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Death, Dying and Profitability

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Article: Death, Dying and Profitability

Article Date: Tuesday, October 23, 2007

Article Source: Compli

Death-Dying-and-Profitability-1023.pdf

On Death and Dying and Dealership Profitability

James E. Lawrence
Compli
610 SW Broadway, Ste. #600
Portland, Oregon 97205
503-294-2020 x121

The end is nigh…?
A few telling media moments…

“173 Chrysler Dealers in Danger of Losing Franchise Agreements, About 450 Banned from Closed Auctions” - By Jennifer Reed, SubPrime Auto Finance News Editor, August 01, 2007

“Imports outsell Big Three for the first time in second quarter …Domestic manufacturers’ market share drops below 50%. Import dealers outsold their domestic rivals for the first time in history in July, as the entire U.S. auto industry was battered by its worst sales month in nearly two years” – Report in the Detroit News, August 3, 2007

Not enough to catch your attention yet? How about this one:

“Yet (despite these record sales) industry-wide dealer pre-tax profit margins compressed (according to NADA data) to a decade low of around 1.5%.” Jerry Marks, AutoRetailStocks.com

Do future predictions get your attention?

“But if things don't improve out of the public and private dealers this summer (07), remember that "massive consolidation wave" I have been saying is likely to occur in U.S. auto retail sometime in the next five years? Watch out, because this summer may push the industry into this "rationalization period" in 2008/2009. So fasten your seat belts. This may prove to be the most interesting (and telling) six months (to observe) in auto retail yet!" - Jerry Marks, the Auto Retail Informer, April 4, 2007 How’s that for news?

Are you angry yet or still in denial? The above headlines suggest the vast majority of (e.g. domestic) dealers are experiencing unprecedented pressures from their respective OEM franchisors. Many, as you can see, are being told that they need to make it or get voted off of the island!

The days of working out differences are seemingly over. There have been a plethora (author’s note: great word) of articles coming out of autonews.com, automotivedigest.com and other auto‐only news channels pointing to something big on the horizon. But now the “mass media” folks like the WSJ are (finally) talking about the pressures building on the domestic OEMs distribution networks, who are requesting, with an almost religious deference to state franchise laws, that their low performing dealers must put up or close up.

Why Are We Here?
How do the “high performing dealerships,” even those with a predominant mix of domestic vs. import franchises, continue to excel in this volatile environment? How do those dealerships that aren’t performing well get out of this death spiral? I will get into that. But first let me digress…even further. What if you were told by yet another “objective third party” that about two-thirds of your dealership’s characteristics are uncontrollable harbingers of your profitability? How would you feel about that? Would you lock the doors and walk away or would you focus on the 1/3 you could control? Let’s find out.

Raising the Dead Issue
"In the long run, we are all dead." – John Maynard Keynes – Dismal Scientist (Economist) I know what you are thinking…”How is it possible that I only control one-third of the elements that lead to better profitability? This is Bull Snot!” OK. Over time, in the long run, you may be able to expand your franchises to incorporate more of the hotter selling imports (good luck) or increase the physical size of your footprint or be able to relocate to better digs with better demographics (ouch-expensive). But in the short run, you can only control about one-third of the elements that determine your dealership’s profitability. The nice part about this reality is that you can start controlling this one-third today.

“How could this be happening to my dealership? There is no way this is true.” If this is your thinking about this article, you are presently experiencing an emotion captured in Elisabeth Kübler-Ross’s 1969 book “On Death and Dying.” It is the first of The Five Stages of Grief. Right now you are knee-deep in denial.

According to Wikipedia – Kübler-Ross originally applied these stages to any form of catastrophic personal loss (job, income, freedom)… Additionally, the change in circumstances does not always have to be a negative one, just significant enough to cause a grief response to the loss (Scire, 2007).

What if you knew you could have added one-third more profits to your coffers over the many years of your dealership’s life? Now THAT would make me sad and certainly generate “a grief response,” so let us walk through these emotions together… The stages are:

1. Denial : The initial stage: "It can't be happening at my dealership."
2. Anger : "Why ME? It's not fair?!" (referring to God, NADA, Government Regulations, your F&I Director or anybody perceived, rightly or wrongly, as "responsible".
3. Bargaining : "Just let me live to see my dealership make more than my flooring and overhead next quarter!"
4. Depression : "I'm so sad, why bother with improving Turnover in Sales, Service and Parts?"
5. Acceptance : "It's going to be OK. I am going to get the hold-back and profits I deserve."

Denial
According to the June 2007 McKinsey study written in conjunction with NADA on top-performing auto dealerships, the difference between average performing dealerships (e.g. Net Profit before Taxes was 2%) and high performing dealership (e.g. Net Profit before Taxes was 6.6%) was based on six basic characteristics of the dealership, broken out into two categories:

Static Factors (Things You Might Control in the Long Run)

1. Region & Demographics
2. Brand (domestic or foreign) - *Author’s note: Duh+
3. Size, structure of dealership

Internal Dealership Practices (Things You Can Control Today for 2.3% more net profits)

4. Talent Management (Turnover)
5. Customer Loyalty (service CRM)6. Performance Planning (Your OEM’s *the devil’s?+ resources)

McKinsey did in-depth interviews with fifteen “high performing dealerships and then did surveys of 700 owners and GMs to confirm what they found…” Pretty strong evidence of a valid research effort wouldn’t you say?

Wikipedia indicates, “Denial is a defense mechanism in which a person is faced with a fact that is too painful to accept and rejects it, insisting that it is not true despite what may be overwhelming evidence.”

If you don’t know who McKinsey is, well they generally ONLY deal with the key players and have generations of honed research and consulting methodology that hundreds of the Global 1000 rely on…in short they are the rock stars of the strategic consulting set. You might want to listen to them. Their research effort went looking for the characteristics that separated the high performing dealerships from the average dealerships. The parts you need to care about are those under the “Internal Dealership Practices” category. These are the elements you have the power to change today. Here is where you need to dig deep, search your emotions and seek honest answers to three catharsis-inducing questions:

1. “What kind of programs do I have in place to enhance customer loyalty?”
2. “What guidance and resources can I get from my (gulp) OEM franchisor?”
3. And “How do I recruit, hire, orient, train and track performance of my employees?”

According to the same McKinsey study the average dealership experiences 71% turnover while high performing dealers experience 54% turnover or a 17% difference. …Those (NADA & McKinsey) figures are tough to deny.

Anger
By now you should be well on your way to seeing the truth of your situation and getting a bit upset (e.g. going ‘postal’) about the whole thing… “It would have been nice to know this stuff a long time ago and what is this letter from ENTER DOMESTIC OEM NAME HERE saying I have ‘180 days’ to respond?”

According to Wikipedia, “Anger is often a response to the perception of threat due to a physical conflict, injustice, negligence, humiliation, or betrayal...” Let’s see, chronically depressed profitability, OEM stress to perform better with reduced marketing support, attractive product (e.g. Aztec, Malibu, etc) or close up shop, all seem likely candidates to cause a certain amount suppressed rage. Getting back to what you can do about your present profit malaise…you can blame your situation on the current F&I Director or GSM or GM, or you can start to examine the causes and what you can alter in “the-here-and-now.”

“Where do I begin?” The McKinsey dealer research strongly suggests that the introduction of a good service reminder program or anything that supports improvements in the service department interaction with new and existing clients will tend to gain repeat customers and reduce acquisition costs. This is a key element in a more productive (and profitable) service organization and higher overall CSI, that studies from automotive research “usual suspects” strongly correlate to a lower cost of new sales and client acquisition. If you don’t have a service CRM program in place, McKinsey research (and probably your Service Manager) strongly suggest you should. Chances are your service people have their own one-off manual systems because they inherently know it is cheaper to keep a client than win a new one.

Bargaining
Wikipedia states that bargaining is the “interaction of influences... including the process of resolving disputes, agreeing upon courses of action, bargaining for individual or collective advantage, or crafting outcomes to satisfy various interests.” “What is in my Dealership’s best interest to do next?” Are there any resources that you neglect to take advantage of from your OEM? Are you “crafting outcomes” that satisfy your dealership’s profit policies? Would you rather your OEM’s regional dealer development representative drive past your dealership or turn into your dealership?

The answer to that question is the difference between average and superb profitability. You may need to “facilitate” an “intervention” with your local OEM dealer development organization. Frankly, do what you have to do in order to get what you need to make your dealership more profitable. Even if it means you need to buy your rep a cup of coffee and talk about your needs. If you work your OEM resources to your advantage, and they are more forthcoming on performance measures and consulting resources, the McKinsey research strongly suggest that you can expect to increase your net profits by .77 points. If you are an average dealer with 1.5% (NADA Data) you would increase your profits by 50%. What could you do with that?

Depression
Wikipedia – “…down in the dumps”…indeed.

There is much in the automotive media which can cause “A depressed mood … associated with grief, loss, or a major social transition.” Much of the research McKinsey and NADA gathered suggest that dealers would have been earning one-third more profits if they had implemented certain changes that simply require a slight adjustment in operations and some readily available technologies that address legal compliance, OEM requirements (e.g. CSI & CPO) and the automation of paper-based, low value business processes they don’t want to deal with anyway, such as time off requests.

“Whew. Ok, People.” The third and perhaps most important element you can take control of today is the better selection, care and feeding of your personnel. The average auto dealer faces personnel turnover that would make managers in most other industries weep with fear and loathing. In addition, U.S. Dealers face competitive challenges no one else on this planet face. They battle regulators and hungry lawyers with unpleasant regularity. They address OEM, deal and personnel based compliance with few layers of bureaucracy and in many cases costly yet antiquated software systems last updated (for real) in the 90s. Lastly, and perhaps most importantly, according to NADA, the average dealer lives off of 1.5% profits, yet a recent Automotive News article indicated that over 50% of dealers were unprofitable in January 2007.

You need another coping strategy. According to the research, to add another 0.77% to your profits you will need to address what McKinsey termed “Talent Management.” The research showed that high performing dealerships experienced 17% less turnover on average. According to NADA the cost of turnover in the sales staff alone is about $25k per position (others like ADP, etc., have this figure as much higher), so if you have 10 salespeople you can reduce costs by about $45k a year by better managing your talent. Q: How much cost savings of reduced turnover across your entire dealership have you been missing out on? A: Sales people turnover times $25k/position times X Years = big money This is definitely something “that might trigger a depressed mood” at your dealership.

Acceptance
“Notions of acceptance are prominent in many faiths and meditation practices. For example, Buddhism's first noble truth, ‘Life is suffering,’ invites people [dealers?] to accept that suffering is a natural part of life...acceptance is often suggested when a situation is both disliked and unchangeable, or when change may be possible only at great cost or risk.” - Wikipedia

This takes us back to one of my original questions… would you deal with the one-third of your dealership’s characteristics that you can control today to gain 2.3% points of profitability on top of your 1.5%? If I told you that the process is neither costly nor risky and relatively easy to implement, would that influence your answer? Well, for gosh sakes I hope so! As the research suggests, there are three simple ways to address your profitability that can be relatively painless yet double or possibly triple the profits at an average dealership. These will require dealers to evaluate present service CRM processes and look for solutions that fit your dealerships “undocumented” client relationship program your service management may have put in place over the years, because they “get it” and deserve a place at the table. It will also require dealers to facilitate an intervention with alienated and possibly shell shocked OEM dealer development reps, to get the expertise and performance enhancement capabilities which they sold to you many years ago when you first signed on. You will also need to arbitrate meetings between your management team and the HR crew to build out a comprehensive hiring and orientation program, because the tone from the top has to support a new way of managing your most expensive resources, your human resources. These straight-forward efforts don’t require a group hug…just a realization that you can’t do it alone and your people want to make more money with happier clients just as you do. This means you need to accept the changes that will happen to your dealership when you implement these simple strategies to gain what the average dealership needs most right now…better profitability and less grief!

Jim Lawrence is Vice President and Product Manager for Compli. Jim has extensive experience in building cutting edge dealership software in the fixed operations and front end of dealerships and is involved in managing the compliance software development at Compli. For more information on this article or any other compliance management software needs, visit www.compli.com or e-mail Jim at jim@compli.com.