Tag: Margin Compression

Leverage Technology to Take On Margin Compression

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Margin compression is an ongoing problem in the auto retail industry. But at least it’s somewhat predictable. Margin compression almost always accompanies economic slowdown—when economic times get tough, profit margins usually start to slim. You might have even seen some of the telltale signs of margin compression at your dealership in recent months—customers taking longer to purchase cars, fewer cars sold, more discounts, and worst of all, less profit per car sold.

As margin compression creeps back into the auto retail industry once again, there are ways your dealership can combat its profit-slimming impact. One of the most important ways you can do this is to focus on process improvements and implement technology to find hidden advantages, opportunities, and areas of improvement.

Insights Lead to Improvement

When it comes to implementing new technology to combat margin compression, the natural starting place is the DMS—the technology that touches nearly every aspect of your operations. The DMS can show the small details that explain the root causes of shrinking profits specific to your dealership. Because, while every dealership has to deal with the problem of margin compression, every dealership combats that problem are differently, depending on the data.

Look for a DMS that offers ongoing support and resources to help you dig into your data, understand it, and make changes to boost profits. Look for smart software solutions and smart people to help you take advantage of your technology. Look for a DMS that provides access to experienced industry professionals who have seen the ups and downs of margin compression before, and know how to leverage your technology to tell you where to make improvements.

Create Efficiencies of Scale

Margin compression demands efficiency. It is a complex, interconnected problem that requires intelligent, integrated solutions. By implementing smart technology solutions that require fewer inputs (in terms of cost and work hours) to achieve the same output, your dealership can create economies of scale. These newfound efficiencies can reverse the profit-slimming effects of margin compression and give you a competitive advantage over other dealers.

A modern DMS can integrate with your dealership’s existing software solutions, resulting in less duplicated work and better, faster inventory turnaround. It also provides real-time data to help your dealership scrutinize each deal and track margins over time. A modern DMS isn’t just a simple management software that works in the background, it’s an active tool to help you gain insights and make changes that impact profits.

Margin compression is a constant problem in the auto retail industry. It comes and goes, and more often than not it overstays its welcome. But your dealership doesn’t have to stick it out and wait for times to improve. You can combat margin compression right now with a modern DMS that helps you stay profitable.

If you’re interested in learning more about combating margin compression, including more about how technology can improve profits, download out our free guide, 7 Solutions to Margin Compression, Strategies for Preserving Dealership Profit Margin.

Master Margin Compression: Seven Solutions

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The lasting impact of global events on the economy is yet to be determined, but dealerships are already feeling the pinch of margin compression. Even as customers continue to buy cars, margin compression and related economic factors create the illusion of success, as dealerships profit less from each new and used car purchase. Unfortunately, you simply can’t solve margin compression by selling more cars and working harder. Smart dealerships are already utilizing their technologies, streamlining processes, and optimizing data to get ahead of growing margin compression woes. Learn how your dealership can leverage these seven solutions to fight margin compression and win back your profits!

 

 

 

 

7 Ways to Fight Back Against Margin Compression

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When the going gets tough, the tough get going! That’s always been the mentality of auto dealers during difficult times. When a new challenge comes along (a pandemic, for instance), tough-minded dealers buckle down, work harder, and fight through the difficulty. It’s an admirable quality and one of the main reasons the auto sales industry is so resilient. But in the last few months, economic and societal factors have combined to throw a curveball at dealers—the resurgence of margin compression—which means working harder to sell more cars doesn’t necessarily mean more profit.

Tough times call for smart measures

The amount of gross profit (the amount of profit over and above the cost a dealer pays for a vehicle), has always been relatively slim for new car dealers. But sudden economic slowdown and the threat of long-term recession have reduced margins even further.

In fact, according to Forbes, economic recession is the main factor that causes margins to shrink—the more severe the slowdown, the slimmer the profits. And while the true impact on the economy as a result of recent global events is yet to be determined, there are ways dealers can combat margin compression right now to stay profitable.

  1. Fixed Operations – By placing a strong emphasis on customer service and retention, and an awareness of your fixed ops offerings, your dealership can create a steady stream of customers when other sources of profits start to slim.
  2. F&I Sales – Even as profits on car sales slim, your dealership retains more profit per dollar generated on the sale of maintenance plans and other services. Plus, a focus on F&I sales promotes retention and ensures future business.
  3. Process Improvements – By focusing on selling cars more efficiently (cost and expense control, more efficient technology, and finding hidden areas of improvement), you can recoup profits lost to margin compression.
  4. Holding Cost Expenses – Speaking of efficiency, reducing the amount of time that a car stays on your lot (by improving the vehicle reconditioning process, for example), reduces waste and improves profit margins.
  5. Employee Training – Employees are key to driving long-term profits. By hiring the right people and implementing the right technologies to manage human resources and emphasize ongoing training, efficiency and profits increase.
  6. Digital Retailing – Now, more than ever before, digital retailing is a must. According to the 2020 Cox Automotive Report, The Rise of the Digital Experience in the COVID-19 Era, consumer interest in finalizing a deal online has risen by more than 73%.
  7. New Technology – Implementing a modern DMS can streamline operations and reduce waste. If your dealership has all its data in a single, interconnected DMS, you have a real advantage in times of economic slowdown and margin compression.

Dealers have always been tough. But tough times like these call for smart, efficient measures to fight back against margin compression. If you’d like to learn more about staying profitable, even in times of margin compression, check out our free guide, 7 Solutions to Margin Compression, Strategies for Preserving Dealership Profit Margin.

Revealed: The Missing Metrics Needed To Fight Margin Compression

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Sell more, make more.

The formula for dealership profits used to be pretty straightforward. Managers that focused on increasing sales volumes could logically expect to see higher profits. Times have changed. According to a recent report from the National Automobile Dealers Association (NADA), for the first time in a decade dealerships on average experienced operational losses.* The culprit: margin compression.

Scouring the Daily Operating Control (DOC) and other financial reports for answers about where to cut costs is a start. But it’s likely that key metrics that affect margins are not included. Dealerships need to expand what data points they incorporate in their analyses of financial performance to uncover the root causes of margin compression.

Managers are better able to make strategic, data-driven decisions by adding metrics from these key areas:

Expenses
Keeping track of operating expenses such as advertising and headcount is a standard accounting practice. Giving meaning to those figures requires benchmarks that can be tracked and analyzed. According to Mandi Fang, vice president and general manager of Dealertrack DMS, the most effective way to uncover the impact of expenses on gross profit is to automatically generate trend reports from the dealership management system (DMS).

“To really get the perspective you need to take action from this data, compare your performance against the benchmarks month over month to understand where you can do more with fewer resources,” said Fang.

Marketing and advertising expenses are also an area where a fresh look can pay dividends. The first step is to take a deeper dive into the existing customer database.

Instead of spending on broad-based campaigns to carpet the potential market, it makes sense to target specific customers who are ready to replace their current vehicles and already have an affinity for the dealership.

Inventory and Asset Aging
The amount of time vehicles sit at a dealership affects cash flow. Fang recommends creating a weekly inventory age report that highlights the top 10 most-aged assets. Look for trends to identify why the vehicles are not moving, such as price sensitivity, upgrade packages, or other contributing factors.

“Most dealers are amazed at what they find with vehicles sitting on a lot for months and excessive warranty claims,” observed Fang. “Using the weekly report to hold department heads accountable to investigate aged assets can bring major gains to your operational efficiency.”

In an interview with CBT News, Dale Pollak, executive vice president at Cox Automotive and founder of vAuto, notes, “Something’s happened in the last two years that I know objectively and empirically to be true … an average vehicle loses its ability to make a positive return on investment [at] somewhere between 30 to 40 days.”**

According to Pollak, up to one-third of a dealer’s new and used vehicle inventory is typically over-age, which ties up capital that could be reinvested in more profitable units. He recommends making “investment-minded” inventory decisions for new and used vehicles based on retail prospects. Then focus on quickly getting vehicles ready for retail to reduce holding costs and improve front-end gross potential.

If used cars are not turning efficiently, it is important to analyze relevant data points such as appraisals, recon costs, pricing, and time to market to determine opportunities for improvement.

Fixed Operations
About half of a dealership’s profits are usually generated from fixed operations. As margins on new and used vehicles fall, the service and parts departments can be a way to make up lost revenue. The main factor affecting profitability is the ability to maintain consistent, efficient utilization of resources.

Kevin LeSage, director of digital marketing for Autotrader, recommends verifying the accuracy of data used to track productivity in the service center to get an accurate view of where to make improvements. For example, the benchmark at most dealerships for technician productivity is 90–95%. If something looks off in performance metrics, verify that sound processes are in place to capture data.

“Technician productivity has more to do with the shop’s loading and scheduling than it has to do with the technician’s ability or performance,” noted LeSage. “Having an accurate understanding of your technician productivity rate can help you realistically assess their bandwidth and capacity for additional work or figure out what tasks that are draining their efficiency can be reassigned.”

Service departments often measure capacity by the number of scheduled appointments. A better metric is evaluating in a week what hours the shop is open, the aggregate staffing hours of service technicians and average time allotment per service type. Then you can realistically evaluate the team’s bandwidth to set goals for the number of services performed every week.

With targets in place for services performed per week, marketing activities can be created to support demand generation. For example, to increase the number of oil changes, series of email blasts featuring promotional offers and links to an online scheduling tool can help boost appointments.

An audit of the service technician dispatch process can also uncover opportunities to maximize the return on each appointment by ensuring lower-level maintenance items, such as oil changes, are not handled by senior-level staff.

Inspection rates are another metric that can drive higher profits. Are service technicians upselling appropriate additional service requests (ASRs)? You won’t know unless you have benchmarks in place to assess results. Additional training and expectation-setting may be all it takes to boost follow-up appointments.

F&I Sales
Tracking the health of F&I sales can uncover opportunities to improve revenue. Metrics to analyze include the average transaction amount, product penetration, product index (number of products per deal), and profit per vehicle retailed (PVR).

According to Tony Troussov, a seasoned automotive industry expert who focuses on the importance of F&I sales, dealerships retain about 70 to 80 cents of every dollar generated through F&I.

“Focus has shifted to improving (F&I) in the wake of margin compression,” said Troussov. “Now there’s a lot more discipline and dealerships are paying attention to the numbers.”

He recommends engaging the F&I team to assess customers’ buying habits and trends, including previous deals and service histories on trade-ins, to craft strategies to overcome customer objections.

Evaluating how F&I options are presented to customers can also reveal ways to boost sales. Instead of offering one item at a time in sequence, bundling F&I products into three or four packages from which customers can select simplifies the sales process and boosts product index metrics.

Final Thoughts
Incorporating these missing metrics into the assessment of dealerships’ margin compression issues is just a starting point. The new and used vehicle market is volatile. Monitoring and reacting daily to real-time data is necessary to hold teams accountable for their performance. Setting benchmarks and using collected data to drive strategic decisions is the best course to mitigate issues and improve margins.

Want to learn more? Click here to download the eBook “7 Solution to Margin Compression: Strategies for Preserving Dealership Profit Margin.” You’ll get an in-depth look at margin compression and steps dealerships can take to combat the problem.

* Lutz, Hannah. “Auto dealers losing money on operations, NADA says.” Automotive News, 2019.
** CBT News. “The Most Effective Way to Reduce Margin Compression at Your Dealership – Dale Pollak, vAuto.” 2019.

Solving the Mystery of Margin Compression

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Margin compression is a known problem in the auto sales industry. It has been for years. And yet, there’s a mystery surrounding the problem that most dealerships can’t crack. Too often the knee-jerk reaction is to work harder and sell more cars. But as sales go up, profits go down. And the mystery deepens. So, what can be done to reverse the trend? Here are 7 solutions to solving the mystery of margin compression.

 

  1. Fixed Ops

If more customers are walking through your dealership’s doors to buy a new or used car, leverage those relationships to provide service lane work for years to come. Parts and services generate an estimated 13.6% of revenue. That’s better than both new and used vehicle sales.

 

  1. F&I

Your dealership isn’t just about selling cars, it’s also about selling maintenance plans and service agreements. If F&I has become an afterthought at your dealership, remember that for every dollar made through F&I, dealerships keep an estimated 70 to 80 cents.

 

  1. Process Improvements

When margins are slim, it makes sense to slim down in other areas as well. By cutting costs and improving efficiency, you can turn the tides of margin compression and make more money per sale.

 

  1. Holding Costs

The longer a car remains on your lot, the bigger the financial drain on your dealership. And if a car sits there long enough, those profits disappear altogether. By improving the reconditioning process and getting cars to the frontline more quickly, you can sell more cars faster and more efficiently, directly benefiting your margins.

 

  1. Employee Training

Employees have a lot of influence over profit, for better and for worse. With more frequent, more focused employee training, you can instruct your employees in ways that improve the sales process and maximize margins.

 

  1. Digital Retailing

Moving toward digital retail, at least in part, has become a necessity for most dealerships. By moving sales and purchasing activities online, you can align your sales processes with the preferences of modern customers, improve efficiency, and increase profits.

 

  1. New Technology

A modern dealer management system (DMS) reduces waste and streamlines operations. If your dealership is still fumbling with old technology, embrace the move to a more up-to-date system. Implemented correctly, technology can improve everything about a dealership, including its bottom line.

 

By working smarter, not harder, you can solve the mystery of margin compression at your own dealership. To learn more about how to combat margin compression, check out our infographic, 7 Solutions to Margin Compression.

 

Fight Back Against Margin Compression

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Margin compression is taking a toll on the auto retail industry. Dealerships across the country are reporting slimming margins, with some even experiencing negative overall gross profits. And the problem isn’t going away anytime soon. Yet no matter the cause, dealerships can either choose to ignore margin compression and continue business as usual. Or, they can choose to fight back, finding ways to outsmart and outmaneuver margin compression with a few tricks of their own.

Finding Better Ways to Do Business

The secret to fighting margin compression is to find alternative ways of generating profit. And dealerships must think outside the box of the traditional sell-more-cars-to-make-more-money approach to business to recoup their missing margins. In general, dealerships can focus on seven specific practices to fight margin compression.

  1. Fixed Operations – When other sources of revenue run dry, service lanes offer a steady stream of customers and renewable income. By placing a strong emphasis on customer service and retention, and doing a better job of creating awareness of their offerings, dealerships can win back customers that have left for the convenience of corner quick lube shops.
  2. F&I Sales – A dealership’s F&I office is where retention is built and future relationships with customers secured. Plus, dealerships retain a larger percentage of each dollar generated through the sale of prepaid maintenance plans and other services than through the sale of cars.
  3. Process Improvements – Through cost and expense control and other business improvements, dealers can sell cars more efficiently to recoup profits lost to margin compression.
  4. Holding Cost Expenses – Time is money for dealerships. The longer a car stays on the lot, the more money it costs a dealership. By removing inefficiencies in the vehicle reconditioning costs, dealerships can improve profit margins.
  5. Employee Training – By maintaining close interaction with employees, and conducting better, more thorough training, dealerships can correct costly mistakes caused by human error and sell cars closer to MSRP.
  6. Digital Retailing – In today’s environment, it’s become almost necessary to move at least part of the car-buying experience online. The shift to digital retail allows customers to do a lot of front-end work in the car-buying process, saving dealerships time and money.
  7. New Technology – Implementing a modern dealer management system can reduce dealership waste and increase profit by streamlining operations. And a modern DMS that provides real-time data allows a dealership to scrutinize each deal and track margins over time.

Margin compression isn’t going away. But by focusing on alternative ways to recover missing profits, dealerships can avoid the negative effects of margin compression and continue to grow their businesses. If you’d like to learn more about how dealerships are fighting back against margin compression, download our free guide, 7 Solutions to Margin Compression, Strategies for Preserving Dealership Profit Margin.

Margin Compression Solution: Cut Holding Costs

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In auto retail, time is money. The faster you sell cars, the faster you bring in money and more inventory. Rinse, repeat, and reap the rewards of your efficiency. In today’s margin compression environment, it’s more important than ever to find increases in other areas of your business. And, one of the best ways to combat shrinking profits is to cut holding costs by improving your inventory turnaround time.

 

Pass on Holding Costs

The effects of margin compression can be devastating. Not only are product costs rising at a rate that‘s outpacing the prices received from the sale of cars, but costs are increasing across the board, driving some dealerships out of business. And, it isn’t difficult to see why. On average, a dealership incurs a cost of $32 per day for every vehicle it has on the lot. So, if it takes 50 days to sell a vehicle, your dealership will spend $1,600 just to have a single car on your lot prior to sale. Now, multiply that by the number of cars in your inventory and you can see why so many are struggling.

Dennis McGinn, CEO for Rapid Recon, a reconditioning service software for dealerships, challenges dealerships to rethink the recon process to improve speeds. He says that most dealerships have a standard 10-day timeframe for reconditioning. However, if dealers can cut the reconditioning timeframe to 3-5 days through process improvements, reconditioning can become a competitive advantage for your dealership.

When it comes to fighting margin compression, efficiency is the name of the game. And, getting cars frontline ready more quickly means eliminating unnecessary steps between acquisition and sale, including the over-reconditioning of vehicles.  

 

Rethink Reconditioning

By eliminating inefficiencies in the reconditioning process, your dealership can increase gross profit per vehicle sold and turn an unwanted expense into an advantage over other dealerships in your market.

 

If you’d like to learn more about decreasing holding costs, and other ways to combat margin compression, download our free guide, 7 Solutions to Margin Compression, Strategies for Preserving Dealership Profit Margin.

Margin Compression Solutions: Process Improvements

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Overcoming Margin Compression with Digital Sales

The age of margin compression is forcing auto dealers to think creatively about traditional car sales. Making a profit requires cutting costs and emphasizing other areas of your business, like fixed ops and F&I sales. But, it also means rethinking your approach to the very foundation of your business. As dealers know all too well, simply selling an automobile has become too expensive to keep many dealerships afloat. If margin compression has found a way to cut into your bottom line, it may be time to shift focus toward digital retailing.

 

Digital Retail as a Solution to Margin Compression

In the face of shrinking profits, the move to digital sales makes sense. In terms of overhead alone, it eliminates many of the costs of a brick-and-mortar dealership, including expenses associated with inventory, facilities and showroom, employees, and lot property. However, selling cars entirely online is a big leap for many of today’s dealerships even though the industry and its customers are moving in that direction.

It’s no secret that today’s car-buying customers prefer to do research online. Oftentimes they already know exactly what they want to buy (and how much they’re going to pay) before ever setting foot on an actual lot. In that respect, moving sales and purchasing activities to the internet allows dealerships to align with the preferences of modern consumers. But, the move isn’t all about the customer. It can have major benefits for dealerships, too.

By allowing customers to browse inventory, explore features, and even obtain ballpark pricing online, dealerships can cut costs and preserve precious margin. And, when the customer finally arrives on site, top dealerships run a name search to find out how much of the sales process has already been completed, improving efficiency and helping salespeople close deals faster. In fact, many dealerships have already established separate “internet departments” to facilitate this kind of experience.

Conclusion

The irony of margin compression is that the traditional way of selling cars is driving dealerships out of business. It’s time to think outside the box of auto sales and move toward a more online experience. The industry and your customers are demanding it.

 

If you’d like to learn more about generating profit through digital sales, and other ways to combat margin compression, download our free guide, 7 Solutions to Margin Compression: Strategies for Preserving Dealership Profit Margin.