Baker Tilly automotive dealership benchmark survey – Second 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 two quarters ended June 30, 2017 (Q2 2017), with comparisons to the same period in 2016 (Q2 2016) and to the quarter ended March 31, 2017 (Q1 2017). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

State of the industry

Manufacturers did not make any major output reductions in the second quarter of 2017 to alleviate the high supply of vehicles on dealers’ lots that existed at March 31, 2017. In order to move new vehicles, specifically sedans, manufacturers continued to increase already record-high incentives. According to J.D. Power and Business Wire, average new car incentives increased 7 percent from $3,706 in Q2 2016 to $3,955 in Q2 2017 and new truck incentives increased 11 percent from $3,144 in Q2 2016 to $3,494 in Q2 2017.

Sales during Q2 2017 were down from the prior quarter, as the industry SAAR decreased from 17.1 million new vehicles as of March 31 to 17.0 million as of June 30 (source: Federal Reserve Bank of St. Louis). Declining new vehicle sales meant fewer trade-ins received by dealers, causing more demand at auto auctions, which led to higher wholesale vehicle prices.

The bottom line

Dealerships saw net income as a percentage of sales increase from Q1 2017 to Q2 2017, which has been the trend as shown below. Although vehicle grosses and fixed operations gross profit percentages have improved slightly, net income as a percentage of sales is down compared to last year, decreasing from 1.80 percent through Q2 2016 to 1.67 percent through Q2 2017. The decrease from last year is primarily a function of increases in advertising and floor plan interest.

Year to date net income as a percentage of sales

One consequence of declining vehicle sales and a high supply of new vehicle inventory is dealers are spending more on advertising across the board. Total advertising expense as a percentage of total gross profit increased 20.2 percent - from 7.6 percent through Q2 2016 to 9.18 percent through Q2 2017.

Total advertising expense as a percentage of total gross profit

New vehicles

The low fuel prices during Q1 2017 continued in Q2 2017, attracting new vehicle buyers to trucks and SUVs. Through the first half of 2017, trucks and SUVs represented 63.0 percent of new sales, up from 58.9 percent a year ago, according to the June 2017 Auto Sales & SAAR survey by Stephens. New retailed cars sold to new retailed trucks have dropped 22.4 percent from 0.34 through Q2 2016 to 0.27 through Q2 2017.

The industry experienced record sales in 2016 with 17.5 million new vehicles sold. Through June 2017, new vehicle sales were 8.40 million units compared to 8.59 million units through June 2016 (source: Stephens Auto Sales & SAAR survey, June 2017). Due to the slower first half of the year, projections for 2017 have decreased again with 2017 sales expected to be at or near 17.0 million vehicles.

New vehicle grosses per unit are improving, but still average below $1,000 per unit. 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

Manufacturer output of vehicles coupled with the declining new vehicle sales resulted in an oversupply of new vehicles on dealer lots. The days’ supply of new vehicles was 145 days, which is comparable with the previous quarter, but well above the 119 days’ supply one year ago.

Days’ supply of new vehicles

Lower new vehicle sales volumes, higher new vehicle inventory levels and interest rate hikes contributed to a $119 increase in net floor plan interest (floor plan interest less floor plan assistance) per new vehicle retailed. Through Q2 2017, the average dealer incurred $12 of net floor plan interest expense per new retail unit sold. In comparison, the average dealer earned $107 of net floor plan interest per new retail unit sold through Q2 2016.

Used vehicles

Used vehicle sales continue to outweigh new vehicle sales during 2017. Through Q2 2017, 1.14 used vehicles were sold for every new vehicle sold, which is a 12.6 percent increase year over year, when 1.01 used vehicles were sold for every new vehicle sold. Similar to new vehicles, used trucks and SUV sales continue to outpace used car sales, averaging 1.58 used trucks for every used car sold through Q2 2017, up from 1.39 used trucks to used cars through Q2 2016.

Although the industry was beginning to see off-lease vehicles hit the market, strong demand for used vehicles buoyed prices. Overall, used vehicles saw an increase in average wholesale prices of 4.7 percent as of Q2 2017 compared to Q2 2016, with cars increasing 2.9 percent and trucks increasing 4.8 percent (Source: ADESA Analytical Services).

Similar to previous years, used vehicle grosses improved from Q1 to Q2. Gross profit per used vehicle retailed (PUVR) increased from $1,291 through Q1 2017 to $1,334 through Q2 2017, a 3.3 percent increase. Gross profit PUVR is comparable to the prior year $1,331, as the figure below shows.

Year to date gross per used vehicle retailed

Dealers continued to manage their used vehicle inventories in order to offset the higher days’ supply of new vehicles. The days’ supply of used vehicles remained at 78 days as of June 30, 2017, matching the historical low of March 31, 2017. Used vehicle days’ supply was previously at 87 days as of June 30, 2016.

Finance and insurance (F&I)

Net F&I income (before compensation) per retail unit sold remained strong through Q2 2017, measuring $945 for new vehicles and $778 for used vehicles, compared to $906 and $743 through Q2 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 F&I department benefited from better penetration rates on extended service contracts (ESC), which rose to 50.1 percent for new vehicles and 49.8 percent for used vehicles. In comparison, ESC penetration was 40.5 percent for new vehicles and 41.4 percent for used vehicles through Q2 2016. In addition, insurance penetration rates increased 16.8 percent for used vehicles from 19.8 percent through Q2 2016 to 23.2 percent through Q2 2017.

The front and back ends of new vehicle deals on a combined basis were $1,885 through Q2 2017 compared to $1,809 through Q2 2016. For used vehicles, the combined grosses were $2,112 through Q2 2017 compared to $2,074 through Q2 2016.

Service

Total service gross profit as a percentage of sales increased slightly from 65.01 percent through Q2 2016 to 65.34 percent through Q2 2017 due to better productivity. The monthly average gross per technician was $10,004 through Q2 2017, compared to $9,806 through Q2 2016.

The mix of service work has shifted over the past two years and particularly in the last year. Internal labor accounted for 21.75 percent of total labor sales as of Q2 2017, increasing from 18.13 percent a year ago. Customer pay labor decreased over that same time period, dropping from 48.87 percent through Q2 2016 to 46.89 percent through Q2 2017.

The trend of internal labor as a percentage of total service labor sales follows:

Year to date internal service labor as a percentage of service sales

Parts

The average dealer’s parts department saw total parts gross profit percentage increase 14.5 percent year over year from 32.3 percent through Q2 2016 to 37.0 percent through Q2 2017. Increases in the parts gross profit percentage were attributable to increased body shop activity. Parts sales per customer body shop RO increased 9.8 percent from $690 through Q2 2016 to $758 through Q2 2017, and the parts gross per customer body shop RO increased 10.8 percent from $221 through Q2 2016 to $245 through Q2 2017. As a result, total parts gross per counterperson per month increased $1,887 (6.1 percent) over the same period to $32,667.

Total parts gross profit as a percentage of sales

After holding near a 57 days’ supply the past two quarters, parts inventory climbed to a 59 days’ supply at June 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 rose to 58.0 percent through Q2 2017 compared to 56.0 percent for the same period last year due to productivity gains. Body shop total labor sales per RO were $722 through Q2 2017, a 12.1 percent increase from $644 through Q2 2016, and the average monthly body shop gross per technician increased 24.0 percent to $9,739. 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

Conclusion

Overall, through Q2 2017:

  • New vehicle sales volume was down slightly compared to last year in spite of increased manufacturer incentives on new vehicles.
  • New vehicle inventory was at a 145 days’ supply. Higher inventory levels, along with interest rate increases, caused the average dealer to incur interest on their new vehicle floor plan in excess of floor plan interest received.
  • The increase in new vehicle floor plan interest and increases in advertising were the major factors in dealership net income decreasing from 1.80 percent of sales through Q2 2016 to 1.67 percent of sales through Q2 2017.
  • Body shop productivity improvements benefited the body shop and parts department. Parts gross profit improved to 37.0 percent, which is the highest it has been in the past ten quarters.

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