Dealer Lab: Payday in May

Publish Date: 
Aug 2, 2010
By Joe Delmont

This story originally appeared in the Dealernews August 2010 issue.

Editor’s note: The Dealer Lab project 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 Motorsports to profitability. When he took over management in July 2009, the two-store (Naples, Fla., and Punta Gorda, Fla.) network wasn’t in good shape — it lost money in 2007, 2008 and 2009. Shenk and a partner have purchased only the Punta Gorda store and are renaming it Destination Powersports to break away from its poor reputation. Our report covers the good, the bad and the ugly of the dealership’s operations.

There were smiles in Punta Gorda when Destination Powersports’ May numbers came in. The operation posted a net profit of $11,543, its first monthly profit since we started the Dealer Lab project in July 2009. That’s an improvement of $12,960 over the previous month, and $34,901 over May 2009, excluding extraordinary items.

Is the operation turned around? It might be premature to say that, but it’s making progress. “The marketplace in Southwest Florida is actually softer than it was last year,” Shenk says. “So I’m happy about our performance. But we still have a long way to go.” Let’s look at the month, one piece at a time.

INVENTORY

Total inventory value, including all units and P&A, improved in May by $139,000, dropping from $1,723,000 at the beginning of the month to $1,584,000 at the end of the month. Inventory quality continues to improve, too; the average age dropped from 368 days on May 1 to 301 days at the end of May. “We went from $3.2 million on July 1, 2009, to $1.5 million in May,” Shenk says, “but we’re still trying to sell off the old stuff. It’s hard to make money on that, but the inventory is getting better and better. As the inventory gets newer, the margins go up.”

Shenk is in a bind with his unit inventory. Because of the number of franchises he runs — Can-Am, Sea-Doo, Kawasaki, Suzuki and Yamaha — he has to carry substantial inventory to show to potential customers. “We can’t lower inventory too much,” he says. “We need to increase sales and reduce noncurrent stuff. This will have the greatest impact on maintaining profitability by lowering flooring per vehicle sold (PVS) and increasing ROI. Our biggest inventory challenge is no longer reducing the inventory, but changing the mix and increasing volume.”

FLOORING

In May, flooring costs dropped to $230 per vehicle sold from $274 the month before. Total flooring costs fell from $7,389 in April to $7,132 in May, a slight savings that dropped directly to the bottom line. “It’ll drop more in June,” Shenk says. “It’s moving in the right direction, but we’re still $66 high PVS compared to the best dealers we track [in the Too Gun program], who are averaging $164 PVS.”

F&I

The F&I contribution to dealership profitability hit $13,513, or $626 PVS in May, up from $7,152, or $504 PVS, in April. “We’ve stabilized our F&I operation with new procedures and new personnel,” Shenk says, “and now it compares successfully with Top Gun dealers.”

SALES

The unit sales picture is mixed, and there is a lot of work to do. The gross sales profit in May from machines (including trailers) was $40,186 plus another $2,685 from wholesale transactions (recorded as “Additional Income”) for a total of $42,871. This is up from the $28,843 in April and is an improvement of more than $10,000. But it’s still not enough to create a positive contribution to the dealership’s net profit. “Our mix of product sold is getting better,” Shenk says, “but we still have to sell off the old stuff and get our total unit sales numbers up. Thirty-six units [including five trailers] just is not enough to maintain the kind of inventory levels necessary to meet the franchise sales agreements we have.”

Shenk needs to retail at least 55 to 60 units a month. His market research indicates 100 units per month is a realistic goal. “Another thing hurting current sales [department] contribution to profitability,” Shenk says, “is our high sales payroll. We’re staffed for 60 units and are selling only half that number.”

SERVICE

Service was off in May, partly because it had to clean up problems created in April. The service contribution to overall profitability in May was only $1,086, down sharply from $6,975 in April. “When you get out of control in service,” Shenk says, “you can’t fix it instantly.” The dealership did $29,000 in total labor in April, but it wasn’t the right mix of work. “When that happens,” Shenk says, “you can lose control because you’re too busy and you make mistakes.” In May, service labor generated only $24,000 while fixing problems. Shenk is still working on them, but has moved to fix the situation by changing service managers, effective June 1.

Shenk runs a five-person service department: one manager, three techs, and two half-time support people. At that size, he needs to generate $43,000 in labor revenue — a reasonable number, he says, when things are running smoothly. May’s $24,000 is only enough to support a three-person staff, which isn’t a sufficient department. If he gets the right project mix and hits $43,000, Shenk estimates that he’ll have about 300 repair orders. “Then we’ll have more people coming through the door with potential trade-ins and potential accessory purchases; that helps all departments and creates lots of additional opportunities.” In May, service wrote 176 R.O.s, down from 211 in April. There’s lots of work to be done here.

PARTS AND ACCESSORIES

The profit per vehicle sold in May was off more than $100 from that produced by Shenk’s other Top Gun dealers, $607 vs. $717. Poor performance in service directly affects profitability in P&A, since service is that department’s largest customer. Another $10,000 in service labor would also mean another $3,600 in parts gross profit. “Even at our current level,” Shenk says, “we are selling way too few accessories for the amount of parts we are selling. That’s really the problem. We’re selling too much repair and not enough lifestyle. We’re administering, but we’re not selling.”

Part of the problem is the dealership’s weak reputation in the marketplace. “We’re not known as the place to go to buy something fun and exciting,” Shenk says. “They only come to us when they feel that they have to. Accessory sales should be two-times parts, but that’s not the case here. The accessories were so old and so dirty, there was no reason to come to the dealership. Even though we have fresher stuff now, people don’t know that; we have to get the fresher stuff and then tell people about it.”

In May, the store posted accessory sales of $279 PVS, up from $237 in April. “That’s good,” Shenk says, “but the number should be $400. That’s $3,000 gross profit that we should have in our parts department.”