19th October, 2016 · Feature

Dealer profitability – the
widening divide

3 minutes to read

BDO Automotive have observed that the gap in Dealership profitability is widening.
On average, Dealers are achieving a net profit to sales of approximately 2% and have done so for decades now. However, whereas once results were crowded around that 2%, we have observed over the last five years in particular that the results are much more scattered, with a greater dispersion of individual Dealer results towards the upper and lower extremes of the profitability band, as demonstrated by the following illustration.

profitability

Of course there have always been Dealers at the extremes, which typically reflects management capability, culture, employee engagement, fortune of the brand/s and geography, but why are we now seeing a greater concentration than ever before of Dealer profitability toward the extremes?

What is new? What is driving the profit divide? Why is the gap widening?

BDO’s view is that the incentives-based model perpetuated by the manufacturers is driving the profit divide. That is the financial incentive that manufacturers have placed – and therefore the greater dependence that Dealers have – on achieving manufacturer incentives (for stock, target achievement, customer satisfaction and non-quantitative measures) in order to achieve profitability. As a generalisation, ‘smaller Dealers’ are unable to leverage the incentives-based model to the same extent as their larger counterparts; in fact, the incentives-based model works against them.

The selling gross of new cars continues to decline, which ideally would be substituted by incentives achieved, but Dealers do not live in an ideal world relative to their ability to leverage the incentive-based model. Consider this generalisation: larger Dealers have the capacity to maximise those incentives by, for example, absorbing greater volumes of stock (relative to their size) to their smaller competitors, which then allows them to manage the applicable bonuses to offset lost selling gross and, in effect, become price leaders in a market that is increasingly exposed to the customer’s ability to compare price using the internet as the enabler. By contrast, smaller Dealers have less capacity to absorb stock spikes and achieve lower incentives relative to their turnover, yet remain at the mercy of the price setting in the market. In summary, their grosses will reflect those of the larger Dealers but their capacity to substitute lost gross with incentives is diminished.
BDO are observing as a general rule that ‘smaller Dealers’ are and will continue to be a challenging proposition when it comes to achieving profitability at industry averages. To give the ‘smaller Dealers’ some definition, we refer to them as Dealers with less than $20 million annual turnover and a 20% combined market share of the brands they represent. There are exceptions of course, but where one of the above measures is true then profitability is likely to be challenging, and when both are true then achieving profitability is extremely challenging.

Arguably, the increasing application of financial incentives by the manufacturers as a method of rewarding the behaviours of Dealers to align to their own goals continues to drive industry consolidation, which further accentuates the consolidators’ (typically the ‘larger Dealers’) ability to access financial improvements and decrease risk.

consolidation

Should you wish to discuss this observation further please contact BDO’s National Automotive Leader, Mark Ward, by email at mark.ward@bdo.com.au.

Mark Ward
Partner,
BDO Automotive.