Baker Tilly automotive dealership benchmark survey - First quarter 2016

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, 2016 (Q1 2016), with comparisons to the same period in 2015 (Q1 2015) and to the four quarters ended December 31, 2015 (Q4 2015). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

Overall

Coming off a record setting year, the question remains whether new vehicle sales can meet the 2016 industry forecast of 17.7 million new units. Although the monthly deliveries for March increased 3.1 percent over last year, the seasonally adjusted annual rate (SAAR) dropped to 16.46 million units—a 3.5 percent decrease according to the National Automobile Dealers Association (NADA). This is also the first month since April 2015 where the SAAR dropped below 17 million units.  Trucks, both new and used, continue to outsell cars due to low gasoline prices.

The bottom line

Dealership profitability is usually at its low point in the first quarter of the year.  As shown in the graph below, net income year to date as a percentage of sales was 1.30 percent in Q1 2016, compared to 1.57 percent in Q1 2015. Declines in bottom lines are mainly attributable to decreased vehicle grosses year over year and increase floor plan interest due to higher new vehicle inventory levels. In addition, fixed expenses as a percentage of total gross profit increased 9.2 percent over this time last year (42.4 percent in Q1 2016 compared to 38.8 percent in Q1 2015).

YTD net income as a percentage of sales

New vehicle sales

March marked the first month since April 2015 where the seasonally adjusted annual rate (SAAR) fell below 17 million units. The auto industry saw an overall 3.1 percent increase in new vehicle deliveries in the first quarter of 2016 compared to 2015. Continued new vehicle sales growth is largely attributable to increased manufacturer incentives. Manufacturers spent an average of 14 percent more on incentives in March alone compared to levels in 2015. As previously noted, low interest rates and gasoline prices continue to impact sales favorably as well.

Gross per new vehicle retailed bounced back in the first quarter of 2016 compared to grosses at the end of 2015, but still remain below levels at this time last year. The following graph represents the average gross per new vehicle retailed over recent quarters:

YTD gross per new vehicle retailed

For the first time since Baker Tilly began publishing the survey results, respondents reported used vehicle sales outnumbering new vehicle sales. The ratio of new to used vehicle sales for the first quarter of 2016 was 0.88 compared to 1.04 for the same period in 2015. Since March 2013, the ratio has ranged from 1.01 to 1.26. This quarter’s drop is being driven by domestic auto dealers, while the average import dealer continued to experience higher new to used vehicle sales ratios in Q1 2016.

Although the industry saw an increase in new vehicle sales, new vehicle inventories in terms of days’ supply increased 39.0 percent compared to the end of 2015 and 13.8 percent compared to Q1 2015. The days’ supply in units for the most recent quarters is as follows:

Days' supply of new vehicles

Higher than normal inventory levels have led to increased interest costs, which is also contributing to the decreased bottom line profitability. Net floor plan interest income (floor plan interest, net of floor plan assistance) PNVR was $69 through Q1 2016, which is considerably lower than the $117 PNVR through Q4 2015 and lower than the $76 for Q1 2015.

Used vehicle sales

According to NADA, auction volume for late models (0-3 years old) increased 7 percent compared to Q1 2015. Trucks have accounted for the majority of this volume with a 40 percent increase over last year followed by compact utilities and subcompact cars, which were both up an average of 26 percent. Conversely, mid-size vans, large cars, and luxury large car sales were down significantly compared to Q1 2015 (decrease of 29-31 percent each).

Although supply of used vehicles in units has consistently been below 90 days since December 2014, the supply increased from 83 days at the end of 2015 to 87 days at the end of Q1 2016. For comparison, supply was at 85 days in Q1 2015.

Similar to new vehicle trends, the average gross per used vehicle retailed (PUVR) bounced back in Q1 2016 with an average of $1,309 PUVR, compared to $1,216 for 2015. This increase is due to the increased demand for used trucks.  However, grosses PUVR are still below levels one year ago ($1,317 in Q1 2015).

Following is the trend of recent quarters:

YTD gross per used vehicle retailed

Finance and insurance (F&I)

Dealers experienced a slight decrease in F&I performance in Q1 2016 compared to the same period in 2015. Overall, F&I products per retail unit sold decreased 4.6 percent year over year while penetration rates on insurance and extended service contracts decreased. Net F&I income per contract (before compensation) dropped to $871 per new retail unit sold, compared to $901 in Q1 2015 (a 3.4 percent decrease). Net F&I income per used vehicle retailed (before compensation) remained comparable year over year ($726 in Q1 2016 compared to $717 in Q1 2015). 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, increased 2.6 percent in Q1 compared to the same period last year ($9,313 in Q1 2016 compared to $9,078 in Q1 2015). The overall increase in activity is being driven by increased shop rates and additional warranty work. The average shop rate increased roughly 1 percent from $106 in Q1 2015 to $107 in Q1 2016. Warranty labor as a percentage of total labor sales averaged 23.7 percent in Q1 2016, an 8.0 percent increase from Q1 2015. These increases are being mitigated by a decrease in customer labor sales as a percent of total sales, which decreased from 48.6 percent in Q1 2015 to 46.7 percent in Q1 2016 (a 3.7 percent decrease year over year). In addition, total service labor sales per RO decreased from $103 in Q1 2015 to $96 in Q1 2016 (a 6.7 percent decrease). As a result, total service department gross profit as a percentage of sales dropped 1.6 percent compared to Q1 2015 (65.2 percent in Q1 2016 compared to 66.2 percent in Q1 2015). The trend of customer pay labor as a percentage of total service sales follows:

YTD customer labor as a percentage of service sales

Parts

The average parts department experienced significant increases over this time last year, primarily due to increased body shop activity. Parts sales per body shop RO increased 8.1 percent ($811.93 per RO in Q1 2016 compared to $750.80 per RO in Q1 2015).  As a result, parts sales per counterperson per month increased 10.5 percent over last year ($89,470 in Q1 2016 versus $80,988 in Q1 2015). 

Although gross profit margins remained comparable to a year ago (32.1 percent for both Q1 2016 and 2015), the increased volume resulted in higher parts gross profits. Parts productivity in Q1 2016, measured as total parts gross per counterperson per month, increased 11.7 percent compared to Q1 2015. Productivity YTD in 2016 has exceeded productivity in each of the past two years. A comparison of parts productivity measures for recent quarters follows:

Average monthly parts gross per counterperson YTD

YTD quarter ending: 201620152014
March 31$ 28,949$ 25,916$ 25,723
June 30 $ 25,576$ 25,874
September 30 $ 27,249$ 26,422
December 31 $ 27,479$ 25,801

Parts inventory levels have remained consistent year over year with a 60 days’ supply at both March 31, 2016 and 2015.

Body shop

Although customer labor sales per RO increased 7.1 percent year over year ($864.35 in Q1 2016 compared to $807.40 in Q1 2015), total body shop gross profit as a percentage of sales decreased (56.5 percent for Q1 2016 compared to 58.0 percent for Q1 2015). Total body shop gross per technician per month decreased 11.1 percent ($8,604 in Q1 2016 compared to 9,673 in Q1 2015). Decreases in gross profit measures are being driven by increased internal labor sales (17.7 percent of total sales in Q1 2016 compared to 14.3 percent of total sales in Q1 2015). 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, in Q1 2016:

  • New and used vehicle grosses bounced back from December 2015 levels, but still remain below levels at this time last year.
  • Overall dealer profitability is down from this time last year, which is mainly attributable to decreases in vehicle grosses and increased floor plan interest resulting from higher vehicle inventories.
  • Vehicle sales volumes are strong for both new and used vehicles, particularly for trucks and SUVs in both categories due to low gasoline prices.
  • In order to meet the 2016 industry forecast of 17.7 million new units, there will need to be continued employment growth, low interest rates, low gasoline prices, and increased sales incentives from manufacturers.

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