Leading Indicators of Profitability II
Balram Dabhade | 17 May 2017
New Vehicle Gross
In this series, the second leading indicator we’d like to investigate is the contribution of the transactional new vehicle gross* to the business.
Over a period of time, new vehicle gross has come under pressure for Australian vehicle dealerships from increased competition, new model proliferation and changing incentive structures for achieving sales targets.
As we explore this KPI further and link it to others, we identified that the biggest contributor to gross reduction is excess and aged inventory. In the last article, we outlined the impact of new vehicle stock holding on dealer profitability (Link)
We studied over 1000 vehicle dealerships from our proprietary eProfitFocus database, selling different brands, from different segments across Australia over three years and observed that you could gauge the relative health of the business by measuring how much of the transactional new vehicle gross a dealership retained.
We studied how dealerships manage their new vehicle gross and how they drive the new vehicle department. From the data we evaluated, we noticed that new vehicle gross has a positive correlation with net profit for any given dealership.
As we did in our earlier study we segmented the industry into:
- Top30% dealers by NP%S,
- Average dealers and
- Loss making dealers
We noticed that the profitable dealers managed a well-balanced business and did not sacrifice the new vehicle gross. That means the profitable dealers focus on the core offering of new vehicle sales to get maximum gross profit from their core business while continuing to drive profit from bonus/incentive activity as well.
The net profit for the Australian vehicle dealerships studied, showed a positive correlation to the new vehicle gross and most of the dealers studied under this exercise showed an increase in net profit with an increase in the transactional new vehicle gross.
Conversely, the dealers whose net profit has been slipping from 2013–2015, showed a steady erosion of the new vehicle gross. Around 67% loss making dealers showed a decline in the new vehicle gross from 2013-2015.
Salient features to remember with respect to new vehicle gross considering our data:
- The top 30% dealers exhibit positive new vehicle gross and have good profitability
- Decline in new vehicle gross across a period may lead to negative / reduced profitability
- A leading contributor to reduction in new vehicle transactional gross profit is excess and aged inventory
As this leading Indicator series continues, we plan to continue to dive deeper into the data, to understand the factors that affect the profitability of vehicle dealerships across Australia further.
Stay tuned for more Leading Indicators in our next publications.
If you wish to know more about our benchmarking and analytical processes and how you can gain from these, we would be pleased to discuss the results of our analysis with you.
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