ONE of the unheralded features of the retail motor industry in the COVID years was that ‘Average’ dealers came close to matching the business performance of ‘Benchmark’ dealers, according to Profit Focus data from Deloitte’s Motor Industry Service group – most of the industry seemed to share in the spoils of the positive market climate during that period.

But as the industry returns to something approaching the business conditions in place prior to 2020, ‘Average’ dealers are seeing their vehicle margins slipping and rising costs biting, as they appear to be heading once again into the tough market conditions evident in the years leading up to COVID.

According to Deloitte Motor Industry Services lead partner Lee Peters, these dealers should be looking at the best practices of the top performing dealers in order to insulate themselves from these margin and cost pressures – reigniting their pursuit of benchmark performance.

Mr Peters said that ‘Benchmark’ dealers (the Top 30 per cent of dealers in terms of business performance) are showing greater resilience in the face of rising stock levels, weakening margins and rising costs, whereas the ‘Net Profit on Sales’ levels across ‘Average’ dealers is starting to fall away.

“The ‘Benchmark’ dealers have used the recent period of strong profits and high cash flow to focus on doing things differently and setting themselves up for sustained success. 

“They are not just riding up and down the waves of a new-vehicle led, COVID-affected market. The ‘Benchmark’ dealers are not just letting the market dictate the way they operate. They have used the really profitable period to try to come out the other side as a different business.

“They have maybe restructured their business operations, re-set their human capital levels, designed a new process, doubled-down on the customer experience, introduced technology solutions to tackle the retention challenge, invested in training, reviewed their value chain connection, or something similar. 

Mr Peters said that during the period of COVID-affected stock shortages, the ‘Average’ dealer that was driven by high vehicle margins due to stock scarcity, achieved levels of ‘Net Profit on Sales’ that were approaching those of the benchmark dealers.  

“In the good period, everyone benefited. And there wasn’t much of a difference between the ‘Average’ and the ‘Benchmark’ levels of performance, because everyone was enjoying the spoils. 

“But in the past 12 months, the two ‘groups’ of dealers (‘Average’ and ‘Benchmark’) have pulled far apart and now, over recent months, the ‘Benchmark’ dealers are really achieving very different levels of profit – now back close to two and half times that of the ‘Average’ dealer.

Mr Peters was speaking to GoAutoNews Premium on the back of the recent Deloitte Profit Focus annual Industry Overview webinar, which was called Reigniting the Pursuit of Benchmark Performance, to encourage the industry to focus on what matters most to help dealers improve their profitability.

He said the best dealers achieved 7.5 per cent ‘Net Profit on Sales’ during parts of 2022 and are still doing over 6.5 per cent during the back-half of 2023. However, the ‘Average’ dealers who achieved over 5 per cent in 2020 and were still doing over 4 per cent during 2021 and 2022, are already back down to 2.5 per cent.

“2.5 percent is still a great number, and we must remember that – in the pre-COVID period, we had only ever seen the industry hit 2.5 per cent as an ‘Average’ once before across 25 years of Deloitte capturing Profit Focus data. 

Mr Peters said that despite 2.5 per cent remaining a strong profit level for the ‘Average’ dealer, “the trends that we are seeing across many key indicators are pre-emptive signs that we might be entering a challenging period for the next couple of years, as margins decline and costs rise”.

“Over 80 per cent of the improvement in an ‘Average’ dealers whole-of-business ‘Selling Gross’ pool over the past few years has purely been from ‘New Car Gross’ increases. 

“And it is now almost 40 per cent more expensive to open the doors every day than it was in 2019. 

“So, as gross margin levels normalise, and fixed costs reach levels we haven’t seen before, we need to make sure we are a different business than we used to be – a more well-rounded business, maximising all parts of our operations.

“That’s why we are trying to make sure that dealers are looking at what the core elements and key differentiators are for those 6.5 per cent ‘Benchmark’ dealers, and making sure they don’t just ride the wave of the ups and downs of the market.” 

“We are entering a period where the gap between the Top 30 per cent and the Bottom 30 per cent of performing dealers will be bigger and more consequential than ever before.”

Mr Peters said that the top attribute of ‘Benchmark’ dealers is that they put the customer at the centre of everything they do.

“‘Benchmark’ dealers are working extremely hard at all elements of customer retention. This starts with the experience they are providing their customers every single day and at every single interaction. They are selling from within their database. Their CRM platform and process is top-notch. And they actively bring their customers along for an enjoyable experience across all elements of their value chain.

“This means they’re getting more trade-ins, doing better finance penetration, have strong service retention, and giving themselves the best chance for their customers to come back to their dealership. They are also incorporating technology into their solutions, and using this to eliminate some costs from their businesses. 

“But to be able to do all of that, of course, there’s a human element – and this is where ‘Benchmark’ dealers really differentiate themselves. They focus on being an employer of choice, attracting top talent, retaining them, training them, and giving their people meaningful careers – and if they achieve this, then they have a better chance at looking after their customers,” he said. 

“Interestingly, the data shows that if dealers get this right, their people are able to grow into high performers over time. This means that they are more productive, deliver better results, and in turn, are then getting paid more because they’re doing more. 

“Therefore they’re more likely to stay in their role and be retained, and then the whole cycle moves in a positive direction, and the dealership is able to deliver stronger profit levels as a result.” 

Deloitte partner Lee Peters

Asked to identify the main source of the fixed cost increases, Mr Peters said: “Headcount levels and salaries are a big part of it. Rent, of course, is a huge part of the overall increase. And with rates rising over the last few years, interest expense levels have increased significantly also.” 

He said that at an operational level, floorplan expenses are well up. 

“Stock levels have now returned for most brands. We are back to close to three months’ worth of stock for many dealers across the industry. So we have vehicle inventory on hand at high interest levels, whereas pre-COVID, we also had high inventory levels but at low interest rates. 

However, Mr Peters was adamant that “There is still a lot of money to be made in 2024 and beyond. There’s a lot of dealers who are doing great work, and posting amazing financial results. For others, we want to reignite the pursuit of that benchmark performance,” he said.