 

Here are a couple examples of how this works: 

Let's say your dealership sells $2 million in new car inventory every month, and you like to keep about $10 million in inventory on the ground. To keep that $10 million in inventory consistent, you order an average $2 million in new inventory every month. This gives you a six-month supply of inventory. Most dealers would feel pretty comfortable with that. 

But there's a significant cost associated with holding a six-month supply of inventory. That cost is pretty easy to determine. What if you could cut that cost in half by holding a 90-day supply and ordering just $1 million in new car inventory every month? 

Your initial reaction is probably negative. You're thinking no way, cut my inventory in half? The manufacturer won't be happy. Besides, the more cars we order, the more we sell. And there's a part of you that takes pride in having all that inventory on your lot. It makes your dealership look big and important. 

But we're talking hard dollars here. With analytics, you get plenty of insight as to what's selling and what's not. You can easily spot when a particular model begins to fall out of favor, just by a slight downward trend in sales volume over a three-month period. At that point, don't order any more of that model until you have sold what's on the lot. You'll also be able to see which models are trending upwards, so you can order more of those.  

Don't let your manufacturer tell you what to buy. Let your data tell what to buy. Every market is different and changes in purchasing behavior don't happen overnight. Analyzing data allows you to catch trends in the early stages, enabling better inventory management and saving thousands of dollars per month. 

Another example of where you can achieve significant savings is in employee salaries. But I'm not talking about laying employees off. I'm talking about increasing the productivity of each employee so you don't have to hire as many new ones. 

The way to do this is by analyzing your gross profit per employee. Let's say you have two stores. Store A is doing $1 million in gross profit per month and has 100 employees. That means they're averaging $10,000 in gross profit per employee, per month.  

Store B also does $1 million in gross profit per month, but they have 120 employees. So they're averaging $8,300 in gross profit per employee, per month. What gives? Store A's employees are 17 percent more productive than Store B's employees. 

This is where you can start drilling down into your data. Breaking out gross profit by department in both stores will give you the first clue on where to zero in your search. Is the problem in sales, fixed ops, accounting or all of the above? 

Clearly there are employees in Store B who are performing unnecessary tasks or duplication of tasks. Is there some process or technology that Store A is using that Store B isn't? Is it a manager who isn't holding their team accountable? The answers to these questions are in your data. If you can find the answers and fix the problem you should soon see a 17 percent increase in gross profit in Store B. 

These are just two examples out of dozens that illustrate the way data can be used to increase profit through increased efficiencies. Today's reporting tools make it easy to drill down and identify where inefficiencies lie. Using this data to create new disciplines will help insulate your dealership from the next sales downturn.

Do you think another recession like 2008 or something close to it will happen again anytime soon in our current economy? Do you see signs of a major downturn on the horizon? 

Josh Blick

Scott, while my crystal ball is as good as anyone's, it is hard to think we would ever see another 2008. The Automotive business is cyclical by nature so, yes, I see flattening or a correction coming in the next 18-30 months. Current new car inventories, incentive levels, and gross profit compression remind me of 2005-2007. Hopefully, history has taught us all a lesson.

Well regardless, it's definitely great advice to prepare now while things a good for the inevitable! Good read, thanks again! 

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