Dealers fixate on costs

Executives at Crown Automotive Group have controlled expenses since the Great Recession, but this year, they are getting more rigorous about it.

"It's crucial. If you do nothing, you'll go backwards because everything's going up in cost — insurance is going up, cost of wages is going up — you have to focus in and make reductions to make the improvements you want to see in net profit," said Jim Myers, COO of Crown in St. Petersburg, Fla.

Like Crown, many other retailers are looking to cut costs as profit margins continue to compress, expenses rise and a possible economic downturn looms.

"It's tough to operate; it's tough to make money as grosses decline," said Greg Dougherty, partner at accounting firm Crowe Horwath in Tampa, Fla. "Dealers are trying to right-size their expense structure to align with the grosses."

Most of Crowe Horwath's dealership clients, which combined own about 1,100 rooftops, want to cut 5 to 10 percent of their expenses this year, Dougherty said. The three main areas he said dealerships look to trim: advertising, personnel and inventory, with inventory reductions helping to offset rising interest rates.

Crown, which owns 22 dealerships in Florida, Tennessee and Ohio, sells about 22,000 new and used vehicles per year. It started aggressively cutting costs last year, resulting in an increase in the group's return on sales of "over 1 percent," Myers told Automotive News. "So on $100 million in sales, a 1 percent gain on that is $1 million," he said.

Now, Crown leaders "scrutinize everything" in terms of the return on the investment, Myers said. If an expense can't be measured by a return, "We ask, 'Is it a tangible or meaningful impact on our customer experience? Or will it help employees' productivity?' If the answer is 'no,' it's cut."

Some of Crown's cost-control steps include paying a bonus of $100 to $2,500, depending on the resulting savings, for any employee cost-saving idea that is adopted. To encourage participation, Crown gives employees a $50 gift card just for submitting a suggestion, Myers said.In addition, Crown seeks vendors that take American Express or Comerica credit cards as payment, Myers said. It pays bills, including monthly advertising costs, this way. "We accumulate a lot of points and use those points to offset cash expenses," Myers said. "We pay a huge amount of our bills that way instead of writing checks. The points can be redeemed for travel or even the gift cards we give out."

In advertising, Dougherty said, many dealers are looking to do more event, digital advertising and social media spending instead of paying for pricey traditional TV or print ads. That's in line with the National Automobile Dealers Association's latest NADA Data findings, which showed that the Internet claimed 55 percent of the average U.S. light-vehicle dealership's ad spending in 2017, up from 34 percent in 2016, while TV spending dropped to 15 percent from 24 percent.

In some cases, cutting costs comes by renegotiating vendor contracts, Dougherty said. Dealer Brandon Boyd started consolidating vendor services a couple of years ago when his expenses rose to pay for General Motors' dealership compliance demands.

"We had to replace our Buick-GMC logo. That cost $21,000 at one store, as an example," said Boyd, president of Boyd Automobile Dealerships of N.C. and Va., in Henderson, N.C. Boyd sells about 4,000 new and used vehicles a year across four stores that sell Buick, Cadillac, Chevrolet, Chrysler, Dodge, GMC, Honda, Jeep and Ram vehicles.

He has consolidated car washing and dealership cleaning services across stores to streamline costs. While not cutting staff, he is cross-training personnel to increase productivity. For example, his sales manager can step in to do finance and insurance when needed.

Many dealers say they will be more aggressive in turning away inventory this year because of the higher interest rates on floorplan loans, even if the factory pressures them to take vehicles.

"I've always tried to be a team player and take all the product asked of me," said Boyd.

"I cannot afford to do that, and I will not do that any longer."

Boyd said while he will continue to take Honda vehicles and most of the Chrysler, Dodge, Jeep and Ram stock, he has an excess of 2017 GM vehicles he needs to sell.

In Massarelli's case, he kept a 120-day supply of new vehicles two years ago, but by May or June, he expects to have his stock at a 60- to 90-day supply and hold it there.

At Crown, going forward, the group will continue to reward staff members for cost-saving ideas, scrutinize all spending for a return on investment and say no to unneeded inventory. If the group does not take those steps, said Myers, the increase in costs will be $500,000 this year.

But he says it is a balancing act, especially turning away inventory.

"You don't want to cut it too far. You want to have enough vehicles to sell," Myers said. "If we can hold it stable, we'll be doing a really good job. We've got to do what's in our best interest."