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Will Trump’s Tax Reform Cause a Sales Dip? How Should You Respond?

I recently read an NADA article that published a shocking new statistic. For the first time since NADA has been tracking dealership profits and loss (its been about a decade), dealerships across the US reported a loss in fixed operations. According to the article, dealerships reported an average loss of $13,338 in fixed ops last year, which is crazy since they reported a gain of $91,774 just the year before. A LOSS in fixed ops! That is the one department at a dealership that should always be bringing in customers. So how is it possible that service departments are suddenly losing money?

According to NADA, dealerships have been focusing on factory incentives by hitting the monthly and quarterly targets set by manufacturers. One of the economists working for NADA said that some dealers are even going out of pocket to make sure they get those incentives and reports that most of the profit is coming from OEM money. These incentives include “customer cash, rebates, volume-based targets or incentives to keep dealerships aligned with the brand image, via a dealership improvement, for example.” This means that other departments are neglected and funds that would normally go to things like advertising disappear – the average advertising budget shrunk 3 percent last year according to NADA. In addition to cutting advertising, dealers are cutting
back on providing snacks, bottled water and other extras for customers (and those little things count when you’re depending on customer retention and referrals). While the gross profit for car sales actually increased last year, the real cost of selling cars outpaced it, making the profit margin for dealerships shrink tremendously. This is crazy because you could theoretically sell the same amount of new cars but lose money because it costs so much more now to sell those same cars. But NADA leaves us with one piece of hopeful advice and says “if dealers home in on service and parts as new-vehicle sales decline, they can still remain successful in this business.”

This is so interesting to me because we were at a factory meeting not that long ago and about half of the dealers said they were losing money in fixed operations. Again, I was totally surprised. We also did a strategy session with a dealership and found out that none of their service managers see the financial statements, which was completely shocking to me. How can we expect our managers to bring in more customers and boost business if we don’t give them the right tools and training to stay profitable in an ever-changing environment?

If a decline in fixed ops wasn’t enough to worry about, a new article published on Axios paints a pretty grim picture for new car sales this year by looking at the 2018 tax reform.

Every year we see a spike in car sales during late April and May because most people get a decent tax return and decide it’s the right time to invest in a new (or used) car. For example, last year we saw a huge surge in car sales during this time because consumers got a “larger-than-expect” tax return. However, with President Trump’s new tax reform, it looks like most Americans will see a much smaller tax return and many will end up even owing the government money. According to Axios, when the new law took effect in early 2018, many Americans did not look to see how this would impact the way they fill out their W-4 forms so most people didn’t withhold enough money from their paychecks. This means taxpayers who are already having a tough time catching up to the new tax law might face a double whammy if the government ends up automatically withholding more from people’s paychecks this year – which many economists are predicting.

The really scary thing is this isn’t the only reason we will see a decline in new car sales this year. The article also tells us that “vehicles are becoming less affordable, due to tariffs on steel and other commodities, rising interest rates and the cost of premium features and technology.” This could result in a huge drop in new car sales this year by at least one millions units nationwide.

So what does this mean for dealerships out there trying to stay afloat? The answer might not be as complicated as you imagine, but it does require a change in the way you are thinking about selling cars. You have to focus on your fixed ops by keeping your absorption high. It might be tempting to reach for the factory incentives and get that OEM money, but if you let your fixed ops dip, it’s going to cost you a lot more, in the long run, to bring it back to where it needs to be.

Now the question is, how do you keep your fixed operations on track? The first thing you have to do is change your mindset. The automotive industry is changing by the minute and if you are going to try and stick to your guns and not change with it, it will leave you in the dust. You have to open your mind to new ways of doing things and one way to do that is to step outside of your bubble. The journalist Germany Kent said it simply “You have to change your thinking if you desire to have a future different from your present.” And one of my favorite street artists Banksy said it in a way that really resonates with me, “Think outside the box, collapse the box, and take a f***ing sharp knife to it.” If you look to the people and entrepreneurs you admire, the ones that have really made it, I guarantee they didn’t stick to what they knew to get to where they are. If you’re not learning, if you’re not out there making new connections and watching how other people get it done, then you are setting yourself up to fail or best case scenario, stay mediocre. And you should be looking to people in other industries. The GM of one of the most successful dealerships in the country models his business after high tech companies likes Amazon and Pelaton. He has created a whole system of customer service based on the Amazon model of consumers never needing to leave their homes. He was bold enough to ask questions like why didn’t Blockbuster invent Netflix or why didn’t Kodak invent Instagram.

Those are two examples of massive companies that have suffered because they were not willing to observe how the culture is changing and figure out a way to stay relevant. Look at how people are consuming and spending their money in other industries to help shape the way you build your own.

The second thing you need to do is train your team. I’ve made this comparison before but I think it is so relevant. You need to think about your service drive team like a band. I played drums in a band up in Seattle for years and we had this incredible gang mentality where we always stuck together and whatever was good for the band for good for the members. It was all about making the best music that we could and that required us all working together and all feeling like an important part of the band. In order to make a great song, everyone has got to be performing at his or her top capacity. You have to have the best equipment, the right education or background and an environment conducive to writing music. The same goes for your service team. You need to train them, give them the tools to get the job done correctly and also create an environment where there is open and effective communication between tech and advisor, advisor and customer and advisor/tech to manager. I am always amazed by the amount of questions I get concerning tech and advisor communication. It seems like more often than not, the two don’t really understand each other and the only way that can be solved is by strong leadership stepping in and teaching them how to work together. You have to think of your team as a family, as a band, as a machine that needs every single part working at its full capacity to operate. All of the pieces to the puzzle are invaluable so treat them that way. Teach your managers about financials and profits and treat your techs like the brilliant engineers they are and teach them how to talk to each other! I promise you, everyone will be better for it.

And finally, if you need help, ask for it! Get in a coaching program because we see what’s out there. It’s our job to track what businesses are doing across the country and across every field, so we know what works and what doesn’t. If you open your mind to new strategies and opportunities, I promise you will not be disappointed.

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