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DeBoer: Lithia sacrifices profit for incentives.
Volume or profit? Public auto retail groups faced tough choices in the third quarter as manufacturer stair-step and other sales targets rose and incentives fell, retailer CEOs said in remarks after earnings releases.
Relief, a few said, may come in the form of factory production cuts.
Asbury Automotive Group Inc. “experienced new margin pressure due to a combination of lower manufacturer incentives and aggressive sales objectives” in the quarter, CEO Craig Monaghan said.
Asbury COO David Hult said declines in midline import and domestic brand margins was concentrated in two brands, which he didn’t name, that had lower dealer incentives and “aggressive sales objectives” that resulted in an overall 7 percent decrease in Asbury’s new-vehicle gross profit.
Smaller payouts
Monaghan said the toughest incentives of the third quarter were on the domestic side. Executives noted that whether they hit the sales targets or not — and sometimes they don’t — the payouts have been “significantly less.”
Group 1 Automotive Inc. CEO Earl Hesterberg said, “Many of our locations are in these markets where the industry is down double digits” while some automakers’ volume targets “are up almost double digits. It’s a disconnect.”
He added, “You just get to a point where you can’t chase every target every month or every quarter and you just have to trade off some volume and avoid selling so many cars at losses.”
Stores can go overboard, however, he said. About a half-dozen Group 1 dealerships overdid the adjustment and lost some trade-in and F&I opportunities. “Generally, it’s a discipline to balance volume and margin and I think many dealers in the U.S. have gotten in very bad habits with a lot of this volume pressure.”
Ford eliminated its stair-step program Oct. 1, which Hesterberg called “an extremely positive move.” Group 1’s Ford business “improved almost immediately.”
Penske Automotive Group Inc. pursues stair-step programs on a “store-by-store” and “brand-by-brand” basis, Chairman Roger Penske told Automotive News.
“It’s not something you do at the end of the week or end of the month,” Penske said. “You do it deal by deal and that’s paid off.”
At Lithia Motors Inc., general managers pursue stair-step programs its leaders believe are reasonable and achievable, CEO Bryan DeBoer told Automotive News.
Mixed results
| 3rd-quarter results reported last week by public retailers | |||
| AutoNation | Penske | Asbury | |
| Revenue | $5.57 billion | $5.15 billion | $1.68 billion |
| Change | 4% | 3.90% | –1.9% |
| Net income | $107.3 million | $88.5 million | $32.4 million |
| Change | –9.5% | 1.10% | –37% |
| Source: Companies | |||
Future service work
He said Lithia is willing to “sacrifice” some gross profit to earn factory incentive cash because “it allows us to build our future service work, which is huge for us.”
AutoNation Inc. CEO Mike Jackson blasted automakers — particularly Nissan — for their continued use of stair-steps and other targeted sales incentives. The programs contributed to a “significant negative impact” on AutoNation’s new-vehicle volume and gross profit per new vehicle retailed in the third quarter, he said. AutoNation’s same-store new-vehicle volume fell 6.2 percent, and its gross profit per new vehicle retailed dropped 6.8 percent.
Jackson called the programs unfair to consumers, damaging to the brand and to retailers and ultimately unsustainable.
“They really make customers profoundly unhappy,” Jackson said. “The leading practitioner is Nissan. … There’s never been anything like the Nissan program.”
He said the number of automakers using the damaging programs is down to a few, mentioning Chrysler in addition to Nissan. But even a few such programs are “very disruptive,” Jackson said.
A few retailer executives expressed hope that production cuts will ease the pressure to hit unrealistic sales targets.
Mini is correcting its production “to reduce availability, which will help us on margin,” Penske said. Mini and BMW combined accounted for the largest single slice of Penske Automotive’s global sales in the first nine months, 25 percent, followed by Audi’s 14 percent.
Group 1’s Hesterberg said, “I don’t think any of us are having to push back as much as we did 90 days ago because many of the OEMs have now reacted and reduced production.”
Hard choices for public retailers
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