Why you shouldn’t subsidize your sales department

My blog article for this month was supposed to be about determining if your dealership was better off having an F&I manager or using a broker. I’ve witnessed smaller dealerships who can’t be bothered with F&I at all or don’t do enough business to justify or keep a solid F&I Manager. I’ve also witnessed larger dealerships switch to using a broker because they have difficulty keeping strong F&I managers due to seasonality and the lure of more money from RV and especially auto dealerships.

As I started writing, I was reminded of a time back in the mid 1990’s, when industry articles and 20 groups were pounding into our heads about how your F&I dept. was a separate profit centre and was to never be used to subsidize your sales dept. As we all know, this line of thinking didn’t last. Since the mid 1990’s and in particular the last 10 years with overly cheap credit, it has been too easy to use F&I income to subsidize the sales dept. When I was a DSM for a major OEM, I couldn’t begin to count how many times I’d been told by dealers that they would accept weak deals if the customer financed the unit at the dealership. Several dealers are subsidizing their Sales Dept. and this belief is reinforced with recent stats provided by CDK Global in the most recent edition of Powersports Business … and that’s why I changed the topic of my article.

The stats reported by CDK Global showed that major unit sales in 2015 increased in America by 5.2 percent over 2014 but new unit gross margins dropped from 8.7 to 8.5 percent and pre owned (used) unit sales dropped from 18.05 to 17.34 percent. What’s wrong with this picture? How is it that unit sales can go up but average gross margins that are already weak, go down? Is this a situation where we point fingers at each other and say it’s the other dealer’s fault for dumping prices? Are some dealers so desperate to move iron that they’ll sell for very small profit and subsidize the deal from F&I or parts sales? It’s likely a combination of both.

Now, I do understand these stats are for metric sales and are not indicative of all product lines but metric sales make up a large portion of unit sales in the industry. I also understand that the reported gross margin figure of 8.5 percent is an average only but while there are dealers who maintain new unit gross margins of 10-12+ percent, there are likely as many dealers who maintain new unit gross margins of 5-7 percent, which contributes to dragging the average down to where it’s at now. That’s where my concern is. What does the future hold for those dealers and what effect does this have on the industry?

My take on why subsidizing a sales department leads a dealership down the wrong path is:

• A business that sacrifices margin and subsidizes its sales department will not be able to build up sufficient equity.
• The business will not have the funds available to reinvest in the property or the technology and training required to remain viable.
• The business will not have the funds available to provide superior customer service that keeps consumers coming back to the store.
• The business won’t have the funds to retain strong and skilled staff.

Let’s be honest, a business that maintains sub-par gross margins and subsidizes its sales department isn’t in a state of prosperity, it’s in a state of survival.

I fully appreciate that it’s getting tougher to maintain margins. Some OEM’s have shrunk margins on units and most dealers have to compete with some dealer that gives their product away for whatever reason. Lowering your prices to meet theirs isn’t being competitive, it’s putting your business in jeopardy. The race to the bottom results in one winner — the consumer. Remember that consumers will pay for superior product, superior service and a superior experience and be happy to come back again. Isn’t that the customer you want?

For those who are struggling with margins and subsidizing their sales department, it’s never too late to change that around. To start, do yourself a favor right now and grab your YTD P&L or your last financial statement. Look at your unit sales dollar amount, grab your calculator and multiply that total amount by 1 or even 2 percent and see the difference it would have made to your bottom line.

Bruce Marcia is the director of Bruce Marcia and Associates, a retail management consulting firm that specializes in assisting and supporting dealerships in the RV/marine and powersports industries. As a recognized troubleshooter with over 30 years of experience in inventory finance, dealership general management and as a district manager for a major OEM, Bruce has had the unique opportunity to understand and learn from all three important fields that make these industries function.

Contact: bruce@bm-associates.com

Website: http://www.bm-associates.com

Phone: 587/577-6264