PITCHER Partners has created a diagnostic tool to help dealers understand whether the issue with declining profitability is a gross margin issue; an expense issue; or a combination of both and what can be done to counteract this.

The Motor Industry Services team says the tool was developed for dealers who are “looking under every rock to find savings or improve gross margins” and is effectively a bottom-up analysis of dealership departments, by brand, to understand how individual dealership grosses are derived and how they are impacted by the big four expenses (Salaries & Commissions, Advertising, Property Costs and Floorplan).In this fourth report in a series of management workshops for GoAutoNews Premium, Pitcher Partners said: “The good times are not only over, but officially long gone.”

The team said “dealers need to be asking themselves if they have Gross or Expense issues and if they have not already started down the path of finding which it is (or both) then they are now playing catch-up”.

The series has been created in collaboration with the Australian Automotive Dealer Association (AADA).

The team said the reason why Pitcher Partners is looking into the relationship between gross margins and the big four expenses “boils down to the systemic changes to cost structures and reduction of consumer purchasing power driven by inflation”. 

“Inflation is a double-edged sword which reduces consumers’ purchasing power, whilst simultaneously increasing the costs of doing business. 

“What commentators do not also make clear is that headline inflation rates are cumulative, meaning that just because inflation is down on the previous month, quarter or year, the effects have already compounded on a higher than target base of 2-3 per cent. 

“The following chart demonstrates Australia’s inflation since 2019 compared to a 2.5 per cent target and its impact on buying power (figure 1) and cost increases (figure 2).

Figure 1: The impact of inflation on buying power

The impact is approximately an 8 per cent reduction in purchasing power overall versus a scenario where inflation was contained at 2.5 per cent per annum. The real impact is actually much harsher as it’s compounded by wage growth at a lower level to actual inflation along with tax bracket creep (less take-home, net earnings) due to lack of government reform in this area. 

Figure 2: The impact of inflation on costs

“The above increase in costs represents a ‘basket’ of goods and services which includes items that have increased, such as food and beverages, alcohol and tobacco.  Insurance and financial services and education   and items that decreased, such as clothing and footwear, health, transport and housing. In reality for businesses, the items that decreased are discretionary and the baked-in costs increases are much higher than 21 per cent.

“In speaking with dealers, there is still a pre-COVID misconception that $2,000 gross margin is the breakeven point for new and used car sales. But that is not correct. Inflation has shifted the breakeven point significantly. 

“In fact, this is now around $3,000, once you factor-in increased costs, particularly floorplan finance interest rates that now hover around 8 per cent for the average dealer. 

“Interest rates have not been at this level since the cash rate was 4.25 per cent (now 4.35 per cent) in April 2012. Based on our analysis of gross margins and cost structures the changes from 2019 to today are:

“Vehicle prices increased commensurately by ~50 per cent during the same period. However, with overstocking the grosses achieved by some dealers have fallen back to 2019 levels, making the front end departments unprofitable.

In coming issues of GoautoNews Premium, the Pitcher Partners MIS team will be diving into the following topics to give some insight into how dealers can understand whether the opportunity exists to increase gross margin or reduce expenses to improve profitability.

• Maximising your island of gross (PMA) – Selling into your PMA and owning the customers closest to you is the easiest way to increase your gross margin by ensuring customers return for aftersales.
• Property KPI’s – If you haven’t already seen Pitcher Partners articles on Property KPI’s or Land Tax , they can be found on the Pitcher Partners website:  www.pitcher.com.au/insights/property-the-dealers-largest-and-least-measured-asset
  
• Reimagining Selling Gross (Gross Productive Margin) – Controlling the big four expenses through creating a best practice environment and maximising the return from your biggest assets – property and people.

By John Mellor