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Auto Dealers: Track Your Competition for Guaranteed Sales Results

Posted by Tom Lombardo | Fri, Aug 08, 2014 @ 10:00 AM

Since the end of winter, auto dealerships have buzzed with the good news that this might be the first year nationwide sales exceed their pre-recession levels. And while nationwide figures can help owners and managers plan, since they don’t apply evenly to every market they can also be used to generate insights into your particular business.

july 2014 new auto sales

Everything Is Getting Bigger

Nationwide net profit comes to 2.5% of total sales, and calculating this metric might be your most important data point because it can help you place your dealership in midst of significant, industry-wide and unprecedented changes taking place right now.

General Motors’ and Chrysler’s Chapter 11 filings drove about 18% of dealerships, mostly smaller ones, out of business, setting up larger ones to grow. That shift imposed upon the industry accelerated the trend towards larger dealerships, with NADA determining that dealerships selling fewer than 399 units were declining in number while those selling 400 or more were advancing. Growth often takes the form of consolidation, and looking at your net profit figure can help you determine where you might fit into that phenomenon.

If you’re tracking ahead of the national average, then you may either be in position to acquire another dealership or to be acquired at a good price. Either way, the trend seems inexorable with one report suggesting that as many as 22% of all dealerships may change hands over the next few years.

Performance and Competition

Fewer competitors’ means stiffer competition from large dealerships, so looking at their business relative to national averages might help illuminate your place in your market today and your prospects for the future.

AutoNation is not only one of the largest nationwide dealerships; it is also one of the few publicly traded companies in the country whose stock outperformed throughout the recession.

Some aspects of their business fall into line with national norm. New vehicles make up 57% of their revenue and 22% of their profit, for example, which is not so different from the national average. They generally pay cash for stock so they have no floor planning taking as much as $90 of each sale, which elevates their numbers, but you’re probably tracking the average just as they are.

AutoNation also has the same two main profit centers you do: finance and insurance, and parts and service – and this is where they distinguish themselves. In both areas they knock it out of the park.

Where industry-wide F&I contribute about 22% to gross profit, at AutoNation it generates 25%. A three point difference may not sound like much – until you consider that F&I accounts for only 4% of their revenue. The extremely high margins they earn on F&I can mean only one thing: they make sure that every customer receives the most complete package possible.

But they really pull ahead of the competition in Parts and Service, which makes up 15% of their revenue – almost a quarter more than the national average. This suggests that their salespeople do a great job selling warranties and that their service departments regularly pull in repeat business. And because of these self-reinforcing synergies, they earn a solid 40% of their profit in their service bays.

Use Today’s Profit to Build a Long Future

Given the volume of new car business they do, it’s interesting to note that they do less used car business than most, with used vehicles contributing 24% of their revenue as compared to a national average closer to 32%. Due to this lower revenue their used car segment generates only 12% of their profit, under performing the averages.

But, from a long-term point of view, looking at parts and service and these used car figures probably indicates that used car sales also create a significant income stream from highly profitable service agreements.

And those agreements are meant to keep each used car relationship fresh right up to the next car sale, helping build a long-term recurring revenue stream.

Guaranteed Excellence

No wonder their stock, which was worth $13.32 on September 15, 2008 when Lehman Brothers’ collapse instigated the Great Recession, climbed steadily throughout and sits at $53.86 today. Quadrupling their market valuation over the course of the worst contraction since World War II proves they’re doing something right.

And one of the things they do best is guarantee their cash flow. One in five purchases over $100 is paid for with a check, and like most successful businesses, AutoNation caters to their customer’s payment preferences. But they do it with a guarantee in place, so they know that if a validated check is returned their revenue stream will continue uninterrupted.

Whichever side of the acquisition equation you see yourself on – buying, being bought, or competing – keeping track of the competition and incorporating what they do best may be the surest strategy for your own business development. Learn more here. 

 

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Topics: Auto Dealerships, Increase Sales

Written by Tom Lombardo