Car dealers – a little bit of common sense and everybody wins

Car dealers - A little bit of common sense and everybody winsAnyone who has been in the motor business for any length of time, especially in management, will be very familiar with the following frustrating scenario. On the other hand car customers and buyers would probably find it hard to believe, and maybe even laughable, that such practices actually go on behind the scenes in seemingly sophisticated modern businesses. Let me paint a picture of a process and a problem that mainly affects large main dealer groups or PLC’s but which has never really been fully resolved to anyones real satisfaction. People in the trade may shrug their shoulders and say “it always been this way” but car buyers may be interested to read about the inner workings and the profit centres derived from their car purchase.

Firstly most large dealers sales teams like to sell cars which fall into the category of nearly new, simply becausethey are less likely to need much repair work, are usually lower mileage, have some part of a manufacturer’s warranty left on them and to the right customer can often sell themselves. It can also be said that to a sales department they represent a more profitable form of car simply because the workshop invoices are fairly constant and if there is anything major wrong the cost can usually be picked up by the warranty. The fact that car makers are getting better at producing quality cars means that competition has increased and with more dealers competing for less customers the dealers are always looking for ways of generating more sales. Clearly this can be done by actively stocking their forecourts with the ‘older’ cars which by definition are being sought by more customers who fall into this far lower price bracket. With these dealerships having worked hard to build a strong reputation and brand image it can be assumed that most customers would like to source these kind of cars from larger dealers where there is likely to be more confidence in the aftersales support than with a ‘Fred in the shed’ type dealer. Although I am by no means saying that this implies that these smaller independents do not provide a similar service, as we have said many times before many of them do it better because it’s their own money! The benefits for dealers in selling older cars are manifold, they are potentially enticing buyers into their brand at a much earlier stage than they may do ordinarily and also will have a chance of keeping those customers loyal and better still become a great advert for more people to buy that product.

Of course there is the main benefit of being able to increase sales and entertain more profit opportunities in terms of finance & insurance products, but also, from a dealership point of view, extra income through service and parts. Yet this is where the problems arise.

Because in most car dealers line managers are generally incentivised financially on the performance of their own departments (i.e. a sales manager is budgeted to sell x amount of cars and make y amount of money and if he does this will be paid z and if he exceeds can earn zz) this actually and naturally causes the alluded to problem. The general manager or dealer principle or brand manager, whatever he may be called, is generally paid his salary and bonus from the performance of the whole business so as long as the numbers add up and the plans are being hit then he and the directors he reports to will be happy. However dig a bit deeper and you will see how these dealers are potentially losing £000s in lost opportunities simply because they are not encouraged to work as a team.

I have to confess here that over the years there has been a lot of mutual mistrust and dislike between sales and service departments, which I have been right in the thick of, sales people generally used to think that technicians were just illiterate grease monkeys who went out of their way to be unhelpful and obstructive and technicians thought us salespeople flash Harry’s who got paid much more than they did despite having no formal qualifications (other than the ‘gift of the gab’). I have even witnessed Christmas parties and team building events descend into violence so bad on occasions that the police have been called and mass disciplinary hearings have followed. This situation has improved dramatically over the last 10 years but if a sales manager doesn’t get on or trust his service manager then these bad feelings can fester and ultimately end up costing someone, usually the business, money.

I will give you an example of how this can work. It is particularly relevant at present with quality retailable stock so hard to come by. A sales manager will make the decision to stock ‘older’ cars, of course he can decide that a part exchange which would normally go to the auction could be a car which with a little more effort could make a good retail unit or he may actively buy this type of car from auction even though with many other people in the trade he will be forced to pay strong money for it. Nevertheless once this action is taken he puts the car through the workshop for an initial “all point inspection” or test and report just to see what his exposure may be. It’s at this point that the service department start rubbing their hands together with glee because they can see easy money coming their way in order to get the car to the standard set by the dealer and ensure that a customer has a car which is fit for purpose. So here’s the equation; the car is 5 years old with 2 previous owners, has a full main dealer history, is the right colour specification and model and the mileage is sensible for the age. Importantly there are customers actively seeking this kind of car and sales people are keen on selling them, so let’s say the dealer has paid £5,000 against a guide price of £4,500, which is what the market has dictated. He thinks he can sell it for £6,995 which is at the top end of the retail price but with a good warranty and first class preparation and presentation standards he feels he can ask this price. He is calculating that as the car has been serviced on time and has had all the necessary procedures set by the manufacturer, he will pay £400 in the workshop, pay £200 for a warranty and £250 on car presentation meaning if he achieves the asking price he can make circa £900 once he has paid his VAT on the profit. Phew! All good news and he has another customer that ordinarily he would not see because he doesn’t usually stock this particular model at such a good price and not to mention the potential for add-on products which could also generate an extra profit. All sounds great with no losers and in an ideal world it would be, other than the fact that the car actually needs a cam belt, pads, discs and other sundry items and he is actually presented with an estimate from his own workshop of £1,000. This, of course means that he will now make less than £300 and once he has paid a salesperson’s commission and thrown in a set of mats means he is suddenly very reluctant to continue with this course of action.

The service and parts managers would probably make around £600 in clear profit from preparing this car and are understandably keen to go ahead and there you have the situation which has faced these players for many years because they all look after their own departments there is no flexibility. The scene continues with the sales manager deciding that he will not retail the car because of the prohibitive costs involved and the service manager not prepared to compromise on the costs meaning all parties make no profit for their respective departments and, more worryingly, the dealership loses out on potentially £1,200 of profit.
To the uninitiated this probably sounds like complete madness and many in the trade will recognise this as the old “wooden dollars” argument. It is sadly though a reality which has existed in many mainly franchised businesses for many years and is a situation which, I am sure, has driven many good operators from the business in frustration at such a backward thinking policy.

Surely for all parties, including customers, a sensible course of action would be that rather than allowing line managers with a vested interest in looking after their own areas of control, the general manager who is employed to oversee the running of the whole operation, should be making a decision on how to ensure that the potential profit remains within the business. What this also demonstrates is the importance of strong relationships and clear communication in the motor trade along with breaking down traditional prejudices which can, and do, still exist.

Some dealers will overcome this by having a fixed cost across all cars meaning whether it is a new PDI (pre delivery inspection) or a car that’s 6 years old with 60k on the clock the price remains the same. The theory being that over the course of the month and with maybe 100 cars involved it should look pretty fair to all parties and means that there are opportunities to sell more cars and more parts and service hours. Others advocate an internal workshop labour rate or warranty rate which can be up to £30 per hour less than the retail rate, though there is then a tendency for the service manager to prioritise on his retail customers who will pay him more money and therefore get priority when it comes to workshop loading. There is a school of thought in the business which is leading to a time when managers are paid for how their department perform but also a bonus for how the business as whole can outperform its budget. This way instead of wasting time on petty arguments and encouraging sales mangers to cut corners in preparation standards more cars can be sold thereby generating more income for the business. Importantly this will give customers confidence that the older car they have just bought for their son or daughter, from the main dealer local to them, will not cause them grief because of issues which arise as a result of a manager cutting back on preparation standards in order to remain profitable.

In today’s market more and more dealers across the board will be attempting to try and sell cars which in normal trading conditions may be quite alien to them and customers may walk on the forecourt of a BMW dealer and see Audi’s or VW’s for sales and Land Rover dealers selling other makes of 4WD which they have taken in and decided to ‘ have a go with’ because they cannot find enough of their own product.

Increasingly they will be trying to sell cars of their own brand which normally just would not fit their criteria whether they want to or not, because again they just do not have the choice they had a year ago, so surely it’s better to make the decision, prepare the cars properly. Do it properly and they can claim more and different customers into the brand and then keep them for life. It’s a wonderful thing common sense, isn’t it?


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One Response to Car dealers – a little bit of common sense and everybody wins

  1. Mark Robbins August 23, 2009 at 2:53 pm #

    Only one small problen there, try buying Five and six year old cars (no matter how well serviced) that doesnt have “engine Management Faults” ECU failures, Limp Mode Resets, or indeed a dashboard that doesnt light up like a christmas tree (Airbag, EM, ABS Light etc) the instant the customer takes it out of the showroom.

    Fine if its in warranty but as a “non specific make” dealer these electronic computer based faults are starting to become VERY profit draining indeed, especially if your workshop has to “out source” the problem.

    Old cars? (Sorry, nearly new !)

    No thanks.

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