RVBusiness January/February 2024
For most dealers, 2023 has been a challenge. Major unit selling margins have decreased dramatically, even as flooring and personnel expenses have increased, leading to significantly lower net profits and balance sheet strength. The low unit sales margin environment has starved dealers of needed gross profit dollars to pay for everything from increased flooring costs to curtailments to employee compensation. For many there simply hasn’t been enough gross profit from other departments to cover the sales shortfall in any significant way. This has lead to low profits and cash flow problems. It’s no surprise that many dealers are quite happy to see the end of 2023!
But what, exactly, is going to change in 2024?
Will the industry wide inventory problems resolve themselves? Or will high levels of non-current merchandise in dealer inventory, manufacturer discount programs, and the influence of bank repurchased inventory being recycled back to market keep the pressure on margins?
Even though it seems that inflation has finally cooled, is it likely that flooring costs are going to sharply drop in 2024? Or will interest rates stay at or near their current levels through much of 2024, as many experts predict?
Will something change in the supply of qualified technicians and other employees? Or will the scramble for talent remain just as competitive in 2024 as it was in 2023?
In other words, there is every reason to believe that the overall market conditions in the coming 12 months might be very similar to those we just experienced in 2023. If you accept that premise there are a few key operational questions to confront.
- Are you satisfied with the net profit your company has earned in the past 12 months?
- Can your business survive and thrive if unit sales margins do not significantly improve over the next 12 -18 months, or even longer?
- Will you be able to attract and retain top tier talent at your current ability to compensate employees?
If the answer to any of these questions is no, it may be time to rethink the revenue model of your business and look to fixed operations to fund the gap created by low sales margins.
Driving more gross profit into the dealership by improving service department operations is a clear opportunity at most dealerships. But many owners and GMs are sales focused and in good markets tend to overlook the importance of the service department as a true cash generator. When sales are good the focus is on just keeping up and getting the units over the curb. In this market, however, service profitability is essential.
The critical driver in service profitability is Collect-able™ Efficiency, and if you aren’t actively and accurately flagging all time in the service department it is very likely your profitability is suffering. Is it important? Every 1% improvement in Collect-able™ Efficiency in a 12-technician shop with a $185 labor rate is approximately $50,000 of gross profit. A 10% increase in efficiency will bring in approximately $500,000 in new gross profit. (It would take about $8.3 million in unit sales at 6% margin to generate this same gross!)
Another key driver of service department profitability is labor rate. Many dealers do not clearly understand the math behind establishing their needed labor rate. When we walk through this process with our clients, we nearly always discover that their labor rate is too low. If you are relying on the local market or guesswork to set your labor rate, yours might be too low as well. Consider the magnitude of the opportunity: in the 12-technician example above, every $5.00 per hour labor rate increase equates to about $130,000 in revenue!
Service operations isn’t the only pathway to bringing new revenues into your business – there are likely opportunities in F&I and other operational efficiencies. But service is a unique and substantial opportunity with nearly no risk: the customer is already at your dealership, agreeing to do business with you, and often times waiting weeks just to get an appointment to come in. There’s no new inventory to buy and generally no new employees to hire. It’s truly a matter of following best operational practices to tap into a significant reservoir of profitability available to almost all dealers. For 2024, it is not an option to be less than excellent in any department.
Questions about your shop from Mike Braman
- Average RV industry work order is open for 34 days… but warranty work orders are open for an average of 50 days and work orders for parts not in stock for 73 days. How does your shop compare to these and what can you do to improve?
- Efficiency starts at the service counter: the better the write up, the more efficient the technician will be. Do you have a defined check in process for service, including a quality walk around and menu presentation?
- Not all jobs are created equal! Some work – troubleshooting on older units, for instance – is inherently difficult to complete profitably. Do your service writers do a good job filtering work, particularly in season?
Mike Braman is the General Manager of A World of Training, an NCM affiliate that specializes in training fixed operations employees. He can be reached at mbraman@ncmassociates.com