As we turn the corner into the new year, most dealerships have just completed (some are just beginning) annual forecasting and planning meetings. Dealers and management teams have rehashed their performance of last year and are setting their sights on an improved year.
As we go to press, the tone of the industry bodes uncertainty, much like it has each of the past five years. This year, employee pricing by GM, Ford and Chrysler have dampened dealer optimism. At the same time, gas prices hit $3.00 per gallon in the wake of Katrina and Rita. Between the glut of used cars in franchise dealers’ inventory, and consumers becoming more fuel conscious, wholesale prices for used vehicles plummeted, especially large trucks and SUVs. As GM and Ford then attempted to turn to value pricing, eschewing incentives, you could hear crickets chirping in new car showrooms. As if on cue, industry experts once again warn of a tight market for the upcoming year, cautioning dealers to batten down the hatches. The more things change, the more they stay the same.
Each new day in the car business presents a new challenge. Whether it be programs or decisions made by the manufacturer, challenges caused by weather, deployment of military troops or even whistle-blowers, management teams must continually adjust. But isn’t this the case in most any industry? Entrepreneurs, after all, run the retail automobile industry and entrepreneurs certainly know adjustment. So will it finally be a year of continued prosperity, one of the long-predicted industry down turn caused by increasing interest rates and spiking fuel prices or something in between? I wish I could say that I was intuitive enough to say with certainty. I suspect that, as long as we are spared catastrophic events such as terrorist activities on our soil or major natural disasters, consumer confidence and big-ticket spending will remain high enough to insure an active market.
I certainly believe I can predict one thing accurately. No matter which way the market heads, there will be dealers that enjoy their best year ever, and there will be others that somehow lose their way. Even the last time dealers faced a serious industry downturn back in the late eighties, some dealers found a way to eclipse their previous high water marks.
|Regardless of the market, dealers that stay focused on their business by proactively planning, rather than reacting, will likely find success during the next 12 months. Common sense? Of course. But it is advice that dealers somehow seem overlook in the majority of cases.
Usually there are two simple factors that cause earnings to miss their forecasted mark. Dealers either over estimate their revenue goals or underestimate their expenses. Often, the former causes the latter.
Spikes or valleys in sales can have a significant impact on the perspectives of dealers, especially where forecasting is concerned. Many dealers have had a rough 4th quarter of sales. The key is to make your projection realistic, based on what your variable or fixed operations sales were for last year. If you aren’t making wholesale changes in personnel and/or procedures or haven’t been given a double allocation of hybrids for next year, don’t forecast a large sales increase. If your dealership is still going to function in much the same manner it did last year, why should you expect significant sales increases? Don’t look at your high-water month and get trapped into thinking, “We sold XX in August, so we should be able to expect to do that every month of the year.” The revenue you project will be what you base your forecasted expenses from. If the sales do increase abnormally, then as the year progresses you can always increase your spending.
Next are the three largest expense items that typically get out of line the quickest: personnel, advertising and interest expenses. Personnel expenses generally bulge for two reasons - overestimating the sales (trying to build the infrastructure to see if you can get the customers to come) and/or the inefficiency of your staff. The turning of the calendar to the New Year often seems to cloud perspectives. Suddenly by creating a new position overall efficiencies within the department are expected to skyrocket, causing sales to increase. Maybe, but not the best bet.
More often, the reason that the position is needed in the first place is that the existing personnel are inefficient or ineffective. Role and job descriptions aren’t precisely defined causing duplicated efforts while others tasks are completely missed. Throwing people at a problem generally isn’t the answer. More job definition, more accountability and compensation plans based on performance are usually a better place to look.
The same goes for advertising and interest. Dealerships with any tenure already have a very strong customer base. The trap that many fall into is that rather than trying to stay in tune and in contact with that customer base, when sales slide, they throw more advertising money at the problem figuring they can adjust their expenses “next month”. The problem is that sooner or later the end of the year catches up with them and there is nowhere to borrow additional budget from. They wind up turning the calendar, vowing yet again to not repeat history.
Finally, the biggest part of interest expense comes from inventory. Why is it that no matter how many years they are in business, at some point in time during the year, the same dealers always wind up with excess inventory and an aging problem (a double-edged sword that both runs up interest and reduces gross profits)? Generally, it is simply due to poor planning and lack of discipline.
Whatever the New Year has in store for us, simple advice can hold the secrets of your success. Be proactive. Set realistic sales forecasts, budget, plan and staff accordingly, define job descriptions, review performances regularly and have the discipline to stay focused on the goals that you have set. After all, it isn’t brain surgery, its just brain power.
Vol 3, Issue 1
Auto retail veteran and F&I products expert Paul McCarthy has joined AUL Corp. as vice president of national sales.