Shortly after the Second World War, as motor companies struggled to gain traction in the emerging market, some bedrock key performance indicators (KPI’s) were established and one of these was the principal of ‘overhead absorption’ (OHA). In my view, this still remains the most useful of all key performance indicators as it establishes the balance and good health of a company.
The principal of OHA in a franchise dealership is that the profits from the after sales departments, after deducting the direct expenses of operation, should be sufficient to absorb the indirect expenses. These expenses are incurred as a consequence of being in business i.e. rent rates, heat, light and power, and the total offset of these costs was considered to give 100% absorption.
In the 1950s, the principal of OHA was modified to include the costs of operating the sales department into the indirect expenses, resulting in a cost neutral position if a 100% absorption rate could be achieved.
The revision of the principle of OHA greatly reduced a dealership's ability to achieve total absorption and so the new KPI was established called ‘vehicle breakeven volume’ (VBE). This new measurement established the number of vehicles that would be required to be sold to achieve total absorption; this was achieved by simply dividing the unabsorbed costs by the average net profit per vehicle.
Any dealership should still strive to achieve the highest possible OHA percentage and the lowest possible vehicle breakeven volume. The reason behind these two valuable KPI's is that when sales are high, after sales profits are generally lower however, in times like ours, when sales are low it would be expected that after sales profits would increase with the extended life and ownership of vehicles.
The point made by the latest statistics published in the dealer-centric journal this month, discloses that at an average dealership’s OHA has now dropped below 60% and that overall profitability is at 0.8% of turnover. In real terms, this is claimed to be an average £84,000 per dealer. Is this due to exalted costs of operating the sales department? After all, the cost of Douwe-Egbert’s coffee doesn’t come cheap, or is it due to a reduction in aftersales performance? Personally, I believe it to be the latter. With OHA and sales ‘profit-per-unit’ so low, it’s likely that VBE will exceed a dealership’s sales potential and lead to operating losses.
Now some of you may consider these profits to be quite acceptable but there are some other points for consideration. The first has to be how much of this profitability is generated from business and secondly, how much is generated from dealer standards bonuses? It is quite possible, indeed probable, that the entire sector is operating on profits generated at the behest of the vehicle manufacturers.
Please do not knock the franchise sector; I believe they are doing a damn fine job to deliver even these lowly levels of performance, but there is a danger in reading averages – an average actually measures the bottom of the top and the top of the bottom and when you consider this, it suggests that over 50% of dealerships will be producing less than this average and the article goes on to indirectly corroborate this by suggesting that the bigger groups are doing considerably better.
All in all this, together with February's new car sales performance, paints a fairly ugly situation. The National Franchised Dealer Association (NFDA) dealer attitudes survey shows, as a headline, a fall in confidence! Now there’s a surprise!
I am on record as suggesting that the biggest shakeup of the industry will happen at the time of the demise of the block exemption regulation 1400/2002 in September next year. At this time, the current route to market for new vehicles will change with the manufacturers being allowed to deal direct with the end-user.
During December last year we saw Renault take a pre-emptive strike - culling the large majority of their private equity dealers to exercise greater control of their products to market. However, this was presented as an action, nominally as a result of falling sales and the net result will be the same - vehicle manufacturer control.
So how does this affect the independent sector? We all fish in the same pond and there can be no storm that affects only half of the participants. With OHA levels as low as these you can safely believe that there is not an Aftersales Manager/Director in the country who is not currently feeling the heat. When sales and sales profitability are low, aftersales must deliver. You will all be seeing additional activity from the franchise dealers trying to take back service and repair of their chosen marque.
As a world watcher who spends too many hours on the road, I find myself searching for answers to questions that I have seen arise within our industry. One such question recently has been why the franchise dealers now want to take on the independent garages based on price alone? What has happened to their traditional argument about quality, trained technicians and the latest in technical innovations and equipment?
If your competitor perceives that it is all about price, you have already won the battle! Now is the time to build your argument to customers that you are able to offer unquestionable quality from competent technicians at a competitive price and that you have not historically been milking their pockets.
As the independent service and repair sector we must not lose sight of the fact that the entry point of all vehicles into the marketplace is through a dealership structure and this structure may change the future. We have relied on the disaffection of customers from the franchise sector, most notably at the time of change of ownership of vehicles from new to second user – in the future, this may be harder to achieve. The battle-cry has gone out and the skirmish for the customer's business will become stronger and stronger, if you wait too long before entering into the fray you may find that your opportunity is lost.
There has never been a better time to engage with your customers – to communicate and show an interest in your customer’s well-being, to let them know about the value of what you can offer; this does not mean that you send them your latest attempt at being cheap!