KPIs or KP Whys?

The game has changed. Here’s what you need to know.

Great business leaders manage their operations through Key Performance Indicators (KPIs). It’s an efficient way to look at your organization from “30,000 feet.” Every industry has them, and the automotive industry is riddled with them. They’ve become buzz words rather than metrics used to drive performance. And this, to me, is a shame.

KPIs are metrics used to evaluate the success of an organization or a particular activity. By definition, it’s a historical observation. A comparison of two things. One is better. One is worse.

Dealers succeed when they stay ahead of the curve. Ahead of their peers. To do this, they are constantly calculating and comparing themselves to others. Ratios, lead times, efficiency rates, productivity. I often feel that the dealership world has fallen into “analysis paralysis” mode.

In my opinion, the calculation itself is of little importance. It is more important to know how you compare to your benchmark. That’s the key. And here’s another secret. Benchmarks change. They are as alive as goldfish in a bowl. That means you must spend as much time understanding your benchmarks as you do calculating them.

COVID-19 has taught us a lot. Dealers must throw away historical success measures and create new ones. They must use entrepreneurialism to redefine what success looks like in the automotive industry. A successful Saturday in a dealership is no longer defined by the number of “ups” in your store. It’s now defined by your ability to convert appointments into sales.

You see, the game has changed.

Let’s deep dive into two KPIs and how they’ve changed:

Used-to-new ratio (retail)

This is the classic KPI in retail automotive. Calculated as Total Used Retail Vehicles Sold/Total New Retail Vehicles Sold, it has been around since dealerships first began. The benchmarks, however, have changed significantly.

According to NADA statistics, in 2017 the average dealership delivered 0.76 used vehicle units for every new vehicle sold.

By April 2021, this ratio had grown from 0.90 to 1.00. That’s an 18.4 per cent growth rate.

Dealers have had to completely change their operations to meet this requirement. And they have embraced it. Market leaders have carved out new revenue streams around it. But I find this exceptionally odd.

More capital than ever is being spent on manufacturing and selling the newest and most technologically advanced vehicles. Showrooms look like expensive shopping malls. New cars are so sophisticated that they drive you now. Purchasing a new vehicle has never been so appealing. So why are so many customers choosing to go backwards and purchase a pre-owned unit? It doesn’t make sense!

The environment has changed. I fully expect this KPI to hit 1.00 to 1.00 by the end of the year. The current semiconductor chip shortage has made this a sure bet. And as environmental factors continue to change, so will benchmarks. The challenge for dealers is to understand the trend and adapt accordingly. Be proactive, not reactive. Manage the business, don’t let the business manage you.

Net-to-sales rate

Automotive retail is a complicated business. However, simple calculations like the “Net to Sales Rate” (calculated as net profit before tax as a percentage of total sales) can truly tell the story of a dealer’s success. This KPI has stood the test of time. It’s informative and, if dissected properly, can present real opportunities to the analyzer.

Successful dealers net anywhere from 2.5 per cent to 5 per cent on sales. In other words, for every $100 in sales, they put $2.50 to $5.00 into their pockets. Very small in comparison to other businesses in the world.

Dealers must throw away historical success measures and create new ones. They must use entrepreneurialism to redefine what success looks like in the automotive industry.

According to Yahoo Finance, in 2020, Alphabet Inc.(Google) netted 22 per cent. It really speaks to the high overhead costs associated with running a dealership. Things like employment costs and rent factors drastically dilute net profit. So while traditional operators love to quote this KPI, I wonder if it is still relevant in today’s environment.

Every business is different. Retail automotive is changing. More and more retailers are moving to digital selling. I can see a future when brick and mortar dealerships go away. Moreover, in 2020, COVID support money has contributed hundreds of thousands of dollars to dealership bottom lines.

The question we must ask is: how should these be considered when calculating a typical net-to-sales benchmark? Should it be normalized? How do you normalize? What does normal even mean these days?

Whatever your answer, the point is that KPIs must be fluid. The goal is not to beat your peers. The goal is to understand the story. Understand the opportunities being presented. What activities are driving the KPI. What factors can be controlled.

The goal is to optimize your dealership, not to compare. This is not a one-size-fits-all situation. KPIs and benchmarks are different for everyone. It’s personal. Just like your favourite brand of scotch.

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