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 tax
payers 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
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