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 four quarters ended December 31, 2017 (Q4 2017), with comparisons to the same period in 2016 (Q4 2016) and to the three quarters ended September 30, 2017 (Q3 2017). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.
The fourth quarter of 2017, and December in particular, had lower new vehicle sales than 2016. New unit sales were down 1.9 percent for the quarter, while December sales were down 5.1 percent compared to 2016. For the year, the industry sold 17.1 million new vehicles, which was 1.9 percent less than 2016 sales of 17.5 million units. (source: Stephens Auto Sales & SAAR survey, December 2017). The fourth quarter slowdown was partially attributable to timing as September and October sales were buoyed by demand for replacement vehicles in hurricane stricken areas. Manufacturers continued to offer high incentives in order to spur sales, with incentive spending reaching levels in excess of 11 percent of MSRP.
We previously noted the new vehicle sales cycle was anticipated to enter a downturn starting this year and analysts are forecasting 2018 new vehicle sales volumes will be comparable to 2017. In addition, substantial numbers of off-lease vehicles are expected to enter the market in the coming years, which will put downward pressure on the new vehicle market.
Gas prices continued to remain low throughout the year, attracting buyers to trucks and SUVs over cars. The annual average price of gas was $2.42 per gallon during 2017, which compared favorably with $2.40 per gallon during 2016.
Year-to-date net income as a percentage of sales for the average dealership was 1.14%, which is a slight decrease from 1.61% through last quarter and below the 1.48% for 2016. The following shows the trend in bottom line performance over the past ten quarters.
The decline in net income as a percentage of sales compared to 2016 can be attributed to an increase in a dealership’s three largest expenses: personnel, advertising and floor plan interest.
Trucks and SUVs represented 69.0 percent of YTD new vehicle sales, up from 64.3 percent a year ago (source: Stephens Auto Sales & SAAR survey, December 2017). Increasing demand for new trucks and SUVs has been occurring for a while. The following shows the ratio of new trucks to new cars retailed for the past five years.
New vehicle grosses per unit rebounded after declining during Q3 2017, but are still well below grosses in 2016 and 2015. The following shows the trend in the average new vehicle gross per unit over the past ten quarters.
Net floor plan interest per retail unit sold increased $104 year over year, up from the $93 year over year increase noted through Q3 2017. The average dealership incurred $17 in floor plan interest per unit sold during 2017, while receiving $87 in floor plan assistance per unit sold in 2016. This change was primarily due to two factors — an increase in short-term interest rates and declining new vehicle sales volumes.
Advertising expense per new retail unit sold increased 27.4 percent from $221 per unit through Q4 2016 to $281 per unit through Q4 2017.
New vehicle inventory levels increased to 119 days at year end due to lower Q4 sales volumes. Although the days’ supply is up from 108 days at the end of Q3 2017, the previous two quarters in 2017 exceeded 140 days, which represented the highest inventory levels in the last ten quarters as demonstrated in the graph below.
The declining new vehicle sales volume in the fourth quarter was also felt in the used vehicle market, and to a stronger degree. Through Q3 2017, 1.04 used vehicles were sold for every new vehicle sold, and by year end 1.01 used vehicles were sold for every new vehicle sold.
Similar to new vehicle trends, used truck and SUV sales continued to outpace used car sales, although to a lesser degree. The average dealer sold 1.61 used trucks/SUVs for every used car sold. This is up 9.3 percent from one year ago when 1.47 used trucks/SUVs were sold for every used car sold.
Used vehicle grosses declined again in Q4 and the average gross profit per used vehicle retailed (PUVR) during 2017 was $1,284. On a positive note, the average gross profit PUVR increased by $28 compared to 2016.
Increases in advertising also affected the used vehicle department as advertising expense PUVR increased 17.3 percent from $272 per unit through Q4 2016 to $319 per unit through Q4 2017.
Used vehicle inventory levels increased to 83 days at year end from 78 days at the end of Q3 2017 due to lower fourth quarter sales volumes. However, the 78 days’ supply was an historical low for recent years. The used vehicle days’ supply was also 83 days at the end of 2016.
The F&I department had solid performance during 2017. Net F&I income (before compensation) per retail unit sold has increased each of the past two years, measuring $983 for new vehicles and $762 for used vehicles for 2017. The following graph shows the trend of net F&I income before compensation for the most recent quarters:
The front and back ends of new vehicle deals on a combined basis increased 5.0 percent year over year, from $1,829 for 2016 to $1,920 for 2017. Used vehicles increased 2.5 percent, with front and back ends on a combined basis increasing to $2,046 for 2017 from $1,995 for 2016.
Penetration rates increased year over year for all major product categories – finance, extended service contracts and insurance. The following shows penetration rates for 2017 and 2016.
While the mix of service work through Q3 2017 was generally comparable to the same period in 2016, the fourth quarter was markedly different as internal labor accounted for 21.7 percent of total labor for 2017, compared to 19.3 percent for 2016, a 12.1 percent increase. This shift resulted in the average reconditioning cost PUVR increasing 7.8 percent, from $555 for 2016 to $598 for 2017. The increase in internal labor supplanted warranty labor, which decreased from 21.7 percent of total labor sales for 2016 to 20.5 percent for 2017.
Departmental gross profit as a percentage of sales increased slightly to 65.2 percent for 2017 compared to 64.9 percent for 2016, a 0.45 percent increase. The increase was primarily due to an increase in productivity as the monthly average gross per technician also increased 0.45 percent to $9,672 through Q4 2017 from $9,629 through Q4 2016. The following graph trends the total gross per technician per month over the ten most recent quarters.
After peaking in Q2 2017, the average dealer saw total parts gross profit percentage continue to normalize in the last half of 2017. Total parts gross profit percentage dropped from a high of 37.0 percent through Q2 2017 to 32.7 percent by year end, which is comparable to the 32.3 percent for 2016. The graph below shows the gross profit percentage trends over recent quarters.
After five consecutive quarters at or below 59 days, the days’ supply of parts inventory increased to 60 days as of September 30, 2017 and remained at that level at December 31, 2017. The days’ supply of parts inventories as of the most recent quarters is as follows:
Total body shop gross profit as a percentage of sales decreased again in the fourth quarter to 57.3 percent from 57.5 percent through Q3 and 58.0 percent through Q2 2017. The decline in the fourth quarter was primarily attributable to a reduction in customer pay labor sales per RO to $777 from $794. For the year, however, departmental gross profit increased one full percentage point from 56.3 percent one year ago. The following shows the trend of YTD body shop gross profit percentages for the most recent quarters of our survey:
Although vehicle sales volumes were down slightly compared to last year, new and used retail vehicle grosses improved over 2016. Higher personnel, advertising and floor plan interest costs resulted in the lowest dealership net income as a percentage of sales (1.14 percent) in the past five years.
Industry analysts are forecasting 2018 new vehicle sales volumes will be comparable to 2017 and it is expected substantial numbers of off-lease vehicles entering the market will put downward pressure on the new vehicle market. Dealers should focus on controlling expenses and continue to manage their inventories in 2018 to improve profits.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.