Baker Tilly automotive benchmarking survey – Third quarter 2017

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 three quarters ended Sept. 30, 2017 (Q3 2017), with comparisons to the same period in 2016 (Q3 2016) and to the two quarters ended June 30, 2017 (Q2 2017). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

State of the industry

September was a record month for the auto industry with more than 1.5 million new units sold, a 6.0 percent increase over September 2016 (source: Stephens Auto Sales & SAAR survey, September 2017). The September seasonally adjusted annualized selling rate (SAAR) was 18.6 million vehicles, the highest since July 2005. September increases were mainly attributable to demand for replacement vehicles in hurricane stricken areas. September’s robust sales served to correct the excess inventory levels seen in recent quarters. In addition, manufacturers continued to offer high incentives in order to move 2017 models and make room for the incoming 2018 models. Although September sales were extraordinary, increased sales resulting from hurricane replacement demand is only anticipated to continue for another month or two. Analysts are still forecasting a decline in 2017 new vehicle sales compared to the record sales experienced in 2016, and industry unit sales volumes are down almost 2 percent compared to the first three quarters of 2016.

As a whole, the new vehicle sales cycle is anticipated to enter a downturn starting with 2017. Leasing has continued strong into 2017 and is anticipated to stay strong in the coming years. Substantial amounts of off-lease vehicles are expected to flood the market in the coming years, which will put downward pressure on the new vehicle market.

Gas prices remained low throughout the first three quarters of the year enticing buyers to continue choosing trucks and SUVs over cars.

The bottom line

Year-to-date net income as a percentage of sales for the average dealership was 1.61 percent, which is a slight decrease from 1.67 percent through last quarter. In addition, bottom line performance through the first three quarters of 2017 is well below the 1.94 percent measured for the same period in 2016. The following shows the trend in bottom line performance over the past ten quarters.

Year to date net income as a percentage of sales

The decline in net income as a percentage of sales compared to Q3 2016 can be attributed to declining new vehicle grosses, increasing interest rates and increased spending on advertising.

New vehicles

Strong demand for new trucks and SUVs continued into the third quarter. Trucks and SUVs represented 63.6 percent of YTD new vehicle sales, up from 59.7 percent a year ago (source: Stephens Auto Sales & SAAR survey, September 2017). According to Stephens, new vehicle sales were 12.8 million units through Q3 2017, compared to 13.0 million units a year ago. 

New vehicle grosses per unit declined compared to Q2 2017, and are still well below grosses in 2016 and 2015. 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

Net floor plan interest per retail unit sold increased $93 year over year. The average dealership was receiving $81 per unit in floor plan assistance in Q3 2016, compared to incurring $12 per unit in floor plan interest expense in Q3 2017. Advertising expense per retail unit sold increased from $256 per unit in Q3 2016 to $292 per unit in Q3 2017, a 14.2 percent increase.

Dealerships’ new vehicle inventory levels normalized by the end of Q3 2017 with the days’ supply decreasing to 108 days. The previous two quarters in 2017 exceeded 140 days, which represented the highest inventory levels in the last ten quarters as demonstrated in the graph below. Decreased inventory levels are attributable to increased sales, in part due to continued increases in manufacturer incentives, particularly on 2017 models. 

Days’ supply of new vehicles

Used vehicles

Although used vehicle sales continued to outweigh new vehicles sales through the first three quarters of 2017, new vehicles gained market share. Through Q3 2017, 1.04 used vehicles were sold for every new vehicle sold, which is an 8.8 percent decrease through Q2 2017 when 1.14 used vehicles were sold for every new vehicle sold. In comparison, 1.01 used vehicles were sold for each new vehicle sold through Q3 2016.

Similar to new vehicle trends, used truck and SUV sales continued to outpace used car sales, with the average dealer selling 1.61 used trucks/SUVs for every used car sold. This is up from one year ago when 1.46 used trucks/SUVs were sold for every used car sold.   

Used vehicle grosses declined in Q3 and remain below grosses attained one year ago. Gross profit per used vehicle retailed (PUVR) decreased from $1,334 through Q2 2017 to $1,305 through Q3 2017, a 2.2 percent decrease. Compared to one year ago, gross profit PUVR dropped from $1,342, a 2.7 percent decrease year over year.

Year to date gross per used vehicle retailed

The days’ supply of used vehicles has remained at a steady 78 days for each of the first three quarters of 2017, a historical low for recent years. Used vehicle days’ supply was previously 92 days as of Sept. 30, 2016.

Finance and insurance (F&I)

Net F&I income (before compensation) per retail unit sold remained strong through Q3 2017, measuring $977 for new vehicles and $776 for used vehicles, compared to $936 and $740 through Q3 2016, respectively. The following graph shows the trend of net F&I income before compensation for the most recent quarters:

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

Although finance penetration rates dipped below figures one year ago for both new and used vehicles, insurance penetration rates on used vehicles increased significantly compared to one year ago. Insurance penetration rates on used vehicles increased 12.7 percent year over year (24.1 percent in Q3 2017 compared to 21.4 percent in Q3 2016). Finance penetration rates for both new and used vehicles decreased year over year by 3.2 percent and 4.6 percent, respectively. Extended service contract penetration rates remained comparable with Q3 2016.

The front and back ends of new vehicle deals on a combined basis remained comparable year over year, decreasing slightly to $1,877 through Q3 2017 from $1,893 through Q3 2016. Used vehicles were also comparable with front and back ends on a combined basis decreasing to $2,081 through Q3 2017 from $2,083 through Q3 2016.

Service

Although total service gross profit as a percentage of sales decreased slightly to 65.11 percent through Q3 2017 from 65.20 percent through Q3 2016, the monthly average gross per technician increased $265 to $9,764 through Q3 2017 from $9,499 through Q3 2016, a 2.8 percent increase. The following graph trends the total gross per technician per month over the ten most recent quarters.

Total gross per technician per month

The year over year growth noted above is attributable to increased shop rates resulting in increases in service customer labor sales per RO. The average customer pay shop rate increased from $107 as of Q3 2016 to $112 as of Q3 2017, a 4.3 percent increase.

The mix of service work in the first three quarters of 2017 was generally comparable to the same period in 2016, as customer, internal and warranty labor all changed by less than 100 basis points.  Customer labor sales were 47.88 percent through Q3 2017, compared to 47.00 percent a year ago, while internal labor and warranty labor flipped.  Internal labor accounted for 21.04 and 20.52 percent of total service sales through Q3 2017 and 2016, respectively, while warranty labor accounted for 20.83 and 21.02 percent of total service sales through Q3 2017 and 2016, respectively.

Parts

After peaking in Q2 2017, the average dealer saw total parts gross profit percentage normalize in Q3 2017. The rise in productivity last quarter related to increased body shop sales per RO, which decreased by the end of Q3 this year. Total parts gross profit percentage dropped 10.8 percent from 37.0 percent through Q2 2017 to 33.0 percent through Q3 2017, but remained comparable to Q3 2016 increasing just 0.4 percent year over year. The graph below shows the gross profit percentage trends over recent quarters.

Total parts gross profit as a percentage of sales

Parts inventory supply continued to climb during the third quarter of 2017. After five consecutive quarters at or below 59 days, the days’ supply of parts inventory increased to 60 days as of Sept. 30, 2017. 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 remained comparable through Q3 year over year at 57.5 percent. Although total labor sales per RO increased 3.9 percent from $658 through Q3 2016 to $684 through Q3 2017, the body shop gross profit percentage remained comparable to last year due to lower labor sales as a percentage of total department sales. The following shows the trend of YTD body shop gross profit percentages for the most recent quarters of our survey:

Year to date body shop gross profit percentage

Since last quarter the gross profit percentage dropped slightly from 58.0 percent. The decline from Q2 to Q3 this year is the result of decreasing total labor sales per RO, which decreased from $722 through Q2 2017 to $684 through Q3 2017, a 4.5 percent decrease.

Conclusion

Overall, through Q3 2017:

  • YTD new vehicle sales volumes are down compared to last year despite a record sales month in September
  • Overall market demand resulting from hurricane replacement vehicles is expected to last through the end of this year, but is not anticipated to push the industry into another record year
  • New vehicle grosses continue to erode, but are being buoyed by F&I
  • New inventory levels have come down significantly since earlier this year when days’ supply was at record highs
  • Increased parts and body shop productivity in Q2 was an anomaly and came down to normalized levels in Q3
  • Fixed operations gross profit margins are comparable to one year ago, which helped keep net income as a percentage of total sales above 1.6 percent
  • Continued pressure on new vehicle grosses, increased interest rates and increased advertising costs are major factors in the decreased bottom lines year over year (1.61 percent through Q3 2017, down from 1.94 percent through Q3 2016)

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