What caused the Quarter 3 2016 reduction in profitability
Balram Dabhade | 15 October 2016
The Australian motor industry is one economic barometer proxy for the Australian economy. They have both enjoyed healthy growth and have seen exponential growth complimenting each other, the last quarter though was an exception to this story.
In Q3 2016 the Australian GDP (in seasonally adjusted volume measures) saw a negative growth of 0.5%, the largest quarterly decline since Q4 2008 and the first fall since the Queensland floods affected the GDP in March quarter 2011, and the motor industry saw one of the lowest quarterly profits in the last 5 years
Using the Deloitte eProfitFocus database of 1000+ dealers, we have analysed the profit reduction and share our insight in this paper.
This fall in GDP was driven by a few drivers such as slumping private investment in new dwellings, new engineering detracting and lower Infrastructure investment.
Vehicle sales and the Economy often are affected by the general consumer sentiment prevailing in the economy. This is because purchase of a motor vehicle is one of the largest discretionary spends.
The June/July period was dominated by Federal elections and uncertainty. Consumer sentiment during this time and retail spending was hit. This resulted in decreased spending on new vehicles.*
The motor industry weathered this and posted above average June sales but the declining consumer sentiment caught up with the industry in July and August 2016. The total dealership revenue declined by 3% and 4% in the months of July and August respectively from the half yearly average for the period Jan – June 2016 for Australia.
The chart below shows the NP%S for the Australian motor industry and we can see the months of July 2016 and August 2016 significantly lower than the other months causing the Qtr 3 profitability to dip in 2016.
We studied the Deloitte eProfitFocus database and here are some quick findings for the reduction in profitability for Qtr 3 2016 as compared to the period Jan – June 2016:
- Total dealership revenue decreased by 2.3%, with new vehicle revenue dipping by 4.9%
- The dealership gross eroded by 3.2%, this was a result of the new vehicle gross reducing by 14.9% and used vehicle gross reducing by 3.6%
- The new vehicle selling gross has seen a considerable reduction as it declined by 22% and the used vehicle selling gross declined by 12%
- The other income including other incentives saw a decline of 5.8% and
- The dealership fixed expenses in dollar terms have gone up by 5% in Qtr 3 2016 as compared to period Jan – June 2016
Following are the major KPIs we’ve seen change considerably in Qtr 3 2016, which has led to the impact on the dealership profitability:
1. New Vehicle Transactional Gross: The new vehicle transactional gross over a period of time has seen a steady decline and was under pressure in 2016, in Qtr 3 2016 we’ve seen the lowest new vehicle transactional gross reported
2. New Vehicle Days Supply: Vehicle inventory has been building up at the dealership levels. The days supply at a dealership level for new vehicle were at 94 days which is up 12 days on the Jan – June 2016 average.
3. Total F&I Income: The total F&I income for Qtr 3 has declined by 23% as compared to Jan – June 2016. We’ve seen over recent years F&I income contributes over 90% of an average dealers profitability
If you wish to know more about how you can gain more from our benchmarking and analytical processes we would be pleased to discuss the results of our analysis with you
* Source - Global Markets research Economic Issues CAN 8th Dec 2016