Questioning the future of the 2% profit model for dealers

First published in GoAutoNews on 28th January 2025 

Far from being the bearer of bad news, the team at Motor Industry Services at Pitcher Partners has been investigating the major market trends at play and exploring what measures dealers can take to thrive rather than just survive – or worse. 

We have been encouraging dealers to identify the multiple challenges they face in today’s rapidly changing and challenging environment so that they can realign their business strategies to create a more positive outcome than more-of-the-same could possibly deliver. 

In order to support strategic the planning of dealers, we think the profit challenges faced by dealers are here to stay – for the following key reasons: 

1. Legacy operational structures, beliefs and technology lock dealers into an unsustainable operating cost base.
2. Most dealer profits are in the hands of the OEM as new vehicles dominate their front-end volume and gross whilst fixed operations margins continue to reduce.
3. The traditional 2 per cent profitability model is not fit for purpose in today’s market as the relationship between gross and expense has fundamentally changed.

With structural change now imperative, dealers need to establish sustainable expense budgets and build business models based on them by considering: 

Operating and Structural Challenges 

1. Property costs will continue to consume between 15 per cent and 20 per cent of dealer gross in 2025 as total gross declines yet site expenses continue to increase. (The 2 per cent model is built on a maximum of 10 per cent) so site utilisation and gross per square meter will become a key focus.
2. Overall operating expenses are up significantly in the last 5 years (up to 20 per cent in some cases) which has been absorbed by historically high front-end grosses in 2021 to 2023 but as the gross evaporates these costs now result in operating losses. With people costs accounting for up to 40 per cent of all expenses there will be significant pressure on productivity per employee with job roles and responsibilities requiring restructuring.
3. Legacy operating processes and technology inhibits the dealer’s ability to change and locks them into unsustainable cost structures. As a “cost out” approach is needed, technology will play a larger role and the focus will be removing antiquated processes and redesigning them in line with today’s market operating conditions, newly designed job functions and customer needs.
4. Dealers have maintained volume via adding new franchises thus adding expense and complexity to operations. A rationalisation of new vehicle brands by some dealers will be required to rebalance their operations and take increased control over their profitability.

Gross Profit Constraints 

1. Capped price servicing will render many workshops unprofitable as required labour recovery rates exceed available charge out rates. The only two answers are to maintain a level of non-CPS work whilst looking to sweat the asset (being the workbay) via increased hours per day, Saturday shifts and multi-manning of work bays. Service gross per cent will continue to fall thus requiring increased labour throughput or a reduction in “non-productive” staff or a combination of both. Stagnation is not an option in Service in 2025.
2. Dealer volume dominated by new vehicles resulting in a reduced capacity for used cars and increasingly exposing the dealership to market driven front end gross fluctuations. Dealers must set their required used throughput objectives to ensure a balanced front end in terms of gross. This will need a review of asset utilisation and used vehicle policies.
3. Finance-driven offers will be used to drive volumes reducing finance income for dealers by replacing profitable transactions with promotional rates to reduce stock levels which are set to increase across many brands. Net amount financed will be sustained but overall F&I profit will be limited. Again, used vehicle strategies will play a major role in growing the contribution of F&I.

Leadership and Management Skills 

1. Dealerships have been “managed” to a profit in the past but now they now need leadership to execute change which is the most difficult of challenges; particularly where executing change has never been a focus for dealership leaders.
2. Entrepreneurial and financial management skills in fixed operations are lacking due to the lack of competency development in recent years as lead times grew and front-end profit hit record levels.

In summary: 

Vehicle retailers are set to go through significant change challenging traditional processes and beliefs and placing pressure on management and leadership to execute.  

Considering the underlying factors at play, slight modifications and tinkering around the edges will not cut it, in most cases there needs to be a ground up/cost out rebuild of the retailing model to ensure sustainable profitability and justify investment into the future.