Motorcycle Industry Alert · 2020-02-27 · Motorcycle Industry Alert . February 2018 . kpmg.com.au ... Consider for example a motorcycle dealership achieving average profitability

© 2018 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.

Motorcycle Industry Alert February 2018 kpmg.com.au

http://www.kpmg.com.au


Small changes in the business can make substantial differences to the bottom line, and investigate how to optimise the business. As in all things, a small change can make a big difference – in football they often call it the one percenters – that last tackle to save a try, or a mark to kick a goal at the last second of a game. These actions can change the outcome of a football game. Similarly, one percenters can change the dynamics of your business. What are the one percenters that could make a change to your business? As the saying goes, if you continue to do what you have always done, you will get what you have always got.


One percenters to make a change Consider for example a motorcycle dealership achieving average profitability of two percent of sales. Often, a high level look at the profitability looks like this:

Average profitability % of sales

Gross Profit / Income 22% Expenses 20% Net Profit 2%

Yet a best practice doesn’t look too different in relation to these numbers:

Average

profitability % of sales

Improved

profitability % of sales

Gross Profit / Income

20% +1% 23%

Expenses 20% -1% 19% Net Profit 22% +2% 4%

Generating increased margins of one percent and lowering the cost base by 1one percent of sales has the effect of DOUBLING a dealership’s profit, if that dealership was achieving a profit of two percent of sales.

The challenge is how to achieve this!

A great place to start looking for your opportunity is to review the structure of your dealership. Where are sales being generated and how are they being converted to gross profit? This may highlight opportunities to increase the gross profit margin.

Generally, best practice motorcycle businesses generate approximately 66 percent of gross profit through parts and service, with 34 percent from new and used motorcycle sales.

New, 25%

Used, 9%

Parts, accessories & merchandise, 44%

Service, 22%

Gross Profit Contribution

Gross profit contribution

Your dealership

New 25%

Used 9%

Parts, Accessories & Merchandise 44%

Service 22%

GP 22% of sales

Profit – 2% of sales

Expenses 20% of sales

GP 23% of sales

Profit – 4%

Expenses 1 9% of sales


Additionally, when you look at the margins generated by each department, parts and service deliver the best margins:

Gross profit margin

Your dealership

New 9%

Used 17% Parts, Accessories and Merchandise 34%

Service 66%

Whilst all departments are important, this data highlights the importance of having a good mix of parts and service work.

Let’s look at a couple of examples in relation to optimizing gross in each department.

Example 1: Departmental Gross Profit contribution Meeting the franchise targets is important for two main reasons: Your dealership gross profit contributions and margins look like the following


(% of total department gross profit)

New 37% 47% Used 10%

Parts, Accessories and Merchandise

38%

53% Service 15%

In terms of dollars, the gross profit from each department looks like this


New $111,000 Used $30,000 Parts, Accessories and Merchandise

$114,000

Service $45,000 Total $300,000

Compared to best practice, this dealership has 47 percent of its Gross coming from new and used – whereas best practice dealers have only 34 percent.

Let’s take the situation where we maintain the new and used sales levels and gross profits, but work to increase parts and service sales and grosses to achieve the best practice mix. How might this change the gross profit generated by the business?


Gross Profit Contribution

(%) New $111,000 27% Used $30,000 7% Parts, Accessories and Merchandise

$114,000 44%

Service $45,000 22% Total $300,000

By working to bring in more parts, merchandise and service sales, to better match new and used motorcycle sales, the dealership was able in this exercise to increase its average gross profit generated from $300,000 to $414,706 per month – an increase of 38 percent.

9%

17%

34%

66%

New

Used

Parts

Service

Margins by Department


Not all dealers would have this level of improvement, but the example highlights the benefit of having what we call a well-balanced dealership – or having each department contribute appropriately to the business.

How do we achieve this? We will spend more time on this in next month’s edition, but let’s start with three easy to implement ideas –

Send out service reminders to all customers who haven’t been back to the dealership Whilst not all customers will come back to the dealership for service (for varying reasons), it is often a mistake to assume certain ones won’t come back. All customers should receive service reminders – if there are customers that are unlikely to come back, is there an offer tailored to them that may incent them to come to the dealership for the service?

Require each motorcycle salesperson to write-up a contract assuming merchandise sales Assume that a customer will buy new items to go with their new motorcycle purchase. Write up the initial quote assuming this. The customer can always alter the merchandise included, or ask for them to be removed from the initial quote.

If additional work is being done on a motorcycle service, make sure the customer has been contacted and given the OK to perform the work. You then have the right to charge for it. Technicians are well known problem fixers; and will often spend time working on additional problems that the customer didn’t ask to be fixed. Contact the customer and get approval for this additional work – it can then be charged for.

Example 2: Improve departmental margins Work to improve your margins

In this example, the current gross profit margins in each department are all below the benchmark (as the following table shows)

Sales ($) Current

Margins Best

Practice New $1,400,000 7% 9% Used $275,000 11% 17% Parts, Accessories and Merchandise

$580,000 31% 34%

Service $165,000 55% 66%

If, on existing sales volumes, a dealership could gross more in each department, most of this additional gross would transfer to the net profit. Why? – Because expenses are already being incurred and there is unlikely to be much, if any, additional expense by generating more Gross profit on each transaction.

By working to improve the gross profit margin in each department in this example, with the same sales revenue, would have the impact shown in the following table –

Sales ($) Current

Margins Gross

Profit $ New $1,400,000 7% $98,000 Used $275,000 11% $30,250 Parts, Accessories and Merchandise

$580,000 31% $179,800

Service $165,000 55% $90,750 Total $2,420,000 16.5% $398,800

Best

Practice Gross Profit $

New 9% $126,000 Used 17% $46,750 Parts, Accessories and Merchandise

34% $197,200

Service 66% $108,900 Total 19.8% $478,850


Following are four ideas you could look at to improve margins. There are many more, but here are four to think about.

In selling new and used motorcycles, there are many areas to look at in relation to retaining gross profit in a deal. These include –

• Reduce price by small increments not large increments. When you have taken $250 off the price of the motorcycle, you can only take more off, not less, in the next round of the negotiation.

• Ensure prospective purchasers take a test drive – to ’connect’ with the motorcycle.

Additionally, it is often only one or two deals that have the highest negative effect on new and used motorcycle gross.

Sales Dealer 1 – GP Dealer 2 - GP

Deal 1 – Model A $500 $500 Deal 2 – Model B $750 $750 Deal 3 – Model A $100 $400 Deal 4 – Model C $600 $600 Deal 5 – Model D $500 $900 Total Gross $2,450 $3,150 Average Gross $490 $630

Service – Sell an extra hour. At $100 an hour, an additional one hour per day equates to $2,100 per month. Cost is already there in technician wages, so every $2,100 is additional gross profit to the business.

In our examples, what we have done has had a significant impact upon gross, yet we haven’t even looked at expenses yet. That is the other one percent from our example at the beginning of this article.

Unfortunately, there is little that can be done for a majority of expenses – rent doesn’t usually decrease, and salaries usually go up. These items alone account for over 50-60 percent of dealership expenses!

Yet there are things that can be done. Here are four that you could consider

Commissions When was the last time commissions were reviewed for staff members? Are commissions designed to both encourage and reward good performance? Often we have seen commission schemes that reward poor performance with good commission payments. Commissions should reward good performance and encourage those activities that drive a result for the business.

Not only does this set commission expenses at an appropriate level, but it can encourage improved gross profits.

Insurance Quotes Insurance is a necessary expense of the business, but do you regularly get competitive quotes when insurance is due to be renewed? There are a number of companies that provide insurance, and the competitive market is such that you can often realise savings over your quoted premium for next year.

Energy consumption Energy costs are rising in Australia presently. There are a number of things you can do in this space. Firstly, get competitive quotes from energy suppliers. Second, look at how you can reduce energy consumption in the business – for example a timer on the air conditioning, or replacing normal light bulbs with LEDs. And third look at options such as solar – their payback periods are much less than they were five years ago.

Be aware of your expenses. Keep the growth in your expenses lower than your growth in gross profit. Being aware of these figures will make sure that you and your staff consider additional expenses before incurring them.


In our businesses, finding the one percenters, or those items that when worked on can make a big difference. You can work to identify these one percenters by looking at the areas discussed in this month’s newsletter. First, look at the contribution to profit from each department; then look at the margins being generated by these departments. The result of this review often identifies those areas that have the biggest opportunity for improvement. It should be remembered that these processes apply to all dealerships – large or small; metro or rural. The size is irrelevant to the opportunity or concepts involved. If you have any questions, please feel free to contact us. Or consider attending our Driving Dealership Financials 2 day workshop in May – it expands on the concepts discussed in our first three newsletters. For more information, please contact – [email protected]

mailto:[email protected]


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).

© 2018 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.

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]

Dean Robinson KPMG Specialist Advisor – Deal Advisory M&A


Laura Pestell Learning Coordinator – Enterprise


http://www.kpmg.com.au

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Motorcycle Industry Alert · 2020-02-27 · Motorcycle Industry Alert . February 2018 . kpmg.com.au ... Consider for example a motorcycle dealership achieving average profitability