Temperature check: the outlook for business profitability
Conducted by world renowned industry consultant Glenn Mercer, Auto Trader's 'Back to Basics' research saw over 80 UK franchise retailers interviewed as well as an in-depth analysis of UK and US market data to establish where retailers need to focus to drive growth in the coming months and years.
In an in-depth study of more than 80 UK franchised retailers, global industry consultant Glenn Mercer assessed the current and future state of businesses’ profitability, particularly at an operational level across key departments. It revealed a generally tepid outlook with growth expected to remain largely flat across all key operational departments, rising in total just 1.5%-2% year-on-year, which is supported by historical data, as well as comparing to well-defined US financial data.
In this chapter, the projections for each area of a retailers business i..e. aftersales, finance & insurance, new car and used car are outlined along with retailers' sentiment towards each of these sections.
A very optimistic view among those surveyed, with the aftersales department expected to carry more of the profit responsibility, with significant growth potential, including in electric vehicles. Beyond all the other departments, retailers felt they had the most control in aftersales and the potential business was ‘theirs to lose.’
Outlook for aftersales profit contribution: Up or up strongly
Retailer comments
“We have come to realise our most profitable employee is a senior-level technician!”
“The aftersales upside is massive, especially if we can keep both new and used cars in the bays.”
“Aftersales is where we can grow profits, we control more of the levers here.”
Due to the challenges in new car, as well as tight regulatory restrictions the outlook for the F&I department was similarly tepid. Although the department faces regulatory headwinds, many retailers pointed to innovation and automation to help boost penetration and retention. This was deemed especially important within the used car market where retailers felt far more optimistic about their ability to maintain profitability.
Outlook for F&I profit contribution: flat or down slightly
“Profits here are half what they were at their peak. We need to do more used-car F&I.”
“Our profit here is set by what the regulator allows us to make.”
“New F&I profits will be flat. There’s more hope in used, where lenders compete for our business.”
Retailers felt that new car margins were largely out of their control and resided primarily with the brands which are having to respond to current market challenges. They also pointed to very well-informed customers, which combined with brand pressure, made them more like ‘price-takers’ than ‘price-makers’.
Outlook for new car profit contribution: flat or down slightly
“New profits are not really in our hands anymore. The level, terms, mix, and profit in leasing are all at the whim of the regulatory authorities.”
“We’re de-emphasize new, as quite simply, the money is elsewhere. For us, new car sales are just icing on the cake.”
“We don’t drive margin in new car. Really, we just take what we’re given.”
The outlook for the used car department was very upbeat and represented the best opportunity to recover profits lost in the new car department. Although outlooks were measured to reflect market challenges, those surveyed felt the potential for profit growth was significant if they’re able to increase performance.
Outlook for used car profit contribution: flat or up slightly
“To recover the profits lost in the new department, used car profits are the answer.”
“We will focus even more on used cars for profitability.”
“Used cars are clearly our bread and butter, today and tomorrow.”
In the past, the solution to improving profitability may have included more aggressive in pricing, to offer more competitive part-exchanges, or find alternative sourcing channels. However, that’s no longer possible: margins and market dynamics are tough, car buyers are highly informed, and competition is more intense than ever.
According to Mercer, therefore, the path to better profits via operational excellence lies in finding ways of working smarter across the different cost centres - to ‘out-manage’ your competition, rather than trying to ‘out-deal’ them.
Retailers are experts at adapting and through his interviews Glenn identified broad tactical and strategic themes that time and personnel constrained retailers are already prioritising to improve profitability.
Retention
Retaining customers is significantly more cost-effective than acquiring new ones. In fact, the cost of retaining a customer is generally 1:4 to 1:6 compared to acquiring a new one. Positive service and aftersales experiences are the strongest levers for retention. Strategies include paying up for trades, setting up pre-paid service plans, converting every new and used buyer into an aftersales customer, and leveraging connected car technology to drive aftersales retention.
Cost Reduction
The single best lever for cost reduction is automation, particularly in reducing personnel costs, which typically account for 50% of gross. Automation can help standardise processes, and limit errors. IT can also assist in bringing underperforming employees up to average or better levels. The interviewees stressed that cost reduction is a ‘game of inches’, and no one or two steps will win. All costs are an issue, but managing personnel cost is key.
Achieving Scale
Scale provides the ability to invest, centralise, and diversify, which can lead to better profitability. Larger stores benefit from economies of scale, allowing them to hire specialist labour, invest in better IT, and upgrade facilities. Sharing premises with other brands and pooling facilities locally can also help achieve scale.
Unlocking the promise of IT
By doing so, retailers can work more efficiently and strategically, identify and respond to changes in the market more quickly, as well as re-engineer workflows, automate processes, and ultimately improve productivity and performance. Throughout the interviews, investing more in IT and the automation of processes was seen as the way forward.
