Five Reasons Your Margin is Still Compressing

White Paper 2016 written by: Herm Brocksmith 

If you think margin compression is just a passing fad, then you’re dead wrong! I recently charted gross profits for the past decade and the results were frightening. Not that I didn’t know it was happening but to see it graphically on a detailed chart brought the reality and clarity of what was truly happening. I encourage you to perform this exercise as it is eye-opening. Share it with your key managers so everyone is on the same page. With over 800,000 vehicles set to come off-lease in 2016, late model vehicle compression in the used car department will be an issue to deal with as well.

In 2013, according to NADA, Used Vehicle Sales accounted for over 31% of dealership total sales revenue. Impressive! Yet, many used car departments lost money and have seen their five-year trend in departmental net profit decline substantially. If the forecasters are correct, the automobile industry may have hit a plateau in 2015. Many have stated that 2015’s record sales will be the high water mark for many years to come. Some forecasters even predict a slight decrease in new vehicle volume over the next few years. Dealership Net Profit margins continue to stagnate with net margin at or below 2% of sales. All of this profit compression is exacerbated by higher real estate costs, higher taxes, and higher employee costs and benefits.

The news is not all bad. There are new technologies and practices that quite frankly are imperative to your operation that must be implemented. Here are several things you can do to improve margin-compression.

1. Quit Using Auctions and Wholesalers to Dispose of Your Trade-Ins. Every dealer wholesales cars. That’s just a reality of the car business. High-mileage trade-ins, vehicles that need too much reconditioning, over-aged vehicles just to name a few. Ironically, wholesaling vehicles is one of the most overlooked profit centers in a dealership. And, yes, I said profit center. Seriously, as an upper-management executive, when was the last time you inspected this cash asset and the disposition of these vehicles. You probably haven’t! Trade-In disposition is a huge inventory velocity center in both cash and physical inventory turning rapidly but not being maximized in just about every dealer I speak to. Most dealers do one of two things or a combination of both when it comes to disposing of their wholesale vehicles. One, they take wholesale vehicles to the auction, and, two, they hand-spread wholesale vehicles to independent wholesalers via relationships between your used car manager and an outside wholesaler. Both the auctions and the wholesalers, in turn, sell these vehicles to used car dealers who retail these vehicles to the public. In effect, the auctions and the wholesalers are the middle-man between you and the retail used car dealers. The fact of the matter is that there are more used vehicles sold retail each year than there are new cars by as many as three or four used cars sold to one new car sold and your wholesale used cars fuel this industry. Sell these wholesale vehicles directly to the used car dealer who sells them to the public and watch your profitability soar. We have a robust solution for additional profits.
2. You’re Advertising to the WRONG People. In today’s digital world, you can advertise directly to the people who are most likely going to buy. No longer is the shotgun approach an effective medium when advertising. Additionally, your current database is a goldmine but most dealers are not effectively marketing to their database properly. The shotgun approach may have worked one day with your TFP (Traditional Foot Print) advertising, but do you really know because there really was no science behind that big TV, print or radio spend. With a well-coordinated DFP (Digital Foot Print) strategy, you can track each and every person who looked at an SEM ad, came to your landing page, Liked a social media post, wandered around your website looking at specific inventory, etc. AND, yes, you can retarget these consumers, follow them around the internet and see what their buying habits are…but are you doing this? Utilizing data, you can then target directly to people with similar likes, habits, psycho demographics, needs and wants.
3. You’re NOT Asking the Right Questions. Who are your customers? What are their demographics? How about their lifestyle? Kids? Gender? Age? Hobbies? Activities? Politics? What sites they went to after they visited your site? By analyzing the DataDNA of your customers, you can find people with the same DataDNA and specifically target this new group of prospects in all of your digital spend. Are your current vendors able to create DataDNA profiles and market over every available platform? Make sense? Kind of scary isn’t it? This is the new reality of digital retailing. This is your new reality.
4. Your Internet People Go for the Low-Hanging Fruit. Just about every internet lead is ultimately worked from the same perspective: what do I need to do to sell a car today? Don’t get me wrong, you must sell cars today and you have to sell cars tomorrow as well. Internet sales people tend to gravitate to the prospect they can close the quickest…those that are well down the sales funnel. But those prospects generally are the least profitable. If 80% of all sales are made after the 5th contact, then why aren’t we contacting all of our prospects at least 5 times with a quality personal contact? If you would, your profitability would go up as well as your closing percentage with all of your lead providers.
5. You Sell Unprofitable OEM Accessories (if you sell any at all?) Instead of the Accessories People Need and You Can Make Money Selling! Think about this for a moment. The most profitable items with volume of at least 30% of new car sales have the most want and need by consumers. These would be items such as: Window Tint and Clear Mask. Offer base packages and upsell to higher quality, more coverage, etc. If you train your personnel and install these items in-house, your profitability soars. As far as OEM accessories are concerned, they have a place in your sales process but you should limit these to packages of the most popular items that your techs can install quickly and efficiently. By packaging the items, profitability goes up. Sales personnel feel more confident and comfortable selling them in packages. We Owes are more effectively handled and your Parts Department will love the additional velocity.

By implementing these practices, your dealership can fight back against margin compression and still sell vehicles in large volume, be Retail Sales Effective with your OEM and have great CSI scores.

About Herm Brocksmith:  Herm entered the retail automobile business in 1986 and has held every position in a new car dealership and used car dealership up to and including dealer principal.  Herm can be reached at [email protected] or call him at 303-944-3456.