Hello, Data; Goodbye, Hunch

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MAJOR RETAILERS ARE HURTING as consumers cut back spending, and many chains are filing for bankruptcy. The problem facing national retailers is that at the same time disposable income is shrinking, banks are tightening credit. Consumers are finding their household budgets turned upside down. They're spending more on food and gas, and their access to credit is being turned off. They can't refinance their mortgages. They've tapped out their home equity, and, in many cases, their credit card limits are being reduced (and their interest rates increased).

How do powersports dealers compare with other Main Street retailers? Will dealers have more problems than mainstream retailers with more diversified product lines and customer demographics? Are dealers more likely to fail?

"Yes," says Bill Shenk, the dealer consultant and training services provider who runs PowerHouse Dealer Services in Englewood, Fla. Shenk facilitates a number of dealer 20 groups and, this month, starts providing statistical data for Dealernews (see story in Speed Read section).

Retailers fail primarily due to the heavy debt load they carry. Often this is the result of a retailer holding overstocks of inventory that consumers aren't buying. When consumer spending was up, a retailer could usually borrow against the inventory to fund operating expenses; the bank would lend a fairly high percentage of the inventory value of that collateral. No deal was too ugly to finance.

GETTING UPSIDE-DOWN

But not today. Shenk says that excess inventory — and the related financing costs and increased expenses associated with moving it — is the most common cause of dealership failures. Once a dealership "gets upside-down" with its inventory, the owner must brace for a downward cycle. As the inventory of units gets older, the expensive flooring costs kick in. "Often the finance company is taking more out of the dealership than the owner," he notes.

The dealer steps up efforts to clear out this inventory, often by increasing spiffs for the sales staff, boosting promotions through expensive print and electronic advertising, and by discounting prices. "Now, you have three additional expenses that you never budgeted, in addition to the flooring costs," Shenk says. In such cases, it's easy for a dealer to actually sell units below cost in order to clear out inventory and bring in cash.

But, unfortunately, it's not as easy as it once was to walk down the street and work out a deal with your local banker. "If the banker just looks at the numbers," Shenk says, "it's probably not a good loan to make. And if you don't have that personal relationship with the bank president or the loan officer who can call the shots, you're probably not going to get the money, since the loan probably has to be made by a committee."

MANAGE TIGHTLY

So if we assume that a dealership can be in the same situation as a typical general retailer in today's tight economy, how's the dealer to get out of a difficult inventory/debt dilemma? Shenk offers some tips:

  • Before you reduce inventory, identify your inventory by category (motorcycles — touring, cruiser, sport, scooter, dual-sport, enduro dirtbikes, motocross dirtbikes; ATVs — youth, sport, utility, UTV; etc.). Know what inventory is selling and what is not.
  • Of the products that are moving, identify which ones carry the best margins. But don't stop stocking items that sell "at margin" just to lower your inventory. This is a common practice when cash is tight, but it greatly increases a dealer's chances of failure. Remember, creating cash flow feels good temporarily; creating gross margin feels good long-term.
  • Maintain inventories based on data, not hunches. Look at inventory turn, return on investment by segment, and percent of revenues (gross sales, gross profit, and dollars per square foot). In the case of showroom unit sales, identify the after-sale profit potential of each segment as well as the average repurchase cycle so you can make better decisions on stocking levels and front-end margin requirements.

Take a look at the average flooring costs per new vehicle among Shenk's PowerHouse dealers (see box). In 2004, flooring represented less than 10 percent of the generated gross margin. Today, it's approaching 20 percent. Shenk notes that his strongest dealers are still keeping flooring costs close to that 10 percent range.

Joe Delmont can be reached at jdelmont@dealernews.com or 952-893-6876.