Article:

Benchmarks – A self-fulfilling prophecy

28 September 2016

Mark Ward , National Leader, Automotive, Partner, Business Services |

Retail motor dealerships must surely be the most analysed businesses of any industry sector.

Benchmarks are the tool by which dealership performance is analysed ad nauseam, not only by Dealers themselves, but by manufacturers, financiers and, dare we say it, a raft of accounting firms as well.

While there is no doubt industry benchmarks are an extremely useful tool, BDO contends that the saturation of benchmark data and its availability to virtually all dealership staff has identified the goalposts so clearly that dealership businesses have lost the opportunity to create a vision for what might be achievable. In short, the achievement of benchmarks has become a self-fulfilling prophecy. When the used car manager and his sales staff know that a gross profit of $2,000 per retail unit sold is benchmark, the parts manager knows that gross profit of 23 per cent is benchmark, and the General Manager/Dealer Principal knows that a net profit return on sales of 2 per cent is acceptable, they know that anything better is outperforming the market.

BDO’s view is that these benchmarks have remained largely unchanged over many years because their very existence has influenced behaviours such that they have become true. Why would a dealer dare suggest, much less create, a vision that net profit to sales of, say, 6 per cent is achievable when all of his staff know that, say, 2 per cent is the accepted industry benchmark.
Come to think of it, why has the net profit to sales return become the ultimate measure of performance? True it is a reasonably reliable and quickly identifiable measure, but why does it often get used without reference to, say, Return on Investment (ROI) and Return on Capital Employed (ROCE), especially given a dealership’s significant investment in inventory, debtors, working capital and, often, facilities?

For many dealers there is a significant time investment in meetings dedicated to comparing actual performance to industry benchmarks in the pursuit of identifying a weakness that, when addressed, will improve profitability. The reality is that BDO is yet to identify two Dealers who have an identical method of accounting for all forms of revenue and expenditure. A Dealer has the ability to influence their own performance against a set of benchmarks simply through accounting treatment.

Some of the more significant examples include:

  • new vehicle factory bonuses taken to either reduce COS or increase Other Income
  • predelivery taken to either increase COS or increase expenses
  • the timing at which the many different forms of holdback, and “back end bonuses” are taken to income
  • the approach to calculating provisions, including doubtful debts, demonstrator and used obsolescence and warranty, and
  • the use of loads/lot fees will potentially increase COS and inflate provisions or be periodically washed back through other income.

Add to the above the commercial elements, which include equity in stock, capital structure, commerciality of dealer principal remuneration, ownership structure and investment in facilities, and you can quickly appreciate how the comparison of Dealer performance can become distorted.

In conclusion, BDO is an advocate for benchmarking but urges Dealers to also be mindful of the many differences caused by wide and varied accounting treatment and the actual commercial differences. Importantly though, benchmarks should not suppress the desire for greater financial returns. Just because the benchmarks, like a set of goalposts, make measurement of achievement more visible, Dealers should not let those benchmarks limit what might be capable if the goalposts were moved. Do not let them become a self-fulfilling prophecy.

If you would like more information about how to get the most out of using benchmarks for your dealership, please contact Mark Ward, BDO’s National Lead Partner on mark.ward@bdo.com.au.