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NADA study measures practices that drive financial profitability

November 17, 2010

The policies and practices that take place within a dealership’s "four walls" represent the No. 1 factor in driving performance, according to an NADA research project to define and corroborate best practices in dealership management.  

What activities and behaviors drive your dealership’s profitability? Although product and volume matter, the study found that the right internal policies and practices are the biggest differentiator of performance.

 

Analyzing survey responses across all the different factors that influence profit—region and demographics, brand and origin (domestic or European or Asian import), dealership size (measured by volume of new-vehicle sales) and structure (stand-alone store versus part of a broader network of dealerships), and operational practices— the study found that operational best practices are the single biggest profit differentiator.

 

Based on this study, the average-performing dealership in an average environment achieves, roughly, two percent net profit before tax. An improvement in each of the influencing factors, one by one, results in more profit:

 

  • If the average dealership could be relocated to a better region with better demographics, net profit would be expected to increase three-tenths of 1 percent, to 2.3 percent.
  • If the dealer had a better-selling brand, profit could increase another nine-tenths of a percent, to 3.2 percent. 
  • Improvements in sales volume and structure can add a full one percent to net profit for this dealer, bringing the total to 4.2 percent.

 

But the big jump can come with implementation of operational best practices: 

  • If the dealer’s operations are consistent with best practices, net profit can increase by 2.3 percent, bringing the total for the hypothetical dealer all the way to 6.5 percent.

 

Obviously, most dealerships cannot change all the external factors that affect profit. They can, however, change internal factors. Therefore, finding No. 1 is vital to all dealerships. 

The analysis suggests that regardless of size, brand, or region, an average dealer who transforms average practices—not poor practices, but average practices—into best operational practices can increase operating profit by more than two percentage points.

 

This article is adapted from NADA Management Education’s "A Dealer Guide to Driving Dealership Performance," which provides more detail on the project. This guide can be ordered at www.nada.org/mecatalog or at 800-252-6232, ext. 2.

 

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