The answer is yes. We have many clients that are selling 50 to 80 new and used vehicles a month while averaging $40,000 to $100,000 in monthly profit. This article will explore the keys to maintaining profitability as a smaller, single point store.
A dealer’s expenses must be proportional to the number of vehicles sold. We have a handful of small to medium size clients that are struggling with profitability. I recently analyzed two clients that sell the same brand and were within twenty miles of each other with similar market share. They were averaging 58 and 75 new and used vehicles, and $230,000 and $275,000 a month in total gross profit, respectively. The first dealer was averaging $65,000 in monthly profits while the second dealer was breaking even. One would conclude that this does not make sense.
In analyzing the two stores, the following was uncovered. The second dealer had a higher monthly rent and owner salary by $15,000. There is still a $50,000 monthly profit difference after factoring in the higher rent and owner salary. In a meeting with the second dealer, he incorrectly stated that they were selling 85 to 90 units a month. He also stated that this store should easily sell 100 units a month and has achieved these levels in the past. He mentioned that he maintains a sales staff, vehicle inventory levels, and an advertising budget to accommodate 100 vehicle sales a month. In the current year, he was maintaining a 120 supply of new and used inventory. Further analysis indicated that the store had not averaged 100 units per month for ten years.
The smaller, more profitable dealer was realistic about his sales potential and the size of his store. His expenses and inventory levels were in line with the size of the store. The second dealer was not realistic about the number of vehicles sold per month, and his expenses were out of line for the sales volume of his store. The first dealer focused a lot of effort to maintain a profitable parts and service operation while the second dealer was mainly focused on the front end of the store. We all know that new vehicle gross profits continue to decline on a per unit basis and the used vehicle department has been a struggle in recent years. Smaller stores must have well managed parts and service operations to maintain profitability.
The following are some characteristics of smaller, profitable dealerships:
- Active owner(s), often time the owner(s) maintains a manager position in the store to help reduce expenses.
- Proper inventory management including realistic inventory levels and reasonable turnover ratios.
- Strong internet presence, including advertising. Advertising dollars are concentrated on the internet as opposed to traditional areas such as print.
- Well run service and parts operations with outstanding CSI and customer loyalty.
- The dealership is not located in a metro area in which rent and other expense factors can be overwhelming.
- Strong F & I per unit grosses.
- Proper capitalization which is necessary to overcome economic downturns and help to fund manufacturer facility upgrade requirements.
- Competent office manager with accurate monthly financial reporting.
- Superior expense controls.
Clearly, it is a challenge in today’s environment for smaller dealerships to maintain profitability. Well managed smaller stores with the characteristics outlined above will continue to prosper and be profitable.
If you have any questions regarding this article or any dealership management issues, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or 800-849-6022.
