April 5, 2010: A difficult equation for the industry to solve
April 5, 2010
Filed under Columns
For those of you who still awake with cold sweats after dreaming about unresolved algebra problems you encountered, take heed. This next math equation, I promise, isn’t anything tricky enough to lose sleep over.
But it’s at root of an interesting and prevailing industry viewpoint.
So here it is: Take any branded part or accessory and then add investment, meaning some cash from your wallet. Then put those two elements into the following equation: Part+investment=(answer).
Is the answer: “Increased interest and thus attention from the dealer executive?”
Many in the aftermarket would answer, “Absolutely.”
Now take that same equation, alter it slightly and ask another question: Does part+investment=success, ie profit?
My answer: Not always. And strictly by the amount of aged PG&A inventory we have in the industry, maybe that answer should be “not nearly often enough.”
Equation No. 2. Take that same branded part/accessory and add it to opportunity, rather than investment. Opportunity meaning a chance to sell something without committing some sort of capital risk to it. Does part+opportunity-investment=decreased interest and thus less attention from the dealer executive?
Many in the aftermarket would answer, “Absolutely.”
And that, in short mathematical form, represents one of the challenges to the aftermarket industry ever committing more of its resources or effort toward programs that provide more repurchasing options for dealers. In other words, programs that allow dealers to return unsold merchandise to distributors or manufacturers.
Let me quickly mention: This long-standing issue of repurchasing is a veritable porcupine. It has sticky points all over it, with the above-mentioned investment notion being just one of those. And this column will not be long enough to delve into or adequately judge every one of those points surrounding this issue.
However, the investment equation is a good place to start simply because it’s such a large hurdle, and such a prevailing notion.
The idea of repurchasing and whether it should or should not be an industry practice is relevant now because cash flow is such an issue at so many dealerships. Even as day by day, encouraging news flows in about the March retail world, you can’t help but wonder if cash flow won’t be a limiting issue going forward well into this year.
Part of what makes this repurchasing issue so difficult to slice and dice is the very real feeling we all share: If we’re going to team up to do something, shouldn’t we both have something at stake? Why should one party commit to risk when another one won’t?
It’s a fair question, but for all practical purposes, it’s not relevant today. If your cash flow is limited enough to keep the lights on, pay the salaries of a significantly reduced staff and keep up with an inflated floorplan, then are you, the dealer, going to consider additional PG&A investments? Not likely.
Does that mean your staff is not willing and able to generate additional profit through a new PG&A endeavor? Certainly not.
Does this low cash-flow scenario present a realistic assessment of a number of dealers in the industry today? Absolutely.
The rub, however, is the prevailing notion that if you don’t have risk, then you don’t have follow through. You meaning your parts manager. You meaning you, the dealer principal or Is there a solution that can somehow fill the void between what the manufacturer is willing to do and what the dealer can afford? The investment equation is such a shared and adopted philosophy in the industry that it seems a daunting proposition to even consider such a solution. Choosing a spot in the Sahara Desert to find the next archeological wonder using only your instincts might be a more successful endeavor.
But it’s worth pursuing simply because of today’s economics. However many consumers return to the dealership this spring and summer, we still will be faced with an oversupply of noncurrent units, a reality that usually results in lower gross profit margins. So we know we have to build revenue, and especially profit, in departments outside of new units, PG&A included.
So how can we accomplish this when we’re mired in this economic predicament? My suggestion to dealers: Plan for failure, let the manufacturer know how you’re going to react to that failure and then provide that plan to the manufacturer as an incentive for them to consider a repurchasing option.
Planning for failure probably sounds strange so let me explain.
We, as an industry, are getting better at product launch time. We’re getting more point-of-purchase material on new product so the customer can quickly identify said product’s features, benefits and cost. What we’re not so good at is deciding what to do with that product if it doesn’t sell in a timely manner. In fact, we’re not even that good at identifying what that timely manner is. Ninety days? Six months?
If we put a plan together that identifies “slow sellers” by inventory date and then what to do with that product once it hits that date, then our inventory turn improves. That means more happy customers because the store has more, newer stuff and of course a much better bottom line because newer PG&A generally sells at a higher profit margin.
If that plan can be spelled out to a PG&A supplier, would they be willing to gamble on a dealer that may not be willing to commit financially to a product line? That’s a tough equation to crack. Many will flatly say “no,” but the very act of committing to such a PG&A plan figures to have long-range benefits to the dealer. Bottom-line benefits that you don’t need to be a math major to calculate.