Put simply, absorption is the percentage of contribution (sales minus cost of goods sold minus department expenses) from the combined efforts of both the PG&A and service departments, divided by the fixed expenses of the store.
At 100 percent absorption, the net profit generated from PG&A and service is covering 100 percent of a dealer’s fixed expenses (rent, insurance, etc). This allows for all profits generated in the sales and F&I departments to directly hit the bottom line.
Absorption percentages have fallen during the years. Yes, some of this might be attributed to higher rent factors with bigger buildings during the years, but the PG&A and service departments simply haven’t kept pace with the sales department growth.
Let’s take a look at some data from the Motorcycle Industry Council that reveals some interesting trends. In 2006, there were 7,562 franchised dealers (franchises, not rooftops) in the country, and 6,411 non-franchised or aftermarket dealers. Question: Why do those non-franchised dealers exist? Answer: Because customers are getting something (selection, customer service, etc.) that they are not getting from the franchised dealers. In 2008, the number of franchised dealers plummeted to 5,927 (a 22 percent decline), while the non-franchised or aftermarket dealers jumped to 8,200 (a 28 percent increase).
Our statistics show more people are coming in the door than even before, as swing counts are up with all brands. Yes, we would agree that customers have a lot more reasons now than ever to not buy a motorcycle, but rest assured they want it just the same. But even if people aren’t buying new vehicles, they are still servicing and accessorizing the ones they have.
Going outside of the powersports industry this trend can be seen in the automotive world as AutoZone had its best quarter ever in Q4 of 2008. People are still using their machines, just maybe holding off on the new models this year.
Is the money still in the metal? Yes, absolutely. Regression analysis studies show a correlation between a 1.5-point gain in new unit gross profit to a 1-point increase in the dealership’s bottom line. But in addition to (not in lieu of) the attention needed on the sales floor, we cannot forget about the PG&A and service departments. Many feel the light switch got shut off in Q4 with new bike sales. But those who had strong attention in the other departments survived the rough winter.
So how do we move the absorption needle? Your rent factor is what it is, so don’t lose sleep over it. Focus on what you can control: Revenue in, and variable expenses out. Ask yourself, “Do I have parts people who happen to make sales, or sales people who happen to sell parts?”
As soon as you wrap your head around the notion that every position in your dealership is a sales position and compliment that position with an applicable performance-based pay plan, you’ll be on the right track. Your goal is to have sales people in every department, who love the idea of having the majority of their paychecks based on commission. If you are the dealer who pays “base plus commission,” consider shifting to a higher commission percentage and change to “base or commission.” At the time where the commission is higher than the base, an employee shifts to 100 percent commission for that pay period. If the employee has two pay periods in a row of not exceeding the base, you probably have the wrong person. Keeping payroll percentages in line is the quickest way to a higher absorption percentage.
In service departments, many of today’s service advisors are former technicians. Nothing against technicians, but they’re typically not the most sales-oriented or people-oriented employees. That position can deliver enormous incremental revenue to the bottom line if you have the right person in the position. There are mixed feelings about whether to pay the advisor off of labor sales, or both labor and P&A sales. In very strong service departments, we’ve seen it be profitable both ways. But the common theme is the service advisors are 100 percent commission based. “Do you have a service guy who happens to make sales, or a sales guy who happens to sell labor?”
Second only to keeping payroll percentages in line, sales training for PG&A and service advisors is the quickest way to move the absorption needle. However, that training will be much less effective if the pay plans do not reward them for these skills.
In a word, “absorption” is the key to stabilizing your business’ profitability in 2009.
Sam Dantzler is the president of Assurant Solutions’ 20 Clubs division. He has been with the industry’s largest 20 group provider for nine years. Contact him at Sam.Dantzler@assurant.com.