Automotive Industry Slump Calls for New Operating Model

Dorian Lapthorne, Director of Deloitte Motor Industry Insights & Analytics, cautions survival in this disrupted environment requires dealers to find new ways to operate.

“The reality for dealers is that transactional sales of new vehicles in the auto market stepped down by about 12% from July last year and have stubbornly stayed there. Overall profitability for the average dealer has dropped 40% from 2016 levels.

“With the profitability of a dealer’s core operations weakening, the average Australian dealer has developed a significant reliance on F&I and bonus income. 

“The concern is that dealerships have had to become so focused on the short-term actions that revolve around these sources of income that they have less time for planning ahead. Dealers & Original Equipment Manufacturers (OEMs) must take action to address this situation because it won’t just sort itself out,” Mr Lapthorne said.

The Deloitte Mid-Year Update indicates that bonus payments fell by 35% between the March 2018 and June 2019 quarter. Even with this reduction, they still amounted to 141% of an average dealer’s net profit. Interestingly, Australia’s top 30% most profitable dealers have much stronger core operations, with less reliance on bonuses.  For these dealers, bonus income equated to 60% of their net profit in the June 2019 quarter. 

“Australia’s most profitable dealers have balance in their business. They could miss their bonuses and F&I income and still be profitable. This frees them up to think longer-term and take active steps to put strength back in their core business of selling cars, parts and service,” said Mr Lapthorne.

Data-driven improvement

Data-driven technology will help dealers take a longer-term approach by improving operational efficiencies, engaging customers and enabling customised sales interactions. By applying a customer lens to all improvements, dealers may find value in shifting from a transactional to a customer lifetime approach.  

“Satisfy customers not just with one transaction but with a lifetime of transactions,” said Mr Lapthorne. 

Equifax Senior Solutions Consultant, Paul Fishburn, adds that the opportunity now exists under Comprehensive Credit Reporting for dealers to benefit from a more complete view of their customers.

“Comprehensive Credit Reporting makes it possible for dealers to better understand a customer’s financial position. With an understanding of the customer’s CCR data and a knowledge of credit provider policy, dealers will be well equipped to direct customers to the most appropriate credit provider based on their financial situation.  This should improve the chances of a customer being approved for credit, at the right price and in a timely manner and a better customer experience could lead to increased sales and associated revenue for the dealer.

Similarly, the introduction of Open Data will widen the potential for the integration of data-driven decisions into dealerships. The use of external data to create a more comprehensive view of the customer will enable dealers to tailor product and service propositions to different customer segments.”

Challenging times for dealers

Embracing the power of data will be a significant differential for dealers facing a highly competitive car market. According to Deloitte research*, as many as 74 car brands were operating in Australia in 2018, yet just five brands were responsible for half of all vehicles sold. That left 69 brands fighting to sell the remaining cars, which equates to an average of 8,000 vehicles per brand. If a brand doesn’t have a top ten ranking, the prospect is even worse, with only 4,500 cars sold per brand.  

“Once you have a contraction in the market, things get very competitive, as brands and dealers try to keep their share,” said Mr Lapthorne.

The average dealership business model is back-end focussed, cost-heavy and facing continually rising costs. In the June 2019 quarter, dealers made four times as much profit from parts and service as they did from selling new and used cars. These figures were boosted by warranty work from replacing Takata airbags, which is not a lasting situation. The collapse in front-end profit means that a higher proportion of gross profit (51%) goes towards covering overheads.*

“Overall, the profitability of the average Australian dealer’s core operations – new, used, parts and service – is weakening,” Mr Lapthorne said.

State of Play*: Motor industry in flux as profitability weakens

New-car sales

As at June 2019 quarter, reported new-car sales were down 8.4% for the year to date. When demonstrators, company cars and press cars are not in the equation, the actual transactional sales in a dealership were even more depressed – down by 12%

Return on sales

The average dealer across Australia made a 0.9% return on sales (NP%S) in 2018. When volumes crashed in the second half of 2018, NP%S was just 0.4%. In the March 2019 quarter NP%S improved to 1.1%, which is still well below the long-term 1.5-2% industry average.

The auto industry was already experiencing profitability pressures before new car volumes started to collapse late last year. Net profit has been in decline since 2015 due to the competitive pressure on new car margins. On top of this, bonus/incentive schemes are driving significant variability in returns from month to month.

Spread of profitability

In the first half of 2019, 32% of dealerships were unprofitable (less than 0% return on sales). The top dealers were also impacted, with fewer dealers experiencing greater than 3.5% return on sales.

Transactional gross profit

The average dealer across Australia in the June 2019 quarter lost $22 on every car they sold. Transactional gross profit is a leading indicator of new vehicle profit in a dealership. Its calculation doesn’t include revenue from bonuses and add-on products. 

F&I income

Finance and Insurance (F&I) income has fallen by 21% since the first quarter of 2018. Lower vehicle volumes accounted for 87% of this drop. Even though F&I fell, the average dealer still made most of their money this way. In the June 2019 quarter, F&I accounted for 106% of a dealer’s net profit. 

New-car selling gross

From the lows of late 2018, there has been some recovery in gross profit per unit, but this was predominately due to higher Original Equipment Manufacturer (OEM) incentives. Dealers themselves removed cost from their operations during this time. Over 40% of the savings in new car departments come from salaries, with the salesperson headcount reduced by 7%.

Falling new car gross profits and increasing expenses – exacerbated by the lower volumes – mean that new car selling gross has fallen 43% since the start of 2016.

Used-car operations

Used car operations have held steady over the last 12 months. The concern is that the industry has not been able to recover some of the shortfall coming from the new car department through a pick-up in used-car volumes as we have seen in other times of of declining new car sales.

For further information please email Mark Thomas.

*Source: Deloitte 2019 Automotive Industry Overview Mid-Year Update presented at the Equifax Automotive Finance Forum.