Do You Know Your Annual Unit Turnover Rate?

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For the past several weeks we have all waited, hoping we would see a chance for an improvement in retail sales. Instead, the dribbling of red ink hasn't stopped — it has just kept going. But is the dribbling coming from the same thing? Is there a sign of a change?

Rather than digging around among the data trying to find a sign that things are getting better, you had best accept the fact that this settling of sales will likely continue. And should it continue to go south, are you doing everything you can do to stay afloat?

It's not just red ink we're concerned about. There are signs that despite the drop in interest rates, there is a good chance a recession will start pressuring the Fed to bring down interest rates yet another quarter point or so within a month or possibly sooner. The problem with dropping interest rates is that they could trigger a round of inflation, bringing on price increases that could have a truly harmful effect in the marketplace.

But we got off the track here; we're not able to guarantee which way the economy will go, so what are you doing to be sure you are still around when this round of negative pressures is over?

Let's start with pipeline inventories — those are new units that are on the way and already on dealership floors around the country. Have you checked your annual turnover rate? You can calculate this in dollars or in units. I suggest using whichever you are used to, but in either case you need to know how off a reasonable pace you might be.

Here's a quick example. Let's say a dealer's total new-unit sales through August 31 were 465 units. Doing this on a calendar year basis would mean that his monthly turnover is approximately 58 units. Simply calculated, the rest of his sales for 2007 would be about four multiplied by 58, or 232 units. So his sales this year ought to be about 465 plus 232, or 697 units.

Obviously the thing that's missing here is the seasonality factor. Not every month is equal when it comes to sales. On average, about 60 percent of a dealership's sales occur between March and June, but that will be different depending on where you are located. The seasonality factor is important and relatively easy to determine. I am not suggesting that you get buried with a pencil, pad of paper and a calculator. Just find an easy way for you to use this kind of tool so you can keep tabs on how well you are doing. (Probably I am preaching to a few Harvard graduates who already have these issues well in hand.)

The goal is to determine the turnover rate, which must exceed approximately two times annually or you're digging a hole for yourself. To avoid digging this proverbial hole you need to know your turnover rate. In this example, the dealer's turnover can't be determined without knowing the average inventory of new units on display or en route to the dealership.

Based on the foregoing sample above, the test dealer should know that his average monthly new-unit inventory should be about 290 units (half of 697) — sometimes more and sometimes less. Obviously, if the dealer is hoping to sell 697 units and he sells a hundred units less (while carrying a monthly inventory of new units of 360 units), then his turnover will be a lot less than it should be.

If this happens (and it does more times than not), it means he will be paying way too much in inventory carrying costs, which is one of the highest expenses a dealer faces. So our suggestion for this month is to calculate your monthly and annual turnover rate of new units on your floor, units being readied for sales and units somewhere in the pipeline en route to your store.

If your turnover is running less than two times annually, then there are only two ways to put a stop to that: Increase sales while holding your inventory at the present rate, or significantly reduce the number of new units you are buying. — DJB

Interpreting This Index

Index is based on the author's analysis of the MIC Retail Sales Report, SEC filings of quarterly and annual reports, and other information provided by publicly traded companies (such as Harley-Davidson and Polaris). Readers are cautioned that these estimates are subject to error, which can result from changes in seasonal patterns due to unexpected weather conditions and fluctuations in the economy. Interruptions in the supply of popular models can also affect these forecasts. Forecasts are not intended for investment purposes. Questions concerning this index should be addressed to the author, c/o Dealernews, or the author via e-mail at djb-llc@cox.net. Copyright © 2007 DJB Associates LLC, All Rights Reserved. Composite Index Advisory Board: Lindsay Brooke, Motorcycle Historian and Analyst • Tom Hicks, Owner/President, Southern California Motorcycles • John Matherson, Owner/President, Mission Motorsports • Paul R. Puma, GE Commercial Finance • Lenny Sims, Vice President, Operations, NADA Appraisal Guides • Craig Southey, COO of Cycle Barn MotorSports Group