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Redefining the Dealership: How a New, More Transparent Sales Process Will Lead to a New Way of Managing Expenses

Friday, December 01, 2006 - Tony Argiz, CPA / ABV / CFF, ASA, CVA, CFE, Principal & Philip Villagas

Phil Villegas
Tony Argiz

For dealerships facing new financial challenges, the future of the automotive retail industry has been the subject of great speculation, and even greater frustration. As dealers attempt to find quick fixes to their revenue woes, long-term, structural solutions are too often pushed to the back burner. Frequently, we find ourselves asking what the industry will look like down the road, while going about business as usual, instead of actively preparing for the inevitable changes that we are already beginning to witness.

As the retail automotive landscape evolves, dealers who want to evolve with it should explore a host of changes in their operational approach that, taken today, can make a significant impact down the road. Simply put, while the future may remain uncertain, the reality of the direction it is taking for dealers is all too clear, and for those who want to succeed, it is time to develop a new way of doing business and achieving profit.

Tomorrow's retail industry is certain to reflect a move toward greater consolidation, both within a dealership's own operational framework, and between dealerships. Those dealers who truly understand their balance sheet and embrace the inner financial operation of their business will be in a clear position to take advantage of the new realities. The dealership of tomorrow will most likely reflect the demands of an increasingly informed consumer, and will boast improved transparency in all transactions, along with better technology, scaled-back compensation plans, (staff and compensation more appropriate to an evolved sales marketplace) and, ultimately, better cost control.

To understand where the retail automotive industry is going, it's helpful to understand the road we have traveled so far. The history of dealerships, and the way that the sales process has developed over time, clearly demonstrates that a wholesale transformation in the way we do business is not only possible, it is likely.

A Look into the Past

Around the turn of 19th century, when cars first started being sold, bicycle shops, hardware stores, blacksmith shops, repair shops, and the front porches of houses all served as points of sale. Back in the day, to become a franchise dealer, little up front payment was needed; personal character was the primarily factor that manufacturers used when deciding who would represent their products.

As the popularity of the automobile grew, so did the need for an adequate outlet system for the manufactures. With approximately 600 different vehicle manufactures in the early part of the century, manufactures like Chevrolet, Dodge, and Ford realized that surviving in the automotive business required a strong dealer network.

In the 1970s, the oil crisis, along with new emissions and safety laws, significantly impacted domestic manufactures and in turn dealers, leading to an upsurge of Japanese and European brands which had been shun by dealers in the previous decade. These international franchises, taken as add-on brands, helped many dealers emerge from this troubling time. As the overall economic downturn of domestic manufacturers continued throughout the 1980's, dealers began increasingly to acquire faltering competing brands. The automotive dealership landscape had changed forever; no longer was a dealer's loyalty limited to one manufacturer.

The mid to late 1990's gave way to a flurry of acquisition and consolidation for dealers. Although privately held groups were solidifying their base, the greatest impact was made by publicly traded companies. In most major market areas, dealerships now had a new player. Family-owned and operated dealerships were no longer the norm, because corporate America was now on the blacktop.

While we're only half way through the current decade, it is already clear that this era will be remembered as one of concession for the automotive industry. Domestic manufactures are making concessions on price and incentive methodologies; they are making concessions with vendors and unions; they are conceding the title of "Big 3;" they are making concessions in the shadow of bankruptcy. Publicly-traded dealership groups are making concessions on their original business plans. Individual dealers and small dealer groups are making concessions on grosses, inventory, and profitability.

Looking Ahead

In order to confront today's difficult realities, and to prepare for a transformed future, dealers should borrow a basic concept from Nissan's marketing campaign; dealers need to "shift" their way of thinking. While the design and engineering of automobiles are changing constantly, the fact is that the way we sell these vehicles is changing at a much faster rate.

The sales and service process is being altered not because vehicles are evolving, but because consumers have more access to information. Today, consumers know more than they ever have about the sales and finance process associated with purchasing a vehicle, and that trend is only going to continue. If dealers are to succeed in the future, they must redefine the concept of great customer service to include the values of clarity and transparency in all interactions.

Experience shows that customers want to be treated on a level playing field, with respect. The idea of fully consistent retail value pricing is perhaps the biggest shift in thinking for the automotive retail industry. Consider the recent employee pricing and family pricing plans rolled out by the domestic Big 3. The underlying success of the programs was driven by the perceived transactional clarity that consumers had in reference to the pricing of vehicles. They understood that irrespective of economic status, vehicle prices were equal across the board. The shift to no-haggle or retail value pricing is well under way.

With a new definition of quality service that entails clear and consistent pricing, the search for profitability must now move in new directions. In a retail environment where the front-end sales grosses are relatively predictable or tolerable, the next area of front-end profit will be F&I profit. Psychic powers are not necessary to see that the days of free reign interest rate mark-ups are numbered. In the end, a flat fee per contract or a predetermined mark-up rate that will likely not exceed 2% may someday be the norm. This new reality creates predictive F&I profits and less variability in grosses. Menu selling of add-on products, services and warranties can bring in a relatively limited amount of additional profit, but the truth is that the F&I department is increasingly curtailed to a confined set of parameters.

Savings, and therefore profit in the F&I department must come from the area of greatest expense: salary. Since finance managers will now have a more straightforward task, operating in a defined environment, it only makes sense that their salaries should be adjusted to reflect their new, more predictable duties. In fact, across the dealership, the entire existing approach to compensation must be re-engineered. Compensation is typically a dealership's highest expense. If front-end sales grosses are predictable or somewhat standard, why would we continue to compensate sales professionals and managers in the same manner, particularly as the pricing of vehicles continues to shift to a set price? Compensation structures must match the newly evolving approach to sales.

In the future, it is entirely possible that one individual will handle the sales process from start to finish - from demonstrating the vehicle to processing the financing. The technology exists to fuel this efficient shift in operations, and it is evolving every day. Within the next five years, there should be a further growth in technology, allowing dealers to move to a Windows-based, fully integrated system that provides access to inventory, customer relationship management, and financing approvals. Ideally, this new system will be seamlessly integrated into the web-site and e-mail for the dealership, and will provide value added on-demand reports and trends, all in a point and click environment. With technology improving, what needs to happen next is to establish the processes and training for front-end individuals in order to build a new sales methodology.

Perhaps the best way to prepare for the future is to visualize the state of dealerships at the end of this decade. While I am not a fortune teller or median, based on trends I can offer this picture: dealership consolidation will increase, with financially attentive dealers taking the lead. The sales and service processes will change dramatically, with transparency and better communications becoming the key to great customer relationships. Operationally, dealerships will streamline back-office functions, embrace technology, and re-tool compensation structures for finance managers and the sales team. In this new environment, profit and success will derive from the ability of a dealership to control costs, while providing excellent service.

The purpose of this newsletter is to provide general information on tax, audit and other issues related to the automobile dealership industry. The information contained herein may not apply to all businesses or organizations and their specific circumstances. Dealerships are encouraged to consult directly with an accounting expert before making tax and accounting decisions.