March 2013 Quarter Industry Overview

Deloitte Motor Industry Services | 6 June 2013

Profitability for the average Australian dealer remained steady throughout the March quarter of 2013 at 2.0% return of sales (ROS).

Whilst this is below the 2012 calendar year average, it remains above the long-term average over the last 16 years of 1.4%.

Economic Outlook

Australia

Economic conditions for Australia remain stable. Latest data indicates that the economy is growing at 2.6%, not far below the long-term trend of 3.0%. A similar rate of growth is forecast for 2013/14. However, given the global economic context, this steady performance is better than it sounds.

As at the end of March 2013, total new cars sales were 5.0% higher on a year-to-date basis compared to March 2012. Should car sales continue at this pace over the remaining 9 months the industry will experience another record-breaking year with over 1.16 million sales. This is more than 8% higher than the FCAI forecast of 1,075,000 released in January 2013.

More recently, the Australian dollar has slipped below parity with the US dollar with expectations that it appears to be gradually trending downwards towards its long-term fair value of USD 0.80 – 0.90. Such a depreciation of the Australian currency would provide some relief for local manufacturers who have had to contend with parity with the US dollar for almost two years now. Further, at 2.75%, the interest rate cash target is the lowest it has been since the RBA began setting monetary policy in 1990. Such low interest rate levels may encourage brands to continue to utilise finance rates for promotional purposes.

Dealer Profitability

Overall

Profitability for the average Australian dealer remained flat throughout the March quarter of 2013.

At 2.0% ROS for the quarter, this was fractionally higher than the December 2012 quarter. High performing dealers across all market segments continue to achieve approximately 4%.

march net profit sales chart

Dealers received bonus payments in January 2013 to incentivise them to clear 2012 plated stock. This lifted profitability for the average dealer to 2.0% for the month for the first time since 2007. Profitability then slightly contracted in February before only slightly rebounding in March. The spike in profitability that has historically occurred in March never eventuated and at only 2.0% ROS, profitability for this month was the lowest since 2008.

On a departmental selling gross level, improvements were noted across the new vehicle, parts and service departments for the average dealer (as a percentage of departmental gross profit) whereas the used vehicle department remained steady.

march selling gross chart

New Vehicle Department

Improvements in the overall new vehicle department selling gross were led by the luxury market segment. An evolving sales mix towards higher volumes and a changing pricing strategy has allowed these dealers to increasingly achieve economy of scale cost advantages, demonstrated by comparatively smaller variable and semi-fixed expenses on a per retail unit basis. The top 30% of new vehicle operators in the luxury market segment have achieved this status by achieving gross profit margins (including holdback and aftermarket) more than $1,000 per retail unit higher than the average dealer of some luxury brands.

Used Vehicle Department

Higher new car volumes have resulted in a larger volume of trade-ins for the average dealer across all market segments. This has resulted in a greater volume of used vehicle traffic for dealers.

Despite remaining a tricky game, the average used vehicle department operator appears to be rising to this opportunity. They appear to be gradually improving their trade-in conversion process and are increasingly understanding dynamic pricing strategies to ensure that a higher percentage of used vehicle traffic is retailed as opposed to wholesaled. As a result, gross profit margins on retail sales have slightly picked up to the extent that there has been minimal difference between the average dealer and the most profitable 30% of dealers. This has been the underlying reason behind the steady departmental selling gross (as a percentage of departmental gross profit). The most profitable 30% of used vehicle departments continue to operate leaner and more efficient operations compared to the average used vehicle operator.

Aftersales

Aftersales sales throughput has been trending downwards for the average dealer since mid-2012. This downwards trend has continued into Q1 2013, however, it has been somewhat masked by a relatively stable departmental selling gross (as a percentage of departmental gross profit) for both the parts and service departments. This suggests that dealers have once again proven their adaptability by reducing departmental costs by a greater magnitude than the decrease in sales. Lower costs appear to have been caused by productivity improvements as opposed to decreasing headcounts. These efficiencies are particularly important in the presence of increased competition from standalone service centres and the growth of grey imports.

Customer retention management (CRM) strategies are vital in growing aftersales sales throughput.

F&I Department

As the contribution of F&I to the contemporary dealership continues to grow in absolute terms, the selling techniques of business managers continue to evolve also. Finance penetration rates have decreased for the average volume market segment dealer in Q1 2013 as zero percent campaigns are becoming less commonly used by some brands in this segment. These rates have remained stable for the average prestige and luxury market segment dealer.

March finance and insurance chart

The growth in F&I income has not kept pace with new vehicle sales volume for the average dealer in the volume and prestige market segments in Q1 2013, with F&I income per new vehicle retailed declining for the first time in more than 12 months for the average dealer in these segments. Such a decline was also experienced by the top 30% of dealers in these market segments. Despite this slight downturn, F&I income remains approximately $1,000 per new vehicle retailed for these volume and prestige dealers with the average luxury market segment dealer now less than $50 per retail unit behind.

March Finance and insurance per vehicle chart

Looking Ahead

Both dealer profitability and vehicle sales look set to once again spike in June. In June 2012, the average dealer achieved 3.7% ROS, with the most profitable 30% of dealers earning greater than 5.0% ROS. This level of profitability for the average dealer was more than 1.5 percentage points higher than the 2012 calendar year average. June 2013 is already shaping up to be another very strong month with a number of brands having already announced end of financial year sales campaigns.

This raises a number of questions for dealer and manufacturers alike:

  • What are you doing to prepare for this spike and subsequent trough? What should you be doing? Have you got enough staff and stock to satisfy this increased demand? 
  • How can you retain these new customers for as long as possible? This will contribute towards higher back-end sales throughput and maximise their return to the dealership over a longer time period.

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