Feb. 9, 2009 – A story worth retelling: Dip down your buckets where you are
February 9, 2009
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It was the 6th of October, 1895. Booker T. Washington was speaking at the Atlanta Exposition and wanted to inspire others, who like him, had been born into slavery and were freed by President Lincoln 40 years prior. Recalling how he made the transition from slavery to university president, Washington told the crowd of a ship that had been becalmed far off the coast of Brazil. Days had passed, and the men were desperate for drinking water. Another ship appeared, and the signal was flashed asking for water. The reply came back, “Dip down your buckets where you are.” Knowing that they could not drink seawater, they repeated the flash and received the same answer. After two more attempts, the men lowered a bucket to the ocean, drew up the water and there tasted fresh, unsalted water.
Although far off the coast of Brazil, the ship was actually in the outflow of the Amazon River and had been sitting in fresh water since their becalming. All reason told them the water around them was undrinkable. It wasn’t until others pointed out to them the solution that they were able to make use of the bounty that surrounded them on all sides. And we are no different. Every measure of our industry shows sharp decline and most are taking every cost-cutting measure they can find. But there is one solution that I don’t hear anybody talking about. One that takes no investment to get a return. Think about this.
I was at a store recently that had lost more than $500,000 in 2008. I had been brought in to help them fix it. Within just hours I had found the following, and the solution was obvious. Consider: Gross margin for new units: 8 percent; gross margin for used units: 6 percent; gross margin for parts: 15 percent; F&I income per unit sold: $113; sales per square foot in each department: about half the national average.
There was no way this store could make it. They were running at half speed in every department, and the most amazing thing about it all was that they didn’t have any idea of what could be done. They thought it was volume. No. The answer was efficiency with what they already had.
I took that store and recast 2008 at proper margins. Keeping the same number of parts invoices, the same count of ROs, and the same count of units sold — the same number of customers walking in the door and making the same number of purchases — I recalculated the sales figures to yield normal margins. New units up to 13 percent. Used up to 18 percent. Parts up to 40 percent, and F&I up to $400. With this alone the loss was cut by two thirds, and the balance could be overcome by cutting controllable variable expenses. There was hope for 2009.
For years I have reported benchmark numbers for our industry. Usually, those numbers are cast as one average for the entire group. I decided to go back and recast 2008 into three groups: An average of the lowest one-third, an average of the middle third and an average of the highest performing one-third. I then looked at the lowest one-third to see what would happen to them if, like my low-performing client, I recast their sales in terms of a proper margin. The results were amazing. Look at the chart above.
For the Harley dealers’ chart, I considered two variables in parts: Average Counter Ticket and gross margin percent. The low performers were getting $67/ticket, and 31 percent gross margin. They were producing an average of $602,000 in annual gross margin dollars. But, by adjusting sales up to attainable margins as proven by the top one-third, gross margin leaped up to more than $1.1 million, an increase of more than a $500,000, with no additional customers walking in the door.
In service I moved the average RO from $423 (the low guys), up to $1,099 (actual for the top one-third). That dropped an additional $855,000 to the bottom line. Again, without any increase in service customers. For new units, I moved the margin from a low 10.9 percent to the average of the top group, 15.5 percent. Boom. Another half million dollars. All told, almost $2 million dollars found — from the same exact number of parts, ROs, units and customers that made that door swing in 2008. Amazing huh. And for the metric folks? Almost $2.4 million dollars left on the table by dealers who just didn’t know it could be done.
My father told me that Brazil boat story some 60 years after Booker T. Washington cited it in Atlanta. It has stayed with me to this day, and the advice is as good now as it was for that group of freed slaves in 1895: Dip down your buckets where you are. The water around you is fresh, and life can be good again.
Just try it. You will see. psb
Hal Ethington has been associated with the powersports industry for more than 30 years. Ethington is a senior analyst at ADP Lightspeed. He can be reached at Hal_ethington@adp.com.