Dealer Lab: Profits stay on upswing in June

Publish Date: 
Sep 1, 2010
By Joe Delmont

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 purchased the Punta Gorda store and renamed 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.

It’s been a bit less than one year since Bill Shenk began working on the Punta Gorda store of Florida Motorsports; June 2009 was the last full month that the dealership was run by the previous management team. Shenk took over management on July 1, and today is part owner of the dealership. In the last 12 months, July 2009 through June 2010, the operation has racked up 10 losing months, dropping a total of nearly $186,000.

But the outlook seems to be improving, and so is our financial tracking effort. June was the second straight month of profitability, even though it was only a few thousand dollars. We’ve reconstructed the June 2009 performance, and now we’ll be able to compare year-over-year performance by month and by year to date. This will give us a much better picture of the performance changes in the dealership’s operations.

Looking At The Numbers

In a marketplace that Shenk estimates is about 30 percent smaller than it was last year, his store’s sales were up 372 percent from sales of $57,758 in June 2009, and gross operating income was up 445 percent over last year. Gross profit in June was $97,344, compared to $21,855 in June 2009.

For the first six months of 2009, the store recorded a loss of $74,731 on total sales of $241,132. By comparison, first-half sales this year were $1,702,476, which generated a bottom line loss of $41,427. June 2010 net income was $2,462 on total sales of $341,568. In June 2009, the store posted a net loss of $50,495 on sales of only $57,758. If we subtract $9,451 in nonrecurring legal fees in 2009 that didn’t appear in 2010, the 2009 loss was still $41,044. So the year-over-year improvement for June was $43,506. On the cost side, flooring was much lower in June 2010 — by almost $9,000 — which drops directly to the bottom line. “At $206 per vehicle sold (PVS) compared to a Top Gun dealer rate of $150, it’s still too high,” Shenk says.

Reasons for the Change

Several factors increased profitability: There was a limited sales process and limited accountability in June 2009; the theft by former employees of parts and accessories is no longer sucking out profits; there are enough people to properly serve customers; most employees are on commission; and the performance of the service department is greatly improved.

Technicians are much more efficient now since the service area was cleaned up, reorganized and air-conditioned. A service board to track jobs has been added, and units are stored so they can easily be accessed by techs. “We have fewer jobs in progress, fewer open R.O.s and less clutter,” Shenk says. The department is more proactive in contacting customers, there is a better system for ordering parts, estimates are better, and there is a higher percentage of parts being correctly ordered the first time. Shenk also has implemented a floating-rate commission structure for techs based on job complexity.

“All those things add up,” Shenk says. “The tech spends more time on the bench and less time looking for units or parts or sending parts back because they were mis-ordered.”

One interesting factor is labor costs, which were much higher in 2010 than 2009. Through June, total 1H payroll was $261,370 compared to only $33,217 last year, an increase in costs of $228,153. What’s the relationship between this huge increase in payroll costs, the increase in sales, and the improvement in the bottom line?

This year, with 13 employees compared to seven last year, the payroll is much higher, but everyone is much more productive and is working harder, since nearly everyone is on commission. Says Shenk, “We doubled the payroll in June and created a lot more revenue. Last year, they cut the staff to a ridiculously low level. Today, I could make more money if I had fewer people. But if you are trying to grow, you have to have more people. You have to get to a critical mass, and right now I am giving up some profit to have people so we can grow the business.”

Targeted Marketing Plan

Shenk’s marketing approach over the last year is based on purchasing almost no traditional image advertising. “We’re getting a bigger piece of the pie, without buying any market share,” he says. “So far this year we have spent zero on traditional advertising; we haven’t spent one dollar of co-op money.”

The $17,712 Shenk has spent on advertising this year has largely been allocated to digital marketing: website development, a Facebook page, listings on eBay and Trader, and a small amount of Yellow Page advertising. No billboards, print, radio or TV; nothing that qualifies for co-op.

“That’s not to say we won’t get to those things, but we’ll get to that,” Shenk says. “But if you’re not doing business correctly, if you’re not getting business from word of mouth, why alienate your customers with bad service? Why pay for advertising to drive customers to your store where they won’t be handled properly? That’s the biggest mistake a dealer can make. Don’t advertise until you’re ready to handle the increased traffic.”

There’s another advertising problem not often recognized by metric dealers, Shenk says, and that’s the highly segmented customer base. There are cruiser and sportbike riders, dirtbike riders and riders of SxS machines and ATVs, as well as PWCs, all in the same season. A metric dealer is better off to market to each segment separately, using targeted marketing methods, rather than using image advertising that brings in all types of customers at the same time.

“It’s very hard to market and merchandise to them all at the same time because they are so different,” Shenk says. “That’s why you’re better to cater to one small group at a time. If you use small efforts aimed at a specific niche, you won’t get run over by lots of customers with different needs/wants at the same time. You won’t be able to handle everyone satisfactorily.”

This story originally appeared in the September 2010 issue of Dealernews.