As we all know, sales of vehicles have surged in recent years. During such times, it is easy to take your eye off the back end of the store. The increase in vehicle sales should be feeding your service department. The service department creates large amounts of gross profit for the store at significantly higher margins than the new and used vehicle sales departments.
Make sure your gross profit percentage generated in service, parts, and body shop operations are growing or staying consistent with prior years. We recently noticed a client that had experienced a decline of 3% in its gross profit in the service department. The store was generating $1,000,000 in service sales a month. The decline in the gross profit percentage resulted in a loss in profit of $30,000 per month. New vehicle sales were booming at this store and no one noticed the slip in the gross profit percentage in the service department.
There were several reasons for the decline in the service gross profit at this store:
- Advisors were lazy and when confronted with a customer complaint would “charge off” the work to policy or reduce the invoice without proper approval.
- The dealership had increased the pay to technicians without a corresponding increase in the labor rate. (The labor rate had not changed in eighteen months.)
- Overqualified mechanics were performing routine service jobs.
- There was an increase in unapplied time in the shop.
- Service sales were not growing in proportion to the increase in vehicle sales.
Times are good for dealers, but we all know the business runs in cycles. When vehicle sales are off, the service department carries the store. Service sales do not decline significantly in a weaker economic environment. Well run stores have service department gross profit percentages of 65% to 75% and parts department gross profit percentages of 30% to 40%. What is your gross profit percentage in the new vehicle department? Maybe 2% to 6%.
In conclusion, do not neglect your service operations in strong economic times. Make sure you are reviewing the operations each month to ensure that you are taking advantage of all opportunities in the back end of the store. Keep in mind, a well-informed potential buyer of your store will be inquiring about the amount of monthly parts, service, and body shop gross before they ask for the new vehicle sales figures. The performance of your service operations are a better indicator of your long term success than the number of new vehicle sales.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCOCPA.com or 800-849-6022.
