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Six Top Key Performance Indicators at New Car Dealerships

Posted by Brandes Elitch | Fri, Jan 18, 2019 @ 09:45 AM
new car dealershipsThere are about 18,250 new car dealerships in the United States. They range from the largest multi-store publicly traded companies to small stores serving rural communities across the country. New car dealers employ over two million people, and they are also a very big part of the national fabric as well as the country’s gross domestic product (GDP).

In 2018, these dealers sold 11,786,069 new trucks and SUVs, an increase of fully 8 percent in this segment over 2017.

They also sold 5,488,181 new passenger cars, a decline of 13 percent from the previous year.

The average price of a new vehicle is $36,000. If you multiply 17 million by 36,000, you will see the extent of what new car dealers contribute to the American economy. My calculator doesn’t go that high.

What Are the Challenges of Running New Car Dealerships?

Here at CrossCheck, our primary customer segment is new car dealerships — a business model that continues to prefer checks over cards for accepting down payments.

new car dealershipsThis is because a new car dealer’s profit margin is typically less than two percent, which means they cannot afford to pay credit card interchange fees of 2.5 to 3.5 percent. In other words, why would you pay the card issuing bank the bulk of your profit?

Add to this fact that — according to the National Foundation for Credit Counseling — fully 38 percent of Americans revolve their credit card balance because they cannot pay it off, so they are not likely to have a lot of funds available on their cards. And here’s something you might not know: only about 70 percent of Americans even have a credit card according to the U.S. Census Bureau.

This is why new car dealerships insist on getting paid by check. Furthermore, since these checks are high-dollar amounts, the dealer wants finality of payment in case the checks bounce. This is why they use check guarantee services for a single check, or a series of checks to be deposited in the future.

Being a new car dealer is a pretty challenging business as it is, and whatever makes life easier and improves the customer experience at the same time is a good thing!

What are the KPIs at New Car Dealerships?

SWOTNow let’s take a look at some of the key performance indicators (KPIs) that auto dealerships needs to know. Dealers rely on these metrics to monitor day-to-day operations with the goal of remaining profitable and creating attractive service department offerings.

1. Know the strength of the market for each model on the lot. For example, we see from the statistics that trucks are hot — sedans not so much. Generalizing, it might mean that you can make a higher profit on a truck than on a sedan. You also need to adjust dealer mark-up to market conditions, which are changing daily, because having a car on the lot for more than a few weeks is a financial liability (see #4 below).

2. Minimize reconditioning delays for cars sold at auction. You want to get cars to the auction as soon as possible whether they are trade-ins you don’t want to sell or units purchased at auction that were bad investments.

Yes, it is possible to buy a car at auction and then lose money on it when you sell it! Seems obvious, but buying a used car right is very hard to do!

Recently, I attended a Mannheim dealer auction in Alameda, Calif. near San Francisco. It is a huge facility with thousands of parked cars ready for auction. There were a dozen lanes with auctioneers in each lane. I wish I had brought earplugs, because the noise was deafening! They ran about 4,000 cars through the lanes in just a few new car dealershipshours. Things happened so quickly it almost seemed as though the cars didn’t even come to a stop as they passed through a lane. It was a fascinating experience and the process illustrates that a buyers' needs to have knowledge and discipline as well as physical and mental stamina.

First, you can inspect the car in the lot, but you cannot drive it or use an OBD reader to access the car’s computer. Consequently, you have to be very accurate in your estimate of what reconditioning the car will need before you can sell it.

After you place your bid, you can’t back out — just like betting in a casino. And you own the car if you hold the winning bid.

I was surprised to see a dozen Teslas there to be auctioned. You would think that the factory, which is right down the street, would recondition them, but auctions are very efficient and obviously Tesla agreed.

3. Manage the New-to-Used Car Ratio at your store. New car dealerships need to meet the new vehicle sales goals set by the factory, but will typically make a higher ROI selling a used car. This creates a juggling act for the dealer.

new car dealerships

4. Control the Inventory Turn Ratio. The best performing dealers will turn their inventory every 20 days. This is tough to do, in part because it requires that all departments in the store work like a team to get things done. To illustrate how important this is, consider how it affects the dealer’s Gross Return on Investment (GROI).

A $20,000 vehicle with a $2,000 profit that took a year to sell would have a GROL of 10, but if it sold in one month, a 12-turn equivalent, the GROI would be 120. A ratio of 120 is considered the minimum necessary for a well-run dealership.

5. new car dealershipsUnderstand the Aged Wholesale Loss per vehicle. This applies to cars that were reconditioned and offered for sale at retail, but did not sell. A benchmark of a five percent loss allowance is typical. Since the average used car today is around $20k, a five percent loss is a thousand dollars. You want to be able to identify losers and not make the same mistake again.

6. Monitor the Appraisal to Trade statistic, which is the ratio of all cars appraised to how many were actually traded-in on a new car. New car dealerships make most of their money on parts and service, and their second most profitable segment is selling used cars. They get used cars from trade-ins or at auction. If the dealer has excessive internal charges for reconditioning, or they take an unpopular car as a trade-in to sell a new car, this will create a lower ratio.

How to Overcome Other Challenges at New Car Dealerships

You can see that it is very challenging to be a new car dealer. You need to have the right franchise, the right product mix, the right team of people in sales and service, and a good location. You also need to have access to a very large credit line to be able to finance a very large facility and inventory. Car dealers are a very important part of our national economy, and here at CrossCheck, we are proud to be a part of their business and help to ensure their success. The C.A.R.S. program was created with this in mind.

C.A.R.S. — CrossCheck’s Auto Industry RDC Solution — uses remote deposit capture (RDC) to quickly process and deposit guaranteed checks into dealership business accounts (usually within 48 hours). C.A.R.S. saves time and money by eliminating claims submissions, bank visits to deposit checks, missed deposit dates and the collection of bad checks. It also includes two premium services.

Multiple Check (a future deposit function) helps increase sales by providing consumers up to 30 extra days to complete down payments while Check on Delivery (COD) mitigates risk by eliminating returned checks for delivered parts sales.

Download our free guide to learn how C.A.R.S. can help increase sales at your dealership.

auto dealer cars

Topics: Brandes Elitch, Auto Dealerships

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.