April 2016: "Is Wholesale Really Worth it?"

Here we are in April 2016 and still, this age old question is still one of the most common questions I get asked today. Even though many Parts Managers have "opted out" of even trying to compete with the "big guys", wholesale parts is still one of the profit centers in the automotive dealership.

Though I still get asked this age old question. my answer has always been the same. It's definitely worth it for some, but for most, it is not profitable to compete in the wholesale parts market when you add it all up.

We all know that the profit margins dealing in wholesale are far less than the profit margins we receive in all other parts gross profit categories such as counter retail, repair order parts sales in service, collision and internal departments.

So when we look at this lower gross margin, it becomes quite obvious that we have to focus on volume sales in order to obtain an overall "fair" amount of wholesale gross profit dollars.

 The volume of overall wholesale gross dollars can far outweigh the focus on gross retention. After all, we can only spend gross profit dollars and not the percentage itself.

In my opinion, it really doesn't matter the amount of wholesale sales and gross profit a parts manager can achieve, it's all about the headline question...

"Is Wholesale Really Worth It?"

So...let's take a look at the advantages of dealing in wholesale in the first place. Manufacturers offer incentives for parts purchases, which is nothing new, but obviously, a parts manager can earn far more on incentives on a volume level.

Notice I said parts purchases and not sales as the manufacturer sells two things...vehicles and parts....which we will expand on further down in this article.

Earned discounts and allowances, return reserve accruals, wholesale compensation for some and even more discounts for volume sales are obviously great profit builders. In many cases, these additional "back end" wholesale purchase profit makers are what generates most or even all of the overall parts wholesale gross profit in some dealerships.

For example, many larger wholesale parts dealers may sell at very little, or in some cases, no initial wholesale gross profit just to gain all the other benefits from volume purchases with the manufacturer.

The discounts, accruals and other benefits can actually allow the high volume wholesale parts dealer to generate massive amounts of additional gross revenue.

Although, one of the most important things to remember here is that these parts "purchase" gross dollars are only realized if the overall parts inventory has a healthy gross and true turn number. If the gross and true turns are not at guide or better, these discounts & allowances, return reserve accruals and other wholesale compensation is just "paper profit" that we can't tender.

If a "high volume" parts wholesale dealer has their "house in order", there is another great advantage in their favor...and that is buying power! If the parts manager has a strong and healthy gross and true turn along with these massive return accruals, in many cases, they can actually "buy up" other dealers obsolescence for less than fifty cents on the dollar!

On top of that, these "other dealer" obsolescence purchases just may not be obsolete in their own inventory! Thus, even stronger gross profit numbers can be obtained by these high volume wholesale parts dealers.  

For the dealer, having a strong, healthy and highly profitable parts department largely from wholesale gross dollars can and does positively impact the overall fixed coverage, or service absorption.

 In addition, all other internal dealership departments benefit as well because of the high inventory gross and true turns as well as high "First Time Off Shelf Fill Rates".

Earlier, I had mentioned that in my opinion it really doesn't matter the amount of wholesale sales a parts manager achieves. In other words, it doesn't matter if a parts manager is a "big player" or not because in the end, if the inventory is not "turning"....it's a losing proposition.

There are many determining factors to whether a dealer parts manager even attempts to be a big player in wholesale. Obviously, market area plays a big role as well as demographics, brand image and a healthy sales "front end". 

The dealer also has to have the capital and space to inventory, or "warehouse" the necessary inventory "on demand" in order to turn inventory efficiently. "First Time Off Shelf Fill Rates" are crucial as well as minimized or ZERO obsolescence. With this said, it doesn't matter how big, or how small, any dealer can be "successful" in wholesale.

In my opinion, being "successful" in parts wholesale means "profitable", plain and simple. So, in order to know if we are successful, or profitable in this case, we have to measure the "true cost" of dealing in parts wholesale.

The "true cost" of being a player in the parts wholesale game is quite often overlooked by parts managers and dealers alike.

Costs such as acquisition and holding costs from insuring and maintaining the parts inventory, performing annual physical inventories, pilferage, damaged inventory and other personnel costs are just a few.

Actually, a most recent study by REM Associates, a respected management consulting company has this to say in their "Methodology of Calculating Inventory Carrying Costs"....

• Over 65% of most companies do not compute inventory carrying costs, as they use rough estimates.
• Leading logistics experts place the costs of carrying inventory between 18% and 75% per year depending on the types of products or goods sold.
• The standard "rule of thumb" for inventory carrying costs is 25% of the total inventory value.
• The "cost of capital" is the leading factor in determining the percentage of inventory carrying costs.

So, as you can see, it's not just about massive amounts of gross profit generation, discounts and allowances, return reserve accruals and any other manufacturer wholesale compensation that determines the "NET" wholesale parts profit. You can now also see it really doesn't matter how big, or how small your wholesale business is.

Even though the manufacturers have set up similar programs for parts purchases as they have for new car dealer purchases and sales, we still have to weigh out all the "pros and cons". As in new car purchases and sales, the manufacturer has made it much easier and tempting to purchase inventory, whether new vehicles or parts.

It's a competitive market out there and it's tough to compete with high volume dealers in both categories, new vehicle sales and parts sales. It's very hard to compete with dealers selling at or just above cost, but let it be known...it doesn't go without risk and costs that are not always factored in the equation.

In conclusion, it doesn't matter if you are a big player or just dabbling in wholesale, it takes a "Smart Parts" Manager to factor in all areas of "Net Profitability" when dealing in the risky game of parts wholesale.

Need to know if dealing in wholesale is really worth it for you?

Just email your request for my FREE Take Away this month and get you ACG "Smart Parts" Wholesale Gross & Net Profit Calculator! Make sure you include "FREE Wholesale Calculator" in the email subject line!

Email: dave@smartpartstraining.com

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com