The old dealership adage, “gross hides all problems” was never truer after the financial meltdown of 2008. As vehicle sales plummeted, so did the gross at almost all dealerships, and that’s when the expense problems came to the surface. In order to survive, dealers found religion, slashed expenses, boosted service department efforts and did whatever else was needed to get by.
Then in the last six months, consumers who have been afraid to spend money or couldn’t get loans have finally felt confident enough or saved enough money to start buying the cars, SUVs and trucks they’ve been dreaming of.
And as consumers have loosened their purse strings, so have many dealerships. As total dealership gross climbs it seems that dealers naturally spend more on advertising, oil services, web site providers, telephone providers and every other vendor who comes a calling.
Ah, history, how you love to repeat. Let’s jump into our “way back machine” and look at what happened in 2005 the first time gas prices hit $3.00 per gallon. There were waiting lines for hybrid vehicles and small, fuel-efficient cars were in great demand. People who recently purchased SUV and trucks were tremendously “upside down”. Now just when it seems like the good times are rolling again, another black cloud looms on the horizon: the turmoil in the Middle East creating gas prices approaching $4.00 per gallon. Can $5.00 per gallon be in our near future?
Rising oil prices are making consumers think twice about buying those long-cherished SUVs and trucks (as evidenced by 2005). In a recent MSN Money article
, Autotrader.com reported that 53% of shoppers say they are more likely to consider a fuel-efficient car. According to an Automotive News
article that percentage is even higher, with “two-thirds of shoppers” looking for smaller or more fuel efficient cars.
As dealers are aware, smaller cars net less gross on average than the larger SUVs and trucks so many Americans love. Less gross means that once again, dealers may be preparing to tighten their belts. When it costs someone an entire day’s paycheck to fuel their vehicle, it’s easy to delay major purchases such as a new car or truck. Service departments will also be impacted because less disposable income means that people will do only the repairs that are absolutely necessary, as opposed to all the repairs recommended.
And just like some consumers who recently locked themselves into long term loans for an SUV, some dealers may now be kicking themselves for signing long term contracts with vendors.
Whether it’s the 10 insertions with the local newspaper, a six month contract for oil services, or a five year contract with your DMS provider, many vendors have taken advantage of the “good times” attitude. They’ve offered substantial discounts for a long term commitment; but if hard times return, just see how willing they are to be flexible with or cancel those contracts.
I’ve long believed that long term contracts of any kind don’t benefit anyone except the vendor. In my opinion, dealers should beware of vendors that offer discounts and other financial incentives to lock them into a contract. If you’re not happy with a service, or if hard times suddenly affect your gross, why shouldn’t you have the right to cancel a service or re-negotiate your terms in order to reduce your expense?
Now obviously, some expenses are fixed and can’t be avoided such as rent, mortgages, heat light and power and these do come with some sort of commitment on the part of the dealer.
But if the expense is semi-fixed such as IT or advertising, dealers may be better off paying a little more or less on a monthly basis but not have a commitment. That way they retain the freedom to cancel the service or search for an even lower priced vendor, if necessary.
Regardless of how many cars a dealership is selling, keeping focused on expenses will always make it easier to stay profitable—and remembering history will help you to not re-live it.