What is the Right Size for Growth?

What is the Right Size for Growth?

Unfortunately it is not a surprise that there is currently great pressure on dealership profitability. The economy is soft and consumer spending is down in many segments of the economy, including automotive retail. Many dealerships are down over last year in terms of gross generated, and expenses have not decreased sufficiently to cushion this impact.

I remember clearly a few years ago the chief executives of the publicly-traded auto dealer groups making a point of stressing to the Wall Street investment bankers that during economic downturns dealerships do far better than many other industries. The reason for this phenomenon is the dealership’s relatively low amount of fixed costs, as well as a high degree of variable costs that can be quickly adjusted should a downturn occur. The variable costs alluded to here, personnel costs, are the dealership’s largest expense component.

Since more than 60 percent of total dealership expenses are personnel related (direct and indirect), the challenge lies in the managing of personnel costs and personnel count when there is a downturn. As grosses soften, pay plans consisting of high variable content automatically recalibrate downward and this, in turn, will lessen the impact on the bottom line, but that may not be enough.

So at what do you look? Personnel costs in the form of changing pay plans or personnel count? The most effective and direct manner of dealing with this high dealership cost is through personnel count attrition rather than the altering of pay plans. Sharing the rewards with fewer people leads to everyone getting a larger slice of a smaller pie. It means working harder and smarter, and with fewer people.

The best way to objectively scrutinize your dealership personnel cost structure may not be to look at the expense side of personnel, but instead to look at the personnel productivity side to get a feel for head count staffing. Bringing staffing levels into line with the franchise benchmark will immediately lead to savings in both the direct and indirect costs which, in many instances, run well above 30 percent of the direct wages paid.

For all franchises represented in our NCM 20 groups, we prepare a detailed study on personnel productivity. An important metric we suggest dealers review is the percentage of total productive employees to total dealership count. This figure should always be above 50 percent.

Another telling metric is gross per employee for the total dealership (at NCM we also break it down even further into gross per employee for each department). Based on this analysis we can easily conclude whether the dealership has a gross problem, a staffing number count problem, or perhaps a combination of both.

For example: Assuming a dealership has 100 employees, fairly comparable grosses to the franchise it represents and its gross per employee runs $7,800 per month, while its franchise benchmark dealers are at $9,500, the following can be deduced:

Average dealership gross is $780,000 per month (100 x $7,800).
Using the franchise gross per employee benchmark of $9,500 per employee, the benchmark dealer would require a staffing level of 82 employees ($780,000 ÷ $9,500 per employee).
The dealership in this example is overstaffed by 18 people (100 – 82).

There is a finite number of ways the dealership in this example can move the gross per employee from $7,800 to $9,500 and that is by either increasing the gross generated by over 20 percent (from $7,800 to $9,500) or by reducing its headcount, or a combination of both. In tight economic conditions, improving dealership gross by over 20 percent may not be a realistic option. Bringing personnel count into line, in the above example, will save the dealership a significant amount of direct and indirect compensation resulting in improved bottom line performance. Obviously, it is preferential to improve grosses and trim head count concurrently, if at all possible.

Using the above two techniques (productive employee percent and gross per employee) to gauge if the dealership’s personnel count is close to where it should be is a good start on the journey of mitigating net profit erosion in the face of diminishing opportunities. Our current economic challenge requires tough decisions in order to get your dealership to the right size so it can continue to grow even in times like this.

Should you have questions about staffing levels, productive employee classifications, etc., please e-mail me using the contact form on this website.

 

This article by Jeff Sacks originally appeared in Dealer Magazine.

Jeff Sacks, president of Jeff Sacks & Associates, is an auto industry speaker, consultant and trainer and is actively involved with dealership and OEM consulting and training.
His website is www.jeffsacksauto.com and his phone number is 800-867-2160.