Now is the time to start working on a game plan to minimize the impact of reduced sales
We just returned from visiting dealerships in the United Kingdom where one headline reads: “Tough times ahead for car dealerships as insolvencies double.” A mixture of falling sales and diminishing profit margins are taking their toll and not just on small dealerships. Some of the leading players have reported seeing their new vehicle profit margins dropping from more than 7 percent to less than 2 percent, which is significantly changing the traditional profit stream of the business.
Whether the recent used-car scrappage scheme, which was worth £2,000 on a trade to the customer, will benefit the industry in the long-term is difficult to say, but some predictions suggest it will be another decade before new vehicle sales return to their former levels. It is also expected that the numbers of failing dealerships will continue to accelerate in 2010. Could it be that our own Canadian Banks’ policy of not lending money unless you can prove you don’t need it isn’t such a bad thing?
After-sales contributions
You might be wondering what this has to do with service departments, which are referred to as the “after-sales department” in the United Kingdom. What a much better name! It is widely agreed that dealerships that retain a high percentage of service customers and a lower dependency on vehicle sales have a much better chance of long-term survival.
Dealership revenue stream in the United Kingdom looks something like this: 50 percent from new vehicles, 35 percent from used vehicles and 15 percent from after-sales.
Yet when you proportion it as gross profit, it tends to look like this: 25 percent from new vehicles, 20 percent from used vehicles and 55 percent from after-sales.
If you are working in the fixed operation side of our business, you might be jumping for joy that vehicle sales departments, who’ve always had the glory, are now looking more like the dealerships’ loss leaders!
Black clouds on the horizon
However, not all the news on the currently profitable after-sales market is positive. In Canada, extended service intervals and improved product quality have taken their toll on the customer retail work order count and on bottom-line revenue. But this is only part of the impending challenge. There are estimates that because of declining vehicle sales over the past few years, daily work order counts could drop an additional 12 percent by 2012.
Obviously dealerships with strong customer retention and full maintenance contracts, which are popular in this country, will do better. Having said that, this recent trip was something of a disappointment.
One dealership that just two years ago appeared to be on the leading edge by offering customers by-appointment and drive-in service, has now reduced to appointment-only service because of a staff reduction. Another dealership offered customers a free while-you-wait vehicle health check performed by service advisors (similar to the one gas stations used to do). It was popular and also generated sales, but once again, had been discontinued because of a cutback in staff.
Then I visited a Ford store that recently twinned with Peugeot and always appeared to operate a very busy service department. They were in the process of expanding the sales department by taking away service department bays and already-restricted customer parking, which didn’t seem to make much sense. To sum it up, stores that just a short time ago were bright, clean and looked well-run, are now tired-looking, maintained by fewer staff and providing reduced customer service at a time when they should be giving more.
To be honest, it wasn’t just dealerships, I also looked at an operation called Kwik Fit, which built its independent operation on clean, bright customer service. Now, to call the place filthy is an understatement.
What about North America?
So much for the United Kingdom, but what about North America? I was recently looking at National Automobile Dealers Association (NADA) numbers which show that average dealership sales have declined by about 14 percent but the dealership gross profit declined by only 8 percent. These numbers, if true, also show that during the last four years, the fixed operation has represented up to 95 percent of dealership profit. But, just as in Europe, eventually the work order count will take another hit because of declining vehicle sales. So now is the time to start working on a game plan to minimize the impact.
It appears that, in the USA, increasing the average hours per work order plays a significant role in increasing the service department’s bottom line. But this will reach a plateau if they are not going to run the risk of overpricing services. Obviously having an effective customer retention system is a big key, but I also liked the free health check, especially for vehicles with extended service intervals. It is a great tool for branding and keeping you in touch with your customer.
It could be that we may get forced into offering the customer faster and more-efficient service as the business shrinks and the customer demands grow, but I believe the future is bright for dealerships who work out where their business is going and become proactive and customer-driven. It’s hard to believe but even with dealerships running out of work, it is difficult to get any service department to do an oil change without an appointment. We’ve tried.
