Fixed Ops in 2018: An Economist’s Perspective
Employment and payroll at U.S. new car dealerships continued to rise through the first six months of 2017, according to a new midyear report released by the National Automobile Dealers Association (NADA).
New car dealerships directly employed 1,134,200 workers through the second quarter of 2017, up from a record 1,131,900 in 2016, according to NADA Data 2017: Midyear Report, which provides a biannual financial profile of new-car dealerships, as well as data on employment, payroll and more.
“We expect to see employment at new-car dealerships reach an all-time high at the end of 2017,” says Patrick Manzi, NADA senior economist. “In addition to the direct employment provided by dealerships, more than another million other jobs in local communities are dependent on dealerships.”
Manzi recently sat down with Fixed Ops Business to discuss the ways in which fixed ops has changed over the years and how dealerships need to take advantage of those operations to remain profitable in the future.
As it relates to fixed ops, what stands out from NADA’s Midyear Report?
As we are seeing declining margins per unit on the new vehicle and used vehicle side, that’s been a trend going back several years and we show it in NADA data in the new vehicle component as new vehicle gross margins as a percent of selling prices. Dealers are bringing in less money from the front side of the business. It makes the focus on running an efficient and profitable fixed ops division even more important. Dealers who are able to successfully retain customers and keep them coming back to the service department will be the ones who will do the best and be the most profitable. We expect that that trend will continue. You can also see in reports that dealerships’ total service and parts sales have been in an upward trend since the recession. That is just reflecting that they are starting to focus in on this and basically, we expect that trend to continue. More and more dealership profitability will be increased by fixed ops.
What has contributed to those shrinking margins on the sales side?
Competition. Basically, now a consumer can go in with all the entire Internet at their disposal. They can look up invoice prices, quickly reference prices of competing dealerships in the region, they can use tools like TrueCar to see what people are actually paying. They’re a lot more knowledgeable when walking into the negotiation process. Dealers want to sell that car, so they’re willing to dig a little deeper into their margin.
With dealerships plateauing with variable sales, has there been an increase in bundling sales and service? How is that shaping how dealerships approach fixed ops?
Yes, the service contract penetration rate is creeping up. Pretty soon it will be at 50 percent of all new vehicles. That trend has been moving forward. Consumers like the ability to roll their service into their monthly payment. You don’t have to worry about a big $1,000 expense down the road if you have that service contract. The thinking is the same as extended warranties and that would get into the $2,000 expense. That peace of mind that all you have to do when your car needs service is run in and drop it off and come back and pick it up, consumers really do like that. That’s another thing dealerships are focusing more on.
We’re going to see more penetration of service contracts and aftermarket warranties. Peace of mind as cars become more technically complex is incredibly important to consumers. You need the expertise of a dealership employee. That’s the big trend we’re seeing there. And my feeling is yes, it’s a general trend that’s reflected across the whole spectrum, regardless of make. In the future, as margins decline on new and used vehicles, running a successful fixed ops department will be key.
How have dealer perceptions of fixed ops changed over the years, particularly as it has become more important to dealership profitability?
In the past, if you were really good at selling cars, you could run a successful business. Now you must be really good at selling cars and you’ve got to run a really tight ship in the service and parts departments. You need to keep the customers coming back in the service department and you also need to manage your inventory in the parts department very efficiently by keeping the right supply of the right parts at the right time, not keeping old inventory for longer than you need to sitting on your shelves. Really, the focus should be on fixed ops for dealerships going forward. That will be a significant profit center going forward and less of the new and used sales. Not to say that they aren’t important, but if you don’t focus on fixed ops, you’re going to have trouble.
One trend from the report was an increase of on-site body shops at dealerships. Is that something you think will continue?
I’m not sure if that’s a trend you can apply nationally. A dealer is able to decide if they have enough business to warrant opening a body shop and I think that’s how most of them make the decisions. If you don’t see the customers coming in and needing that service, it might be better to contract that service out to another body shop in the region. I think that’s trended up slightly, but I don’t think it will be a nationwide trend unless they decide they can do it profitably. It’s a dealership-by-dealership thing. It depends on where you are in the country. Let’s say you’re in a more rural area with fewer body shops. Then maybe it would make sense to own your own. If you’re in a more urban area where there are low-cost options for you to contract out your services and you don’t have to hire some people, then it makes less sense to do so.
From your experience, what are the most successful dealerships doing today?
So, dealerships who run successful service and parts departments are good at maintaining relationships between the dealership and the consumer. That can get into retention and turnover. If you can keep good employees in your dealership who can create good relationships with customers over the life of their car, or the life of the customer. As long as you can maintain those relationships and make the customer feel like they’re getting their money’s worth by coming to your dealerships, those are the ones that are successful.
Some dealerships offer perks for customers. I think I read recently that if you enrolled and you get your car serviced exclusively through the dealership, they might help you out with tires. Also, the increasing service contract take rate. It really is that ability to roll all of your car expenses into that one monthly payment that’s very attractive to people. You just focus on that one budget and if you can fit that into your budget, it’s that peace of mind with not having to pay for service.
Keeping turnover low and keeping those familiar faces in the service bay when customers walk in is also very important.
What are keys to keeping turnover low?
So, providing them with proper training and adequate training and compensating your employees well. That’s the big question in your industry: How do you keep the millennial generation happy and working for you for a long time? That one is still unanswered. It’s still kind of a high-turnover industry. The most successful dealers are the ones that manage that turnover well. Adequate training, listening to the concerns of the employees and compensating them adequately.
And turnover does affect profitability. Some of the most profitable dealerships are the ones that train their employees well and train them for opportunities for advancement.