Customers appear to be deferring the decision to purchase a new vehicle while borrowed money is relatively expensive. This inflation control mechanism is forcing them to reconsider their spending habits with the average household approximately £160 per month worse off through increased mortgage payments compared with 12 months ago. The latest dealer profitably figures from ASE cover the month of May 2007 and were therefore collated before the most recent interest rate rise at the beginning of July. The average profitability for the five months to May was 0.9 per cent, while the spread between the top 10 per cent and the bottom 10 per cent of dealers continues to widen with the difference now at 8.8 per cent. The key differences appear to be volume driven and the decline in footfall will simply exaggerate the problem as dealers compete over fewer customers who are still in a position to change their car despite the increased interest rates. The best dealers in the country are selling over twice as many vehicles as the worst, split evenly between new and used, but they are managing to do this by incurring the same level of sales expenses. In fact we estimate it costs the worst dealers £112 to generate £100 of gross. Innovative thinking needed With decreasing footfall, a key focus area for dealer managers is to ensure that expenses do not spiral out of control in an attempt to bring customers into the showroom. Dealers will have to be innovative in their thinking in order to generate footfall without significant increases in costs. Advertising spend needs to be reviewed to ensure that it is providing value for money, possibly reducing newspaper advertising in favour of lower cost internet advertising. The UK dealers who went to the Nada conference in Las Vegas earlier this year were exposed to the latest US ideas in internet advertising which included video clips from the department managers and the best ways of presenting vehicles for sale. It is imperative that every vehicle advertised on the internet has several photographs and includes a full specification in order to give the customer enough information to want to come and drive the car. Any dealer who does not present their stock properly will lose customers who are prepared to travel further to source the car that they want. Profit margins in used stock During May the average margin in used vehicles was almost £300 higher at £920 for the best dealers in comparison with the worst on an average stock value which is £2,000 cheaper. This would suggest that the profile of vehicles needs to be addressed in conjunction with the disposal policy especially as the customer's disposable income is declining and they will turn to cheaper cars. Caution needs to be exercised in the run up to the September plate change and any pre-registrations may have a negative effect on profit even though they will earn substantial manufacturer bonuses. The best dealers are also protected from any downturn in the vehicle sales market by achieving over 100 per cent absorption of overheads. However, the bottom 10 per cent of dealers, with an absorption of only 46 per cent, will struggle to cover the overheads of the business as vehicle volumes decline. Increasing hours per retail job card and maximising every opportunity to up-sell should help to ease the situation in conjunction with tight cost control. Workshop managers should also be focused on ensuring that efficiency is as high as possible and that internal or warranty work does not become an easy substitute for retail work, which offers the opportunity to generate additional gross. The increase in interest rates will also increase costs as a result of the substantial borrowings to fund both property and stock. Dealers need to ensure their business model continues to work on a higher cost base and now may be the time to consider re-budgeting for the last five months of the year. The combination of a decline in vehicle sales and increase in overheads may be enough to force some dealers to close the doors or indeed have them closed by creditors. There is nothing new here but only by focusing on the basics will you be able to ride out the storm. The best dealers do these things day in day out and are better prepared to survive the fall in vehicle sales and increase in costs which will inevitably follow the increases in interest rate unless the dealership proactively changes its daily processes.