Bob Rosen’s Dealer Perspective

Are you puzzled by a dealer experience or wonder why you got the answer you did from a dealer? Bob Rosen may be able to tell you why. Email your questions to bobr@ride-ct.com.

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The World’s Oldest Profession – Sales

By Bob Rosen

Even before un-virtuous ladies of the night could offer up their services something had to take place to generate interest and awareness for their “business.” They found themselves needing to sell their attributes to potential clients. Attracting interested parties, emphasizing the superiority of their offering over the competition, and negotiating a final price all come under the heading of Sales. It’s fair to say that the Sales profession holds the honors of greatest longevity. When explaining what makes the world go ’round, an old boss of mine stated it simply: “Nothing happens until somebody sells something.”

That’s certainly true in the motorcycle business. Selling takes place in every department of a dealership.  There are dedicated sales persons that spend all of their time attempting to move new and pre-owned units out the door. Parts and accessory personnel are responsible for improving revenue for their department by making it easy for customers to buy. There is a concerted selling effort undertaken in the service department whenever additional work is suggested. In successful dealerships, there is even selling activity in the business office where a bike buyer might be offered an extended warranty, tire and wheel insurance, and other enhancements to their deal.

For this column, let’s focus our attention on what happens when you enter a dealership with the possibility of buying a bike on your mind. A good sales experience starts with the sales person attempting to understand your wants and needs in the area of two-wheeled conveyances. If he/she is doing their job, they can provide a valuable consultative element to your search for the perfect bike. Interviewing you, the prospective buyer, takes time and no small amount of awareness on the part of the sales person. Unfortunately, this does not always happen. Too many times, the lightly experienced and barely trained sales person thinks his role is to show you the bikes and hope like hell that you’ll buy one of the shining beauties on the floor. So, the very beginning of the dealership’s selling challenge is to understand the need for skilled sales people and making sure they are on the floor to stimulate the selling process.

Sales is a profession that calls on a host of skills and knowledge. Many of the skills employed are transferable among different products and services. An outstanding motorcycle sales person could easily be an outstanding sales person in a non-motorcycle environment. And that’s part of the reason you don’t find more top notch sales people working to sell you a motorcycle. Just follow the money. If one possesses the skill and work ethic to sell successfully, then I can say with great certainty that they will find greater earning opportunities outside the world of motorcycles. Even moving over to auto sales can significantly increase a sales person’s pay.  There are plenty of car sales persons earning six-figure salaries. Not so in the world of motorcycles. Good sales people stay with bikes for reasons other than money.

Let’s say you’ve done your internet homework and have decided on a particular model of bike. You are greeted at your local dealer by an enthusiastic sales person.  Actually, this simple act doesn’t happen often enough. The most common complaint among bike shoppers is that they were ignored after entering the showroom. An astute dealer can professionally attend to your needs. After the preliminaries are completed, the oldest dance in the world begins. It’s your goal to buy the bike at the lowest possible price. It’s the dealership’s goal to sell the bike at the highest possible price. There are a couple of basic principles to keep in mind as the dance begins.

Dealership selling philosophies vary widely from store to store. Some dealers will give you a bottom line price the first time you ask. Others will be conservative and want to discuss pricing with you to maximize their profit on every deal. Dealerships are motivated by two very critical factors – gross profit and cash flow. The difference between all of the costs associated with the bike and the ultimate selling price is gross profit – the money the dealer keeps. Cash flow simply speaks to how well the dealer can keep up with his expenses. The buyer has no way of knowing what’s on the dealers mind on any given day.

The difference between MSRP and cost on bikes varies by brand and sometimes model. Typically, if a bike sells at full MSRP, the dealership will earn somewhere between 12% and 17% gross profit.  On a $10,000 bike this is $1,200 at 12% to $1,700 at 17%. Depending on model, time of year, and other factors the dealer can earn additional profit from the manufacturer through special incentives.

Any costs added to a bike will reduce the final profit on the sale. This includes initial set-up, any parts or accessories “thrown in” with the deal, the labor to install these parts, delivery costs, etc. A hidden cost unknown to most buyers is the dealers cost to finance the bikes after they have arrived at the dealership. These “flooring” costs can really add up. If our $10,000 example bike has been on the dealer’s floor for a year or so, there can be an additional $500 or $600 of cost added to that bike.

Beyond gross profit on the deal, other factors are considered by dealers when selling a bike. These include the probability of selling the bike based on the current time of year, how many of that particular model are in stock, how long the bike has been in inventory, whether a new version of that model is coming out soon, and the selling history of that model.

And finally, we can’t forget about the sales person who is handling the deal. Unless you’re dealing directly with the owner of the dealership, there has to be some room in the price to pay the sales person a commission. Typically, motorcycle sales people are paid a small base salary and earn the rest of their pay through commissions. The commission structure provides a real incentive for sales people to get the highest price they can on every sale.

So, “How much is that bike?” is a question that kicks off some serious thought on the part of the dealership. Like any business, the dealership needs to generate some profits to keep the doors open. As you can see, what that will be on the bike you want to buy depends on a lot of factors. 

(Posted March 27, 2014)

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A Visit To The “Dentist” – Part Two

By Bob Rosen

Here in the Northeast, there is an 800-pound gorilla that enters the room every November – the weather. It has an enormous impact on every dealer, and there isn’t a single thing the dealers can do to change the temperatures or precipitation levels that are headed their way. They can, however, take steps to make sure their business practices are set to soften the blow to their business.

 The service department really feels the effect of dramatically reduced customer activity. When customers don’t bring their bikes in because of falling temperatures or questionable road conditions, a lot of the inventory of technician hours can disappear each day without being sold.

 A brief digression back to costs, which I touched upon in my last column. There are three broad categories of costs in the typical dealership:

– Fixed costs, which are set, repeatable, and have minimal variations. They include rent (or mortgage), insurance, vehicle payments, etc.

– Variable costs, which can change from month to month and include utilities, payroll, supplies, etc.

– Cost of goods, which  is simply what the dealership pays for bikes, parts, and anything else it sells.

If we think of the business equation as having two sides – demand (customers buying activity) and supply (the dealers’ efforts to satisfy that demand) – then we can study how smart dealerships impact both sides of the equation to minimize the negative effect of seasonality.

Supply Side Cost Control

On the supply side, the single greatest service department variable cost is technician wages. The simplest (and worst) way to handle reduced seasonal service demand is to simply lower the number of available technician hours by reducing headcount – laying off technicians.

Dealerships that use this method of cost control can achieve some immediate savings by lowering their payroll expense. The down side to this approach includes poor employee loyalty as technicians can’t count on continuous employment and may need to keep a constant eye open for a better situation elsewhere.

Also, the dealer takes the risk of losing a laid-off technician permanently if they find alternate employment during their layoff. When the busy season returns, the dealership is left short-handed or is forced to find another technician to fill the vacancy – not always easy to accomplish. Service department morale is best served when employees feel confident about their prospects for continuous future employment.

The opposite extreme of reducing service hour inventory by laying off technicians is to keep everyone on the payroll regardless of whether or not there is work for all. This can get expensive for the dealership as hours paid to technicians without corresponding customer billing comes directly out of the dealerships pocket at a time when they can least afford it. Few dealers can continue to pay full wages when revenue slides steeply in the off-season.

Dealers that want to retain their technicians through the winter without going broke have developed flexible pay plans. Usually, these pay plans provide for an incentive during busy times and a way for technicians to get paid while they are producing far less billable hours in the off-season. Sort of a “Make hay while the sun shines” approach.

A technician’s peak earning opportunity occurs when there is a lot of work and (if he is highly productive) he can exceed the flat rate hours for repair jobs and/or work overtime for extra earnings. During the off-season, the technician will be paid a lower hourly rate for time that he is not producing billable hours, which reduces the hit to the dealerships’ bottom line.

In some states, like Connecticut, the state unemployment system accommodates “partial layoffs.” Under Connecticut’s Shared Work program, employers can lay off staff for up to 40 percent of their normal work hours. This is usually equivalent to two days per week. So, instead of laying off employees for an extended period of time, dealerships can reduce payroll hours by up to 40 percent. Those partially laid off employees stay on the payroll, work fewer hours, maintain their benefits, and receive state unemployment benefits for those days not worked. It’s possible that other states have similar programs.

Regardless of the method employed, it’s pretty common for supply side service costs to be controlled by modifying the single biggest component – technician wages.

Demand Side Cost/Revenue Control

No business can survive without adequate demand for its products and services.  Ideally that demand will be sufficient to cover cost of goods and both fixed and variable costs, leaving some profit to pay the owners for their trouble.

In the off-season, proactive dealerships try to stimulate service demand via any number of creative approaches. Those dealers that simply let the off-season hit them between the eyes without taking some special efforts are doomed to financial suffering and playing catch-up for most of the following busy season.

Even though most Northeasterners don’t ride through the winter, many bikes are parked at the end of the riding season still in need of service work or repair. Getting that work done during the off-season can bring much needed cash flow to dealerships. It also means that riders can ride on the first warm day of spring without enduring the service log jam that occurs every year as riders want their bikes taken care of at once.

In addition to doing service in advance of the next season, proactive dealers offer incentives to riders so they will be motivated to get service work done in the winter. The extra costs associated with offering pick-up and delivery will eat into dealership profit margins.  So will dealer discounts on parts and service labor. If a dealership can offer these incentives, he has a chance to see some off-season revenue – albeit at reduced profit levels.

The service department is an important piece of the overall picture. Dealerships that measure results, utilize best practices, and apply creativity in the management of their businesses have a decent chance of sustaining a profitable dealership and being around for the long haul. 

(Posted Feb. 9, 2014)

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A Visit To The “Dentist”

By Bob Rosen

How does the dealer decide what to charge you for repairs and maintenance on your bike? If you’ve been to a dealership a few times, you probably think you have a pretty good idea of how things work. But, there’s a lot more going on that isn’t obvious to the average rider. We’re going to take a look at the part of the iceberg that’s below the water line to see what goes on beneath the surface and how it affects your experience at the dealership (and your wallet).

Most riders view making an appointment with the service department the same way they think about the dentist: “I’ve got to take care of periodic preventative maintenance. Or, there’s a problem that needs to be taken care of before the pain gets worse.” Occasionally, we might go to simply have the latest cool accessory installed, but usually we only go when we have to.

When we arrive, we see the state-mandated sign that announces the hourly service charge. Maybe it’s $75 per hour, or $95 per hour or (if you live in a major metropolitan area) well north of $100 per hour. It’s likely that the service rate is substantially more than the rate you’re earning on your job. So, besides being something you really don’t want to do, it’s liable to take a goodly chunk out of your hard earned income. About the only time you can avoid the big ouch is when you’re in for a warranty repair or manufacturers recall, both of which are done at no cost to you.

Simply stated, there are a few key areas that need the dealer’s careful scrutiny to insure that the service department is holding up its third of the three-legged stool of dealership profitability. They are:

– Technician hourly rate of pay

– Use of Technician hour inventory – productivity and efficiency (two very different things)

– Effects of seasonality (high season vs. “winter” activity)

Technician Compensation

There are nearly as many pay plans for technicians as there are dealerships. It’s much more involved than simply coming up with a technician hourly rate or salary. Firstly, there is the issue of different skill levels – typically designated as A, B, and C. “A” technicians are those with the most experience and training and earn top wages. “C” technicians are often just out of school and perform the least complex service procedures (tire changes, oil changes, etc.). They, of course, are at the bottom of the pay scale.

If capable, over time they will work their way through “B” on their way to “A” status. The real challenge in developing a technician pay plan is tracking the number of actual billable hours produced by each technician and also how to pay them for time that they are not actually producing revenue for the dealership. Keeping technicians motivated and reasonably satisfied with their earnings is critical to a successful service department.

Technician available hours inventory

The concept of inventory and its cost is one that most dealers grasp reasonably well. In the parts department it’s simply the purchase cost of the goods that are on the shelf. Most parts inventory is quite durable and has a long shelf life during which the dealership has an opportunity to convert that inventory into revenue. It’s totally different in the service department. Other than some miscellaneous shop supplies and other odds n’ ends, the service department inventory is very short-lived.

In fact, by the end of each work day, the inventory has been depleted and is exactly zero. That’s because the inventory in the service department consists of one thing – the number of technician hours available to be converted into revenue. If the service department had a successful day, then they converted all or most of the available technician hours to billed hours. Any hours that were not billed due to lack of work, inefficiency, lack of parts, etc. are gone forever. So, one of the greatest challenges in the service department is to make sure as much of each day’s inventory of hours gets sold.

Efficiency and productivity

As the old saying goes, “If you don’t measure it, you can’t manage it.” This is particularly true in attempting to maximize the revenue potential from the inventory of technician hours.

Efficiency is the measurement of how many hours a technician is actually working on bikes expressed as a percentage of how many hours he is at the dealership. Example: if a technician is punched in for eight hours and has spent 6 of those hours working on bikes, he has been 75% efficient. Taking into account lost time for lunch, breaks, waiting for parts, etc., a realistic efficiency target is 80-85%. You might be amazed at how many dealers fail to achieve this critical benchmark or even measure it.

Productivity is the measurement of how many billed hours a technician has generated as a percentage of the clock hours he has been working on bikes. Example: if a technician has been punched in on repair jobs for 6 hours and has generated 6 hours of billing, then he has been 100% productive. A realistic goal for a skilled Technician in a well-run shop is 125% productivity. He can generate more billed hours than worked hours by beating the flat rate times that are assigned to most repair and maintenance jobs.

In part two, we will address the very real effect that seasonality has on a service department’s financial performance. We will also tie together the multiple elements associated with operating a service department to get a solid sense of how the whole picture looks.

(Posted Jan. 26, 2014)

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Building a Three-Legged Stool 

By Bob Rosen of RIDE-CT.com

As motorcycle enthusiasts, we get a real kick out of accessorizing our rides, maintaining them, acquiring riding gear and occasionally buying a new or used bike. We have many choices of how and where we can scratch this itch, and local dealerships are always glad to provide an outlet for spending urges.

Dealers can attract customers with outstanding product selection, great customer service and attractive prices. A shortfall in any one of these areas means lost sales and, possibly, customers lost forever. Getting things right on the customer experience side is one thing; maintaining a financially-sound business while doing so is an entirely different matter.

As in all business, there is a constant tug of war between the push of profits generated by revenue (sales) and the pull of costs. It’s a battle to keep costs from consuming all the profits. Lose this battle and the resulting red ink can only be sustained for so long.  This scenario spelled the end for approximately 4,000 dealers that have closed their doors since 2007.

Of course, savvy owners keep an eye on overall dealership financial performance. They track store revenue, costs and profits. In order to get a better handle on what’s really happening, it’s handy to look at the business in terms of individual “profit centers.”

In the motorcycle dealership that typically means the three primary business segments; a three-legged stool as it were – motorcycle sales, PG&A (parts, garments and accessories) and the service department.

In recent years, a fourth important revenue and profit center has been developed at many dealers in the areas of finance and insurance (F&I). For now, let’s focus on the three primary legs of the financial stool, beginning with a look at some basic terms.

“Revenue” is another word for sales measured in dollars and cents. “Cost of goods sold (COGS)” is the actual direct cost to the dealer for any item or service that is later resold to customers. “Gross margin,” expressed as a percentage of revenue, or dollars, is the amount remaining after the cost of an item or service has been accounted for.

For example, if an item is sold by the dealership for $100 and the cost of that item is $75, then the gross margin is $25 or 25%. Think of gross margin as money the dealer has left after paying the direct cost of items sold. This money will be used to pay the stores operating expenses which include salaries, rent or mortgage, utilities, insurance, taxes, maintenance, new equipment, etc. If the dealership has been careful with its money, there may even be some money left after paying the expenses – which we call profit.

There are quite a few other measurables that are used to evaluate a dealership’s operating performance. However, you can look at a dealers profit and loss statement and zero in on revenue, gross margin, overhead (operating expenses), and net profit to get a very quick snapshot of the financial health of the business.

An acceptable overall gross margin for the entire dealership is in the range of 20 percent. That means for every $1 million in revenue, the dealership has $200,000 to pay its operating expenses. The three main profit centers provide this money in different proportions:

Bike sales – For most dealerships, the largest revenue generator is the sale of new and pre-owned motorcycles. The sale of bikes can account for 75 percent or more of total revenue. For new bikes, manufacturers establish the cost of their bikes and publish an MSRP. So, one end of the gross margin equation is fixed (the cost) and the other end is variable (the selling price).

Manufacturers want their dealers to be successful and set costs and MSRPs to provide an attractive margin opportunity for the dealer. This margin disappears quickly as dealers discount, and more than a few dealerships have discounted their way out of business. Typical new motorcycle gross margin at full MSRP can range from 12 to 20 percent. These percentages will vary by brand and any dealer incentives that might be in place. As a result of discounting, actual gross margins are usually less.

The cost of pre-owned motorcycle inventory is simply what the dealership had to pay to acquire each bike (plus any refurbishment costs) – whether that be as a trade-in on a new bike sale or an outright purchase. In these cases, the dealer has more control over both the cost and selling side of the gross margin equation. As a result, we see higher gross margins on pre-owned bikes. Dealerships will typically strive for pre-owned bike gross margins in the range of 20-25 percent. As a result, dealers welcome the opportunity to build their pre-owned bike business.

PG&A – A strong PG&A department will go a long way to ensuring an overall acceptable financial picture for the dealership. Gross margins can vary widely as different suppliers establish their own individual cost and MSRP structures. PG&A gross margins can range from as low as 20 percent to 50 percent or more. Well-run dealerships typically average around 35 percent for their entire PG&A departments.

Service – Service is perhaps the most challenging department in any motorcycle dealership and is typically the smallest in terms of generating revenue. But it is responsible for the highest gross margin percentage in the dealership. Industry standards for service department gross margins hover around 65 percent.

As we look at the above numbers, we see that the way to a solidly profitable dealership travels down three different paths, each with their own unique challenges. In future columns, I’ll take a detailed look at each leg of the three-legged stool.

(Posted Dec. 10,2013)

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How to Make a Million Dollars as a Motorcycle Dealer

By Bob Rosen of RIDE-CT.com

You might have thought I was going to say: “Start with $2 million.” That’s actually the time-worn answer that some dealers will give you with a chuckle when discussing the
financial reality of their chosen profession. Like any business, keeping score for the typical motorcycle dealership is largely a matter of numbers – revenue, costs, profits, number of bikes (sold, on the floor, etc), inventory (value, turns, etc.), service hours sold, technician efficiency, and many more metrics. That being said, putting the motorcycle dealership under financial scrutiny and trying to define the path to success is not just a matter of profit & loss statements, balance sheets, and cash flow analyses. The day-to-day action steps that are taken to generate those numbers really speak to what this business is all about. In this, the first in a series of columns on the business of motorcycles, I’d like to lay the groundwork for future reviews of how the customer contact side of the business relates to the tough financial reality that every dealer faces…

 It’s Not Just About the Numbers

I’ve had more years in the saddle than I’ve had behind the counter, so my viewpoint regarding motorcycle dealerships is really flavored from the customer side of the equation. As a consequence, my dealer management activities always had the “voice of the customer” speaking to me loudly and clearly. The most successful dealers in the business have learned to hear that voice while paying careful attention to the money side of things. However, even the most effective dealerships must operate in the greater arena of market and economic reality. Let’s take a macro look at what has happened at the retail level for motorcycle dealerships in the United States over the past few years.

 The Big Picture

As identified in a recent Outdoor Industry Association study, the sale of motorcycles, gear, and accessories in the U.S. is about $10 billion per year. This dollar volume is divided among approximately 10,000 dealerships, independent shops, and a growing population of online sellers. Our coveted motorcycle business is just a tiny slice of the $16 trillion U.S. total economy.

As we crossed the bridge from the last century to more recent times, the retail motorcycle business enjoyed an unprecedented run of year-over-year growth. MIC (Motorcycle Industry Council) data shows that sales of motorcycles in the U.S. grew every year between 1992 and 2005, topping off at nearly 1,100,000 bikes sold in 2005 (includes on-road, dual sport, off road, and scooters). Sales in 2006 were a leading indicator of the troubles that were just around the corner. In 2006, sales dropped for the first time in more than a decade, slipping to just over 1,000,000 units. Then we got slammed by the recession of 2007-2008 which created serious downward momentum in motorcycle sales. Sales slid steadily and precipitously to about 460,000 units in 2012. A 58% reduction in sales volume over seven years spells big trouble in any industry. The effect was most keenly felt in the dealer community. Exact numbers are hard to come by, but industry experts feel that there were about 14,000 dealerships in the country in 2006. Since then, about 4,000 dealers have closed their doors. Even the mightiest of the mighty got hit hard. Harley-Davidson stated that 64 dealerships went dark between 2009 and 2010.

This included a lot of big “showcase” dealerships that represented many millions of dollars in revenue.

So far, 2013 U.S. sales numbers are only partially encouraging. Unit sales for the first 6 months of the year show a 5.2% decline in overall volume compared to the same period in 2012. There are some rays of sunshine in the gloom, however. Off-road unit sales are up by 5.4%. And, some manufacturers in the on-road segment are seeing renewed life. Sales of Harley-Davidson bikes are up 4.2% through the first 9 months of 2013, fueled by 20% growth in the third quarter alone. BMW is reporting 17.6% year over year growth through August. It’s the big Japanese brands that are dragging the on-road numbers down.

What’s It All Mean?

The data clearly shows that the industry is still undergoing a lot of distress with some real success stories mixed in. Dealer bike sales are still well below half their 2005 high point. Even though there are fewer dealers to handle the volume, there is still a tremendous amount of pressure on dealers to “move the metal.” By reviewing this industry-wide data, we have set the stage to increase the magnification of our motorcycle business evaluation tool. Now we can take a look at what your local dealer thinks about every day:  “What can I do to give my customers a great retail experience while maintaining a financially sound business?”

This review has been focused entirely on the sale of new motorcycles. There isn’t a dealer in business today that can exist by only rolling new units out the door. There are also used bikes to be considered. If we think of bike sales (new and used) as one bar on the sales chart, then we need to add two more. In our next column we’ll take a look at all three legs of the stool – bike sales, parts & accessory sales, and service revenue. Without these three legs standing tall, the dealership will wobble and possibly fall to the floor. Stay tuned.

(Posted Nov. 3, 2013)