Delegates to the 2023 Deloitte Industry Overview were told that more people die on the descent from the summit of Mt Everest than die attempting to reach the peak because the euphoria that kicks in from the achievement clouds the imperative to remain focused on the dangers that continue to surround them at the lower levels.  

Delegates were told that the retail motor industry faces a similar challenge, having amassed a mountain of profitability in the past few years, driven largely by stock shortages and the resulting increase in gross levels, and now faces significant signs of selling gross profit declines that demand to be managed to avoid future business trauma.

Deloitte said it wants dealers to remain profitable for as long as possible, and therefore wanted to make sure they have a plan for the next 12 months to do so.

The moderator of the Overview, Deloitte partner Lee Peters, told GoAutoNews Premium that one of the main takeaways for dealers from the total Industry Overview program was that “the climb up the profit mountain has largely been driven by the ‘front-end’; and in particular the new car department and a highly unusual set of market conditions with global stock shortages.

“How long we can stay on top of the ‘profit mountain’ will be determined by how successful we can be in the ‘back-end’; mainly through the service department, focusing intensely on customer lifecycle and retention. 

“The path of descent back down the ‘profit mountain’ will be led by our people – through training and development, re-tooling, upskilling, strong retention, breaking down silos, team empowerment, leadership and culture, employee experience, amongst other human-centred focus areas.

Lee Peters

Mr Peters said the large majority of the profit improvement for the average dealer between pre-covid (2019) and today (2022) has been through the increase in selling gross from the new vehicle department.

“The average dealer has improved by approximately $275,000 per month of selling gross in total in 2022 from where they were in 2019, and approximately $250,000 (90 per cent) of this was from the new vehicle department alone.

“All other departments have generated selling gross levels that are relatively similar to what they were in 2019 (see table).

Mr Peters said that the industry and its dealer network still have time to prepare to navigate the descent down to more historically ‘normal’ profit levels.

“The current levels of profit provide a buffer to get ready for whatever will happen next.

“They allow the industry to address some of the current challenges: ageing used stock, growing overhead costs, floorplan interest, , additional discretionary spending, people and productivity, other macro-economic factors, and so on.

He said that electric vehicles sales are gathering pace and, as the industry navigates the orderly transition to electrification, dealers should be vital to assist and support the transition.

“How can we best invest resources to support the entire ecosystem transition? The automotive industry, and the dealer network, should hold the key.”

The Deloitte MIS director of insights and analytics, Dorian Lapthorne, warned dealers that while business conditions for dealers were “wonderful” right now, expenses are an issue across the business as a whole – especially floorplan. 

He said that service absorption, one measure of the ability of a dealership to cover its costs via the back-end operations, was below 50 per cent at the end of 2022.

“People costs are up, rent is up, but really the biggest mover has been floorplan expenses, which “really is a crucial factor that we think has more to play out”. 

He said the average dealer at the end of 2021 had a monthly floorplan expense of just under $14,000. By the end of 2022 that had grown to $33,000 a month – an increase of 137 per cent. 

“Two factors drive floorplan; one is interest rates and one is stock levels. 

“What we are seeing here is the impact of interest rates. If we look at it on a per-unit-held basis, it has gone from $200 at the end of 2021 to over $300 at the end of 2022. And that is before the rest of the interest rate increases flow through. So we have a 60 per cent uplift, remembering that stock levels are still 25 per cent lower than they were pre-pandemic. 

“If we do a hypothetical calculation, and calculate the current level of floorplan expense per unit over a pre pandemic level, then there’s probably another 30 per cent or so more to come. And maybe even more than that, depending on what happens with the interest rates. 

“So over the course of a year and a bit, I think we’ll see that floorplan expenses have gone from about $14,000 a month for the average dealer to over $40,000 a month.”

Mr Lapthorne told delegates that the average selling gross profit for the average dealer per month has doubled since the start of 2019. 

“In 2020, it grew by $160,000 a month and all that was new and used cars; mostly new but used cars have had a fair chunk to add to that,” he said.

“In 2021, there was another $50,000 that came along. In 2022 we added another $65,000 a month on top of the previous two gains. Again, it’s all about new cars. Used cars had really started to throttle back but not below pre-COVID levels. 

“Fixed operations really started to grow, almost offsetting that use car shortfall.

Dorian Lapthorne

“So if we look at that three-year period, the average dealer is seeing $275,000 a month more selling gross each and every month. But most of that is coming from new cars as a direct result of the unprecedented stock shortages. Used cars are still slightly ahead of pre-COVID levels and fixed ops is slightly ahead as well. 

“But if we look at just the last six months of 2022, we see a different picture emerging. In those last six months … selling gross profit across the average dealership started to decline and $70,000 a month was taken away. Half that was new car margins being flat and costs starting to rise. 

“Used cars are a combination of falling margins and rising costs. And fixed ops is still growing. But the growth in that last half of the year was very much lower than the growth that we saw in the first half of the year.” 

Referring to overheads Mr Lapthorne said costs started rising in 2022. Fixed expenses grew by 15 per cent (or $60,000) during 2022 and that was enough to wipe out much of the selling gross profit improvement. A third of that came from rent and property, and a third of that came from people cost in the tight labour market. 

But, he said, dealers were still operating at very “incredibly high” levels of profitability month-in-month-out, averaging 3.5 to 4 per cent net profit as a percentage of sales. 

“Those would be our benchmark numbers pre-COVID. So the average dealer is now performing at a level that used to be the domain of the top 30 per cent of dealers. 

“But this is very, very heavily dependent on new car margins and to a lesser extent the used car margins. And if we do a hypothetical exercise where we back out those abnormally high new car margins and use car margins and we see that there’s actually a trend underneath; and that underlying trend is really about the rising costs and the flat volumes 

“So what are the key takeaways? 

• The margins are strong. They’re abnormal, they’re based on stock shortages that will last a little bit longer while order banks are delivered; but they’re still very strong. 

• Service work is growing, but could be growing more and needs to keep growing to protect against the fall in vehicle margins. 

“The real takeaway is that those two key points give dealers time to prepare for what’s coming. 

“Those current levels of profit, or that buffer, can be used to get ready for things that are perhaps a bit more normal when stock starts to come back and margins do start to come down,” Mr Lapthorne said.

By John Mellor