DEALERS who have been watching their service profitability eviscerated by Capped Price Servicing (CPS) contracts written years ago, but still in place at outdated rates, have had their worst fears confirmed by data prepared by the Motor Industry Services group at Pitcher Partners; CPS without CPI adjustments is eventually unsustainable.

The analysis shows that a metro dealer selling 150 units a month will eventually see workshop revenues eroded by $1 million a year and workshop gross profits slashed by $500,000.

The issue is that dealers are committing to labour rates and repair-time charges that will still be under contractual obligation for anything up to 10 years-time without an adjustment for inflation.The author of the analysis, Aidan Cousin, said that these service contracts can commit a dealer to a service cost for years and that, unless they adjust for inflation, Capped Price Service becomes Cut Price Service.

This comes at a time when the cocktail of increasing stock levels and hard-up car buyers is seeing car retailers scouring their businesses for new ways to arrest the erosion of margins flowing from the new car department.

Mr Cousin said that additional pressure on service profitability was coming from a failure by OEMs to set realistic Standard Repair Times (SRT).

“If the recommended SRT’s aren’t achievable for a technician to safely carry out the required maintenance within the allowable time, this is another impost on the dealer’s profitability,” Mr Cousin said. 

Pitcher Partners performed the analysis of CPS on behalf of the Australian Automotive Dealer Association (AADA). It follows grave concerns amongst retailers who are seeing CPS contracts devised by OEMs being written out as far as 2030 with insufficient allowance for inflation or no allowance at all.

Aidan Cousin

Mr Cousin said that this meant that many dealers are already not making any money on any of the CPS repair orders going through the workshop and, because of this, they would prefer these customers take their service requirements to other dealers elsewhere.

An index calibrated by Pitcher Partners from 2019 showed that in the full year of 2023 only two of the main brands were ahead of the index for inflation of 120.5 per cent. 

The index for one brand was just 74.7 putting its CPS index some 45.8 percentage points behind the inflation that occurred in CPS contracts written in the four years from 2019.

Mr Cousin said: “CPS has turned into a race to the bottom between OEMs to see who can have the cheapest and longest policy in Australia. This has driven down the service labour rates and the standard timing to perform scheduled services, putting pressure on dealer aftersales margins. 

“It is illogical to expect that a program set at a relatively competitive rate (at today’s prices), will be beneficial to dealers in any way after three, five or let alone ten years that these programs run. OEMs are also not coming to the party to keep rebates relative to mounting cost pressures.Mr Cousin said that the OEMs introduced Capped Price Servicing in an effort to keep their customers loyal to the brand and bring down the Total Cost of Ownership (TCO) of typical vehicles.  CPS offers a package of services for a number of years with fixed or capped priced servicing costs for customers’ peace of mind. 

“This was to encourage customers to maintain their vehicles within the franchised dealer service departments rather than being lured to potentially cheaper offerings from third-party providers.

“Whilst CPS is beneficial for the consumer, the OEM’s also had a lot to gain by introducing these programs,” he said. 

“Manufacturers wanted to ensure the customers returned to their dealer networks for servicing rather than leaking patronage to the third-party aftermarket providers, thereby firming up their replacement parts sales through their dealer networks. Parts sales account for a significant portion of OEM distributors profits.

“Dealerships would have the opportunity to better retain customers, along with benefiting from the significant portion of the gross profit that comes from the parts and service departments, win-win. 

“In return, dealers agreed to reduce their hourly labour rates – comparable to warranty rates – to ensure they could compete against third-party service providers. 

“Over time, concern has increased from dealers that there has been a real reduction in the service gross profit due to CPS pricing and reimbursements not keeping pace with rising costs, to the financial detriment of the dealers.“Our analysis shows that dealership service revenues and gross profits were the first casualty with the introduction of CPS programs by Toyota15 years ago, with the best intentions, but revenue has been eroded as the OEMs administered pricing lags behind the rising rates of inflation,” he said.

Another area impacting dealer profitability is the recommended Standard Repair Times (SRT) being allowed by the OEM’s to carry out the applicable services. 

“If the SRT’s aren’t achievable for a technician to safely carry out the required maintenance within the allowable time, this is another impost on the dealer’s profitability. 

“We identified pressure coming to bear on these SRT’s, however time allowances remained on the gross margin accretive, rather than being loss generating.

Mr Cousin said: “CPS at its core is a virtuous endeavour to keep a brand’s customers loyal to the local dealership PMA. Retaining a customer is far cheaper and increases the likelihood of a repurchase.

“To support this analysis, we reviewed the servicing prices obtained from 11 brands over a 5-year period from the volume, prestige and luxury segments of the auto market. 

“We noted only two brands out of 11 surveyed kept their prices above the rate of inflation since the benchmark year of 2019. Two brands did not have continuous model lines during the survey period to enable accurate pricing comparisons and another discontinued their CPS program altogether, so these three brands were removed from the data set.

“This means that the dealers of the remaining 6 brands have decreased their real revenue over the same period. We surveyed many other brands and found the CPS programs prices were similar. The above table is the representative set of the OEM brands for which Pitcher Partners was able to obtain data.

‘The CEO of the AADA, James Voortman told GoAutoNews Premium: “With inflation increasing the input costs of service departments, dealers are now losing money for every CPS repair order going through the dealership.” 

“As we know, the first thing to go when profits disappear is customer service. OEMs risk disincentivising dealers to the point that CPS will have the opposite effect it is intended to have.”

Mr Voortman said that OEMs need to re-assess the CPS rates to be adjusted to index CPI to allow dealers to provide the service profitability and deliver the first class experience the brands demand. 

“If this is not taken into account, those brands behaving cheaply will become just that. I doubt that is a strategy most would endorse,” he said.

James Voortman

By John Mellor