Those of us who have worked in auto retail for any length of time know when the industry is thriving. It’s easy to forget the difficult periods when profits are high and the workload is more manageable. However, we’ve also weathered some hard times, even times when dealerships were shutting down.
I tend to adopt a “SWOT analysis” mindset when it comes to business situations. You may be familiar with the SWOT framework – it looks at a company’s Strengths, Weaknesses, Opportunities, and Threats – and it originated at the Stanford Research Institute in the 1960s.
Early on in my career managing dealerships, I didn’t have regular access to mentors or advisors. So I started studying leadership and management principles on my own. This self-directed learning has afforded me the ability to anticipate trends and plan proactively.
Rather than just reacting to the current environment, I’m naturally inclined to take a more strategic, forward-looking perspective. I try to get ahead of potential challenges by systematically evaluating a business’s internal capabilities and external market dynamics. This SWOT-oriented thought process allows me to identify both risks and opportunities on the horizon.
By adopting this analytical mindset, I’m able to provide more holistic guidance and make more informed decisions, rather than simply relying on gut instinct or short-term considerations. It’s a skill I developed out of necessity early on, and one that continues to serve me well in navigating the ups and downs of the auto industry.
The critical need for dealership spend management
Dealership profits are expected to continue declining from the record highs seen during the pandemic, but remain above pre-pandemic levels: Net pretax profits for the average franchised dealership fell 33.4% in the first half of 2024 compared to 2023.
Key Factors Impacting Profitability
Several factors are expected to put pressure on dealership profits through 2025:
- Increasing inventory levels and interest rates are raising floorplan expenses.
- Gross profits per vehicle are declining, with new vehicle gross profit down 32.9% in early 2024.
- Dealer competition, manufacturing overcapacity, uncertain EV adoption, and fluctuating consumer demand.
- Rising advertising costs as a percentage of vehicle prices.
Cost Index hits record high, dampening profitability
The Cox Automotive cost index reached a new record high in Q3 at 77, indicating a majority of dealers see the cost of running their business as growing, not decreasing, thereby impacting their profitability, which continues to be viewed as weak.
The dealer profitability index score in Q3 was 34, lower than the score of 40 one year ago and down significantly from the index peak of 60 in Q3 2021. The profitability index for franchised dealers held steady from Q2 to Q3, at 43, exactly half of the peak score of 86 three years ago.
Be nimble, be quick.
To maintain profitability, dealers will need to adjust spending and variable costs more quickly to match changing market conditions. Effective spend management is more pressing than ever and I fear the majority of retailers are not prepared.
With the downward trend in dealership profitability, rising operational costs, and fluctuating consumer demand, it’s essential for franchise car dealerships to employ comprehensive spending oversight. For any dealership, especially those historically resistant to change, taking decisive action on spend management can distinguish between thriving and merely surviving in an increasingly competitive market.
Financial oversight enables better control over expenses, increased operational efficiency, and the protection of profitability—cornerstones for long-term success.
Without proactive spend management, dealers risk deteriorating profit margins, especially in light of rising costs. Yet, some dealership owners, entrenched in old ways, might ignore these imperatives until financial troubles force action. But by adopting a structured approach to managing expenses, dealerships can enhance their financial standing without resorting to drastic measures that may hurt operations, team member morale and/or customer experience.
1. Track and analyze ‘Expenses as a percent of Gross Profit’ every month.
Sometimes, we have to face things we’d rather avoid. But once we do, we often realize they weren’t as daunting as we imagined, and the insights we gain can be empowering.
Before you prepare your final financial statement and close the books for the month, ask your CFO or controller to review your “Expense to Gross Profit Percentage” compared to benchmarks. I have a free, easy-to-use self-assessment worksheet available to help with this.
Now is not the time to rely on gut instincts.
2. Avoid hasty personnel cuts: a thoughtful approach to workforce management
One of the most common knee-jerk reactions in spend management is to cut personnel costs when profitability declines. However, hastily reducing the workforce can have significant drawbacks, especially if it leads to understaffing, low morale, or compromised customer service.
Instead, dealership management can assess staffing levels based on actual needs and performance metrics.
For instance, one dealership experiencing a slow period took a measured approach by reviewing each department’s staffing requirements. Rather than across-the-board cuts, they reassigned personnel to areas with higher demand, optimizing labor costs without sacrificing service quality. This approach preserved employee morale, reduced turnover costs, and maintained high service standards, ultimately supporting a smoother path back to profitability.
Conducting regular workforce evaluations and balancing staffing levels with demand is a ‘best practice.’ This proactive approach prevents the need for drastic cuts, instead fostering a stable and efficient workforce that can quickly adapt to market changes.
3. Prioritize efficient inventory control
Vehicles
The adage “time is money” couldn’t be more accurate for vehicle inventory. Holding onto cars for extended periods incurs unwanted storage, flooring, maintenance, and insurance costs while each vehicle depreciates in value. managing stock levels more effectively, ensuring that they stock fast-moving models and minimize “dead stock” (units that sit for too long and are difficult to sell).
When management relies on historical data to forecast demand and optimizes its stock accordingly, this approach not only reduces carrying costs but also improves cash flow, providing the dealership with more capital for other operational needs.
Parts
NADA reports that an average dealership has around $50,000 in parts that haven’t moved in 12 months or more.
Efficient parts inventory management emerged as a key focus area at NADA 2024. Experts emphasized the importance of optimizing and maintaining a healthy parts inventory to improve accuracy and increase parts sales. By minimizing waste, reducing obsolete parts, and streamlining stock orders, dealerships can decrease customer wait times and boost customer loyalty.
4. Analyze Fixed Ops costs, optimize for cost reduction
The service department is a major revenue center for dealerships but it’s also be a significant expense area. Optimizing service department spend requires a deep dive into cost structures, staffing efficiency, and parts management. Many dealerships struggle with understanding the full cost dynamics of their service departments, often overlooking the opportunities for savings.
One example is a dealership that reduced its service department’s operating costs by conducting a time and motion study, identifying that technicians spent excessive time retrieving tools and parts. By reorganizing the layout and improving the inventory system, they cut down on wasted time, allowing technicians to perform more jobs per day, which increased profitability.
Additionally, regular cost analyses of consumables like oil and cleaning supplies can uncover potential savings. Negotiate bulk discounts with suppliers for high-use items, reducing expenses while still maintaining quality.
And speaking of negotiating…
5. Negotiation techniques with vendors: maximizing vendor relationships
Negotiating with vendors goes beyond securing the best price on paper. There’s a strategy to establish robust, mutually beneficial relationships with their vendors to maintain high-quality services at the best possible prices. Regularly assessing vendor and bank contracts and renegotiating terms can lead to significant cost savings without sacrificing product quality.
For example, a dealership in Texas saved over 15% on its after-market parts procurement costs by establishing performance-based incentives with its supplier. The dealership guaranteed a set volume of parts orders, while the supplier, in return, provided tiered discounts based on the volume ordered. This type of arrangement benefits the store and fosters a collaborative supplier relationship, leading to more consistent quality and service.
Taking a page from the publicly-held dealership groups, try implementing a vendor approval process. Taking the time to assess your entire vendor base can reveal opportunities to consolidate orders or reduce the number of vendors, leads to greater purchasing power and potential for bulk discounts.
A dealership in California reduced overhead by consolidating suppliers and renegotiating contracts. This strategy allowed them to save nearly 10% annually on parts and services, directly impacting their bottom line. Their proactive approach to supplier management underscored the benefits of relationship-driven negotiation in optimizing spend without compromising quality.
Operational efficiency is a powerful, often underestimated lever for boosting dealership net profit.
Unlike expense reduction, which provides one-time savings, improving operational efficiency generates ongoing gains that compound over time.
By optimizing workflows, reducing time-wasting activities, and utilizing resources more effectively, dealerships can unlock substantial cost savings while enhancing productivity and customer satisfaction.
Simple (though not always easy) adjustments – like streamlining service processes, leveraging better technology for inventory management, or refining sales procedures – can yield returns that are often 10 times greater than traditional cost-cutting measures.
Focusing on efficiency not only enhances the bottom line but also creates a resilient foundation for long-term profitability and growth.
Imagine this: while you’re fixated on slashing expenses to inch up your profits, operational efficiency is sitting there in the corner, rolling its eyes and sipping a martini.
Yes, you heard that right—efficiency. Because, here’s the thing: by fine-tuning your operations, you could be saving ten times what a cost cut gets you. And this isn’t rocket science; we’re talking small but strategic tweaks. Picture your entire team working like a well-oiled pit crew. Suddenly, profits rise, and you’re the genius who did it all without lifting a single pink slip. So go on, impress yourself—look into operational efficiency. After all, what could be more attractive than profit by design?
In the current automotive retail environment staying profitable demands more than traditional methods of just “selling more cars.” It requires a comprehensive, data-driven approach to managing every dollar spent. With a well-structured spend management strategy, dealers can protect their profitability, streamline operations, and establish a solid foundation for future growth.
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