Our fourth and final installment of our annual trends and analysis series will focus on our findings as they relate to the parts and service departments for our client dealers. The information used is from the first nine months of 2015.
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The stronger sales of vehicles over the past few years have helped to fuel an increase in the service department. Customers, especially those that purchase new vehicles, are more inclined to bring their vehicles back to the dealership. The result? Nearly 80% of our dealers saw service sales rise, increasing on average over 8.5%.
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Gross profit percentages averaged approximately 63.7% for the current year as compared to 62.9% in the prior year. For the current year, gross profit percentages ranged from just over 53% to nearly 76.5%. The reasons for the disparity can be many – too much unapplied time, experienced techs performing basic services (i.e. oil changes), warranty or internal work performed at lower hourly rates. The industry standard for gross profits from the service department has been historically in the 64 to 67% range. Dealers and service managers need to continuously monitor their service department to make sure they are maximizing the gross profit of the department.
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Since service is the main driver of parts sales, and with service sales being up, we would expect parts sales to be up. This has held true. 84% of our dealer clients experienced growth in parts sales. On average, the increase was just over 11.5%.
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Our dealer clients averaged approximately 32.9% of gross profit on parts sales ranging from 26% to 40%. The reason for such a disparity? Many dealers have a significant wholesale parts operation and/or sell a sizable amount of tires. Both of these areas tend to drag down the dealer’s gross profit on a percentage basis, but help to add overall gross profit dollars to the bottom line. As mentioned in one of our articles published earlier this year, Is Your Wholesale Parts Department Really Profitable?, dealers need to manage their wholesale parts business as a separate profit center. One bad account receivable can wipe out all of a month’s profit. Overall, our dealer clients saw their gross profit percentage rise by nearly 3%.
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The past decade has seen the demise of the body shop at most dealerships. Environmental issues and slim margins paid by insurance companies have driven many dealers out of that business. Currently less than 25% of our dealer clients still maintain a body shop. The data explains why. Those with a body shop generated a gross profit percentage of just under 53% for the current year, while last year, the gross profit percentage was over 54%. Those dealers who run body shops need to evaluate their profitability to at least ensure the department is covering its own expenses.
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Parts and service are the backbone for many dealers. Their profitability is used to “keep the lights on” at the dealership. The more the gross profits are able to absorb overhead costs, the more profitable the dealership. Often times during successful years, some dealers will not notice the slide in gross profits and profit percentages in these departments. Building and maintaining profitable parts and service departments is what will carry dealers through the inevitable market downturns in vehicle sales.
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For your convenience, the first three articles in the series are here for reference: 2015 Dealership Trends & Analysis, 2015 Dealership Trends & Analysis – New Vehicle Sales and 2015 Dealership Trends & Analysis – Used Vehicle Sales.
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If you have any questions regarding these articles, please contact Charlie Paolino at 800-849-3100 or CPaolino@DowneyCoCPA.com.
