For many outside the industry, it is hard to understand why during a pandemic and acute vehicle shortage, could the typical dealership be so profitable.
But only a dealer insider understands that historically a vehicle margin is very slim, intensely competitive and how much sales target pressure a typical dealership is subject to. All these factors lead to a situation where a dealer is likely to lose a significant amount of money selling new vehicles and then depend on used vehicle department, finance, service and parts to recoup losses and then make a meagre profit.
However, with the semi-conductor shortage leading to unprecedented shortage of vehicle supply, the sales margin of most dealers have doubled – dealers are simply unwilling to discount vehicles that are near impossible to replace. Which means that many dealers are currently making a profit selling cars and are utilising the other departments to make healthy record profits.
But this won’t last.
It could be 6, 12 or 18 months, but eventually the factories will wind back up and once again dealers will be under pressure to meet aggressive sales targets and to take on large inventories. This scenario will result in sales margins close to the historical small amounts. However, the last two years have also seen a huge pressure on expenses and employee shortages have also pushed up wages, which have lately been covered by increased margins.
Dealerships (like many other employee heavy industries) have had stagnant productivity for the past 3 decades and will eventually need to address this. Based on KPIs’; sales per salesperson, RO’s per advisor, technician efficiency, vehicles sold per sqm and deals per admin head, there has been little (if no) improvement and technology seems like the only option to improve dealership profitability long-term.
The solutions that are needed to improve the sustainability of dealers must include; online car sales that require less salesperson resources, improved advisor/service client handover and more efficient admin processes.
Dealers probably only have a few years to get it sorted before lower margins will harm their business substantially.