June 2017 - An ACG "Smart Parts" Perspective: "The Future Of Parts Profits"

A recent National Highway Traffic & Safety Administration, (NHTSA) study revealed that there are currently approximately 253 million passenger cars and light trucks running on our roads throughout the USA today. The age of these vehicles is approximately 11.4 years, dating back to almost 2005.

This information caught my attention as I was thinking about all these recalls going on out there and I started to wonder just how many of the vehicles on the road today are being effected by all these recalls. I also wondered about how all these recalls actually impact our dealers overall profitability.

The first thing that came to mind was the fact that automotive dealerships are really getting a huge "gift" by the manufacturer with so many recalls driving customers to their respective dealerships without even having to spend a dime in advertising to get them in.

The next thing that led me to even more "fact checking" was that I was witnessing astronomical increases in warranty parts and labor increases in all the stores that I visit on a regular basis. These increases also seem to be going well beyond any particular dealer's forecasts, or projections made prior to the start of the year.

As I began my research, I found out that in 2014, a record number of passenger car and light truck vehicles had been recalled. In retrospect, I realize that this statistic isn't surprising to "Smart Parts" Readers out there, or even the fact that their warranty parts sales have also increased dramatically.

What is interesting about what we have been experiencing over the past few years is how this all breaks down and where it's leading us to. Let's take a look at the progression on these statistics that will give "Smart Parts" Readers a better view on my perspective going forward.

In 2011 and 2012, there were approximately 16 million U.S. Vehicles recalled by the manufacturers, issued either voluntarily, or by NHTSA and the Department of Transportation. Prior years were similar and didn't waiver too much from these statistics.

In 2013, however, the trend started to shift drastically with 22 million U.S. vehicles being recalled, which was an increase over previous years by almost 38%. This trend continues in 2014 with a record of approximately 51 million vehicles being recalled, which was initially predicted at 64 million, but downplayed due to vehicle recall duplication on Takata Air Bag Recalls. 

This whopping increase of 131% over the previous year was matched and even slightly higher in 2015 with 51.3 million vehicles recalled by manufacturers and NHTSA. That's approximately 20% of the total estimated passenger cars and light trucks on the roads of the U.S. today.

General Motors leads the "recall charge" with approximately 27 million of the 51 million vehicles recalled due to not only the Takata Air Bag issue, but also, the faulty ignition switch and seat belt recalls. Other leaders that follow are Honda, Fiat/Chrysler, Toyota and Ford Motor Company. All pretty much led by the Takata Air Bag Recall.

In January of this year, Honda added 772,000 vehicles to the list of effected vehicles with the Takata Air Bag Recall and expects this number to keep rising throughout 2017 and into 2018. The trend continues primarily due to "safety recalls" issued the NHTSA.

Of the 900 recalls issued through January of this year, 123 are considered "safety recalls" issued by the NHTSA involving over 19 million vehicles. Predictions on the Takata airbag recall alone will exceed 42 million vehicles before it's completion.

Even manufacturers of vehicle child safety seats have been hit with the "recall bug" with approximately 8 million child safety seats recalled over recent years by the National Highway Traffic & Safety Administration and the Department of Transportation.

"So, what does all this have to do with the future of parts profits?"

First of all, let's consider one of the basic facts that are revealed in the above research, which is the fact that approximately 20% of the vehicles on the road today could be filtering back into automotive dealerships.

Return visits that could result in both sales and service opportunities without the added expense of advertising or even dealer reputation to some extent. More customer visiting dealer showrooms and service departments that perhaps would not have, if not for the recall on their vehicle.

Let's take a look at another fact in the above research, which indicates that of the approximate 900 recalls issued, 123 were issued by the NHTSA due to safety. The 123 "safety recalls" added up to approximately 19.1 million vehicles.

Even if some of these vehicles may not actually be on the road today, it's still a staggering number. Well more than all recalls combines back in 2011 and 2012.

These are staggering numbers, even though, according to NHTSA, 75% of all recalls are performed within 18 months, resulting in the remaining 25% of all recalls that do not get repaired.

Another recent study says that there are approximately 17,450 new car dealers currently in the United States, not counting Canada. So, if I just do a little math on the numbers, it indicates that there is an average of 913 "safety recalls" out there, per dealer in the U.S., 913 potential new opportunities that perhaps would not have been there without these "safety recalls".

The average automotive dealers' ""active" customer base ranges anywhere from 7,000 to 15,000 customers. So when you think about it, there is a potential on increasing a dealers total "active" customer base by 7% - 13%, based on these averages.

So, with all this information and all this potential in increasing overall parts profits, in my opinion, there has to be some questions answered as well as an overall "game plan" in capitalizing on these new opportunities. Some of the questions that came to my mind are as follows;

• How can we change our dealer image to keep these customers coming back?
• Is it finally time where we can be that "my mechanic" to the customer and regain their trust?
• Do most people still think that the dealer is way too expensive?
• Are we more concerned about industry percentage guidelines or overall gross profit?
• What do we have to do to change this image and get more competitive?

These are just a few the questions that popped in my mind and I'm quite sure many other "Smart Parts" Readers out there could add to this list quite easily.

I also think our "frame of mind" should change with these recall customers as I still often hear Service Advisors say..."They'e not going to buy anything anyways, they're just here to get their "free" recall done"...

One other most shameful "overlooked" fact about most of these "safety recall" vehicles is that a great majority of these "safety recall" vehicles have well over 50,000 miles on them and may require other needed repairs or maintenance services.

Unfortunately, many of these recall customers don't even receive a "Complimentary Multi-Point Inspection" from the service department, which is crazy, in my opinion, especially for safety and liability reasons, not even counting in the potential sales opportunities.

I do believe though, that many of these customers are only there for their "free" recall and wouldn't even consider going to the local dealer for their service needs. Some even hate the thought of even going to a dealer for any reason, and some even consider forfeiting their opportunity to get their recall taken care of. 

Given the fact that we all know this already, but what if....what if we could change this perception of these potential "gold mine" customers. What if....what if, we came out with a concept that would include dealership advertising to something like..."Dealership Service WITHOUT Dealership Prices!"

The above phrase, of course, is an example of how we could overcome the perception that's been out there for years. If we think about it though, what if we could change this perception, what impact would it have and what can we do to get change started?

One thing I have been noticing more and more lately is that dealership parts departments are now starting to offer more choices. Choices that include aftermarket parts to give customers more options, such as "good, better, best" options.

Common services such as brakes, shocks & struts, batteries, steering, axle & suspension, etc., are some of the services that some dealers are experimenting more and more with. Staying up to date with the competition with competitive pricing is back in the limelight. 

Not only have I seen more and more of this in my travels, I am also seeing the overall prices on these common parts going way down in price. Not only in the aftermarket, but also in the manufacturers competitive pricing.

In a recent dealership visit, I was involved with the parts and service managers, conducting a competitive market survey on some of the most common, comparable services and repairs that can be performed not only at the dealer, but at local garages and aftermarket facilities.

I was actually shocked to learn that I could buy a front brake "kit" that includes brake pads and two front rotors for less than $100.00! Of course, the quality would fall more into the "good" category, but even in the "better & best" categories, I could purchase that same brake "kit" for $125.00 - $150.00. This price was of name brand quality backed with a lifetime warranty.

I guess I didn't realize just how competitive it has gotten and with today's technology and social media, the customers are far more informed than ever before. Quality is one thing that has always been the difference, but now, quality and competitive pricing are going hand in hand.

We are definitely competing in a new age that, in my opinion, really needs a "shake up" from some of the standards that the automotive dealerships' service and parts departments have lived by for many, many years. Industry guidelines on percentages and standards have been with us for years and for good reason.

The dealership structure in general is unique compared to many other retail businesses. The automotive dealership actually operates with up to five or six separate businesses under one roof. It takes a unique set of guidelines and standards to be profitable overall as compared to other retail parts and service companies.

I believe we can have the best of both worlds where we can still operate under the standards and guidelines that have shaped the industry as well as having a little "shake up" in order to stay competitive in our auto repair parts and service industry.

I was told years ago when it comes down to maintaining industry guidelines and percentages..."You can't spend a percentage, but you can spend gross profit."

In other words, would I rather have 35% of $100,000.00, as compared to 45% of $50,000.00. The choice is obvious and I feel we need to get on the bandwagon.

In my opinion, a great deal of our future parts profits will come from this huge, expanding customer base as automotive dealer warranty parts and service continues to skyrocket, primarily due to the massive increase in factory recalls, along with a better strategy in staying competitive in the marketplace on customer pay parts and labor.

We also have to continue to change our overall image as a whole to regain customer trust. It's time we lose the image of "dealer prices" as far as customer perception. Maybe, just maybe, we need to look at our gross margin expectation in customer pay to more overall gross in general, at a lesser gross retention on more than just oil and air filters.

With many manufacturers in selected states now paying retail on warranty parts, we are actually seeing warranty parts retention percentages now in the low to mid 40% range. A far change in the expected 28% retained warranty parts gross in the past.

This "shift" in warranty sales and gross profits along with the vast increase in recall traffic may just be what we need to refocus on who our customers are and where our future customers will come from. The facts indicate that the potential to increase these "overlooked" opportunities as well as customer base is right in front of us.

With this "revitalized" and growing customer base along with a more competitive customer pay marketing plan, I believe this could be the time to shift gears and get "more" of our customers back into our dealership parts and service departments.

In addition to that, it appears that the manufacturer is offering more and more incentives, or "purchase power" discounts on overall parts purchases. Even though they are also highly focused on "brand loyalty", we still have tremendous options and new opportunities to grow parts profits.

The future of parts gross profits, in my opinion, is bright and full of new and existing opportunities. We just need to "get out of the box", instead of just "thinking out of the box".

Eventually, we have to stop complaining about how we lost all these customers to the aftermarket, and start doing what it takes to capitalize on the opportunities.

"The future of parts profits is right in front of us....the questions is....are we ready for it?"

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