Ideally, fixed absorption rate is one measurement in which no auto dealer wants to come up short: If a dealership's fixed operations generate enough net income each month to cover all of its costs — a 100 percent rate — then all the other pieces of the profitability puzzle go right to the bottom line.
The concept might seem simple.
But getting to that level? Not so much.
According to the latest Average Dealership Profile from the National Automobile Dealers Association, the average fixed absorption rate for U.S. dealers in the first quarter was 57 percent — despite an average fixed operations profit margin of nearly 47 percent.
Put another way: Despite earning almost $47 in profit on every $100 of sales from service, parts and body shop work, most franchised dealers must rely on their used- and new-vehicle departments to cover large portions of their operational costs before they hit profitability.
In today's retail environment, that could be a problem.
A robust fixed absorption rate can help a dealership ride out cyclical auto industry downturns over the long haul. When new-vehicle margins get squeezed — as they are now by rising floorplanning costs, greater competition and factory incentive programs in a declining market — dealers still have a strong economic leg on which to lean.
For those who value absorption rate as a reliable measure of dealership health — and there are skeptics (see story, Page 45) — the implication is that many dealers have to up their fixed ops game to keep their businesses on sound financial footing.
"I would think the majority of dealers would see [improving fixed ops absorption] as a guiding principle of their stores, and if they don't, they need to," said Lee Harkins, CEO of M5 Management Services, a leading fixed operations consultant and coach.
"The confusing part about absorption from a percentage standpoint is, you've got umpteen people out there telling you that it should be calculated this way or this way or this way. But the bottom line is, you want fixed ops to cover a minimum of 100 percent of your expenses."