Over the past decade, state auto associations have worked diligently to revamp their state’s dealer franchise laws to include a statute that supports retail reimbursement for warranty parts.
States like Maine, Florida, and New Jersey laid the groundwork in the mid- to late 2000s. Currently, more than 40 states have laws that require the manufacturer to reimburse the dealer at the same rates it charges its retail customer; California, Colorado, Iowa, and Minnesota are all set to pass similar laws by the end of this year. Most state laws also allow the dealer to submit for a warranty labor rate increase using a similar process as the manufacturer’s standardized process, which often limits the amount of the annual increase.
Thousands of dealers across the country have exercised their rights for retail reimbursements for warranty parts and are currently reaping the benefits. Many dealers in the northeastern part of the country, where the laws have been on the books for five to 10 years, have generated hundreds of thousands if not millions of dollars of additional gross profit without increasing volume.
When these laws first became publicized, many dealers were skeptical. Some thought manufacturers would resist approval or seek retribution. However, as the years have passed, most manufacturers have complied, and we’ve seen no real examples of retribution. It truly is a no-brainer. In fact, one Honda dealer in New Hampshire called it “the biggest no-brainer in the history of the auto industry.”
Here are the top five things you need to know about warranty parts reimbursement at retail rates:
1. Calculate the Impact on Your Bottom Line.
The additional gross profit generated from a warranty parts rate increase to retail can be huge. The average dealer picks up approximately $8,000 to $12,000 per month in additional gross profit. Some dealers can generate more than $30,000 a month. However, the results for each dealership will vary based on the volume of warranty parts sales and markup percentage.
The average dealer’s retail rate typically ranges from 70% to 90% over cost. Most manufacturers pay 40% over cost. If a dealer is approved at 80% markup over cost, that dealer would in effect double their warranty gross profit.
There is a drastic difference among the average markups charged by dealerships to their retail customers for parts. Some dealers have been approved at over a 100% markup. Others have been approved below 60%. The main reasons for such discrepancies directly relate to the parts matrix in place and discounting practices.
Too often, dealers do not implement an aggressive enough parts matrix to maximize their profitability. Other times, the matrix is effective; however, discounts are utilized too liberally, reducing the rate and profitability. Both scenarios can cost you thousands of dollars a month in gross profits.
2. MSRP Is Not the Same as Retail.
Some manufacturers pay list pricing or MSRP, which most dealers perceive as a 67% markup. But MSRP is a price matrix determined by the manufacturers. On average, MSRP typically pays between 50% and 60% markup over cost. For some manufacturers, such as Subaru, it can be even lower.
If your dealership employs a reasonably aggressive price matrix, it is usually well worth submitting for retail rates. Regardless of your situation, it is critical to calculate the impact on your bottom line to determine the revenue opportunity.
3. Your Factory Won’t Just Give It to You.
Most state statutes include a provision that requires the dealer to submit 100 sequential qualifying customer-pay repair orders to the manufacturer to substantiate its retail rate, a.k.a. the “100-RO analysis.” Even without this provision, most manufacturers will still require the 100-RO analysis.
It should be noted that the "100" designation may be somewhat misleading. Analysis requires the dealer to include all nonqualifying repair orders and results in the accumulation of substantially more than 100 total ROs due to maintenance, internals, and warranty. It could take more than 1,000 actual repair orders to accumulate 100 “qualifying” repair orders.
This process can be very time-consuming. Additionally, all manufacturers do not interpret these state laws equally. They can reduce the rate substantially or reject the submission if material errors exist. This has the potential to prolong the process and cost you money.
4. Retribution Has Yet to Materialize.
This is the No. 1 fear of dealers who hesitate on submitting, but the best evidence of the lack of retribution is the bankruptcy proceeding that occurred nearly a decade ago: Several New Jersey Chrysler and General Motors dealers had exercised the rights to retail reimbursement at that time. Both manufacturers had the opportunity to enact retribution on these dealers, yet did no such thing. Since that time, GM has been the most vocal to its dealers about potential retaliation, but it ultimately amounts to empty threats.
5. Time Is of the Essence.
This is a huge win for the dealer without any real downside, but time is of the essence. The sooner you are approved, the sooner your dealership can begin reaping the benefits of the higher rate.
Due to the labor-intensive nature of this project, it typically takes dealership personnel six to nine months to submit and receive approval from the manufacturer. Partnering with a company that is well-versed in these submissions can streamline the process and maximize the impact.
Francis X. O’Brien II, CPA, CIA, CFE, is principal of O’Connor & Drew PC and has expertise in dealership operations, including warranty parts and labor reimbursement analysis as well as internal controls and fraud investigation.