Baker Tilly automotive dealership benchmark survey – First 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 quarter ended March 31, 2017 (Q1 2017), with comparisons to the same period in 2016 (Q1 2016) and to the four quarters ended Dec. 31, 2016 (Q4 2016). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

State of the industry

Gasoline prices continued to remain low, which attracted buyers to purchase SUVs and trucks. Coupled with manufacturers not slowing production, sedans were sitting on dealers’ lots.  In order to move new vehicles, specifically sedans, manufacturers were offering record high incentives. According to J.D. Power, incentives increased 15% from $3,400 per vehicle in Q1 2016 to $3,900 per vehicle in Q1 2017. March marked the 24th consecutive month where the industry has seen an increase in incentive spending.

As new vehicle values experience pressure due to oversupply, used vehicle values are expected to drop significantly in the coming years due to anticipated oversupply of off lease vehicles. During and after the recession, dealers and automakers were pushing consumers away from leases by not offering cheap lease deals. In recent years, as evidenced by record sales in 2015 and 2016, automakers and dealers began pushing leases in order to sell new vehicles. As a result, the industry will see a great deal of off lease vehicles coming into the market in the coming years. According to Reuters, roughly 12 million vehicles will be coming back into the market over the next three years. Although an abundance of used vehicles is good news for consumers, dealers will need to focus on selling the vehicles they have before they lose value. Both GM and Ford reported a 7.0 percent decline in used vehicle prices in Q1 2017 compared to the same period in 2016. Both manufacturers are expecting this to be the trend throughout 2017.

Gross domestic product climbed a meek 0.7 percent in the first quarter of 2017, which marks the slowest growth in the last three years. Most analysts expect this to be temporary and anticipate 2017 growth will come out ahead of 2016.

The bottom line

Dealership profitability improved slightly from this time last year. Net income year to date as a percentage of sales increased from 1.30 percent in Q1 2016 to 1.33 percent in Q1 2017. Slight increases can be attributable to healthy improvements in Finance and insurance (F&I) and parts departments, with offsets from the new vehicle department.

Year to date net income as a percentage of sales

New vehicles

The industry experienced record sales in 2016 with 17.55 million new vehicles sold. Forecasts for 2017 vary between analysts, but the overall consensus is that sales are expected to come in at or near 17 million vehicles. In a survey by Stephens, year to date new vehicle sales through March 2017 were 4.01 million units, a decrease of 1.54 percent from the first quarter of 2016.

Car sales continued to decline compared to truck and SUV sales, which was primarily due to persistently low gas prices. According to the Stephens survey, cars made up 41.6 percent of new vehicle sales during the first quarter of 2016, compared to just 37.0 percent during the first quarter of 2017. Low demand for cars coupled with the influx of off lease vehicles beginning to enter the market has resulted in an oversupply of vehicles. New vehicles days’ supply hit its highest in recent history at 146 days, compared to 139 days one year ago.

Days’ supply of new vehicles

The high supply of new and used vehicles has led to downward pressure on new vehicle pricing. Gross profit per new vehicle retailed (PNVR) decreased 9.8 percent from this time last year ($1,023 PNVR in Q1 2016 compared to $922 PNVR in Q1 2017).

Year to date gross per new vehicle retailed

In addition, the average dealer’s new vehicle department is being negatively impacted by increased advertising expense and lower net floor plan interest income. Advertising expense per retailed unit sold increased 55.4 percent from $198 per vehicle in Q1 2016 to $308 per vehicle Q1 2017. Net floor plan interest income was $69 per retail unit sold in Q1 2016 compared to $0 in Q1 2017.

Used vehicles

New vehicle sales outweighed used vehicle sales in 2016, with the average ratio of new to used vehicles sold at 1.02 as of Dec. 31, 2016. During the first quarter of 2017, this ratio dropped to 0.88. Similar to new vehicles, used trucks continue to outsell used cars at an increasing rate. The average dealership’s ratio of used cars to trucks sold was 0.64 in Q1 2017 compared to 0.78 in Q1 2016.

For the second consecutive year, gross profits bottomed out in December but bounced back by the end of Q1 as demonstrated in the graph below. Gross profit per used vehicle retailed (PUVR) was down to $1,256 at the end of 2016 increasing to $1,291 through the first quarter of 2017. However, this figure is still below the gross profit PUVR of $1,309 reported in Q1 2016.

Year to date gross per used vehicle retailed

Although the industry is beginning to see an overflow of used vehicles in the market, the average dealership had lower used vehicle inventories on hand as of March 31, 2017. Used vehicle days’ supply reached a recent historical low of 78 days. In comparison, used vehicle days’ supply has ranged from 82 to 96 days since December 2014.

Finance and insurance (F&I)

Net F&I income (before compensation) per retail unit continued strong through Q1 2017, measuring $927 for new vehicles and $771 for used vehicles, compared to $871 and $726 through Q1 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

The continuing improvements in the F&I departments has offset the declining grosses per new vehicles retailed. The front and back ends of new vehicle deals on a combined basis were $1,849 through Q1 2017 compared to $1,893 through Q1 2016. For used vehicles, the combined grosses were $2,062 through Q1 2017 compared to $2,035 through Q1 2016.

Service

Service department gross profit remained consistent in Q1 year over year at 65.2 percent, which is up from 64.9 percent for 2016. Overall productivity, measured by total gross per technician per month, increased 7.7 percent in Q1 compared to the same period last year ($10,034 in Q1 2017 compared to $9,313 in Q1 2016). The increase in gross profit was being driven by an increase in shop rates. The average shop rate increased from $107 to $111 year over year as of March 31, which is a 4.1 percent increase. Within the service department, the mix of work has changed over the past year. Internal work has been replacing warranty work and, to a lesser degree, customer pay work. Year-over-year, warranty labor sales decreased by 10.0 percent, while customer pay labor sales decreased by 0.5 percent.

The trend of customer pay labor a percentage of total service labor sales follows:

Year to date customer labor as a percentage of service sales

Parts

The average dealer’s parts department is off to a good start this year with total sales per counterperson per month increasing 8.9 percent from Q1 2016 to Q1 2017. In addition, total parts gross per counterperson per month increased 12.0 percent over the same period. Total gross profit percentage for the parts department increased 3.0 percent year over year from 32.2 percent in Q1 2016 to 33.1 percent in Q1 2017.

Total parts gross profit as a percentage of sales

Parts inventory levels remained comparable with December 2016, but have decreased by three days since Q1 2016. The days’ supply of parts inventories as of the most recent quarters is as follows:

Days’ supply of parts inventory

Body shop

Body shop gross margins increased compared to 2016 and from this time last year. Gross profit as a percentage of sales climbed to 56.9 percent in Q1 2017 compared to 56.5 percent for the same period last year. The slight improvement can be attributable to an increase in total labor sales per repair order (RO), which increased from $720 per RO to $749 per RO, a 4.0 percent increase. The following shows the trend of year to date body shop gross profit percentages for the most recent quarters of our survey:

Year to date body shop gross profit percentage

Conclusion

Overall, through Q1 2017:

  • Dealership profitability is up due to F&I and parts departments pulling through as new and used vehicle grosses decreased compared to this time last year.
  • Vehicle sales volumes are down slightly in the first quarter of 2017 compared to last year. However, according to analysts, vehicle sales are still on track for another solid year.
  • The average dealer reported significant increases in new vehicle inventories with days’ supply at 146 days as of March 31, 2017, compared to 139 days as of March 31, 2016. Used vehicle inventories decreased from 87 days’ supply in Q1 2016 to 78 days in Q1 2017.
  • F&I performance continues to trend upwards with increases offsetting decreases in new vehicle grosses.
  • Performance in both the body shop and parts departments improved with increases in gross profits from Q1 2016 to Q1 2017.

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