While developing The Garage workshop for auto dealers, I constructed an interesting Excel worksheet, designed to drive the point that the current service and parts department models must change now. The results startled me. Continuing to survive from “first-owner” vehicles isn’t going to provide sufficient service and parts gross profit for many to survive the predicted continued new unit sales reduction. Not only will there be far less first-owner vehicles to service in the near future, the current crop of exceptional automobiles have few maintenance or repair needs before 100,000 miles, after they are already in the hands of the second owner.
A market of midgets
I made a few calculations regarding market penetration of the first-owner vehicle market, and the reality is that even the absolute best customer retention program will only be maintaining customers with midget-sized repair orders yielding little gross per visit. For example, if a dealer has a 10,000 name customer database, a 35% annual penetration yields about $47,000 customer labor gross profit per month. Magically double that customer penetration to 70%, and the additional $47,000 gross profit is significant, but it has to be reduced by the extraordinary marketing, discounting, and additional staffing expenses necessary to attain that increase.
By my calculations, that will leave about half or about $24,000 additional gross profit — not a lot considering that it is nearly impossible to hit 70% retention, and maintaining it at that level won’t happen — there are too many variables. Also, keep in mind that any penetration figure is of a quickly diminishing market of first owners.
I have analyzed a typical dealership based on actual industry new unit sales results. The first column lists the calendar year; the second shows the actual car and light trucks delivered and projected for the near future by year, and in the third column are the four-year running totals of available first-owner units (the primary source of new car dealer service and parts revenue).
The matrix shows that by 2011 the number of first-owner units available for service will have dropped from some 66.3 million in 2007, to only 45.7 million by 2011, a reduction of 31%. Carrying those calculations over to a medium-sized dealer environment, at a typical parts and labor gross profit-per-customer-visit calculation, the matrix demonstrates that the $180,000 a month customer gross profit level enjoyed in 2007, will be about $135,000 in 2010 and down to $124,000 in 2011. Yikes!
Of course, some franchises would not suffer the steep losses of others.
Most dealers have already cut support personnel to minimum levels, as well as other controllable expenses. The odds are expenses will only increase from here forward, particularly in areas where management has little or no control, such as with utility costs.
Most dealers/managers reading this have already begun experiencing the beginning of this harsh downturn. The few that have increased customer repair order counts did so gaining business from recently closed points.
As a result, everyone is looking for the ubiquitous silver bullet, which will recreate the vanished customer pay and warranty service and parts gross profits. While I am certainly not advocating there isn’t a need for improved first-owner customer retention (gimme all of it), the numbers just don’t get the job done versus the loss of units. Putting substantial resources (time and money) to increase the penetration of something which is already 37% smaller is like?? well, you know.
OK mon ami, don???t take my word for this impending disaster. Send me an e-mail at email@example.com (subject line: “My Situation”) and I will e-mail you a two-part Excel workbook, in which you can plug in your own numbers — formulae already included! It will include a tab for you to calculate your customer labor and gross profit per visit. You don’t need to know anything about Excel to use this little program.
The good news is there is a substantial untapped market of second- and third-owner vehicles, many times larger than the first-owner group. While this is a much tougher group of vehicles to repair, requiring a far different employee skill set than dealers typically have, we have been able to assist dealers through that learning curve with workshops and in-dealer work.
Regardless, at least initiate an aggressive conversation within your organization about developing some meaty profit-building alternatives, versus simplistic oil change and inspection initiatives, whatever those possibilities might be. Please don???t delay or you might not have a place to work or own in the coming two years. Unfortunately, the crashing sound has already begun!