A look back at the year that was in terms of dealership financial performance.

What a year it has been! This year will be viewed as an extraordinary one in history.

A recovery year from the dark times of the COVID shutdown. A year of sharply rising prices and soaring interest rates. A year of inventory shortages. A year of reinventing business models that have ruled the retail automotive space for hundreds of years.

It’s harder than ever to run a dealership. Customers are demanding more, and OEMs are supporting less. Just getting your committed vehicle allocations seems to be a pipedream these days. Yet dealers survive. In fact, they are thriving and experiencing some of the most profitable years ever. But is this sustainable? What will the future look like? How have the economic conditions of today impacted the retail environment of tomorrow?

Let’s explore this together.

Inflation and average gross profits

In August 2023, the Consumer Price Index rose nearly four per cent. This is significantly higher than the two per cent benchmark set by the Bank of Canada every year. This means that the average consumer paid four per cent more for a “general basket of goods” than it did one year ago. Included in this basket are transportation items such as the cost of new and used vehicles. This statistic doesn’t surprise the average automotive dealer.

Dealers have been selling vehicles at prices never seen before, embedding huge gross profits, tons of accessories and a variety of F&I products in every deal. “We sell at the price the market bears” dealers often say. While this statement is true, the average Canadian consumer seems to be getting the short end of the stick.

History tells us that this won’t last forever. Canadian’s have seen this before and watched it normalize time and time again. As the Bank of Canada continues to raise interest rates and limit money supply, prices will decrease again. When? Who knows! But rest assured that sooner than later, dealers will find themselves struggling to earn even the smallest gross profit in every deal again.

Start preparing for this inevitability now.

Interest rate increases

Today, the overnight bank rate is sitting at five per cent, a significant jump from the .25 per cent it was sitting at in April 2022. To think of the speed and slope at which rates have jumped this last year, it is amazing that our economy isn’t sitting in a deep depression. And yet, the automotive industry is charging forward — people want more products and services than dealers can even deliver.

Is this sustainable? The economist in me says: no. The average Canadian today has an outstanding auto loan of $26,494 with an average term of 5.5 years. This is up 50 per cent from just 5 years ago. Interpreting this, the average Canadian has chosen to take on more debt than ever and has masked this fact by committing to lower monthly payments for longer periods of time. This isn’t good for anyone! People owe more than they own and it costs them more than ever to service this debt. Scary times for sure!

If interest rates do normalize, I fear that default rates on automotive loans will skyrocket. You are already seeing signs of this in the industry — BMO has recently pulled out of indirect automotive financing and there is chatter that others are going to do the same. The Sub-Prime lenders are becoming more active and winning more business now than they have in the last five years.

I fear the automotive ecosystem may be at an inflection point but time will tell how it will look in the coming years.

OEM support, allocation constraints and lack of warranty campaigns

These days, the general consensus amongst dealers is that OEMs aren’t playing their part in supporting the dealer network. Vehicle supply shortage and deferred warranty campaigns are major issues today.

OEMs need to start supporting the ecosystem. Dealers and customers alike are suffering, and their patience level is running thin. Solutions are needed now. Dealers can’t keep promising delivery dates to customers that can’t be met — it’s just not good business practice. Things need to change from the OEM side of the relationship. Customers deserve better, especially if dealers continue charging what they do.

I look forward to what next year will bring us. The future is unknown but history tells us that the automotive industry will survive and adapt. Dealers will figure out a way to succeed in whatever conditions they face.

Changing market conditions will not hold back the growth of this industry — stay the course and continue looking for opportunities. They are out there.

The post Things that impacted your dealership’s financial heath appeared first on Canadian Auto Dealer.

New tools and techniques like omnichannel marketing, leveraging AI, data and CRM are gamechangers. Can dealers adapt?

Technology is quickly changing the automotive industry. The way cars are marketed, sold, tracked and analyzed today is very different than they were just a few years ago. It is an exciting time to be in this ecosystem — that’s for sure.

Below are a few examples of how retail automotive has evolved, and the related strengths, weaknesses, opportunities and threats that they bring to the table. Dealers must determine how each will create additional revenue streams or cost savings. They should also consider brand, geographical region, target market, staffing capabilities and willingness to invest in new technologies when analyzing these areas.   

Omnichannel marketing

The marketing strategy of a dealer group is their single most important success factor today. The benefit of having a well thought out, and professionally structured, “marketing wheel” includes better customer experience, increased loyalty, customer retention with lifetime value and world-class brand recognition.

By definition, the “Omnichannel approach” represents an organization’s presence across various marketing channels including: Websites, Apps, SMS, social media, email and traditional marketing campaigns like in store events, mail outs and flyers, AutoTrader, etc.

This approach is no longer optional — it is a critical success factor. The real discussion for retailers today is understanding how it fits into its current processes. That is, which of the elements should be maximized and minimized while considering cost, outreach, ROI, impact on brand and customer experience. Retailers can’t have everything. They have to figure out what the best balance is for their brand and customer base.

Artificial Intelligence (AI)

Artificial Intelligence (AI) is perhaps the most heard “buzzword” today. Dealers can leverage this technology to create a real competitive advantage against their peers. Imaging bolting on machine learning and technology to automate the omni channel marketing experience — talk about an opportunity!

Today, the initial customer interaction is managed through your BDC or your group’s marketing team. Customers often feel that the information they receive is fragmented and this significantly hinders the customer experience.

Separate humans are interacting with customers on a daily basis and the weakness in most groups is that different messages are being delivered to the world. Inconsistency in your marketing message is a significant threat to the automotive experience. 

AI can solve this. Machine learning can decide how to interact with the world based on customer specific preferences and actual dealer specific information like current inventory, wait times, service availability. That means, AI can turn this weakness into a tangible opportunity very quickly!

Imagine if your AI based BDC and marketing teams work proactively to scrape data off lease portfolios and automatically contact customers who are coming due, offering them selections of vehicles coming down their pipeline and trade value and equity position using up-to-date market data — this is all possible with the right AI tool.

The benefit of having a well thought out, and professionally structured, “marketing wheel” includes better customer experience, increased loyalty, customer retention with lifetime value and worldclass brand recognition.

This technology can respond to customer queries in an interactive and fun way (i.e. the “Chat GPT” tool that actually speaks). Customers ask questions and AI provides real time answers using data pools built by dealers (i.e. extracted from DMS systems, CRM tools, accounting data, search history, geographical specific data). This could revolutionize the way we do business and have a monumental impact on profit lines and customer experience for years to come. 

Data warehouses

The key to bringing the above noted theories to life is having a warehouse of clean, up to date, usable, flexible and leverageable data. It should be extracted from your CRM, DMS, and various other sources for customer and market information. It must live in a functional warehouse (i.e. SQL server) that can be sliced and diced and have a user interface that is easy to use.

The inherent cost of this aspect is the most prohibitive, with cost >$100K on the low end. The problem is that most dealers (especially the smaller ones) are not actually willing to invest into this concept. They “talk the talk” but don’t “walk the walk.” It is very much an unknown territory for most dealers and the ROI has yet to be proven.

Overall, we may be closer to this reality than we think. The technology already exists today. The real threat is that car buyers claim to be forward thinking tech people but, as we saw during the pandemic, are not willing to alter their buying approach for big ticket items like cars.

For this to actually become reality, new generations of buyers must replace the old ones and OEMs must fully buy into this new way of doing business. 

Time will tell what the future of retail automotive will look like. The only guarantee is that it will be different than it is today.

The post The future is coming appeared first on Canadian Auto Dealer.

Dealers need to borrow cash to run their businesses, but not all loan types are the same.

Dealers need access to a ton of capital, and I mean a ton!

Think about it, no dealership is sitting on enough cash to fund their operations. Money will be needed for new and used vehicle inventory purchases, parts inventory purchases, building upgrades and leasehold improvements, not to mention the cash needed to pay employees and vendors every month. That’s a lot of cash! The relationships dealers have with their lenders are critical to their ongoing success.

Funds can be easily accessed when the right partnerships exist. That said, access to this capital isn’t free and is certainly not given based on a “gentleman’s handshake.”

Proper due diligence is always done by both parties before a lending agreement is ever reached. Most lending agreements incorporate covenants to ensure borrowers are financially sound and have the necessary liquidity to repay their debts. A covenant is a promise that a borrower makes to a lender to comply with certain conditions throughout the course of a loan. They go beyond simply paying back the money that was borrowed.

Funds can be easily accessed when the right partnerships exist. That said, access to this capital isn’t free and is certainly not given based on a “gentleman’s handshake.”

Loan covenants are broken down into 2 elements:

• A “keep well clause” describes what companies will, or will not do, while the loan is outstanding. For example, it may require you to keep a certain management team in place, or, to remain a good-standing franchise dealer of a recognized OEM throughout the life of the loan;
• A “financial clause” requires you to maintain certain levels on key financial ratios throughout the life of you loan. These are meant to give the lender a quick snap shot of your liquidity and borrowing positions at any point in time. 

Common types of covenants:

• Debit-to-equity: This ratio is calculated by dividing total debt by total equity and is considered a primary measure of debt capacity. If your ratio is high relative to your peers, it is perceived to hinder your company’s ability to raise new debt if it’s needed to survive major economic downturns. That is, highly leveraged companies carry more risk of missing debt payments when revenues decline. In general, a company with less debt and more equity (i.e. low debt-to-equity) is viewed as a heathier organization than one on the opposite end of the spectrum;
• Current Ratio: This ratio measures a dealer’s short-term liquidity, or, its ability to pays its bills that are currently coming due. It’s calculated by dividing current assets with current liabilities. Naturally, companies who own more than they owe are perceived to be healthier than those carrying more debt so you always want this ratio to be greater than one.   
• Debt-Service-Coverage Ratio: This is a key measure of a company’s ability to repay its loans, make dividend payments, and take on more debt. It is commonly used to evaluate capacity to finance future growth and assess credit worthiness. It is calculated by dividing earnings before interest, taxes, depreciation and amortization by interest and principal payments. In other words, it shows how much earnings a company can generate for every dollar of interest and principal paid. While debt is a common component of every business’ balance sheet, it is critical to assess the manageability of that debt. The debt-service-coverage ratio is a classic metric to assess this exact concept.

What happens if you are in breach

A few possible consequences may occur if your dealership fails to meet its agreed upon covenants.

If the breach is minor, your lender will simply discuss the matter with you and help you develop a corrective action plan. For serious or reoccurring issues, lenders can recall their loan and end their relationship with you. It is important to note that lenders don’t want you to fail. In fact, they’ve loaned you money because they believed in you and want you to succeed in your entrepreneurial journey.

The key to any banking relationship is to have open channels of communication. If you find yourself in a situation where you are about to breach covenants, be proactive and talk to your bank about it right away — they’ll appreciate that more than you know. 

Keep covenants in mind when you’re making business decisions. Whether you are looking to acquire new equipment, buy an existing business or simply increasing your vehicle inventory floor plan line, these all have implications to your existing and future loan covenants.

Make your strategic decisions considering all aspects of your business, including but not limited to, future capital requirements and implications to current banking agreements.

The post What are Bank Covenants and why are they necessary? appeared first on Canadian Auto Dealer.

Sharing secrets to career success in the C-suite for automotive executives.

Dealerships are complex organizations. Success factors are constantly changing so it’s important that your executive team is nimble and well rounded. They must be adaptable and have strong problem-solving skills; forward thinking and be able to communicate in a strong and concise manner.

Gone are the days that your CFO’s core skills were limited to accounting and tax. These are just table stakes now. To add real value in the retail automotive space your senior financial executive must also have the skills discussed below:

Networking skills: You need be able to build relationships within the organization and externally. This includes having strong ties to other C-suite executives in the automotive space and outside of it too. Best practices often come from outside the industry you are accustomed to. Consider joining boards and attending networking sessions in your local community — the idea here is to surround yourself with great people and to help others succeed. As the old adage goes, you get what you give in life.

IT skills: While you don’t have to know how to code, you need to be able to speak the language. You have to know what terms like data warehouse, SQL and Python programing language mean and how they can be used to improve the efficiently and output of your organization. You can delegate the rest. Very often the CFO also acts as the CTO in the dealership world. Be the leading voice when it comes to technological change. Your group will be better off for it.

Disruption and execution skills: If you prefer to spend your time with external stakeholders you are likely a disruptor. This characteristic involves looking for the latest business trends and constantly benchmarking your company outside your industry. Once you have identified the changes you’d like to make, the CFO must then drive the execution. You must move the “goal posts” and be experienced with the various elements of change management. Change is good and could lead to improved profitability and efficiencies but it must be managed properly so be cautious.

Strategic thinking skills: You are the leading facilitator of strategic thinking within your organization. You are constantly calling meetings, making agendas, taking minutes and following up on action items. This is a key skill set if you are looking to grow your dealer group — you can’t stay still. You are looking for new initiatives and business opportunities. There are plenty of leaders with this skill set in the automotive space — we’re kind of lucky in this regard. Reach out to them and understand how they see the world.

Analytical skills: Those who have chosen this career path are likely Excel gurus. They are comfortable being behind the computer and working models to support their business plans. It’s important. You must document your thoughts and understand how it will impact the different elements of your financial statement. This process creates transparency and visibility. It allows you to break down the various elements of a business plan and assign them to various members of your operations team.

Documentation is key to analysis — you certainly can’t do it on the back of a napkin. You need a formal and rational way to analyze business opportunities to drive success.

As you can see, today’s automotive CFO should possess a number of different skills to be successful. Up-and-comers in the profession should focus on developing these areas — don’t spend your time reading the tax act, you’re better off having dinner with a mentor in another industry.

Maybe go out golfing too, and really get to understand how they drive change. These relationships will be more important to the success of your group and your career than you can ever imagine. Focus on being a networker, technologist, disruptor, executor and analyst. If you do, you will be a success.

The post Want career growth? Try these tips appeared first on Canadian Auto Dealer.

Leverage opportunities within data warehouses and your DMS systems

Modern businesses know the power of data.

If used right, it can give your organization a real competitive advantage. Using data as a predictive tool, rather than a backwards looking one, can really improve your dealership’s ability to make decisions and drive profits. This idea is not automotive specific. All dealer groups are focused on leveraging data to run a more efficient and more cost-effective business.

Here are some things to consider:

Data Warehouses

A data warehouse is an accumulation of data, gathered from multiple sources, organized in a logical manner, used by enterprises for reporting, data analysis and decision making.

The data warehouse is the core element of business intelligence. There are a few different types of databases but by far the most useful one for dealer groups are relational databases.

Relational databases organize data in one or more tables of columns and rows which make it easy for users to understand how different data sets relate to each other. When data is related, you can build reports that connect one type of data to another to draw conclusions.

DMS Systems

Some major players in the retail automotive space are CDK and Reynolds. There are many others of course. Some, like newcomer Tekion, have embedded cloud-based technologies so that dealers can leverage their data better.

Access to the data is the key differentiator in the automotive space. Traditional DMS systems made it very hard to gather and manipulate information but this is now becoming a conversation piece when looking at your systems. These systems embed accounting, operational and customer-oriented information into one system.

Sounds technical, I know, but it’s actually very simple.

Since your DMS system holds key information about your business and customers, you should extract that data, on a daily basis, and build a data warehouse with it.

Here is an example of what this could look like:

• Create two tables: 1) customer data: name, gender, age, occupation, income level, vehicle details and 2) vehicles coming off lease: make, model, trimline, kms and colour. Now imagine combining these two. You can arrive at a list of targeted vehicles your used car manager should focus on buying that, based on your historical data, your female customers, with a specific occupation and income level, aged 30 to 35, are likely to buy;
• Create two tables: 1) employee data: age, occupation, education level and 2) Sales data: sales and gross profit generated by employee by month. By combining these two data sets you can refine your hiring practice to focus on recruiting the right age and education of staff that will generate the maximum profits for your dealership in the spring, summer, fall or winter.

Data is powerful

If leveraged correctly, you should be able to narrow down the exact type of car, with colour and trimline your female professional customers (as an example) are likely to buy on a rainy Tuesday in November. Yes, you can get that granular!

You can slice and dice data as needed to arrive at predictive conclusions that will help your business make smarter decisions. And, of course, smarter, more efficient companies will generate higher profits in the future.

Not only is data powerful, it is profit generating.

Using your data, the right way, will yield healthy and sustainable profits. The automotive industry is heavily focused on this concept and, as the industry evolves, it will continue to play a major role for leading dealer groups.

The post Predicting success with data appeared first on Canadian Auto Dealer.

Many dealerships don’t like audits but they are a necessary part of the business

Many dealerships in Canada are going through their year end audit right now. It happens every year and, for some reason, has historically been assigned a negative connotation.

You often hear phrases like: “Oh no, our auditors are here” or “ I need this piece of information for our auditors” or “I’m concerned with the way you are doing things operationally—I know our auditors won’t like it.”

For some reason, many people on the operations side fear this time of year. This article is intended to remove that negative stigma.

Dealers can be subject to several different types of audits:

Internal audits occur when someone within the organization is assigned to “check on” the work of another employee or department. Are deals being built correctly? Are warranty ROs being closed and submitted properly? Are Business Managers engaging with customers in an ethical manner? Are we following OMVIC rules?

In larger corporations, there is a department set up to make sure things are being done the way they are intended. This could be accomplished in a dealer group by having controllers visit different stores to make sure the processes and procedures are the same everywhere.

Dealers generally hire external auditors to come in once per year to prepare the year-end financial statements (and likely the tax returns too). A corporation must hire an auditor to come in to verify that they are complying with Generally Accepted Accounting Principles and Tax Laws.

This is generally referred to as a financial statement audit. While there is a ton of preparation work your accounting department must do for this, it is generally done to add value to the organization. The idea is to have someone outside the organization confirm that what you are doing is as correct as possible.

External audits can also be performed by third party organizations such as the Canada Revenue Agency (for income tax, HST, payroll taxes), Workplace Safety and Insurance Board (WSIB), OMVIC or other provincial governing bodies, and OEM (warranty audits).

These organizations have a legal right to check your dealership’s work and policy to ensure compliance. While these can certainly be invasive and time consuming, it is very important work for the automotive industry as a whole —everyone including owners, employees, customers and investors are better off because these independent bodies act as a second set of eyes on your books.

The approach taken by all the above auditors are virtually the same. They use a combination of the following procedures to gain comfort on what you are doing:

Substantive Testing: Used to verify the information entered into your accounting system is correct. Common methods to test under this approach include performing various analytical calculations and tying transactions back to source data to ensure things are properly recorded.

Internal Control Testing: Used to determine whether the information system (ie. your DMS system) promotes correctness. This usually involves reviewing the source code of your system to ensure it yields correct decision-making information.

Combined Testing: an approach that leverages elements of both the above testing methods. Auditors usually take this approach when performing their work. This is especially true with larger groups as it allows the testing team to be efficient.

Indifferent of the testing approach or audit type, the goal of any audit is to provide reasonable assurance that information being presented by an organization is free of material misstatement.

In other words, is the financial position of the dealership presented accurately? As a byproduct of their work, auditors will also evaluate your risk management, control and governance process and provide you with high level recommendations to help your organization run smoothly for years to come.

As you can see, having an audit performed is not a bad thing. It actually helps your business identify issues and fix them before they become big problems. It adds value to your entire organization. You should use the recommendations they provide to set your group apart from your competitors.

Take advantage of it. Leverage it. Level up your dealer group.

The post Don’t fear the year end audit appeared first on Canadian Auto Dealer.

Make sure you’re tracking your return on your advertising dollars

When was the last time you analyzed your advertising spend? Is it too much? Too little? Are you allocating the right amount between digital and traditional media? Are items hitting this account that should be posted elsewhere? 

Dealership success is directly linked to marketing efforts. Optimization is key. Your marketing campaigns need to be reviewed and scrutinized monthly. Your plan needs to be nimble—you should be able to “change on the fly”. This will ensure you are maximizing your efforts and increasing the likelihood of success. 

Consider these items when analyzing your marketing plan:

What should actually go into the advertising account:

There seems to be ambiguity around what should actually be posted to the advertising account. This surprises me. OEM accounting manuals, regardless of brands, are very clear about this. Only expenditures directly related to the marketing of vehicles and the promotion of your fixed operations should be accounted for here. This includes:

Traditional media: Newspaper, radio, television, direct mail, billboards, sponsorships; 

Sales promotion expenditures: Business cards, license plate frames, auto show exhibit expenses, showroom displays and promotional banners;

Digital Media: Connecting with customers using the internet and other forms of digital communication. For example, email, social media, text and multimedia messages. 

As you can see, it is extremely clear what items should, and should not, go into this account. Stick to these rules and you will be able to track your marketing success better over time. Clean accounts equal clean analysis. 

Key Performance Indicators

Marketing is pointless unless you generate results. There is a systematic approach to determining your success—measuring Key Performance Indicators (KPIs) that are targeted toward marketing and advertising efforts. 

You should break these down into the following categories: 

Customer KPIs: Sales closing ratio, conversion rates, churn rate, upsell rate.

Financial KPIs: Return on investment, customer acquisition costs, monthly recurring revenue.

Project KPIs: Lead time per project, project costs and time, utilization rates.

Digital Marketing KPIs: Monthly leads/prospects, cost per lead, retention, monthly website traffic, click-through-rate, traffic on social media. 

The list can go on and on. Sure, it takes some work to track these but it’s worth it. Your marketing team must rationalize their decisions on spending. You can’t run this department based on “gut-feel”—you’d be surprised how many dealers do. 

Remember that targeted strategic efforts yield targeted strategic results. Don’t spend without reason. 

Benchmarks

It’s important to keep your marketing team accountable. Compare your team’s performance to industry benchmarks. The ones presented below are averages—you should tailor them to your own specific brand, geographic region and dealership style. 

According to NADA, by June of 2022 $4.26 billion was spent on advertising by dealers across the US. The average spent since 2016 is $635 per new retail unit. Going back a decade, this number was thought to be approx. $500 – $550 per new retail unit. The spend per unit seems to be going up. Interesting isn’t it? Retailers were led to believe that the push to digital media would be the solution to outrageous advertising spend. I guess “they” were wrong. 

Email open rates average 21.5% and click-through rates average 2.3% according to campaignmonitor.com. This means that despite all your digital marketing efforts, almost 80 per cent of your targeted email campaigns are going unnoticed. Even if you were able to generate a lead to your website, 97.7% of the time, visitors won’t even filter through your site. Staggering to say the least. 

Finally, return on investment in the automotive industry ranges from 10-15 per cent. Are your marketing campaigns generating these returns? If not, you should refocus your efforts to something more rewarding. 

Marking and advertising investments are necessary to run a successful dealership. You can’t survive without them, and you certainly can’t be an industry leader without a strategic plan. 

Focus on the right type of advertising for your market. Ensure you are measuring their success by calculating specific KPIs and comparing them to industry benchmarks. Hold your marketing team accounting—at the end of the day, your dealership’s success depends on it.

The post Analyzing your advertising spend appeared first on Canadian Auto Dealer.

I hated studying economics in school. Too theoretical, I thought. I’ll never see this in the real world, I thought. Boy, was I wrong!

Economics explains the balance between customers’ unlimited wants and their limited resources (usually cash) to acquire them. This is the definition of the economic problem. People make choices that maximize their personal benefits. 

A customer will buy a minivan because they’re lugging around four kids to hockey practice or an expensive sports car because they’re wealthy and travel lightly. The question is: how should the auto dealer respond to changes in market demand?

Today’s dealership is a case study in modern economics. The laws of demand and supply, elasticity of demand, perfect competition—you’re seeing it all play out in real time. 

Let’s see how some of the most basic economic concepts play out in today’s dealership. 

The Laws of Demand and Supply

Demand is the relationship between a product’s price and quantity sold. If a Toyota Camry costs $1,000,000, very few people will want it. If a Ferrari costs $10,000, people will be lining up to purchase this luxury supercar. While consumer preferences and wants change by generation, the theory that price and demand are inversely correlated will always remain true. 

Dealers are dialed into this concept and work to manipulate product pricing to generate demand. Black Friday sales, Winter Tire Season sales, negotiating vehicle selling price to close a deal—this is what we do best. The challenge dealers face today is on the supply side—how much inventory should dealers hold to meet their current market demands?

The law of supply states there is a direct relationship between price and quantity supplied. If you can sell a tire/rim package at top dollar, your fixed operations department will stock up on them—people want them, and we can make money selling them. 

The quantity supplied, or held in inventory, is directly related to market demand. The more people want, the more you produce. Eventually, dealers find the sweet spot—the point at which market demand meets quantity supplied, or the market equilibrium. This is the point at which dealers will run at peak efficiency.   

Today’s problem is that dealers have very little control on the supply side. With chip/labour shortages caused by the pandemic, OEMs have not been able to hold up their end of the bargain. Dealers are scrounging for inventory. They have customers lined up for cars (i.e. strong market demand) but no cars to give them (supply shortages). Thus, the retail automotive industry is not in an “equilibrium” state. In fact, it hasn’t found its equilibrium in years. 

Elasticity of Demand

Taking the laws of demand and supply one step further leads us to the concept of demand elasticity, or how responsive consumers are to price changes. At the extreme end, a product’s demand is said to be “perfectly inelastic” if customers are willing to pay any price for it. If the demand for a vehicle remains constant regardless of the price charged, we would find ourselves in this environment. 

Sounds familiar, right? Today, dealers are able to charge exorbitant amounts for cars—far more than they ever have before. And, not surprisingly due to supply shortages, the demand remains strong. It’s a crazy world. What was once only theoretical has made its way into reality.

Economic theory suggests that there is only one way to combat high demand and low supply—raise prices. This is exactly where we find ourselves today. There is no way to tell when this will correct itself, but eventually it will and the auto industry will fall back into that sweet spot. 

For now, dealers are enjoying the highest grosses seen in decades, tons of pre-sold cars and an almost non-existent vehicle pipeline. Strange times, to say the least, but eventually this too will correct itself. The laws of demand and supply will make it happen!  

Perfect Competition

The retail automotive space operates in a perfectly competitive environment—many buyers, many sellers, standard and similar types of products, easy entry and exit. This economic environment gives customers the option to shop at any dealer and find the same cars being sold. 

Customers are attracted to you because of convenience, service and, perhaps most importantly, price. Dealers must adjust pricing to reflect market conditions or risk losing customers. In other words, operating in a perfectly competitive environment naturally forces demand and supply to calibrate. 

This one economic theory, in my view, defines the toughest thing about running a successful dealership. Selling prices are always being questioned by consumers so businesses are forced to reduce expenses—it’s really difficult to make a few bucks. 

One notable feature of this environment is constant innovation. The prospect of greater market share and setting themselves apart is an incentive for dealers to innovate and make better products/services. While no one firm will ever possess a dominant market share, you can really set yourself apart by focusing efforts on this aspect. 

The past few years have truly been a case study for economists. The retail automotive industry has been at the forefront of proving that the laws of demand and supply always hold true. We discovered that, although theoretical, dealers are actually selling products that are more inelastic than we once thought. 

With today’s supply shortages, we can sell cars at higher prices and not impact market demand. But, a word of caution, the industry is still one of perfect competition, so don’t get greedy or the dealer down the street will take your customers. 

Who knew—economists were right all along.

The post Today’s dealership: A case study in the laws of modern economics appeared first on Canadian Auto Dealer.

Not all profit streams require major investments

Dealers today are looking for new profit streams without having to make major capital investments.

With current supply shortages, many dealers are being forced to rethink their businesses and figure out new ways to control vehicle lifecycles. To that end, many are reconsidering the in-house leasing concept.

If done right, this business model could provide dealers with new profit streams, an enhanced ability to service customers and, perhaps most importantly, the ability to control their vehicle pipeline.

Here’s what to consider when developing an in-house leasing company:

Executive sponsorship: You’ll need 100 per cent “buy-in” at all levels, otherwise this won’t work. There needs to be clear direction to the F&I team that when getting customers approved for leases, there is an order of operation that must be followed (first: OEM lenders; second: in-house leasing company; third: banks).

F&I managers cannot have the autonomy to choose, as they’ll always select the lender that offers the highest reserves and allows them to earn the most amount of commissions.

People/staffing is by far the biggest make-or-break consideration. You need trustworthy people running and working in the following departments (not “Car Guys”).

To that end, it is critical that the in-house leasing company offers competitive programs that will attract F&I managers and won’t result in a significant decrease in earning potential, otherwise the company will never get off the ground. Any fragmentation to upper level management buy-in will always lead to failure.

Capital: You’ll need both a short term and long-term funding plan. In the short term you need to answer questions about cost of funds, availability of capital, floor plan requirements, credit approval process. You’ll have to decide now whether seed capital is required to get this project off the ground. Your long-term plan relates to your securitization strategy. Which LifeCo will you be working with and what are their requirements?

Financial/business plan: Define the opportunity. Are you talking about 200 on-road units, or 10,000? If the opportunity is small, it might be best to simply partner with an established leasing company and collect a referral fee (easier and less risk).

For the most part, you won’t be able to compete with subvented rates in the new car market. In this category, you will only attract subprime customers which come with other risk factors.

These customers will not generally be long term customers and therefore don’t offer long term customer life cycle value. At best, you would attract five per cent of total new car sales to your in-house leasing company. 95 per cent will go to OEM lenders.

In the used car market, your F&I managers will choose to work with you if, a) your executive team mandates it, and b) your reserve program is competitive. Otherwise, they will always chase the money and what will line their pockets best.

How to drive the behaviour of the F&I team: Refine the F&I payment plans to motivate the shift to in-house (i.e. everything that isn’t subvented needs to go to the in-house leasing company, so compensate them accordingly). You will need proper leadership in the leasing company. This person needs to be independent of the dealership as they will ultimately need to be accountable for the credit approval process.

Your credit approval process needs to be tight and solid. No loopholes. Completely independent from the dealerships. Where mediation is needed, management must always side with the decision of the in-house leasing company or it will always face the risk of nonpayment.

Risk management: Your risk mitigation strategy starts and ends with an independent and transparent credit policy—it needs to be “fair but firm.” You will need to stress the importance of having a separate and strong leadership in this leasing company.

Your leader cannot be someone related to the dealership. Independence is key. This person must have a strong banking and finance background. There cannot be a vested interest or connection by the leasing company and the dealerships. They must be completely independent and run by a finance professional, not an automotive person. At the end of the day, a leasing company will have different metrics and KPIs based on risk, so hire a leader who truly understands this and is willing to develop a long-term strategy around this idea.

Benefit of an In-House Leasing Company

There are both financial and intrinsic benefits to starting a leasing company:

Financial benefit: In the long run, if you have enough on-road units and a pipeline that replenishes itself, you can make money. However, this won’t happen in years one to three. If you’re lucky, this could happen in year five or so. The key to winning in the leasing game is having a long view.

Intrinsic benefit: You’ll be able to control the customer and own the lifecycle of the vehicle. Your strategy should be to push three-year leases. If you assume a car lasts nine years before it is scrapped, you can make money on it three times over. Sounds good to me!

Structure of Leases (Open vs Closed End Lease)

Open end: Customer guarantees the residual value of the vehicle. They can either choose to buy the car at the end of the lease, or are responsible for the balloon payment at the end. Customer takes on all the risk.

Closed end: No guarantee of residual value in these types of leases. The leasing company is responsible for any decreases in residual values at the end of the lease.

From a risk mitigation perspective, in-house leasing companies should only be offering open ended leases. Moreover, when dealing with commercial leases, always assume a residual value of $1. The least amount of exposure you have, the better.

People/Staffing

This is by far the biggest make-or-break consideration. You need trustworthy people running and working in the following departments (not “Car Guys”):

Credit approval: Based on FICO Score or Beacon Score (Equifax, Credit Bureau). The Credit approval needs to be on a sliding scale, not a hit-or-miss exercise, otherwise your business will never get off the ground.

Collections: You will need people making collection calls and dealing with repossessions. This is the reality of this business, so you need a process to deal with this aspect too.

Relationships with lenders: You’ll need to build relationships with banks and a securitization partner.  This is your major cash flow injection every month. Without these key relationships, you won’t be able to stay cash positive and grow your business.

Assessing and updating residual values: Do this every month using Canadian Black Book or American Lending Guide. You need an accurate matrix to refer to in order to build proper leases and mitigate your risk exposure.

Defining your interest rate spread: Your opening APR needs to incorporate the following: Cost of funds + 2% + 300 bps or 400 bps to cover risk factors. Therefore, assuming your cost of funds is three per cent, your opening APR needs to be 7.99% or 8% (3% + 2% +300pbs). 

You can clearly see how difficult it is to compete against OEM lenders who are currently offering 4.99% on mainline brands. This means your customer base is really anyone who doesn’t care about prices (i.e. high net worth individuals who care more about the car they drive rather than the rate) or those individuals who don’t qualify elsewhere.

Of the two per cent spread you’ve built into your model, one per cent should be used to cover S,G&A expenses and one per cent to accrue for future losses (Reserve or Packs). Net-to-sales figures for an established leasing company runs between one to three per cent net-to-sales. Much of this comes from admin fees charged deals, excess KM fees and other sources of income

Financing covenants:

A leasing company is a leverage-based business. You will need to have access to at least 8:1 Debt-to-Equity to run this type of company. When negotiating with your bank, it is recommended that you push for 10:1 to be safe. This is a very capital intensive and leveraged type of business model, so plan ahead to ensure you can stay afloat.

A well-run leasing company can generate a tremendous amount of cash and help you funnel used vehicles to your dealerships. While risky, benefits can be huge. Strategically plan and consider the items mentioned above. Staff the project appropriately and you will see a successful business emerge in the long run.

Lease well!

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Six key considerations for choosing the right F&I partner for your dealership

Dealers spend a lot of time trying to maximize profitability in their F&I departments. The truth is, this is one of the few remaining profit centers that are still within your control — you can still choose your partner, products, margins and strategy that best meet your group’s objectives. 

While OEMs are slowly starting to penetrate these areas, as of today, dealers can still maintain some manufacturer independence in F&I. 

Finding a comprehensive F&I partner is a big decision. They need to deliver results now and future proof your organization for any upcoming changes within the industry. The F&I of today will not be the F&I of tomorrow. Your partner needs to be as fluid and forward thinking as you are so it’s extremely important to select wisely. 

Here are six areas to focus on when selecting the right F&I partner:

Product offering: Consider both the breadth and depth of products being offered. Do they fill the F&I gaps of your customer base? Do they align with your group’s positioning and perceived competitive advantage? Most of the major providers offer similar types of products, such as warranty, appearance protection, tire and rim protection, gap insurance, credit and life insurance, and various “bill of sale”-type products such as etching. The question really is, what products are you planning to sell and what strategies are you going to implement to increase penetration? 

Sales process provided: As dealer groups continue to expand by both brand and region, it is critical to have a consistent and unified approach to selling products, including digital selling. An F&I Manager in one store must speak the same language as one sitting in another store, and the sales pitch needs to be the same too. Decisions like whether to use menu selling or step selling needs to be established and supported by the partner you select. The goal here is to allow your business office to present as many of the products being offered as possible. The message needs to be one of support to the customer base. At the end of the day, buying extended warranty or paint protection isn’t going to materially change monthly payments so customers need to feel like they got “value” out of the transaction. F&I Managers need to change their focus from maximizing dealer profitability to maximizing the perceived value proposition. The money will naturally follow thereafter. 

Reporting: You will need a comprehensive and robust reporting tool. It needs to offer timely KPIs that can be used to drive operational decisions. Cloud-based tools have now become the standard too. I think it’s reasonable to expect an interactive and dynamic reporting portal from your partner as a minimum. It would also be great if your partner’s reporting tool integrated with your DMS system. This will eliminate error, manipulation and wasted time by your business office. Meaningful and timely reporting is a key success factor. 

Training: At the end of day, you will choose a partner because of their commitment to support your team. You need them more than they need you. They are the subject matter experts and they can train your team to be ones too. Some providers offer deep offsite training for days at a time while others rely on virtual courses that can be completed on your own time. You need to select one that fits your company’s culture best. Do you believe in the professional development of your staff? If so, show your support by giving them the training tools they need. 

Presence within the dealership: Perhaps the biggest item on the list is your partner’s commitment to in-store visits. Force your partner to prove themselves to you. How many in-store visits will they commit to? What type of support are they offering, how will they work with managers and the F&I team? You don’t want to just hear the words, they must do it! This will be the “game changer” and is directly correlated to improved performance. If your prospective partner offers a consistent and value-added presence in your dealership, choose them. Full stop. 

Profit sharing: This last point is important but shouldn’t be the deciding factor. Most major providers offer some sort of profit-sharing model. Some are offshore, some are domestic programs. The key is that they offer a “win-win” opportunity. These payouts will be big once you are fully integrated and maximizing the program. There are some tax issues to consider here too if you are considering an offshore program. It generally takes dealers approximately five years to achieve optimization here so you need to be committed for the long run. 

Choosing the right F&I Partner is a “major” decision in a dealership and should not be taken lightly. Using a strategic selection method is key. The six criteria presented above will help you in the selection process. Feel free to use it and tweak it to meet your needs.

The right partner is out there—you just need to find them. 

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Here are a few handy tips to closing your books within five business days

What makes a solid accounting team? Most would say their ability to close the month within a reasonable time frame. 

OEMs require financial statements to be submitted by the 15th of the following month, however, for today’s dealer groups, that is way too slow. Today’s average time to complete month end accounting and deliver financial reporting is 5 business days. Some even do it quicker. 

Financial information is most useful to end users when it is available immediately following the event(s) that is sought to record. If a car is sold in July, it must be recorded in July. 

If shop supplies are bought in September, it must be recorded in September. Delays are unacceptable — transactions must be recorded accurately and in a timely manner. If you follow this practice, your financial and operational reports become a valuable management tool. 

Here are some tips to help you find the “Holy Grail” — closing your books within 5 business days:

Align goals and objectives and ensure that your staff and 3rd party vendors understand your cutoffs. Make sure that no conflicting interests exist. 

This really starts with your organization’s executive team. Everyone must know and follow the 5-day close rule and it is senior management’s job to educate their team. 

Establish and circulate cutoff deadlines throughout the dealership. As an example: Only cars delivered by “X” date will be recorded this month, anything delivered after, even 1 minute after, will be posted the following month. 

Leverage accruals where possible. If vendor invoices aren’t received by “Y” date, just accrue for them. This ensures expenses are recorded the correct period without having to delay the closing process. Be stern on this. By following strict schedules, financial data becomes more quickly available to end users. The more you make exceptions to the rule, the harder it is to meet your deadline.  

Streamline and automate current business processes. Use technology to make things more efficient. If it doesn’t add value to the dealership, stop doing it. Involve front line staff in this change and reward them for their ideas. Staff members who involve themselves in changes tend to take ownership of new processes, allowing it to become the norm more quickly. 

Transactions should be entered into your DMS system as soon as they occur. Set intra-month deadlines for accounting staff to ensure things happen routinely and in a timely manner. Use standard entries where possible — it definitely speeds things up. When posting errors are discovered, work with your team to find the root cause and adjust processes to eliminate the error from reoccurring.

Post bank transactions on a daily basis. Demand that bank reconciliations be prepared, and reviewed, every single day — no exceptions. This is the key to hitting that 5-day close benchmark. Track vehicle deliveries daily and ensure these get posted in a timely manner. If you don’t, bottlenecks will occur at month end. 

Think about adjusting commission cut-off dates for sales staff to, say, the 25th of the month. This will cause fewer deals to be delivered at month end which always helps the accounting team during this busy time.     

When managing large accounting departments, it is critical to have internal checklists. Each team member should follow their own personal checklist, which, should, all fit into the bigger list. 

My experience has also shown me that there are a handful of “non-negotiable” items that must occur daily and some key timelines which make the process work smoothly. I lay these out below:

Non-Negotiable Tasks:

• Bank Reconciliation must be done daily. All outstanding items need to be addressed that same day. No transaction is allowed to carry forward. 
• Part Statement invoices need to be posted every day. This will make the month end parts statement reconciliation much smoother.
• Floor plan payouts need to happen everyday. No exception. This ensures your cash position is as true as possible and that your assets and liabilities reflect reality. 
• Deals need to be posted within two days after they are received in accounting. No delays are allowed. 
• The payables team must post all invoices they receive in the mail before they go home at night. You’d be surprised how doable this is and the huge effect is has on meeting your closing deadline

Key Timelines:

• Business day 20 (the month you are closing) to Business Day 5 (the month after you are closing):
  • The accounting team needs to focus on items that impact the P&L (posting deals, invoices, revenue and expense items)
• Business day 6 to Business Day 19 (after you have closed the month) 
  • The accounting team should be focusing on items that impact the cleanliness of the Balance Sheet (cleaning schedules, printing payables cheques, collecting receivables.)

If you follow these simple guidelines, you will have no problem cutting down the days needed to close the month. Hitting a 5-day close will naturally result. Your accounting team will be the envy of the industry, and very soon, you will be looking for ways to reduce the closing process to 3 days. 

Give it a shot! You’ll be happy you did.

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What to think about when buying a business

I’ve often felt that leaders in the retail automotive space are the most entrepreneurial people in business. They are self-motivated and driven, communicative and resourceful. 

Most importantly though, their ability to be nimble in the face of adversity is what really sets them apart from the average person. We have seen this in spades throughout the COVID pandemic. 

Dealerships have not only survived, they have thrived; growing in profitability, size and capacity. The acquisition market remained hot throughout the first quarter of 2022 with multiples on premium brands averaging six to eight times EBITDA.  

The continued strength of the retail automotive space is really a testament to this entrepreneurial spirit. Leaders are constantly looking to grow their business. The best in class are always exploring new opportunities—whether that means acquiring new dealerships or complementing an existing business with an ancillary-type venture. 

Let’s explore the things you should consider when analyzing a new business:

Current financial markets and economy: Consider the general state of the economy with specific focus on the sector you are looking to participate in. Is it strong and growing, or weak and bearish? How will interest rate increases impact your opportunity? This factor will be more important for those needing acquisition financing and inventory return expectations, so ensure you consider this factor from a broad perspective.

Financial strength of the business: Consider the stability and consistency of the earnings you are analyzing. You are trying to determine if the number you are looking at is a “normal” representation of what this business can actually achieve. 

Don’t be afraid to ask hard questions. If you see a large spike or drop in earnings you need to do the work to understand why. This will have a direct impact on the acquisition price. 

For volume-based businesses, such as automotive dealers, you also need to consider that high-volume businesses generally attract higher multiples than low ones—even if they generate the same net profits. This is what I call the “momentum” factor. There is an unexplained energy that exists in a dealership that is constantly busy—the hustle and bustle is infectious and creates momentum that could lead to bigger and better profitability in the future. 

Your front-line manager, not the executive team, will drive the success of the business from a customer and strategy perspective. While owners take the risk, it is really the team below them that will make the gears turn properly. 

Location, location, location: Dealerships located in high growth, business-friendly areas will demand a premium compared to those that are located in desolate rural places. The real question you need to ask is, can you create a synergy with the acquired entry, assuming the location won’t change in the near future? 

Management team and employees: Inheriting a quality management team is the real “game changer” in your business venture. The wrong people will surely lead you to failure. 

Your front-line manager, not the executive team, will drive the success of the business from a customer and strategy perspective. While owners take the risk, it is really the team below them that will make the gears turn properly. Without them, you will fail. Full stop. To that end, you must not only consider the employees you are acquiring, but more importantly, what your strategy is to retain them.  

Real estate: In major Canadian markets, such as Toronto and Vancouver, real estate ownership creates a natural hedge against poor operating results. It is therefore more valuable to buy a business that owns its land and building than one that doesn’t. While you may not be a real estate mogul, the possible financing and leveraging opportunities are endless when you own an asset that is guaranteed to increase in value over time. 

Reputation: Dealerships with strong brand reputation will attract the biggest multiples. That is because of the uphill battle one must climb when you are trying to alter customer perception of your organization. It’s very tough to change what people think of you. You’ll need to spend a lot of time and money to win back customers and this might not be a battle you can win. Before signing the agreement, speak to a sample of the dealership’s customer base to gain insights on where improvements need to be made. Then draft your plan of attack. 

The “You” factor: This is one that buyers often overlook. You need to know what you are bringing to the table and determine how this addition will fit in your business structure—even more importantly, how you will fit with it! 

What can you and your team offer this business that will help them take off—is it financial resources, strategic leadership, external relationship, synergies or complementary services? This list can be long or short. 

The key is for it to be derived from “truth.” Be factual and honest. Do a SWOT analysis of yourself and remember to document it. This will lead to a solid action plan and setting yourself up for success. 

None of the items discussed above should be new to you—this is Business 101. It’s simply a logical approach created when one uses a critical thought process. 

This is why you pay consultants the big bucks —to develop a systematic, step-by-step way of thinking that will improve the likelihood of your success. 

The key takeaway here is that you need to think before you act. You can not enter into a new business without doing the preliminary deep thinking. Plan before you act. Remove your gut from the equation. Ask the right questions. This will give you the best chance of winning. 

Good luck on hunting for your next venture.

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