News - General News

Profits high but dangers loom

Tread carefully: Dealers need to watch business practices to retain profitability, Deloitte warns.

Dealers have been doing well while vehicle stocks have been low

General News logo24 Aug 2010


CAR dealers have been enjoying some of the most profitable trading conditions in 15 years, according to auto consultants Deloitte Motor Industry Services, but there are warning signs that the good times could be brought undone by overstocking and a return to undisciplined business practices.

Deloitte says that 12 months ago, the average level of net dealer profitability was at a record 2.3 per cent of sales and that the so-called benchmark dealers, those in the top 30 per cent of performers in the Deloitte Profit Focus database, were achieving more than four per cent.

Deloitte MIS managing director Wayne Pearson told GoAuto that in spite of a trying time in the economy, “the perfect storm of government stimulus, low interest rates, reduced stock levels and higher productivity, plus overall expense management, all combined to produce some of the best profit results on record for the industry”.

He said the latest quarter to June 30 capped one of the most profitable six month periods in the past fifteen years of recording profitability data in Profit Focus. But he warned that some of the “good habits” that made dealers strong and profitable during the global financial crisis were starting to be overlooked.

This meant that while remaining at near-record levels, net profit in the last quarter as a percentage of sales for the total market eased to 1.8 per cent, with the top 30 per cent of dealers edging down slightly to about 3.5 per cent.

 center imageMr Pearson said: “The last six months have been good for the average dealers and great for the best dealers. The key to being great in the next six months is keeping the disciplines and not forgetting the good habits.”

He said that one of the key factors likely to adversely affect dealers was a trend to increasing levels of stock.

“Looking back 12 months ago, new vehicle days supply for the industry was down to 55 days for both the luxury and non luxury markets.”

More importantly, used vehicle days supply was down to about 65 days. This was keeping used car gross profits high at $2300 a unit and giving dealers the ability to trade more aggressively in new cars.

“Roll forward 12 months and we see that new-car stock levels are now dangerously high at 67 days. That is 15 per cent above the previous low and was increasing quite rapidly in the last quarter leading up to the end of June 2010.

“Luxury dealers have been the most affected with new-vehicle stock levels rising from lows of 55 days 12 months ago, to current levels across the market of 70 days. The non luxury market is carrying less overall stock, but has still risen from a 52 day low to a bloated 65 days.

“This has rebounded into used-car stock where the levels have increased from 65 days to 85 days, with both the new and used markets carrying similar inventory levels. This level of used car stock will have an impact on Dealers’ ability to trade in new cars.”

Mr Pearson said that the growth in stock levels, coupled with recent interest rate rises, had seen floor plan costs skyrocket from 12 per cent of vehicle gross 12 months ago to 17 per cent of vehicle gross in the last quarter.

“A $100 per unit fall in new vehicle gross and a $300 reduction in used car gross, coupled with the pressure of increased stocking, has lead to a substantial decline in new and used vehicle selling gross over the last twelve months” he said.

“New vehicle selling gross has fallen from 27 per cent to 20 per cent in the last quarter and used vehicle selling gross has gone the same way, from 22 per cent to 16 per cent across the market. The fall-off in luxury dealerships has been even greater.

“The usual suspects of overstocking, pre-registering cars and supply push sales processes are again starting to show in the average dealer as they follow the market performance downwards.

“These are the risks dealers face and it’s their ability to keep the ‘good habits’ during these times that will determine the winners and losers for the next six month period.”

Mr Pearson contrasted average dealer performance with the Deloitte benchmark dealers.

“During this same period the top 30 per cent of dealers were able to maintain the selling gross levels in both new and used cars at 45 per cent and 52 per cent respectively.

“Stock levels of the top 30 per cent of dealers for new and used vehicles remain at 60 and 50 days respectively and, although floor plan costs have increased due to rate rises, these are still four to five percentage points of gross lower than the average dealer.

“So the disciplines around managing stock at benchmark levels, irrespective of market conditions and incentives on offer, does deliver an outstanding bottom line to the best practice dealers,” he said.

Share with your friends

General News articles

Motor industry news

GoAutoNews is Australia’s number one automotive industry journal covering the latest news, future and new model releases, market trends, industry personnel movements, and international events.