Where does the new profitability come from?

First of all, let us take a look at the history on how markets have developed over time.

Back in the early 2000’s, I was working at a big international OEM, which also happened to have operations in Russia. Russia was booming at that time! Russia was our daily topic of discussions and friendly arguments. Firstly, one of the main bets was how soon through the year Russia was going to sell their yearly quota? And secondly, where should we supply more cars for Russia from?

I was visiting Moscow frequently, meeting with dealers and local sales organizations. However, there was one thing that I failed to do – and that was convincing Russian automotive retailers that the ‘good times’ would not last forever. I was trying to convince dealers to become more professional, cost cautious, organized and well equipped. It was an endless battle, because more cars were all that they desired. There were dealers in Russia opening brand new, large showrooms with tiny – minimum requirement – workshops attached to them.

Well, we all know what happened when the crisis hit Russia. Car dealers were closing down their business overnight, and large organizations were collapsing due to the enormous running costs and no alternative revenue sources.

Why am I sharing this story with you?

Well, there are two types of dealers when market conditions are changing: those who will survive and grow and those who will vanish. There is a distinctive difference between these two kinds. The first ones are well prepared. They spend some of the money they made during the prosperity period to build up the organization, establish and maintain key processes, and focus on cost and revenue structures, which allows them to survive.

Now, it is time to talk about something basic, yet important, particularly “Aftersales Absorption Ratio”. It is one of the basic KPIs that many companies analyze. However, not all companies are utilizing these measures, and the markets which are booming at the moment have a tendency to disregard or forget about the importance of this critical factor. The Aftersales Absorption Ratio shows a dealership, how much of the fixed costs of the company is covered by the Aftersales revenue. In other words, it tells you, what is going to happen when you suddenly stop selling cars or the sales slowdown.

As with every KPI, the key is to interpret it correctly.

What is an acceptable level? What is the desired state, and which value indicates potential ‘trouble’?

Let us examine first, how a company should calculate the Absorption Ratio. First of all, we would need to review the entire aftersales revenue stream – both parts and labor related. That is our “plus side”. On the other side, we have all fixed and semi-fixed expenses, including: buildings, salaries, IT, overheads, etc. Proportion of the cost which is covered by the aftersales revenue is exactly what we are looking for – the Aftersales Absorption Ratio.

  1. Above 80%: If your Aftersales Absorption Ratio is higher than 80%, your company will most likely survive a poor sales period of time. When it happens, you might reduce some costs further, and increase your aftersales revenue and finally the company will be fine. Good job!
  2. Between 60% and 80%: This could be problematic. You have big overhead or your sales department is much bigger than your aftersales operations. Have you thought how to increase your aftersales revenue? Have you optimized your processes or implemented an effective DMS? It is the right time to do that - while you still generate revenue.
  3. Below 60%: Looks like you are stuck in a comfort zone. As I wrote before, the good times will be over one day, and competition will heat up. Now it is the time to build a proper structure in your business, so when the time comes, you will be the one who survives and expands.

I wish you always to stay in the upper tier.

Rafal Jacaszek | Director Business Consulting
| Rafal.Jacaszek@incadea.com

Director Business Consulting, main tasks cover focusing on the strategic positioning of the professional services team to optimally drive the short and long term objectives of incadea customers. Rafal has over 15 years of automotive experience and has gained a significant reputation on market trends. Prior to incadea, Rafal held leading positions at General Motors Europe, being responsible for the GME Dealer Management System Project, assuring processes between GME, DMS vendors and GM Retail network in Europe. Rafal started his career with the automotive business units of EDS.