The New Car Dealership

from my email last week.

What lessons are there that can be applied to your business?

New Retail Model: Slash Your Way to Net Profit

Because he was high-priced talent, Ron Wolff was among the first to go when the Minneapolis-area auto dealer who had employed him for 30 years cut staff last year.

As general manager and 20 percent owner of a Nissan-Hyundai-Subaru store, he was given an ultimatum: Purchase the store or accept a buyout.

Wolff took the buyout, sold his 10 percent stake in another dealership and used the proceeds to buy a small Chevrolet-Buick store nearby. And now he's making cuts of his own -- a prime example of the new lean, hard-nosed philosophy that guides dealership management these days.

"Times change," says the 57-year-old Wolff. "Gross profit is hard to come by. You have to cut expenses to make things work."

Wolff is among the dealers forging a new business model for auto retailing. Gone is the traditional emphasis on gross profits, in which dealerships primarily are concerned about the difference between invoice price and selling price. Instead, more dealers are using a variety of cost-control measures in every corner of their stores to focus on net returns and on the bottom line.

The emerging post-crisis auto industry is "a far more rational business," says Mike Jackson, CEO of AutoNation Inc., the nation's largest dealership group. "I'm convinced this really is a transformational moment for our industry."

Dealers are renegotiating vendor contracts and holding off on new construction or dealership renovations, even as factories push upgrades. The most radical cuts are in advertising and staff.

The result: Many dealers survived the brutal recession and stand to thrive this year even with a modest uptick in vehicle sales.

The National Automobile Dealers Association reports that in the first nine months of 2009, the average dealership's net pretax profit was 1.7 percent of sales, up from 1.3 percent in the comparable period of 2008.

Ford Motor Co. also noted "a striking turnaround" in its dealer network, says Jim Farley, Ford group vice president of global marketing. In 2008, about half of its domestic-brand dealerships lost money. But in 2009, fewer than 20 percent were unprofitable.

Farley attributed the gains to "Herculean" efforts to cut expenses, as well as lower vehicle inventories.

Rethinking expenses
"Most dealers come from a sales background," says Steve Emery, a consultant with NADA. "They were oriented toward volume and gross profit -- that's how they were raised. Then they started bleeding cash."

Auto retailers are rethinking everything -- from office supplies to inventory to the vendors who tend the potted plants. When they buy equipment, they demand to know the payback period.

"Every vendor in the industry is spending 50 percent of their time renegotiating contracts with dealers," says dealer consultant Mark Johnson of Seattle.

"In many cases dealers simply canceled the agreement, even though the time period to cancel had not arrived. Many vendors have chosen to simply accept the cancellation, hoping to trade it for goodwill with a dealer in the future."

At his new store, Mora Chevrolet-Buick in Mora, Minn., Wolff requires the general manager to open all mail and sign off on all purchase orders. Wolff reviews purchases on a weekly basis. "You don't want employees to feel they have a free hand buying things," he says.

Loren Sheffer, of Fort Myers, Fla., says he has had to learn the difference between luxury and necessity. "We used to have a plant service that just put greenery around the store. We also had a balloon service supply us with balloons for events," he says. "All that's out the window."

In the past, dealers were reluctant to switch computer vendors. But especially in the first half of last year, dealers "panicked" and shifted to the lowest-cost providers, says Adam Gillrie, a Tampa, Fla., dealer consultant who specializes in technology.

'A lot of upheaval'
"There's a lot of upheaval right now," says Gillrie, although the activity has slowed somewhat since the beginning of this year.

Dealers want to be sure their new systems can handle their Internet marketing needs, he says.

"We are big on the Internet and do zero advertising in print," says Jim O'Neill, president of Del Ray Acura and Del Ray Hyundai in Del Ray Beach, Fla. "We don't see a return from newspaper advertising."

The shift reduced his advertising cost per car to $125, down from $300, and saved $30,000 to $40,000 per month, he says.

Wolff also eliminated newspaper advertising. "We don't feel it's effective. Most customers at least look at our cars online, and we are working hard to get electronic media going with regard to e-mail blasts," he says.

Though some dealers pulled the plug last year, many have been shifting away from print for the last decade. NADA figures show that from 1998 to 2008, the Internet overtook Radio and direct mail as a dealer advertising medium and is slightly behind TV.

At the same time, newspaper's share of dealerships' ad budgets sank to 23 percent in 2008, falling from 52 percent in 1998.

Last year the average dealership slashed its overall advertising budget 18 percent, NADA says.

Fort Myers dealer Sheffer slapped a strict limit on all advertising expenditures. "I joined 'advertisers anonymous,'" he jokes. "You can't advertise your way out of a bad market."

Jason Kuhn, who owns two Volkswagen stores and one Honda dealership in Tampa, Fla., slashed his 2009 advertising expenses 40 percent -- the single biggest cost cut at his dealerships. He reduced Radio and TV advertising and switched from network TV to cheaper cable. Print ads were dropped three years ago.

Instead, Kuhn's stores have bolstered online and e-mail campaigns, concentrating on existing customer lists. A customer referral bonus was raised from $100 to $400, and referrals are through the roof.

With tighter used-car supplies and higher auction prices, Kuhn also sent mailers to existing customers inviting them to sell their vehicles back to his dealerships if they needed cash -- no strings attached.

"For the first time, it wasn't a campaign to sell cars; it was a campaign to buy cars," Kuhn said. "I do see that continuing."

Paying on net profit
Dealership department managers historically earned a percentage of gross profit. But now dealers typically pay them a percentage of the net profit for their department or for the store, NADA's Emery says.

More service writers also are being made accountable for expenses. Some dealers are factoring rental-car expenses and repairs that had to be redone into service advisers' pay.

"They're often the ones who generated the expense," Emery says.

O'Neill says he ties managers' bonuses at the two Del Ray stores to net profit. All managers earn a healthy salary up front and a year-end bonus based on the store's overall net profit.

In 2009, his net pretax profits were 4 percent of revenues, almost double his typical return on sales. He says his sales rose 14 percent year over year.

Kuhn, the Tampa dealer, last year revamped compensation for salespeople. Instead of paying them 20 to 30 percent of gross profit, Kuhn now pays on a sliding scale from $200 to $400 per car. The amount goes up with volume.

"Our salespeople were taking a big hit because the gross profit per car sold has dropped dramatically," Kuhn said. "And we really wanted to incentivize our sales force to think in a volume basis."

Lean and mean
Many dealers trimmed staff, cross-trained many employees and combined positions.

John Buelow, a Minneapolis dealer consultant, says dealers also are subcontracting some functions, such as used-vehicle buying, human resources, information technology and warranty administration.

"We have even seen some dealership groups start looking at part-time salespeople who work flex schedules but have no benefits," Buelow says.

Burke O'Mally, a Saturn, Chevrolet, Subaru and Mazda dealer based in Sterling, Va., eliminated cashiers in the service department, giving that role to the service advisers.

"They don't like it, but it's actually better for the customer," O'Mally says. "Instead of handing off the customer to the cashier, the customer stays with one person on their car. When the customer has questions, the cashier can't answer questions. The customer wants an answer."

He also has just one service manager for Saturn and Chevrolet. He is one of a few Saturn dealers in the Washington, D.C., area still servicing Saturn vehicles.

"Cutting people is the quickest way to get your cost down," O'Mally says.

Sheffer, of Fort Myers, cut his staff 15 percent. He has a part-time parts manager who also handles warranty administration.

"He works out of his house. He keeps inventory current and only works a few hours per week," Sheffer says.

Instead of a full-time receptionist, Sheffer has a part-time receptionist during peak hours. And he no longer employs a greeter to welcome customers.

"I'm not a big believer in specialists," he says.

Neither is Wolff, who runs his shop with three people -- a parts manager, a service manager and a service writer who acts as a floater to back up the other two.

Wolff's new-car sales manager doubles as a salesman. His office staff is on a four-day week and also is trained to handle other responsibilities such as answering phones and handling warranty administration and title work.

And he laid off a staff member who washed cars, giving that responsibility to two porters.

As Wolff says he knows all too well: In this economy, sometimes heads have to roll to make the numbers work.

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Better this year
193 dealers participated in a nonscientific Automotive News survey on their outlook for 2010. Here are some highlights.
• Nearly three-quarters said they were profitable in 2009.
• More than three-quarters said they expect to be profitable in 2010.
• 2 out of 5 said they are making a profit on new-vehicle sales after commissions.
• 4 out of 5 said they are making a profit on used-vehicle sales.
• 3 out of 10 said their marketing budget would rise in 2010.
• Nearly two-thirds said they cut employment in 2009.
• Nearly one-third said they plan to hire in 2010.

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(Source: Automotive News, 02/15/10)

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