Baker Tilly automotive dealership benchmark survey – 3rd quarter 2014

On a quarterly basis, Baker Tilly conducts a benchmarking study of auto dealerships. Respondents to the most recent study were primarily dealerships located in the Upper Midwest. This whitepaper summarizes key data as of and for the three quarters ended September 30, 2014, with comparisons to the same period in 2013 and to the quarter ended June 30, 2014. Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

The bottom line

Overall, dealership profitability is down slightly compared to the same period one year ago. Net income as a percentage of sales was 1.88% through September 2014 compared to 1.98% for the same period in 2013. This translates into the average dealership’s profit being $1,000 less for every $1 million in sales compared to last year.  As shown in the graph below, year-to-date profitability for the three quarters ended September 2014 remained comparable with the two quarters ended June 2014.

YTD net income as a percentage of sales

New vehicle sales

Across the industry, new vehicle sales volumes are higher than last year with increases in all quarters through September 2014. In a survey by Stephens, year to date new unit sales through September 2014 were 12.4 million versus 11.7 million last year, an increase of 5.7%. The increase in new unit sales is being driven by a .6 million unit (9.8%) increase in truck sales.

Overall grosses per new vehicle retailed (PNVR) have improved during 2014 compared to 2013 and are $39 per unit higher through the first three quarters of the year. A year over year comparison of recent grosses PNVR follows:

YTD quarter ending20142013Change
March 31$1,031$1,0191.1%
June 30$1,049$1,0054.4%
September 30$1,042$1,0033.9%

Through the first three quarters of 2014, new vehicle sales outnumbered used vehicle sales. The ratio of new to used vehicles sold was 1.16 for both the three quarters ended September 30, 2014 and 2013, which is comparable to 1.14 for the two quarters ending June 30, 2014.

The average dealership reduced new vehicle inventories in terms of days’ supply during the third quarter of 2014 to 99.9 days, down from 111.6 days as of June 30, 2014. The days’ supply in units at the end of each quarter is as follows:

Days' supply of new vehicles

Advertising expense PNVR was $216 through the three quarters of 2014, compared to $202 for the first two quarters, which is a 6.7% increase. In comparison, advertising expense PNVR was $183 through the first three quarters of 2013.

Floor plan interest earned (floor plan interest, net of floor plan assistance) PNVR has been trailing 2013 throughout the year due to higher inventory levels. Floor plan interest earned PNVR increased $25 from $43 for the first half of 2014 to $68 for the three quarters ended September 30, 2014. This increase in the third quarter is similar to 2013, when floor plan interest earned PNVR increased $27 from $45 to $72.

Used vehicle sales

Grosses per used vehicle retailed (PUVR) were considerably strong in the first half of 2014 compared to the prior year due to strong demand. The third quarter of 2014 had markedly different results due to:

  • Low payment lease incentives and 0% financing offers on new vehicles shifted customer demand from used vehicles to new vehicles.
  • The increase in new vehicle sales resulted in more trade-ins, which in turn increased the number of vehicles eventually reaching the auction. 
  • A large number of off-rental vehicles became available, inflating the overall market supply of used vehicles.  

These three factors combined to negatively impact used vehicle prices and grosses.  As a result, the average gross through the first three quarters of 2014 dropped to $1,422 PUVR, compared to $1,544 PUVR through the first half of 2014.  Comparatively, the quarterly year-to-date gross PUVR ranged from $1,475 to $1,485 during 2013, and was $1,482 for the year.  Following is the trend of recent quarters:

YTD average gross PUVR

The average dealership showed a slight decrease in used vehicle inventory on hand at the end of the third quarter; presumably many of these vehicles ended up at the auction.  The days’ supply in units as of September 30, 2014 was 93.7 days compared to 96.2 as of June 30, 2014. In comparison, the days’ supply in units as of September 30, 2013 was 91.4.

Finance and insurance (F&I)

The F&I department’s steady improvement during 2013 continued through the first three quarters of 2014. Net F&I income before compensation per retail unit sold was $841 for new vehicles and $664 for used vehicles through September 30, 2014, compared with $777 for new and $594 for used during 2013. The improvement is comparable when examining the first three quarters of each year, as net F&I income before compensation per retail unit sold was $776 for new and $586 for used through September 30, 2013.  Following shows the trend of the most recent quarters:

F&I Income before compensation per retail unit sold

Finance penetration rates rebounded from second quarter levels, increasing 5.3% and 1.7% for new and used vehicles, respectively. A comparison of average new and used penetration rates are as follows:

 NewUsed
March 31, 201468.1%58.0%
June 30, 201466.1%56.8%
September 30, 201469.6%57.7%
September 30, 201367.8%56.5%

Extended service contract (ESC) penetration rates continue to improve each quarter, with an increase of 4.2% for new vehicles and 1.8% for used vehicles from the second quarter. The new and used ESC penetration rates have climbed to 42.6% and 40.5%, respectively, through the third quarter 2014, compared to 39.0% and 36.7% for the year ending December 31, 2013.

Service

Service department productivity for the first three quarters of 2014, measured as total gross per technician per month, improved 3.8% over the same period one year-ago ($9,712 in 2014 compared to $9,176 in 2013), however this was primarily due to a 3.2% increase in the average hourly customer pay shop rate from $100 to $103. These gains were mitigated by an increase in unapplied time as a percentage of gross profit from 2.6% through September 30, 2013 to 3.2% through September 30, 2014.

Customer pay labor as a percentage of total labor sales has been trending downward from 52.2% for 2013 to 49.5% through the first three quarters of 2014. The decrease in customer pay labor has been offset by a steady increase in service warranty labor sales (15.7% for 2013 compared to 19.1% through September 30, 2014). 

Customer labor as a percent of service sales

Although there has been a change in the mix of service work, it has not had a significant negative impact on the service department. Rather, an increase in unapplied time as a percentage of gross profit from 2.6% through September 30, 2013 to 3.2% through September 30, 2014 was the driving force behind a decrease in department gross profit as percentage of sales from 67.0% for the first three quarters of 2013 to 66.1% for the first three quarters of 2014.

Parts

An increase in service productivity normally benefits the parts department. However, because the year-over-year service productivity gains were primarily the result of a shop rate increase, the average monthly parts gross per counterperson remained relatively flat compared to the first three quarters of 2013.  A year-to-date quarterly comparison with 2013 is as follows:

Average monthly parts gross per counterperson YTD
 20142013Change
March$25,929$24,5965.4%
June$25,992$25,5561.7%
September$26,359$26,399-0.2%

Total parts gross profit percentage improved from 31.7% in September 2013 to 32.1% in September 2014. This increase was mainly driven by a 12% increase year over year in parts body shop customer gross per RO ($180 through September 30, 2013 compared to $202 through September 30, 2014).

Parts inventory levels decreased to a 57 days’ supply as of September 30, 2014 from 62 days as of June 30, 2014, but are comparable with levels one year ago (58 days as of September 30, 2013).

Body shop

Body shop productivity, measured as total body shop gross per technician per month, increased 3.6% from $9,132 for the first three quarters of 2013 to $9,460 for the first three quarters of 2014.  Similar to the service department, this increase was driven by an increase in customer pay shop rates from $48 in September 2013 to $54 in September 2014.

Body shop gross profit percentages have been steadily declining each of the first three quarters.  Although a similar trend existed last year, the declines are steeper in 2014.  An early onset of winter weather may be needed to buoy the gross profit percentage for the year to a level comparable to 2013.  A comparison of body shop gross profit percentages follows:

YTD body shop gross profit percentage

Conclusion

Although lease incentives and low-interest financing offers spurred new vehicle sales in the third quarter of 2014, this negatively impacted dealership profitability as new vehicles average lower grosses than used vehicles.  The resulting increase in trade-ins, along with a large volume of off-rental vehicles, inflated the overall market supply, which negatively impacted used vehicle prices and dealership profits.

The abundant availability of used vehicles and resulting downward pressure on their prices may create an opportunity for dealers who can afford to hold their used inventory until demand catches up with supply.  However, the current depressed market values may result in larger year-end write-downs.  Many dealerships may find 2014 will not be as profitable as 2013.

If you would like a more detailed analysis of how your dealership compares to our survey, please contact your Baker Tilly representative or email us at autodealers@bakertilly.com.