Dealer Lab: Losses Reduced Significantly in 2009 Over 2008

Publish Date: 
Feb 1, 2010
By Joe Delmont

Editor’s note: Dealer Lab is a joint effort between Dealernews and PowerHouse Dealer Services, a consulting firm run by former dealer Bill Shenk, detailing his efforts to return Florida Motosports to profitability. When he took over management in July 2009, the two-store (Naples and Punta Gorda) network wasn’t in good shape — it lost about $1 million in 2008. Our reports will cover these efforts, good, bad and ugly. To make it easier to track month-to-month performance we’ve added a rolling 12 month financial report that’s available exclusively on the Dealernews website. To download, visit www.dealernews.com/thelab12monthtable. Note: The current Top Gun dealers report is not available this month, but will appear in the March issue.

There’s been progress on improving the profitability of Florida Motorsports — which posted profits at the Naples store in the last three months of 2009 — since the project started in July. This location store posted a loss of $274,551 for 2009, a sharp improvement over the loss in 2008 of more than $500,000. Detailed year-over-year comparisons aren’t possible because the operations in the two years were different in the treatment of expenses and in the types of automated accounting systems used.

Here’s an accurate comparison, though: The Naples store lost $251,255 in the first six months of 2009 operating under the old management team. Total losses for the store in the second half of the year during the Dealer Lab project dropped to $23,296. Historically, the first six months of the year in Florida are better powersports months than the second half of the year. The gains come primarily from changing personnel, Shenk says, and implementing procedures that improve employee efficiencies. Shenk thought he would have the dealership cleaned up in three months, but six months later he is still working on it.

Revenue at the Naples store in 2009 totaled $7.2 million, down from $12.2 million in 2008, and generated a gross profit of $1.8 million, about the same as 2008.

In December, the dealership posted a gross profit of $159,520 on total revenues of $502,318. Net profit was $700. “That’s $47,000 better than last December in a marketplace that’s more than 40 percent smaller,” Shenk says. “Our gross profit will continue to get better as our inventory gets cleaner.” The gross profit as a percentage of sales in December was 31.8 percent, an improvement over the 23 percent posted in December 2008. When Shenk took over in July, this number hit 24.4 percent.

Flooring costs were still $100 per unit sold too high in December because of an unfavorable bank agreement negotiated early last year. This added more than $5,000 to December expenses, lowering the bottom line.

Cleaning up a messy inventory situation has been a big problem for Shenk, but the team is making significant progress. The team has lowered inventories from $4.8 million on July 1, 2009, to $2.5 million at Dec. 31, 2009. The improvement was made primarily by identifying the scope of the problem and creating awareness of the problem among employees. “We all go where we look or focus,” Shenk says. “So keeping inventory and flooring costs as a consistent focus with the team is very important.”

The second point is compensation. “You have to pay for what you want done,” Shenk says. “Previously, if a salesman sold an old unit for no profit [something that often happens] he would not make any money. We made an important change by taking money from the sale of current machines and paying that money on the sale of noncurrent or old inventory. This has a two-pronged effect: Salespeople know they have to get gross somewhere to build the potential payroll kitty, and management puts that available payroll on what they need to sell the most, which is old inventory. That’s one of the reasons why our payroll has been out of line as a percentage of gross profit, but it continues to improve as inventories get better.”

The third step is resetting the showroom by putting 2009 and 2010 inventory in the back of showroom and on racks, and putting the oldest inventory near the door. The inventory project has been huge, especially with the kinds of old stuff being carried by the dealership. Shenk even found a new — but beat-up — 2001 dirtbike in his inventory that he first thought was used, but later discovered had never been sold.

One of the most important improvements made was getting new sales-oriented people in any position that touches customers — from sales to service. “It was important to have people who interact with customers to have a sales personality,” Shenk says. “Too many times, and certainly in our case, these people tend to be administrators. If you asked them a question, they gave you an answer, but they never tried to sell you anything.” Nearly 100 percent of compensation in most jobs in the store is commission-based, a move that seems to be working. The average parts ticket increased from $34 in July to $59 in December. The improvement is also apparent by looking at payroll as a percentage of gross profit. This figure for the parts department dropped from 49 percent in July to 38 percent in December. In the service department it dropped from 64 percent in July to 58 percent in December. This doesn’t mean people were paid less, Shenk points out. It indicates that they were more efficient in generating better margins. “We actually have double the people we had in July,” he says, “but the percentage of gross profit for payroll is less and we have people making more money than they did before.”

Next month: secret shoppers.

This story originally appeared in the Dealernews February 2010 issue.