The world automotive industry is expected to lose $110 billion in sales in 2021. With the U.S. being the #1 auto sales country globally, that is a significant sales loss for dealerships.
Although the dealership industry held gross much better with the limited available inventory, they need to start looking beyond front-end gross to keep the profits increasing as sale volumes remain constrained.
Wholesale used vehicle prices have already increased and aligned according to retail pricing. Thus, limiting the ability to hit home runs on used inventory acquired before the wholesale prices caught up with retail price levels. OEM incentives also decreased to match the dealers’ ability to hold gross on MSRP or even above sticker!
All this adds up to stabilized margins. Dealers will likely be more profitable per deal through the remainder of 2021. However, with sales volume decreased and margins balancing out, the months of easily achieving record profit growth will quickly come to an end.
As fast as all these shockwaves rolled through the industry and gave dealers record profits, there will likely be a bounce-back shockwave that erases most of the advantages that gave dealers the record profits.
The buyers that are paying more and extending finance terms are likely to be upside down longer. When chip supply and inventory levels return to normal, these customers will not be able to upgrade as easily (although I have faith that dealers will find ways to help these customers the best they can). When this happens, demand will drop as inventory levels are rising. Thus, creating the bounce-back shockwave to lower demand and higher inventory.
Growing up in the midwest, we had a saying, “Make hay when the sun is shining.” I think the dealers are doing this every effectively in today’s market. Unfortunately, many are resting on their laurels and enjoying the record profits with a very casual eye to retaining higher profits as things return to the norms.
Good times are perfect for looking at ways to improve the overall performance. Dealers have the cash to invest in improving processes and software. They have the money and ability to adjust business practices for continued success as the market stabilizes.
Incremental changes have always been the key to dealership success. Things change, dealers adjust. It’s that simple. Record profits provide dealerships the ability to make incremental changes without fighting for survival cash flow. Most of us in the industry have been part of a wholesale change in management, ownership, or process change. These wholesale changes often happen when the dealership is not performing or even losing money, and the wholesale change seems to be the best way out. When dealers are making record profits, incremental change, not a wholesale change, is what keeps your dealership outperforming the industry.
Here are some industry trends you and your team are likely seeing and could be testing while profits are high.
Online to Dealership handoff
More and more customers are starting their deals online with Digital Retailing (DR) tools. There still is a disconnect between online and offline for most dealerships. If a customer fills out a credit app or trade app or proceeds through a DR platform, why do most software companies and dealers fail to sync all the data? When a customer comes to the dealership, they should never have to repeat a step they did online, nor should the online pricing, process, information be different when they enter the showroom.
A full DR setup can be very disruptive to your current sales process. But we know that more and more consumers are becoming comfortable with DR, and online sales will continue to grow. Any dealership can enhance the online to dealership handoff by adding an integrated online credit app. An integrated digital credit app can also be used for showroom buyers so that EVERY buyer goes through the same credit process. It’s a simple process adjustment that delivers exponential results for both online and offline buyers. The dealership team uses one process, saving time, effort and often eliminates duplicate software costs.
e-Contracting your F&I deals
E-contracting is gaining traction with more lenders and dealers using e-contracting systems. If you are not set up yet for e-contracting, you need to look at it very soon. If you are using e-contracting a little, expand it as much as possible. E-contracting with every lender or captive that will let you use e-contracting saves the dealership time and money.
A few of the benefits you get from e-contracting are…
- No “returned contracts” – Eliminate clerical errors that cause paper contracts to get returned unfunded.
- No shipping costs – many dealerships spend $1,000-$4,000 a month on FedEx or other shippers to send the paper docs to the lenders.
- Faster funding – dealers get the funds in their bank account in days, NOT weeks (or in some cases, a month or more). Increased cash flow speed keeps the funds in the dealership’s account and available for new inventory purchases, etc.
One thing to keep in mind as you look to e-contracting, keep your process and software fully integrated. Integration is a significant time-saver that eliminates duplicate efforts. An integrated credit app (noted above) that flows into lender decisions and e-contracting will eliminate rekeying and fat finger typing mistakes that slow down the sales and approval process.
Maximizing lender profit on each F&I deal
This sounds like a no-brainer, right? But, audits have shown that 20% of deals sent out to lenders end up being finalized with a lender decision that doesn’t maximize the deal profit. The F&I team is often pushed for speed to finalize a deal, and that leads to an effort to get a deal done fast instead of them taking the time to analyze all the lender decisions to find the maximum profit.
Software can help solve this issue. Software that gives the F&I manager the ability to instantly find and analyze all the lender decisions against each other. The F&I manager eliminates many manual calculations because the software automates them and compares the lender decisions based on profitability.
The F&I managers get to focus their time on finding adjustments that increase profitability and selling ancillary products that increase F&I revenue. Giving the F&I team a platform that allows for automated calculations and recalculations will enable them to find and capture the readily available profit missed on 20% of deals by most dealerships.
Many dealers are seeing $2,000 plus F&I PVR currently, and that is excellent news. As I noted earlier, it’s hard to desire additional revenue when you are hitting records every month. To keep up record profitability, dealers need to start capturing missed F&I revenue. Where I’m from, $2,100 in F&I PVR is better than $2,000 in F&I PVR. Adding a simple software tool for your F&I team to capture that revenue is the absolute no-brainer.
SPoC – Single Point of Contact
Some dealerships are using this process now and succeeding at a very high-profit level. Even if this is WAY too futuristic for your dealership today, every dealership needs to look at it. At some point, the multi-silo sales process is going to change. I’m not saying this is going to happen overnight or even in the next several years. I am saying that the current sales process, which consumers have much distaste for, will shift.
When 20%, 30%, or 50% of deals start as online DR deal will it make sense to have 3-6 people touch each sale? As an industry, we talk an awful lot about customer relationships. Today we expect the salesperson to “manage” the customer through the process and resolve issues created by the lousy handoff between online and showroom. The sales team must placate the customer when they are forced to repeat the work they did online. They are required to manage communications between the desk and the customer. They are also asked to sell a vehicle with little to no F&I insight and work the customer through any F&I issues. Salespeople are expected to manage the process they have little control over and still get crushed with a bad CSI score when something goes wrong.
Technology is simplifying the sales process to where most dealers can start looking at the SPoC process. Not so you can do a wholesale change now, but so you can start seeing how you can incrementally adjust your current process to be more efficient. Start asking questions like “Is there software that can help my F&I managers do more deals per manager?” (Hint: the answer is YES – see above section on Maximizing lender profit on each F&I deal). Faster deals mean more deals per F&I manager, and that means you can do more deals with fewer F&I managers.
Integrating a digital credit app with your F&I process will also decrease your F&I manager’s workload. It’s not hard to see how minor incremental adjustments can start to add up to increase dealership profitability.
What functions can be accomplished through one employee vs. two? With technology, do I need 3-6 F&I managers or just 1-2 that oversee all the deals initiated by the sales team? How many desk managers do I need when the salesperson accomplishes 85% of the sale and just requires management signoff? These are big questions that every dealership needs to start investigating if they haven’t started already.
The BIGGEST thing to keep in mind as you look for ways to grow profit over the next year or two is that the software you look at should allow you to get to the level you want today and next year. Make sure you can start with minor incremental adjustments and add features as it makes sense. Much of the software pitched to dealerships is not built for growth. It often can solve one problem today with a major overhaul to your current sales process but leaves you needing to change software providers down the road. If you are only solving today’s problem, you are left vulnerable to disruptive change as you need to leap from software provider to software provider as you must address new market needs.
It’s not easy being a dealership and having 30 companies tell you they can solve this problem or that problem. I hope this information is enough to get you thinking about what happens when the inventory issues get resolved and head back to “standard” profitability. Experiencing record profit should be addicting, and finding ways to maintain that growth should be front and center for every dealership.
If you are interested in learning more about ProfitIQ and discussing the incremental steps available to your dealership for continued profit growth, please reach out to us at – sales@creditiq.com
