Motorcycle Industry Alert December 2017 - KPMG · used motorcycle sales, and Finance and Insurance...

Motorcycle Industry Alert Know where you are – look at your road map December 2017 KPMG.com.au

© 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Know where you are – look at your road map The ultimate outcome of business is to generate a profit and a return on the money we have invested in it. Generating good levels of net profit provides many other advantages such as:

• business success and longevity;

• staff and owners work enjoyment;

• happy customers; and

• a great place to work. The challenge is to keep working on the business to ensure it continues to move in the right direction. From all the dealerships and data we have seen over the years, there are five KPIs we see that are an indicator of the health of the business and its level of profitability. Keeping an eye on these indicators will help ensure that everyone is working towards optimising the return the dealership generates.

They can also serve as early warning signs if there are any underlying issues developing in the business. These indicators that help drive profitability are:

Expense coverage – The ability of aftersales gross profit to cover the expenses of the dealership. A higher number usually links to higher net profit for the dealership.

Dealership margin – Look at your mix of business, and the margins you achieve throughout the business. Earn a return on the sales you make. Expense structure – Have the expense structure to match your business operations. Make sure your expense structure fits the revenue you generate, and vice versa.

People – Are you getting a positive impact on your investment in people? Whilst they generate revenue for the business, people are also the largest expense of the business – you have a right to expect a return on the money that you pay them. Usually this benefits them as well as you.

Growth – You need to work to grow the business each year. This growth doesn’t always have to be significant, but you need to work to grow the business. Growth in revenue and gross profit needs to be greater than the growth in expenses.

Expense Coverage

Dealership Margin

Expense Structure

People


People People are the lifeblood of the business – they help generate the revenue, interact with the customers and make the business flow.

Having the right people is essential – many times we have seen how just changing one person in the business can make a significant change to the culture and effectiveness of those around them, and the business as a whole.

People are also one of the biggest investments that a dealership has – salaries, commissions, and other on costs usually comprise more than 50 percent of a dealership’s expense base. To be profitable, a motorcycle dealership needs to generate a return on that investment. This concept also works well for the staff– productive staff tend to be happier, and also be paid well for their performance.

So how does your dealership perform in this area?

One measure we often use is Dealership gross profit per employee – If it is above $9,000 your dealership could be said to be “in the zone” of achieving desired returns on your investment in people. Remember that your investment is not just in what they are paid, it is in their development and growth as well. For definition purposes, we are defining Gross profit as Sales revenue less cost of sales.

If you are achieving more than $9,000 gross profit per employee per month, you can tick that checkbox, and move on to the next major KPI.

On the other hand, if your dealership is achieving less than this – the next step is to look at what we call “lower level KPIs” and ascertain what part(s) of the business are where the opportunities lie.

This next tier of people KPIs to look at include:

Monthly people KPIs Best

practice goals

Your dealership numbers

Total sales revenue per dealership employee

$41,000

Net profit per employee $950

Motorcycle sales per salesperson

20-22

Motorcycle gross profit per salesperson

$15,000

F&I per motorcycle sold $14,000

Parts sales per employee $50,000

Labour sales per technician $12,500

Labour gross profit per technician

$8,000

The key determinant here is to understand what is causing the problem. It can include the following possibilities:

• The staff member requires more training/coaching for their position.

• The staff member doesn’t fully grasp what their job is.

• The staff member doesn’t know what performance level they need to meet.

• They are not the right fit for the position.

• They are not the right fit for the dealership culture.

• There is a personality conflict between staff members.

Once we understand the cause of the problem, you can find the right solution.

And as Richard Branson says, if you look after your staff, they will look after your customers.

Dealership margin After looking at people, the next step on our journey is to look at the dealership margin, which can be broken into two areas:

1 The mix of business within the dealership.

2 Gross profit achieved from each transaction.

The margin that we gross (make) in each transaction is a critical factor in the dealership’s profitability. If on the same sale, a best practice dealer can make 2-3 percent more gross profit, they are probably doing it on a similar cost base, and that additional gross profit is almost all net profit for the business.

Is your dealership achieving these levels of gross profit in each department?

Department Percentage of sales

New 9%

Used 17%

Parts, accessories and merchandise 34%

Service 66%

Looking at your individual departments will help understand where opportunities may lie in the business. Please note that for new and used gross profit, we are not including commissions and floorplan in the calculation. These are categorised as departmental expenses so that they can be tracked separately.


Looking at these best practice numbers, say your dealership is only achieving 60 percent gross profit on its service sales. Compared to a best practice dealership, you could be missing an opportunity of 6 percent, or put differently missing out on $60 income for every $1,000 of sales revenue. This might not sound like much, but it is almost all net profit the dealership is missing out on.

How do we ensure we can achieve best practice margins in the business? There is no one easy solution, but it starts with tracking our results – if we aren’t measuring it, we can’t manage it and work to improve.

Once we are tracking our number, there are a number of potential areas that need to be considered (some of which we go into greater detail in following issues). These include:

• Building the right culture in the dealership, a customer culture.

• Having the right people in your team, who also live the customer culture.

• Developing and training those people appropriately.

• Managing each department efficiently and productively by focusing on those operational areas that matter.

Often we miss the gross opportunity because people are not spending enough time with the customer, explaining things, and developing a rapport with the customer.

Dealership expense structure Question: If you were going to concentrate on only one of the following - revenue, gross profit, or expenses - to improve profitability, which would you choose?

An interesting question, and in differing circumstances any of the three might be a better choice. But a majority of the time expenses are the last one we should choose. This might surprise you, but consider the reason why.

Many expenses are relatively fixed. People expenses are by far the largest expense in the dealership; and if you have the right level of staffing, this is not easily reduced. Nor is rent – very rarely are you able to get a rent reduction. So, effectively between 60 and 80 percent of a dealership’s expense structure is relatively fixed.

How then do we optimise our expense structure? The key is to have the right expense structure for the size of our business – that is when we can make money. Right size your business between throughput and expenses.

It is important to optimise your expenses. Don’t cull expenses too far, otherwise you damage your ability to generate sales and gross. But look where you can optimise expenses to 1) help drive revenue and gross profit, and 2) not waste the gross profit you generate.

Take commissions for example. Commissions are part of the expense structure. Do you have the right commission structure – one that rewards people for achieving what you need them to achieve. The right commission structure will optimise that part of the dealerships expenses.

Pay good commissions to people who achieve good results.

Pay low (or no) commissions to staff who are performing below an acceptable level.

Answer: Revenue that generates gross profit.

If you had to choose between revenue, gross and expenses; always look at growing revenue first. Provided it is revenue that comes with gross profit. Why?

• Revenue increases dealership throughput.

• Increased revenue usually increases gross profit.

• An increase in revenue often comes on the same fixed cost, such as rent.

• The dealership’s expense structure usually reduces as a percentage of sales and a percentage of gross.

So remember, look for revenue first, but keep an eye on expenses.

Expense coverage The fourth key plank we look at when analysing a dealership is Expense coverage. Expense coverage is defined as the ability of your aftersales department to cover the expenses (excluding salespersons commissions) of the dealership. We exclude the salesperson commissions as this expense would not occur if there were no bike sales in a particular month. And provides a more realistic expense level for the analysis. Example: The Dealership grosses $40,000 from the service department, and $60,000 from parts and merchandise. The Dealership has expenses of $130,000 and salesperson commissions of $10,000 What is the Expense coverage? Expense Coverage = Parts and service gross profit expenses = ($40,000 + $60,000) ($130,000 - $10,000) = 83% In this example, Expense coverage is 83 percent. What does this mean?


It means that 83 percent of the normal expenses of the business are covered by parts and service gross. It also means that the dealership is not as reliant on new and used motorcycle sales, and Finance and Insurance to generate a profit. Essentially, a higher expense coverage rate puts a bigger base to the underlying profit of a dealership, and generally leads to higher profitability.

Growth The final area to look at is growth. Is your business growing? Growth doesn’t necessarily lead to an increase in profitability and return on your money invested in it. But it is rare where profit increases without an increase in profitable revenue. You need to plan to grow the business every year – why?

Expenses grow every year – therefore you need to grow gross profit to exceed the growth in expenses. That might purely be increased margins, but it may also be increased revenue that is driving a higher overall gross profit number.

Reviewing these five areas will provide you with a status of where the business is at, and potential areas you can work on. Below are a number of activities where we have found dealers can improve operations, and improves a number of the five highlighted KPI’s. 1. Motorcycle sales – Start each negotiation at Retail

Price and work down, showing the discount percent at each step. This shows the customer the value that you are forgoing at each stage.

2. Motorcycle sales – Negotiate in small increments. Reduce the price as little as possible in each round of discussions. Every $50 you can keep on the price makes a significant change in the gross profit you can achieve on the sale.

3. Focus on repayment selling – Many people borrow to purchase anyway; give them the price as a repayment. You can still sell the motorcycle, but may get finance as well.

4. Service gross profit – Fully explain any work being done upfront. The customer understands what you are doing and is less likely to query the bill.

5. Service additional work – Contact the customer for approval before doing any additional work. Many technicians often just do the work; it is hard asking for the additional labour sales revenue after the work has been done.

Your Checklist Below is a quick checklist of the numbers to look at to provide a quick road map to the health of your dealership, when measured against best practice in the industry.

KPI Best

practice goals

Your dealership numbers

Expense coverage

>90%

Dealership gross profit (% of sales)

>23%

Expense (% of gross profit)

<90%

Gross profit per employee

>$9,000

Growth GP growth > Expense Growth

Net profit >5% of sales

Return on total assets

10%

Once, you know where the dealership sits, remember that Actions and Activities drive Outcomes – If you want to change any of these results, you must change the right actions/activities in the dealership to get the Outcome (or Profit) you want to achieve.

And remember, at the heart of our business is the customer – no matter what else is happening, how we are able to look after their customer and meet their expectations is the core as to whether they will give us their business, and continue to do so; whether that is the sale of the motorcycle, the service work, or purchase of merchandise and accessories.

KPMG.com.au

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

© 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo and are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

August 2017. VICN15760ENT.

Contact us

Rohan Meyer Senior Manager – Enterprise

+61 2 8841 2124 [email protected]

Also, meet the broader KPMG Motor Industry Team:

Wayne Pearson

National Leader Motor Industry Services, KPMG Enterprise


Steve Bragg

KPMG Director, Consulting & Compliance – Enterprise Advisory


Brian Fellowes KPMG Director, Training & Dealer Groups – Enterprise


David Pring KPMG Partner – Enterprise Tax


Stephen May KPMG Partner – Enterprise Audit


Gary Ormond KPMG Senior Manager – Enterprise


Aaron Street KPMG Partner – Enterprise Advisory & Tax


Ian Kowalski KPMG Partner – AKL PE

+64 9367 5907 [email protected]

Bruce Sinclair KPMG Partner – Enterprise


Laura Pestell Learning Coordinator – Enterprise


Motorcycle Industry Alert December 2017 - KPMG · used motorcycle sales, and Finance and Insurance...

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