Sept. 1, 2008 – Breaking down top dealer costs

By Steve Bauer
Manging Editor
Personnel costs far outweigh other expenditures for dealerships, but their biggest expense after that varies widely depending on their sales volume, according to a Powersports Business survey of 500 dealers across the nation.
The survey, conducted by Irwin Broh & Associates, questioned metric, European and Harley-Davidson dealers. The wide-ranging survey examined dealer spending, their revenue and their inventories
Dealerships selling 250 or more units stated that floor plan interest and money spent on maintaining or upgrading facilities was their second biggest cost, whereas dealers selling 100 units or less said that their second largest expenditure is advertising.

Drawing interest
Although floor plan interest is a large expense at nearly all dealerships, those at smaller volume dealerships admit that they can focus more of their investments on other projects, as smaller showroom floors equate to less of a financial hit. According to the survey, 27 percent of dealers that sell 100 units or less say advertising is their second largest expense. And for many of them, it’s well worth the investment.
“Floor plan interest is my smallest expense,” said Mel Sinclair of Sinclair Cycle in Roanoke, Va., whose dealership sells roughly 75 units per year, and has only a few models on display in his store. “I’m a small dealer in a larger metro area, so my biggest priority is to advertise my store as much as possible.”
Sinclair says he spends roughly 25 percent of his total costs on advertising alone, and that employee benefits amount to another 15-20 percent.
“I’m not interested in training employees just so they can go work for a bigger dealership in two or three years,” he said. “I make my benefits package attractive because it’s important to the success of my business to have continuity on my staff. It might not mean as much to larger dealers, but I’ve learned through the years that for me to succeed I need to have great salespeople and technicians, and I’ll pay extra to ensure I don’t lose them.”
Chad Goland, owner of Silver Pines Powersports outside of Boulder, Colo., says advertising/marketing is important for his business, which must compete with ski resorts and other recreational activities not involving powersports.
“Last year, we spent close to 35 percent of our total budget on advertising, and if I could afford to do more I would,” he said. “We don’t sell a lot of units on a yearly basis, but I bet if I didn’t advertise our sales numbers would be cut in half.”
Goland adds that upgrading his current building is another priority for him, so he can add more showroom floor for parts, accessories and garments, which he thinks will be a big boost financially.
“We’re going to build an addition next year that will allow me to bring in more apparel, especially clothing and gear for women,” he said. “It’s really amazing how many more couples I see come into the store lately, and right now I don’t have much on display. The investment to build the addition is a big one, but as a smaller volume store the more accessories I can add into the mix, the better.”

Growing pains
Another significant cost to dealers, especially those who have outgrown their current stores, is upgrading or maintaining their facilities. For dealerships that sell 500-1,000 units per year, 29 percent say it’s their second largest cost behind personnel. However, it’s a price many are happy to pay considering the potential growth in profits that will follow.
“We had been in the same, 3,000-square-foot facility for the past 12 years, and we simply outgrew it and decided last year to take the plunge and construct a new building,” said Troy Opperman, owner of Berlin Powersports in Berlin, Wis. “We also decided to invest in a new site, which meant the added cost of purchasing land, developing it, etc.”
Opperman says the new dealership, which is expected to open sometime in early 2009, will be three times the size of his current building, allowing for more display areas and the capability to handle more inventory.
“In my opinion this is the most important decision I’ve had to make regarding my business,” he said. “It’s a huge financial investment, but I’ve done enough research to know that I have the customer base that is very hunter/outdoors heavy, and I would expect our sales numbers to double or even triple in the first year of operation.”
Nathan Powell, owner of Ridgetop Cycle outside of St. George, Utah, says one of his biggest expenses for 2007 was a remodel of both the interior and exterior of his dealership, which he felt was necessary because things were looking outdated.
“I sell metric bikes, and nearly every time a customer would enter the store, I’d hear comments about how pleasantly surprised they were by the models and selection because the dealership didn’t look very promising from the outside,” he said. “I’ve spent roughly $30,000 on various upgrades and plan to add more.”

Flooring costs
As dealerships increase in volume, the interest paid for flooring costs begins to become a more significant expense. According to the PSB survey, of dealerships that sell 1,000 or more units per year, 31 percent say that floor plan interest is their second biggest expense behind personnel.
“That certainly is a big cost for my dealership, because the more units you have on display, the higher your flooring costs will be,” said Josh Krell, owner of Woodridge Powersports in Little Rock, Ark.
Krell says that keeping your displays under control is very important in helping to minimize flooring costs.
“I’d say flooring interest is probably one-third of my total costs, and I work really hard to try and keep it that low. The more units you have on your showroom floor, the more it will cost you, so I try to keep a good balance.
Tyler Floyd, general manager at Pilot Powersports outside of Springfield, Ill., says that flooring costs are an item that dealers who sell in higher volumes must deal with.
“It definitely cuts into your bottom line, but as long as you’re getting a good volume of units out the door, then the cost is definitely worth it in the long run.”
Floyd adds that his dealership also spends a large percentage of revenue on advertising, which he says although might come as a surprise to some, is vital to the business’ success.
“Just because we sell a good number of units doesn’t mean we can just sit back and the customers will come walking through our doors,” he said. “We put a lot of emphasis on advertising because we want to reach potential customers who perhaps have never thought of riding an ATV or motorcycle. Especially now, with the cost of gas, we are pushing that hard in our advertisments, letting people know how fuel efficient motorcycles are. We won’t ever skimp on advertising, I can guarantee you that.”
Although flooring costs can be costly, it certainly doesn’t seem to stop some dealers from continuing to grow their businesses.
“I own three stores and I plan to open another in 2010,” said Rick Lester, owner of Power Country Vehicles, which has store locations in both Washington and Oregon. “I know flooring costs are sometimes a sore issue with dealers, but I think the key is to avoid going overboard as far as your displays go, and if you’re doing a good job advertising and selling, then you won’t mind the costs as your profits continue to increase.”

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