Automotive benchmarking survey - First quarter 2018

Authored by Mike Krueger

On a quarterly basis, Baker Tilly conducts a benchmarking study of auto dealerships. Respondents to the most recent study were primarily dealerships located in the Upper Midwest. This whitepaper summarizes key data as of and for the quarter ended March 31, 2018 (Q1 2018 or Q1), with comparisons to the same period in 2017 (Q1 2017) and to the four quarters ended December 31, 2017 (Q4 2017 or 2017). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

State of the industry

New vehicle sales in Q1 2018 increased 1.9 percent nationally over Q1 2017 due in part to two additional selling days compared to last year and increasing manufacturer incentives. Although analysts forecasted new vehicle sales volumes to be comparable to 2018 (17.1 million units), the SAAR came in at almost 17.5 million units. Trucks and SUVs represented almost two-thirds of new vehicle sales, up from 63.0 percent in Q1 2017, but down from 69.0 percent for the year 2017.

The bottom line

Year-to-date net income as a percentage of sales for the average dealership was 1.43 percent, which is a slight increase from 1.33 percent through Q1 2017 and well above the 1.14 percent for 2017. Improvements in fixed coverage increased the bottom line performance over Q1 2017 and the full year for 2017. Fixed coverage through Q1 2018 was 70.7 percent compared to 66.5 percent for Q1 2017 and 68.0 percent for the four quarters ended Dec. 31, 2017. The following graph shows year-to-date net income as a percentage of sales over the most recent quarters.

Year-to-date net income as a percentage of sales

New vehicles

New vehicle grosses per unit declined during Q1 2018, falling below $800. The decline in new vehicle grosses was primarily caused by cars being discounted in order to make sales. The following shows the trend in the average new vehicle gross per unit over the past ten quarters.

Year-to-date gross per new vehicle retailed

After hovering above $280 per new vehicle retailed (PNVR) throughout 2017, advertising expense PNVR decreased to $230, which is $78 lower than YTD Q1 2017 and $51 lower than YTD Q4 2017.

Net floor plan interest PNVR increased for the fifth quarter in a row. The average dealership incurred $40 in floor plan interest PNVR in Q1 2018, compared to $17 per unit sold during 2017. This change was primarily due to two factors — an increase in short-term interest rates and an increase in the days’ supply of new vehicles.

New vehicle inventory levels increased to 130 days at Q1 2018 compared to 119 days at year end 2017. Compared to one year ago, the days’ supply decreased 16.8 percent from the 146 days at Q1 2017, which represented the highest new vehicle inventory level in the last ten quarters as demonstrated in the graph below.

Days’ supply of new vehicles

Used vehicles

While the declining new vehicle sales volume in the fourth quarter was felt to a stronger degree in the used vehicle market, the increasing new vehicle sales volume in Q1 2018 benefitted the used vehicle market, and also to a stronger degree. Through Q1 2018, 1.09 used vehicles were sold for every new vehicle sold.

Similar to new vehicle trends, used truck and SUV sales continued to outpace used car sales. The average dealer sold 1.89 used trucks/SUVs for every used car sold. This is up 17.4 percent from 2017 when 1.61 used trucks/SUVs were sold for every used car sold.   

Used vehicle grosses declined again for the fourth quarter in a row, with an average gross profit per used vehicle retailed (PUVR) of $1,265 for Q1 2018. The following shows the year-to-date gross profit PUVR for the most recent quarters.

Year-to-date gross per used vehicle retailed

Reductions in advertising expense helped offset the decrease in average used vehicle grosses. Advertising expense PUVR decreased $63 from $319 for 2017 to $256 for Q1 2018 — a reduction of 19.7 percent.

The increased sales volumes helped push the days’ supply of used vehicles to 76 days at the end of Q1 2018, which was an historical low for recent years. The used vehicle days’ supply was 83 days at the end of 2017.

Finance and insurance (F&I)

Although vehicle sales volumes were up in Q1 compared to Q4 2017, penetration rates decreased — most notably for insurance and extended service contracts. The following shows YTD penetration rates for Q1 2018 and Q4 2017.

Year-to-date penetration rates

The decrease in penetration rates did not have a significant impact on F&I productivity. Net F&I income (before compensation) per new retail unit sold decreased $6 from Q4 2017 to $977, and net F&I income (before compensation) per used retail unit sold increased $3 from Q4 2017 to $765. The following graph shows net F&I income before compensation for the most recent quarters:

Year-to-date F&I income before compensation per retail unit sold

Service

Customer pay labor sales surpassed 48 percent of total sales for the first time in seven quarters, while customer labor sales per RO based on standard labor rates was above 1.00 for the first time in almost three years. As a result, productivity measures such as service labor gross and total gross per technician per month both increased in Q1. Service labor gross per technician per month was $5,137 for Q1 2018 compared to $4,806 for 2017, and total gross per technician per month was $10,156 for Q1 compared to $9,672 for 2017. The following graph shows the total gross per technician per month over the ten most recent quarters.

Total gross per technician per month

Even though productivity measures per technician increased, unapplied time increased 50 basis points to 3.7 percent of departmental gross profit compared to the year ended December 31, 2017.

Parts

After peaking in Q2 2017, total parts gross profit percentage declined for the third consecutive quarter. Total parts gross profit percentage was 32.3 percent for Q1, down from 32.7 percent for 2017 and 33.1 percent for Q1 2017. The graph below shows the gross profit percentage trend over recent quarters.

Total parts gross profit as a percentage of sales

After two quarters at 60 days, the days’ supply of parts inventory decreased to 56 days as of March 31, 2018. The days’ supply of parts inventories as of the most recent quarters is as follows:

Days’ supply of parts inventory

Body shop

Total body shop gross profit as a percentage of sales decreased for the third consecutive quarter to 56.1 percent from 57.3 percent through Q4 and 58.0 percent through Q2 2017. The decline in Q1 was primarily attributable to a reduction in customer pay work. Customer labor made up 55.2 percent of total departmental sales, compared to 56.2 percent through Q4 2017. The following shows the YTD body shop gross profit percentages for the most recent quarters of our survey:

Year-to-date body shop gross profit percentage

Conclusion

Year-to-date increases in vehicle sales volumes bodes well for dealers if vehicle grosses can recover from the Q1 downturn. If new vehicle sales volumes normalize to the 2018 industry forecast over the next three quarters, or if vehicle grosses do not recover, dealers should focus on controlling expenses and continuing to manage their inventories to improve their profitability.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.