First published in GoAutoNews on 14th January 2025
Dealership retail success has always been driven by eternal optimism, an ever-increasing new market, growth in disposable incomes, a never-ending supply of cheap money and in recent times supply constraints resulting in record Dealership profit.
Now the party is well and truly over as vehicle grosses return to long-term averages and ongoing expense increases start to bite hard as gross profit shrinks. In addition, we have more brands fighting over the market negatively impacting gross thus retail profitability has never been more challenging.
Dealers who can unwind systems, processes and embedded “beliefs and folklore” will inevitably be those who prosper as continuing to operate in a “traditional” fashion is not sustainable.
Our objective is not to create fear but rather to lay out the reality of the current market and to help Dealers and OEM’s start the transition journey required to maintain retail profitability.
Given the resilience exhibited by Dealerships over the years these challenges will ultimately become a blessing by driving new processes and setting new operational performance benchmarks.
8 Drivers of Structural Change in 2025
- In 2025 monthly gross profit per employee to maintain a 2% + return on sales will approach $20,000 per month depending on location (In 2019, $15,000 was the objective) .
- “Nice to have” services will be cut and disjointed or non-integrated technology will come under scrutiny. Consolidation of administration, offshoring of functions and streamlining of management structures is inevitable.
- Dealers who acquired new franchises in recent times to maintain front end volume (as opposed to growing used) will suffer as margins contract and inventory increases.
- Best practice service operations will focus on asset utilisation not investment in new assets. Multi-manning, improved charging efficiencies, technician sourcing, labour mix and outsourcing of internals will be vital to ensure retail service gross covers operating costs particularly in capped price servicing environments.
- Fixed operations leadership will be under significant pressure as they move into a business transition and growth environment away from the traditional management focus as the onus for profit improvement shifts from the front to the back.
- 80% or more of sales will continue to occur within 48 – 72 hours of first customer contact requiring outstanding experiences in the showroom, over the phone and online. Innovative customer interactions and fully integrated offers including F&I and car care options at the first contact will be “not negotiables” as enquiry levels decrease.
- Traditional staffing structures and functions must be modified to keep people costs below 40% of Gross Profit. Resources will shift from high labour low profit activity towards activities directly linked to profit, particularly in the front end of the business where staff numbers will be reduced and processes consolidated with management hierarchies under the microscope.
- Leadership skill gaps across the business will become evident as we move into transition phase requiring execution of new strategies not just management of existing processes. There will be a challenge for Dealers and OEM’s as embedded beliefs, processes and mantras are replaced allowing for a transition to a sustainable business model.
The Changing Face of Dealer Profitability
This table tracks net profit per employee since 2021, from highs of $4,000 + delivering 5% return on sales to a loss of $(650) per employee per month as we move into 2025.
Structural change is a necessity as operating costs exceed gross profit capacity in many Dealerships
In the following weeks Pitcher Partners will cover in detail the strategies Dealers need to adopt to navigate this period of transition and set themselves up for sustainable retail profitability.
We will examine the following business transition opportunities over the next few months:
- Improving efficiencies in lead management and the purchasing process
- Driving fixed operations growth strategies
- Integrating the customer value chain
- Setting the foundations for cost out strategies
- Building financial acumen in future leaders
- Growing used car contribution to improve front end ROI
Interesting times ahead for Dealerships and to fall back on a well-worn mantra we await to see the good habits and new processes these relatively tough times will bring.
