PITCHER Partners has released a position paper, Pitcher Property Best Practice KPIs, that addresses a missing link between dealers’ investment in their land and their buildings and the way they manage that investment. 

The paper points out that the industry breaks down every aspect of dealership operations into the finest detail as part of the every-day controls of the operations but, as a rule, the industry doesn’t measure the potential return on the capital investment in the property on which it sits and therefore is not in a position to understand and manage its implications for the success of the enterprise.By adding rent into individual sales cost and return calculations, the Pitcher Property Best Practice KPIs helps dealers understand this core feature of their business. 

Pitcher Partners said that other benefits of the Pitcher Property Best Practice KPIs are:

• To evaluate whether a new brand should be added to a dealer’s portfolio
• To assess whether an existing brand should remain in a dealer’s portfolio
• To determine whether the next facility upgrade is feasible
• To evaluate whether a dealership is the best and highest use for the property

Diana Kao, client director, Motor Industry Services, who headed the development of the property KPI project at Pitcher Partners, said: “The Australian automotive industry is considered a mature market. The industry is well versed when it comes to financial and operational KPIs with dealers able to rattle off their parts and service absorption, finance income per new vehicle contract, parts gross profit as a percentage of sales, the front and back end contributions at the drop of a hat. 

“The key here is we scrutinise the dealership asset in minute detail, as these metrics form part of a dealer’s standard management accounts.

Diana Kao

“However, what about the other significant asset that belongs to the dealer? What about your property?” Ms Kao said. 

“In the current paradigm of rising costs and inflation, court cases around legal goodwill, OEMs implementing agency models and more recently, renewed interest by OEMs around facility upgrades, we at Pitcher Partners decided to bridge that gap with our property best practice KPIs.”

“This was a ground up process. We started by reviewing the property valuations accumulated from the various buy/sells, audit and consulting projects we worked on and distilled an acquisition cost per square metre for both the showroom and the workshop by capital city (excluding Darwin and Hobart as unfortunately, we just didn’t have enough information). “Then using the rental yield and general lettable areas (by square metre) in these property valuations we were able to then extract a monthly rental cost per square metre. This means we have two property best practice KPIs. One that allows dealers to measure whether they are paying fair value for a property and another that measures the monthly return this property should generate.

What this means is that for a Sydney dealer, it costs $2,450 per month in rent to display one vehicle and it costs $1,856 per month in rent for one service bay.

“But we took it one step further and created a property best practice KPI linked to operations, namely “gross per customer transaction after rent.

“Essentially, it is the gross that is leftover after each customer interaction after rent. For the showroom, this is the gross per new or used unit sold less rent and for the workshop, this is the gross per repair order less rent. 

“This KPI is forward looking as it places customer interactions at its centre (i.e. number of vehicles sold, number of repair orders sold) but by subtracting rent we’ve made it an equal playing field for dealers to compare and focus only on the grosses. 

Ms Kao said: “We did this for two reasons, the first being rent is a fixed expense and by its nature isn’t something that can be changed in the short term. 

“Through our analysis we noticed that the best practice dealer was significantly better at monetising these customer transactions and have a higher frequency of transactions. 

“Dealers need to decouple the concept of volume to only include new vehicles. The easiest way for a dealer to increase their unit volumes is through used cars. Which leads us to our second reason for making it all about gross; the best dealers put simply, gross better and more often.

FOR THE AVERAGE DEALER

FOR THE BEST PRACTICE DEALER

“You might be wondering, so how does the gross per transaction after rent relate to my business?

“Well, what we have found is that rent represents 17 per cent of gross for the average dealer and 10-11 per cent for the best practice dealer. 

“Rent representing 10 per cent of gross is not a new concept and is still readily recognised as best practice within the industry (Eagers Automotive referred to a 10 per cent rent to gross profit ratio in their Analyst and Investor Event Material published on 11 June 2024), but it’s important to note that for the average dealer, the rent as a percentage of gross is 70 per cent higher at 17 per cent. 

“Furthermore, through our analysis, what we have found is that service heavily subsidises the dealership rent due to the higher volume of transactions going through the service department per day as compared to the new and used vehicle departments. 

FOR THE AVERAGE DEALER FOR THE BEST PRACTICE DEALER

Average dealer versus best practice dealer

“To really highlight the difference between the average dealer and the best practice dealer, here is a worked example:

For the average Sydney dealer, grosses are around $3843 per customer transaction in the front end. Rent accounts for about 16 per cent of gross which leaves you with $3230 to cover the likes of floorplan interest, advertising and salaries and commissions. Assuming the average cost per unit is $50,000 and you pay an interest rate of 6.5 per cent with 90 days stock, you only spend $400 per unit on advertising and your salesperson earns an annual wage of $120k including commissions while selling you 12 units per month, you would be left with about $1,184 gross.

However, for the best practice Sydney dealers, grosses are $4392 per customer transaction in the front end. Rent accounts for 10 per cent of gross which leaves $3955 to cover floorplan interest, advertising and salaries and commissions. 

Again, using the same average cost per unit of $50,000 (this is a cost that you cannot readily influence) and you pay an interest rate of 6.5 per cent but with 60 days stock (instead of the 90 days per the previous example as you are a best practice dealer), you still only spend $400 per unit on advertising and your salesperson earns an annual wage of $150k including commissions but is selling you 15 units per month (instead of the 12 units per above, again, as you are a best practice dealer) you would be left with about $2,180 per unit gross.