Nearly every dealer I have met in the past year or so recognizes that the "other shoe" will likely drop in the car business. The "other shoe" amounts to the collective sense that the past nearly 10 years of unprecedented volumes of new and used vehicle sales will come to an end, and the ongoing effects of margin compression will make it harder to achieve the profitability dealers have previously enjoyed from their operations. This thinking has many dealers, as well as the consultants who serve them, looking to fixed operations as a principal source of profitable opportunity. The shift makes good sense. Front-end gross profits as a percentage of new and used vehicle sales prices have been on a steady downward trajectory for much of the past seven years. In new vehicles, this percentage ran close to 4 percent in 2009, and it's approaching 2 percent today. In used vehicles, this percentage ran close to 14 percent in 2009 and hovers around 12 percent today. Meanwhile, fixed operations continue to deliver a roughly 45 percent gross profit margin of sales, which is roughly the same ratio it has been for years. This disparity begs the question: If profitable growth is your goal, and we're in an environment where new- and used-vehicle sales promise ever-smaller returns, shouldn't dealers double down on the business that's capable of delivering a better return on the investment in time and money to drive the growth? Of course, the answer's a no-brainer. A greater emphasis on more profitable fixed operations is really the only way for dealers to truly move the needle for storewide profitability. That's not to suggest that new and used vehicle sales aren't equally important- they are. It's just going to be more difficult for dealers to realize the level of growth, in both sales and profits, that they will need to achieve from variable operations alone. But this operational shift focus won't be easy for a lot of dealers (or even their service directors and managers), mostly because they have long regarded fixed operations as the "back end" of their business. Further, the traditional best practices-like stacking the schedule with more early morning appointments than you can really accommodate-are increasingly out of step with today's customers, who expect a different kind of engagement and experience. Some dealers may take satisfaction and solace in the fact that, if the "other shoe drops," their service and parts departments will do just fine. They point to the fact that their service and parts businesses buoyed and sustained them when the Great Recession struck in 2007. I would counter this point by suggesting that while service and parts revenues for dealers did increase following the economic downturn, the gains flowed more from the necessity of vehicle owners to repair their vehicles for maintenance or recall issues- not a conscious and proactive effort by dealers to secure this business. I would also submit that many of the dealers and service directors or managers who tout significant growth in their service business in recent years haven't implemented a truly long-term strategy for owner retention. Rather, the gains come from working their existing pool of customers even harder. It's fairly easy to identify service directors and managers who've taken this path. Pull a couple of months of ROs. Look for high dollar outliers (especially clustered around individual advisors). Look across various products and their penetrations. When I do this exercise, I'll often see an inordinate number of services-a flush, anyone?-that bring a high-profit margin for the dealership and questionable benefit for the customer (The analysis gets really interesting when you cross-check the product penetrations against prevailing spiff programs). Such efforts to drive incremental, profitable growth in fixed operations often result in what might be described as a path that provides short-term gain and long-term pain. Here's a potential proof point: Examine your retention rates across your owner base for each of the past three years. What direction is the number trending? Of the customers you lost, what was the average cost of the last service you performed? Now, go deeper. How much has your advertising expense to attract new customers changed in the same three-year period? Is it more or less on a per customer basis? On average, advertising expenses have been increasing steadily for the last six years, which is an unsustainable trend for dealers. Dealers who honestly answer this exercise often find a surprise or two. For one thing, the customer defection rate is often higher than they thought. In addition, some may realize that, without the natural pull-through of owners from record-setting year-over-year gains in new and used vehicle sales, their service and parts business wouldn't really be growing while the cost to capture new customers is increasing. Industry-level statistics also indicate that dealership service departments haven't really gained much ground in terms of retaining customers and enjoying the benefits higher spends per RO and lower acquisition costs that repeat customers offer. According to IHS Polk, the average industry loyalty is only 51.5 percent. Put in stark terms, this means one out of every two customers will not buy from the same brand again. In service, the loss of half of your customers means you must recover one out of every two customers you serve just to stay in place, and you end up spending more in advertising and marketing to replace the customers you've lost. On top of that, Cox Automotive research indicates that dealerships only provide service to less than one out of every three visits that take place across the country every day (see graphic 1). This means that after all of the hard work and investment to inventory and sell a car, 70 percent of the service business goes to chain and independent service centers and shops. If you take a step back, many would rightfully conclude that dealership service departments are doing a far better job sending customers to other businesses rather than retaining them. Similarly, you could make the case that the traditional ways dealers have addressed this problem aren't terribly effective. The dynamics remind me of what pilots encounter when an airplane goes into a spin. I've flown several planes and even managed to spin a few. It can be a scary situation. You lose lift under a wing, the airplane spins and you start to fall. It's not hard to recover from a spin but it is absolutely counterintuitive. Every fiber in your body screams at you to pull up. But that's the last thing you should do. Instead, you reduce power to idle, turn the wheel to center and apply opposite rudder. You only pull up and re-apply power when the spin stops. In many ways, I believe that dealership service departments are facing their own "spin." You're losing ground with current customers and the corrective action runs counter to the traditional approaches they've applied, which tend to focus on upselling the customers you have captured. I would also suggest that the damaging effects of the "spin" haven't truly been felt, thanks to the record-setting pace of new and used vehicle sales in recent years. The missing ingredient, I believe, is a recognition among dealers, service directors and service managers, that the proper response to the "spin" is counter-intuitive. The response isn't doubling down on the business you capture, but investing in the processes and technologies that provide the one thing today's customers crave most-a positive, rewarding, technology enhanced experience. Spin recovery is only possible if you have enough altitude, and you need to start building that altitude now. I base this recommendation on the results I've seen from dealers who have placed a premium and priority on the service experience they provide. Like Motorcars Honda, they're seeing retention rates rise, not decline or stagnate, because they offer a compelling alternative to the experience today's customers have, rightly or wrongly, come to expect from dealership service departments. The problem, however, is that this important strategic shift, like the maneuvers that stop an airplane's "spin," don't come naturally to dealers, their service directors and service managers. As a result, I'm concerned that fixed operations won't be the savior many dealers believe it might be, like it was the last time when the car business takes a downward turn. In the following chapters, we'll examine the reasons today's customers are less likely to continue tolerating the traditional kind of service department experience many dealerships still offer, and how dealers and their service teams should realign their thinking to meet the technology enhanced, experience-focused...
