Ever since the last recession, the national average net profit for tire dealers has hovered around 2.5% to 3%.
Some overly optimistic survey results report that the national average is at 6%. However, we can roughly cut that number in half.
After all, who takes the time to respond to surveys about net profit if you’re losing money, right?
More often than not, many tire dealers don’t see their true net profit until halfway through the next year, when their accountants finally get through filing after two extensions. Sound familiar? That said, I am noticing some amazing things.
For one, we have more and more top operators breaking 20% net profit.
Less than three years ago, so many people would tell me that having a payroll benchmark of 45% of gross profit dollars was unrealistic.
I was told that to achieve that number you’d have to cut payroll to the bone, and you’d lose all your good employees in a market where it is hard to find any employees.
Then why am I seeing some people in the high 30’s?
Please hear this loud and clear: The best way to manage payroll is by not cutting it, but by adding gross profit dollars! This isn’t some shady math trick. How do you add gross profit dollars? There are essentially three ways.
The most difficult way is to sell more. I’m not saying it is horribly difficult, but it takes the most effort.
A slightly easier way is to decrease your costs of goods sold (COGS). Speak with your suppliers and your parts vendors, eliminate shrinkage through controls, and maybe join a buying group. I say this is easier because it requires several phone calls and process changes in a short period of time. And then you just maintain versus selling more, which is a daily effort that never stops.
So, what is the third, and easiest, way? Raise your prices.
Recognize that often, we are the ones standing in the way of success because we can’t believe someone would pay more for our services than what they would pay somebody down the street.
Would you like something fun to do? Tell me that your labor rate cannot go above $100. My head will spin like a top as funny sparks shoot out of my ears like an old Tom and Jerry cartoon.
If you cannot be priced more than your so-called competition, why is it also true that some people pay $10, $30, even $50 more at other stores right down the street?
The two-bay shop down the street that sells $50 alignments is not your competition.
How does Outback sell steaks for more than IHOP? How does the drug store sell milk for more than the grocery store? Two words: convenience and value.
Don’t let the 2% of customers who complain about price set your price for the 98% of customers who don’t.
Are you better than the store down the street? Is your equipment newer? Are your techs better trained with Automotive Service Excellence and Tire Industry Association certifications? If not, maybe start making improvements there. If yes, then charge for it.
Don’t let the 2% of customers who complain about price set your price for the 98% of customers who don’t. My point is, where 45% used to be the benchmark, in today’s environment, you should push to get to 40%, and work very hard to at least get to 42%.
Payroll isn’t the only benchmark you should set a stretch goal to obtain. For years, due to pressure from the Tier 1 tire manufacturers, we struggled to get to 25% tire gross profit.
Now, due to the flood of Tier 3 tires on the market, we are seeing a lot of dealers breaking 30% plus, and those who are buying incredibly well with the right mix of product are nearing 40%.
I don’t suggest getting 40% on Tier 1 products. But make sure you have the right tires and pricing strategy to ensure that you are getting a fair share of Tier 3 product, rather than letting them go somewhere else, or worse yet, employing a pricing strategy that is cost-plus.
This requires some work, and often some professional guidance, to help you create a pricing strategy that may pay up to 50% on some tires, and only 15% on others. But this ensures that you are capitalizing on your market opportunities.
Back to COGS. Parts should be another stretch goal — to 55% or even 60%. This is hard. You must provide exceptional service to achieve 60%, and you must have the right mix of maintenance services. If all you are doing is fixing broken cars, 55% or 60% is not attainable. Air filters, cabin filters, bulbs, coolant and other items are what allow you to achieve higher margins.
I hope this has gotten you fired up. Maybe you think I’m crazy and don’t understand the real world. But what I do know is the tire dealers who have the highest customer satisfaction rates, the largest profit ratios and the biggest volume are also the ones with the highest prices.
If you aren’t getting 20% net, you are leaving opportunities on the table. This business doesn’t have to be as hard as we make it. Find someone to help you achieve what is possible, if you must. The industry needs you to raise your game. And as always, have another super-fantastic month of driving operational excellence! ■