Baker Tilly automotive dealership benchmark survey - Fourth quarter 2015

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 four quarters ended December 31, 2015 (Q4 2015), with comparisons to the same period in 2014 (Q4 2014) and to the three quarters ended September 30, 2015 (Q3 2015). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

Year in review

The industry experienced its best year since before the American auto industry bailout in 2009. Six years after the recession, which greatly impacted dealers across the United States and around the world, car buyers came out of the woodwork and demonstrated they were ready for an upgrade.

Vehicle sales in 2015 soared due to an improving economy, higher wages, lower gas prices, and pent up demand from the recession. Although real GDP was estimated to increase 2.2 percent in 2015, the annual rate rose 2.4 percent over 2014. According to the Bureau of Labor Statistics, unemployment dropped to 5.0 percent in December 2015, the lowest it’s been since June 2008. Low unemployment rates are a sign of a healthy economy as the fulfillment of jobs is necessary to support consumption growth. Nationwide, the average price of gas dropped to $2.40 per gallon in 2015, down from $3.34 per gallon in 2014. Gas price levels are the lowest since 2009 and according to both the U.S. Energy Information Administration (EIA) and AAA, gas prices are expected to remain low throughout 2016 as well. With gas prices the lowest in years, car buyers are gravitating toward SUVs and Trucks. Sales of light trucks and SUVs increased 13 percent over 2014, while passenger car sales fell 2 percent from 2014. A combination of employment confidence and low gas prices, coupled with the average vehicle on the road being 11 years old, has led consumers to finally take the plunge to buy.

Perhaps surprising to some, consumers didn’t lose confidence in car makers despite the Volkswagen engine-emissions tests scandal and the Takata air-bag flaw, which resulted in the largest automotive recall in history.

The bottom line

Although dealership profitability continued to decline in the fourth quarter of 2015, overall profitability for the year remains above 2014 levels. As shown below, net income year to date as a percentage of sales was 1.58 percent through Q4 2015, compared to 1.41 percent through Q4 2014. Declines in year to date net income as a percentage of sales throughout the second half of 2015 are mainly attributable to decreasing vehicle grosses.

YTD net income as a percentage of sales

New vehicle sales

Industry wide, the number of new units sold in 2015 hit a 15-year record. According to a survey by Stephens, new units sold during 2015 reached 17.4 million, compared to 16.4 million in 2014, a 5.8 percent increase. In comparison, new vehicle sales in 2009, in the midst of the recession, were 10.4 million units. Both domestic and import unit sales increased at the same rate (5.8 percent over 2014) and as a result, the proportion of domestic and import unit sales remained comparable to 2014 (45.2 percent domestic and 54.8 percent import).

Truck unit sales increased 12.8 percent compared to 2014, while car unit sales decreased 2.1 percent year over year. As a result, truck sales gained more market share compared to last year (56.7 percent in 2015 compared to 53.2 percent in 2014).

Although the industry experienced record unit sales in 2015, the average gross per new vehicle retailed has drastically fallen since December 2014. The following graph represents the average gross per new vehicle retailed over recent quarters:

YTD gross per new vehicle retailed

New vehicle sales in units continued to outnumber used vehicle sales through the fourth quarter of 2015. The ratio of new to used vehicle sales through Q4 2015 was 1.07 compared to 1.08 through Q3 2015. However, this figure is still well below the 1.16 noted through Q4 2014.

New vehicle inventories in terms of days’ supply bottomed out in September for the third year in a row. At year-end, day’s supply of new vehicles decreased compared to one year ago due to increased sales near year end. At the national level, new vehicles sold in December 2015 were 1.6 million units compared to 1.5 million units in 2014, a 9 percent increase. The days’ supply in units for the most recent quarters is as follows:

Days' supply of new vehicles

Net floor plan interest income (floor plan interest, net of floor plan assistance) PNVR was $117 through Q4 2015, which is considerably higher than the $82 PNVR through Q4 2014. The increase in net floor plan assistance is primarily attributable to dealerships turning new vehicle inventories quicker in 2015 compared to 2014. In addition, dealerships have also benefited from competition between floor plan lenders and the resulting decrease in floor plan rates.

Used vehicle sales

Used vehicle sales have increased for the sixth consecutive year. During 2015, 16.2 million used vehicles were sold compared to 14.2 million units in 2014–a 14.5 percent increase. The increased demand for used vehicles has resulted in the fourth consecutive quarter where the supply of used vehicles in units has been less than 90 days. The average days’ supply in units as of December 31, 2015 declined to 83.3 days compared to 95.9 days as of December 31, 2014.

Similar to new vehicle trends, the average gross per used vehicle retailed (PUVR) continued to decline in Q4 2015, dropping to an average of $1,216 for the year, which is 12 percent lower than the $1,389 average noted for 2014.

Following is the trend of recent quarters:

YTD gross per used vehicle retailed

Finance and insurance (F&I)

Through the four quarters ended December 31, 2015, net F&I income continued to outperform prior year. Net F&I income per contract increased year over year – climbing 1.3 percent for new vehicles ($646 in 2015 compared to $637 in 2014) and 5.4 percent for used vehicles ($570 in 2015 compared to $541 in 2014).

Net F&I income (before compensation) per retail unit also remained strong during 2015, increasing 2.2 percent and 6.5 percent for new and used vehicles, respectively. Net F&I income (before compensation) was $867 for new vehicles and $703 for used vehicles for the year ended December 31, 2015, compared with $848 for new and $660 for used vehicles during the same period last year. The following graph shows the trend of net F&I income before compensation for the most recent quarters:

YTD F&I income before compensation per retail unit sold

Service

Overall service productivity, measured by total gross per technician per month, fell 5.8 percent in 2015 compared to 2014 ($8,766 through Q4 2015 compared to $9,307 through Q4 2014). This decrease can be attributable to increased warranty work (including recalls) and smaller service jobs. Recalls reached a record 51.26 million vehicles during 2015 according to the National Highway Safety Transportation Administration. Warranty labor as a percentage of total labor sales averaged 21.7 percent in 2015 compared to 20.5 percent in 2014. In addition, total service labor sales per RO decreased to $175 in 2015 from $186 in 2014.

Although the YTD percentage of customer labor sales increased slightly from 2014 (48.4 percent versus 47.9 percent), levels throughout 2015 were consistently below 50 percent. The trend of customer pay labor as a percentage of total service sales follows:

YTD customer labor as a percentage of service sales

Parts

Parts productivity for 2015, measured as total parts gross per counterperson per month, increased 6.5 percent over 2014. A comparison of parts productivity measures for recent quarters follows:

Average monthly parts gross per counterperson YTD

YTD quarter ending: 201520142013
March 31$ 25,916$ 25,723$ 24,596
June 30$ 25,576$ 25,874$ 25,528
September 30$ 27,249$ 26,422$ 26,400
December 31$ 27,479$ 25,801$ 27,863

Parts sales per counterperson per month increased 6.0 percent over last year ($85,654 in 2015 versus $80,781 in 2014) while margins remained comparable (31.9 percent for 2015 versus 32.0 percent for 2014).

Parts inventory levels have remained relatively consistent year over year with a 58 days’ supply   at December 31, 2015 compared to 59 days at December 31, 2014. As of September 30, 2015, the average dealership had a 60 days’ supply.

Body shop

Total body shop gross profit as a percentage of sales for 2015 was 59.1 percent, which is an improvement over 2014 (57.6 percent), and the highest point in three years. In addition, total salaries and wages as a percentage of gross profit decreased 1.8 percent from last year (35.3 percent for 2015 compared to 35.9 percent for 2014). The following shows the trend of YTD body shop gross profit percentages for the most recent quarters:

YTD body shop gross profit percentage

Conclusion

Overall, through Q4 2015:

  • Vehicle sales volumes were up industry-wide for both new and used vehicles.  Sales of new SUV’s and trucks continued to outpace sales of new cars and the margin between the two continued to widen due to lower fuel prices.
  • Although average new and used vehicle grosses continued to plummet to or toward the lowest point in the past two years, increased vehicle sales volumes result in improved profitability.

The outlook for 2016 is uncertain. The National Automobile Dealers Association is forecasting 17.7 million new unit sales for 2016, but only if manufacturers increase their incentives.  The potential for interest rate increases may negatively affect new vehicle sales in 2016 and rising interest rates will also negatively impact dealership profitability. 

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