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.

ABS-GDP seasonally adjusted

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.

NPS

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:

  1. Total dealership revenue decreased by 2.3%, with new vehicle revenue dipping by 4.9%
  2. 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%
  3. The new vehicle selling gross has seen a considerable reduction as it declined by 22% and the used vehicle selling gross declined by 12%
  4. The other income including other incentives saw a decline of 5.8% and
  5. 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 

Gross

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.

DaysSupply

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

FIIncome

 

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

 

Deloitte Logo

 

General Information Only
This presentation contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this presentation , rendering professional advice or services.
Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this presentation.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals, all committed to becoming the standard of excellence.
About Deloitte Australia
In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms. Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 6,000 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit our web site at www.deloitte.com.au.
Liability limited by a scheme approved under Professional Standards Legislation.
Member of Deloitte Touche Tohmatsu Limited
© 2017 Deloitte Motor Industry Services Pty Ltd