Aug. 18, 2003 – It’s all in how you mix it
August 18, 2003
Filed under Features
So, would like to have $1.5 million in gross margin for your $8 million in sales? Or would you rather have $3 million for the same amount of work? Yeah, double. It’s all in how you mix it. And it really depends on you. It depends on where you show your interest, and where you put your time.
We all know that we can expect about 40% margin on parts, 60%-70% on labor, around 12%-14% on new units (non HD), and close to 18% on used. F&I comes in at a net figure, so call it 100%.
So, we all start out with the same general rules, but some of us seem to do better at mixing it all up, and coming out with a soufflé, rather than a pancake. Here’s how it works.
Imagine a group of dealers who each sold $8 million per year, but could arbitrarily determine what they would sell out of their store: parts, service, new units, used units, or just F&I. OK, we will eliminate the F&I thing right now, since it would take a real salesman to sell F&I without selling something else.
Among dealers, one likes parts, another likes service, a third is interested in new metal, and a fourth just likes to fix up those wrecks, make ’em pretty, and get top dollar out of them. And then there is the dealer who just pretends to be in business, but all he really wants to do is race! Anyway, here we go.
Now, we all have to sell something in each department, but the amounts we sell will be determined by our interest. I looked at 113 dealers for the period January 2002 through June 2003, and noticed that they had each chosen to push a particular department. They each focused on their interest.
Dealer A liked parts. Of all the 113, he had the highest percent of his sales concentrated in parts. The average for all 113 dealers was 14% in parts, but he was at 44%. O.K., he really liked parts. And his service was high too: 25%, compared to 7% at the other 112. But he paid a price. His new bike sales totaled just 29% of all income, compared to 64% for the other dealers, and his used units came in at just 1% of all sales, compared to 12% in the other dealerships. Now, you can’t raise one percentage without decreasing the others, and in this case he was increasing the higher margin departments.
So, he likes parts and service. Now, this is a dealer in a large metro area, but to illustrate a point and make all things equal, we will take his percentage mix of department sales, and apply that to an $8 million dealer. When we do that, we see that he gets a total of $3 million in gross margin.
And remember, you can’t pay your bills with sales dollars. You can only pay your bills with gross margin dollars.
The average dealer in our group of 113 carved out $1.9 million in gross margin on $8 million in sales. But our guy with the focus on parts and service and the same $8 million in sales gets $3 million.
This same dealer is highest of all dealers in both focus on parts and focus on service. And, he comes out, when extrapolated to the $8 million level of sales, with the highest gross margin.
What about the guys who love the metal? It’s shiny, it’s fun to get on, and besides, you really look good sitting on it.
But what does it do for your bottom line?
Well, let’s look at our dealer in the 113 with the highest number of dollars coming from sales of new units. It is a small dealer in a small mountain town, and he focuses primarily on the sale of units. All the ranchers and farmers do their own repairs, and (I guess) they all get their parts mail-order. Whatever, this dealer gets 88% of his sales dollars from new units, while the other 112 average 64%.
And this guy comes in with the lowest total gross margin of all ($1.5 million), even when bumped to the $8 million level of total sales.
And with a focus on used? I found a dealer on the East Coast who specializes in used bikes. He is franchised, but still focuses on moving the used machines. His used department accounted for 39% of all sales dollars, while the other 112 dealers averaged only 12%.
And his gross margin? Our East Coaster lands $2 million in gross margin, just a touch higher than the average of the 112 at $1.9 million.
Amazing, isn’t it. They all sold $8 million, but the guy that pushed the parts and service ended up with $3 million in margin. The one who got all the trips to Japan for selling the most units (ever notice those contests are always based on unit sales?) has $1.5 million to pay the bills, and the fellow on the East Coast selling used bikes all day long ends up with about $2 million.
So mix it up. Do what you like, but remember, soufflés taste a-heck-of-a-lot better than pancakes.