Dealer chains report fixed operations growth

Jan. 1, 2020
New vehicles sales are steadily recovering, and large publicly-owned dealerships are benefiting significantly.

New vehicles sales are steadily recovering, and large publicly-owned dealerships are benefiting significantly. They are also rapidly increasing their profits, in part due to focusing on their parts and service operations, according to the year-end reports from the largest dealer groups.

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According to data from R.L. Polk, new light vehicle sales reached 12.7 million units in 2011, and are on track to top 14.3 million this year. Dealerships have reported record profits, in part because they've been able to pilfer service business from shuttered competitors. "That whet their appetite," says Polk's global automotive practice leader Mark Seng. "Now they're focusing their attention on the aftermarket to grow their business."

While fixed operations accounted for less than 15 percent of those company's revenues, parts and service were responsible for between 40 and 50 percent of their profits, on average. The numbers for parts and service sales reflect dealers' growing emphasis on fixed operations—which means aftermarket dealers will likely face increased competition from OEM service departments.

Not all the news in the service department was good for dealers, however. Warranty sales took a hit (in some cases dropping more than 10 percent), not only because of the aging of the vehicle population, but also because of the record number of recalls in 2010, which drove up warranty revenues the prior year.

And dealer share of the post-warranty repair market was forecast at just 28.1 percent for 2011 and 2012, according to data from the Automotive Aftermarket Industry Association. From 2010 to 2011, the number of vehicles in operation still under warranty dropped from 14.2 percent to 12 percent.

Large dealer chains report record numbers

AutoNation, the largest public dealer chain, reported 2011 revenue of $13.8 billion, up 11 percent compared to 2010. The company reported $2.25 billion in parts and service revenue, up from 2.2 billion in 2010, a 3.8 percent increase. Fixed ops revenue now accounts for 17 percent of the company's total revenue and 42 percent of its total gross profit.

AutoNation has implemented a good/better/best pricing strategy in an effort to increase customer retention rates in the service bay. They also offer vehicle service contracts and prepaid maintenance programs.

"We continued to deliver impressive results, setting another record for the highest ever annual and quarterly adjusted EPS from continuing operations," said AutoNation chairman and CEO Mike Jackson. "We are looking forward to the continued recovery in auto retail, buoyed by accelerated product offerings, robust consumer credit and strong replacement demand. We expect industry new vehicle sales to be approximately 14 million units in 2012."

Penske, AutoNation's next-largest competitor, had its most profitable year in company history, and reported fixed ops revenue of more than $1.3 billion (a 7.2 percent increase, driven primarily through acquisitions), accounting for 13 percent of total revenue and 44 percent of the total gross profits.

Warranty business there declined by 7.7 percent, while service and parts revenue increased 5.4 percent in the fourth quarter, and customer pay was up 3.4 percent. According to the company, the decline in warranty was directly related to the Toyota, Lexus and BMW 2010 recall campaigns. However, gross profit margins for service and parts stood at 57.3 percent, representing an increase of 120 basis points from the prior year.

Sonic Automotive, meanwhile, had total fixed ops revenue of $1.2 billion, a 4.8 percent improvement over 2010. That accounts for 15 percent of the company's total revenues, and 48 percent of its total gross profits. According to Sonic's executive vice president of operations, Jeff Dyke, customer pay revenue increased five percent for the fourth quarter and 3.2 percent for the year.

"2011 had the largest revenues in gross year and fixed operations in company history," Dyke said during the earnings conference call. "I want to congratulate our fixed operations team on a job well done. We began to install playbook in fixed operations in 2009, and as a result we’ve grown our fixed revenue over 10 percent since this base year. We've grown our revenue on average $34 million each year for the last five years, with a dip in 2009 just due to the economy."

One of Sonic's next big service initiatives: equipping service advisors with iPads, which the company claims has helped boost products and hours per R.O. sold in stores with the technology.

The other major dealer groups also grew their fixed operations business. Group 1 had fixed ops revenue of $776 million, a 2.5 percent improvement from last year; fixed ops accounted for 13.3 percent of total revenues and 44.3 percent of gross profits. Asbury had fixed ops revenue of $577.9 million (a 4 percent increase, again largely attributed to acquisition activity); fixed ops generated 13.5 percent of total revenue, but 44.7 percent of gross profits. Gross profits for same store sales were up three percent, even though warranty profits decreased by 11 percent and wholesale parts sales remained relatively flat. Lithia Motors reported fixed ops revenues of $325.7 million (a 14.6 increase overall; same store sales were up 4.6 percent); their service and parts business accounted for 12 percent of total revenue and 48.2 percent of gross profits.

Dealerships face reduced competition from other dealerships, thanks to efforts to cull the dealer population over the past few years. They have also seen record profits, with the average dealership's profit increasing 60 percent in 2010, according to the National Automobile Dealer Association (NADA). Fixed ops will likely continue to be a focus, because of the high profit potential and because of the increasing age of vehicles on the road — for dealers to keep their bays full, they will need to attract a larger portion of post-warranty vehicles.

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