DEALERSHIP retail success has always been driven by eternal optimism, an ever-increasing new market, growth in disposable incomes, a never-ending supply of cheap money and, in recent times, supply constraints resulting in record dealership profit. 

Now the party is well and truly over. Vehicle grosses have returned to long-term averages and ongoing expense increases have started to bite hard as gross profits shrink. In addition, we have more brands fighting over the market further negatively impacting gross. Thus retail profitability has never been more challenging.  

But we at Pitcher Partners have seen that dealers who can adapt by unwinding systems, processes and embedded “beliefs and folklore” that are now out of date in this new operating environment will inevitably be those who prosper as continuing to operate in a “traditional” fashion is not sustainable.

Our objective is not to create fear but rather to lay out the reality of the current market and to help dealers and OEM’s start the transition journey required to maintain retail profitability.

Craig Rowney

Given the resilience exhibited by dealerships over the years these challenges will ultimately become a blessing by driving new processes and setting new operational performance benchmarks. 

Eight drivers of structural change in 2025

1. In 2025 monthly gross profit per employee to maintain a 2 per cent plus return on sales will approach $20,000 per month depending on location. (In 2019, $15,000 was the objective) 
2. “Nice to have” services will be cut and disjointed or non-integrated technology will come under scrutiny. Consolidation of administration, offshoring of functions and streamlining of management structures is inevitable.
3. Dealers who acquired new franchises in recent times to maintain front end volume (as opposed to growing used) will suffer as margins contract and inventory increases.
4. Best practice service operations will focus on optimum asset utilisation not investment in new assets. Multi-manning, improved charging efficiencies, technician sourcing, labour mix and outsourcing of internals will be vital to ensure retail service gross covers operating costs; particularly in capped price servicing environments.
5. Fixed operations leadership will be under significant pressure as they move into a business transition and growth environment away from the traditional management focus as the onus for profit improvement shifts from the front to the back. 
6. Eighty per cent or more of sales will continue to occur within 48-72 hours of first customer contact. This demands outstanding experiences in the showroom, over the phone and online. Innovative customer interactions and fully integrated offers including F&I and car care options at the first contact will be “not negotiables” as enquiry levels decrease.
7. Traditional staffing structures and functions must be modified to keep people costs below 40 per cent of gross profit. Resources will shift from high-labour low-profit activity towards activities directly linked to profit, particularly in the front end of the business where staff numbers will be reduced and processes consolidated with management hierarchies under the microscope.
8. Leadership skill gaps across the business will become evident as we move into the transition phase requiring execution of new strategies, not just management of existing processes. There will be a challenge for dealers and OEM’s as embedded beliefs, processes and mantras are replaced allowing for a transition to a sustainable business model.

The Changing Face of Dealer Profitability

This table tracks net profit per employee since 2021, from highs of $4,000-plus delivering 5 per cent return on sales to a loss of $(650) per employee per month as we move into 2025. 

Structural change is a necessity as operating costs exceed gross profit capacity in many dealerships

In the following weeks Pitcher Partners will cover, in detail, the strategies dealers need to adopt to navigate this period of transition and set themselves up for sustainable retail profitability. We will examine the following business transition opportunities over the next few months:

• Improving efficiencies in lead management and the purchasing process
• Driving fixed operations growth strategies
• Integrating the customer value chain 
• Setting the foundations for cost out strategies
• Building financial acumen in future leaders
• Growing used car contribution to improve front end ROI

There are interesting times ahead for dealerships and, to fall back on a well-worn mantra, we await to see the good habits and new processes these relatively tough times will bring.