Steve Bragg
THE retail motor industry is currently facing a large number of challenges. For average-performing dealers these issues are seen as headwinds but the best dealers we work with see the challenges as opportunities.
The best dealers have the necessary procedures and business systems set in concrete where the total business, with all its disciplines, are performing well right across the enterprise.
Unfortunately, this is not always the case.
The dealership model has been moulded over the decades to be heavily focused on new-vehicle sales and, while this has driven new-vehicle sales to record numbers, it has stripped many dealerships of the focus, skills and expertise required to run all six highly profitable departments simultaneously.
The result is a finely tuned and low-margin business that often is unprepared or under-resourced for change and for challenging markets.
We often find during the ‘good times’ dealers have followed the new-vehicle volumes (sold or unsold) driving many dealerships to the lowest common denominator of performance. This results in bad habits which need to be fixed to fill the void caused by the challenges the market faces.
Today, an average dealership is structured in a way that all its profit comes from the last 10 per cent of the business it does.
There was a time when a dealership’s breakeven point was 22 days in a 30 day month. Today it is day 28, leaving little margin for error.
So those last 10 vehicles sold for the month and the last four days of service and parts sales are critical and that means when there is an impact on the last 10 per cent of sales, average dealer profits are impacted more severely than what should normally be the case.
Storm clouds have been building for quite a while and, as dealers have traded volume for profits, the storm has started to intensify.
But, with a focus back on your own business and making decisions that may not benefit all the stakeholders, you can navigate your way through.
In the immediate future, dealers will have to navigate the new rules on selling finance, declining sales and rising costs.
In the medium term dealers need to start factoring in whether a change of government will see parallel imports impacting their dealership investments and in the longer term consideration is needed on the rise in EVs and autonomous cars.
Flex Commissions banned and Fixed Commissions introduced
This has been well documented previously so there is no need to go into the detail.
We all know that from November 1, 2018 (only a week or so away!) dealers will no longer be able to set a finance rate above the base rate set by the financiers. They are only able to discount the rate.
These changes have the potential to radically reduce the profit dealers are currently making in their finance and insurance departments and overall operations.
The answer to maintaining the current levels of profitability requires dealers to increase their penetration rates. It’s a simple solution that has a difficulty rating of nine out of 10 to execute in the current industry’s framework.
The ideal market model to look to for solutions is the US, although the regulatory requirements in Australia are more aligned to the UK. The good news is the latest data from the UK Finance & Leasing Association shows dealer penetration rates at 89.3 per cent, up nine per cent year on year. In the US, NADA data puts it at 84 per cent.
So how do Australian dealers shift from our lowly average of 30-40 per cent penetration to 80 per cent or more?
On the brighter side, the introduction of comprehensive credit scoring will level the playing field for the dealer as the consumer will be better informed, as will the dealer, to ensure the best rate possible is offered to the consumer.
This means financing the vehicle purchase at the Point of Sale (PoS) is the easiest and best option for the customer.
Remember, your customer wants to take the path of least resistance when purchasing a vehicle.
An informed and educated customer is a benefit to the dealer as long as they are open and transparent in the finance process. Australian dealers will need to ensure they are the ‘easiest path’ for the consumer to finance if there is any hope in increasing penetration rates.
To increase penetration you need to invert your process. Where financing the car was a post-sale decision, it is now a pre-sale decision. This requires your F&I team to be proactive, rather than reactive when it comes to identifying, qualifying and signing up customers.
The mindset has to focus on “lost contracts” rather than “won contracts”. People’s performance is driven by their commission package. The assumption is that 100 per cent of customers get finance, and commission is reduced for every percentage point below 100 per cent.
It’s a huge mindset shift, but it is the only way of driving the changes required to maintain earnings.
The good news is that the present state of the finance market will help dealers. The current market slump is a “credit squeeze”.
Tightening up on lending has driven house prices down and reduced the ability for customers to do home loan top ups and buy cars.
This is where the dealerships step up and fill the void. But to do this dealers need to be on the front foot with the customer. Customers must walk into the showroom preapproved to borrow money from the dealership, not walk in as a complete stranger.
Important question: How have you prepared for the changes?
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- Have you trained or changed your team?
- Have you structured your dealership for the new regulatory changes?
- Do you need finance business managers any more?
- Have you worked with your primary and secondary financiers to understand what the new processes are and how the business will operate under the new compliance?
- Are you ready and know how to get your customers financed on November 1?
- The biggest short-term risk to your business is that your finance and insurance department will be paralysed with confusion, impacting or preventing sales.
- Are you contacting your customers today and letting them know they are preapproved to buy a car and for what value?
Declining volumes and rising expenses
The motor industry has had strong performance over the past five years, supported by rising house prices increasing the general wealth of Australian consumers.
Now that housing prices are showing signs of slowing down, we have already seen a corresponding fall in the volume of luxury-car sales and now the overall market generally is down 0.9 per cent YTD September. This is a growing issue for dealers already facing pressure on gross margins.
In addition, expenses in dealerships continue to grow. Particularly rents driven by CPI increases, insurance and the cost to open the doors have all increasing out of step with thinning margins.
All these factors are putting further financial strain on dealers.
Do one quick test of your people. Break them into two categories:
- Those who generate gross
- Those who support the generation of gross
Then ask:
- Is this person achieving my minimum acceptable standard of gross to support their employment? If not replace or retrain.
- Do I need this person? They aren’t making me gross, so can I replace their function with technology, job sharing or offshoring?
If you have not already right-sized your operational structures, now is the time to ensure your dealership can maintain profitability in a lower market. Consider remuneration structures and ensure they align with the overall dealership profitability.
Regulatory pressure to allow parallel importing in Australia
Currently, only specialised or enthusiast vehicles over eight years old are able to be imported into Australia.
With the exit of manufacturing in Australia, recently there has been a push for the government to reduce these restrictions which could see an increase in parallel importing of motor vehicles.
While this is off the table under the current government, the landscape will dramatically change quickly with a change in government. This has the potential to impact new-vehicle volumes by up to 10 per cent, putting further pressure on dealers by reducing their throughput and diminishing their gross margins.
Are you ready to become a parallel importer next year?
Electric vehicles (EV)
The EV market is growing with many countries pushing for no combustion engine vehicles by 2030.
EVs are obviously very different to the traditional internal combustion engine (ICE) vehicle counterpart. For example, the Model S Tesla has approximately 150 moving parts in total. Just the internal combustion engine in a normal car has thousands. Most of the wear and tear and maintenance on a car today comes from the engine.
The battery for the car will be the most expensive component when purchasing a vehicle. This gives rise to the prospect that, after investing in the battery, consumers will have the option to upgrade their model by merely purchasing a new “shell” for the vehicle.
No one aspires to own an EV, but they do aspire to drive a Mercedes Benz or a BMW.
So there will be a move from ‘ownership’ to ‘drivership’ as performance will be less relevant and the brand will be paramount.
This is also a growing trend with the younger generations, so the EV-makers will follow the trend.
This will cement the importance of the front-end sales experience and shift the requirement for expensive dealership properties for dealers to transact from. Dealers will need to shift from transaction hubs to experience hubs with the transaction taking place virtually and delivery of the vehicle personalised.
The challenge for dealers will be that we will have a 20 to 30-year transition window where they will still have a requirement (and desire) to service the exiting ICE customer fleet which will be a declining customer base, and will possibly need to provide some basic service needs to EV customers.
Autonomous vehicles
With the first fully autonomous vehicles expected to be tested on Australian roads within the next five years, the retail motor industry will undergo a dramatic transformation.
When autonomous vehicles are widely accepted, the process of purchasing a car at the dealership will no longer be the norm. Instead, people will purchase subscriptions which will allow them to be driven by autonomous vehicles from location to location for a monthly service fee.
This will have many and varied impacts on dealers.
Importantly, it is expected to increase the total kilometres travelled by each vehicle. Dealers are best placed to sell, finance, maintain and manage the fleets of autonomous vehicles.
Next week
The big dealer groups need to get bigger – KPMG
Dealerships are a long way behind the consolidation seen in supermarkets. But not for much longer
By Steve Bragg
