Article

2007 Brings Record Profits

March 2007, Auto Dealer Today - WebXclusive

by Don Reed - Also by this author

Do you like that headline? Would you like to have record profits in 2007? If your answer is “yes” then you probably are waiting for me to tell you how. Do you believe that you can increase your new or used vehicle sales by 40 percent? Or, how about increasing your Gross Profit per retail unit by 40 percent? Maybe you are strong in F&I and believe you can increase your F&I gross by 40 percent this year, huh?

Unfortunately for most of you the answer to these questions is: “probably not.” So, how can you have “record profits” in 2007 if the front end of your store does not have a record year? The answer lies in the backbone (fixed ops) of your store. Interested? Read on.

Can your service department increase its customer pay labor and parts sales by 40 percent? YES! Can your service department increase its customer pay labor and parts gross profit by 40 percent? YES! How do you do that? You start by doing things differently and by doing different things. This means, of course, that things have to change.

The first thing that has to change is your own attitude. You must believe in the concept that 100 percent service absorption will put you on the road to having a record year. You then must transfer this attitude to your entire management team. Yes, I said entire management team – including those folks in the front end. You see, 100 percent service absorption benefits everyone in the dealership and will enable you to become more competitive in your market. Competitive not only with the aftermarket service business, but also with the other new and used car dealers’ sales departments. Now let’s focus on this 40 percent increase in customer pay labor and parts gross that I’ve referred to.

If you are an average dealer, you are currently selling about 1.5 hours per customer pay repair order. If you trained your service writers how to effectively communicate with each and every customer about their vehicle’s service requirements and needs on each and every visit to your service department, you will see the transformation from service writers to service advisors. These new service advisors will add on average about .6 of an hour per customer pay repair order. This equates to a 40 percent increase (.6 divided by 1.5) in hours per RO which results in a 40 percent increase in labor sales and gross profit. As an average dealer, you will also experience about an 80 percent parts sales to labor sales so now your parts sales will increase by about 40 percent as well. Based on an average labor rate of $75 per hour with a labor margin of 75 percent and a parts margin of 45 percent, your new service advisors are now producing additional gross profits of about $25,000 on every 500 customer pay repair orders every month. This annualizes to about $300,000 per year on 500 ROs. On 750 ROs, it jumps to $450,000 and at 1,000 ROs per month, it soars to $600,000 for the year.

Let’s convert this gross profit into front end language for comparison purposes. NADA says that the average gross profit per retail unit is about $1,500. Let’s divide that number into our potential for gross profit improvement as outlined above:

  • .5 HPRO Improvement on 500 RO’s = $300,000 = 200 New Units
  • .5 HPRO Improvement on 750 RO’s = $450,000 = 300 New Units
  • .5 HPRO Improvement on 1000 RO’s = $600,000 = 400 New Units

Would it be worth your while to train your salespeople to sell an additional 200 new units per year? I certainly hope so! Would it then make sense to train your writers how to become advisors?

Grab your December 2006 financial statement and do the math for your store. Of course, if you are below average, the opportunity for profit improvement is even greater. Hopefully this exercise will have a positive impact on that attitude I referred to earlier. If you or your management team still have not bought into what I’m telling you, then here is some homework for your service director/manager. Get your hands on 50 used vehicle reconditioning internal repair orders. Total up all of the labor sales on the 50 repair orders and then divide that number by 50 to determine the average labor dollar sales per repair order. Next, divide the average labor dollar sales per repair order by your internal effective labor rate, and the answer is your average hours per RO. Now, I’m guessing you came up with 2.0 hours per RO or higher. I can tell you that it is not uncommon to get 3.0 hours per RO on internal reconditioning repair orders. Why is it that your writers are averaging 1.5 HPRO on customer pay ROs while averaging 2.0 to 3.0 on Internal reconditioning ROs? The answer is quite simple: Your writers ADVISE your used car manager on all of the vehicle’s needs and simply WRITE what the retail customer asks for. Does this make any sense to you?

Train your writers to advise every customer like they were your used car manager and stop writing one item repair orders that read: “Lube, Oil & Filter.”

Let’s make 2007 a record year for profits in your dealership. The opportunity is in your service department right now as you’re reading this article. Now go out there with your new attitude and make some money! You deserve it!

Vol 4, Issue 1

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