“The Model is Broken”

For years many of us have known that the new car dealership model was broken, but we’ve been able to gut our way through it. The auto crisis of today has simply put us in a position that if we are to survive we cannot continue to ignore the issue any longer and as they say “just deal with it.” Just dealing with it is a band aid on a cut artery. You will slow it down, but eventually you will bleed to death.

You can agree or disagree, but let me tell you why the business model is broken:

1. Because of demand from the factories we go out and buy high dollar real estate and build high dollar facilities, built on factory specifications so we can sell their product at little or no profit.

2. Because there are so many dealers we cut our own throats to fuel our egos and make the factory guys happy.

3. We go upside down in our cash because of rebates, incentives and fighting with the factory over warranty claims, oftentimes sitting on edge as to when the next audit will be.

4. Our margins on new cars have been cut from a high of 22% in the early 70’s to almost nothing today, yet we still negotiate our selling prices.

5. Within these high dollar facilities we have high dollar equipment and computers dictated by the factory. Haven’t you noticed they always have something else to sell you? Often what they sell you, you can buy cheaper elsewhere.

6. The Factory has passed cost after cost on to us; everything from display items to brochures and advertising cost.

7. We hire technicians who we are required to spend a fortune on in order to meet the factory’s requirements. After we’ve invested large amounts of money in them, they quit and open their own shops and beat us at our own game.

8. We think these fancy facilities create customer loyalty, profits and future sales. For a few customers they do, but for the majority, Not! They buy their next car based on convenience and price.

9. Our egos get all involved in the creature comforts for un-loyal customers who by and large couldn’t care less. Did I mention convenience and price?

10. Within about an 18 month window we lose the customer to the Jiffy Lubes of the world. This time price isn’t a factor. It’s all about convenience.

11. We abuse the used car department by charging them retail because we’ve been taught that’s the way you do it. We’ve come to believe that if we don’t charge them full retail that they will give it away anyway. All we’re really doing is creating an additional price gap between what we can sell a car for and the competition. We continue to wonder why we can’t compete and get the numbers we need.

12. What creates the problem in number eleven is our pay plans. As long as we pay sales people and sales managers based on gross we will always be working from cost when we price our cars and when we sell our cars. If we had better designed pay plans and priced our cars based on market rather than cost it wouldn’t matter what we charged them in service one way or the other.

13. Because of the size of our facilities, long hours and the lack of clearly defined processes, we always seem to need an additional manager to ensure that our sales staffs are doing all the things they should be doing in the first place. We have a New Car Manager, an Assistant New Car Manager, a Used Car Manager, an Assistant Used Car Manager, an F&I Director, a couple of F&I Closers, a Desk Manager, a Floor Manager, a BDC Manager, an Internet Manager, a Phone Manager, a Workroom Station Manager, an Assistant to the Assistant Manager, a General Sales Manager, a Recon Manager, an Inventory Manager, a Dealer Exchange Manager. We need all these people partly due to the hours we are open, but mainly it’s because we can’t get the sales person to do the things they should be doing in the first place.  This is perpetuated because we are paying them in a manner that rewards them primarily for one thing and one thing only and that’s gross profit. In the past we have paid managers very well for their opinions, especially when it comes to used cars. Their opinions still matter, but they just don’t matter as much as they once did.

14. We spend a fortune in advertising with little or nothing to show for it. But, gosh it’s nice to see our name in lights. But if we don’t advertise we don’t have ups, because the sales people do a lousy job with follow up. They don’t have time to follow up because they are standing at the front door waiting for you to generate an up for them. What a great system.

15. We spend another fortune in floor plan cost to let new and used cars sit for 60 to 300 days and think nothing of it. We haven’t yet learned to think FAST. We haven’t yet learned to move FAST. FAST is not in our vocabulary.

16. We still don’t “get the Internet” and its power. It should not be called the Internet. It should be called the “Equalizer.” Our model doesn’t work well with the Internet. We have to make big grosses in order to pay for all these enormous costs we are dealing with. Look around you. Look at the under 40 generation right down to the teens. Do you think these people are going to come in and play the dealerships’ games after playing video games all their lives? No, they are going to push buttons, get the best price and be done.

Ok, I’ve told you all about how the model is broken. In an upcoming article I will tell you how to fix it. In the meantime think about what I’ve said and what you would do differently if you started with a clean sheet of paper. I’d love to hear from you. That’s all I’m gonna say for right now, Tommy Gibbs