Most dealers know about service and parts absorption*. Often dealers are encouraged to aim for 80% to 100% absorption, however the great majority achieve somewhere between 40% and 60%. The world is changing, dealer absorption levels have been falling for years.
What if you knew the maximum absorption potential for your dealership for the brands you market?
A key driver of absorption, with varying methods of calculation is 'service retention'. Is absorption related to service retention?
The answer is a definite YES. Figure 1 illustrates the direct relationship between service retention and absorption, based on our dealer financial modelling.
It makes sense doesn't it, retain more customers, after selling the vehicle and you will increase service and parts GP and therefore increase absorption. Great!
There are many income streams into dealer service and parts operations. Something that is often overlooked is the importance of retaining pre-owned vehicle owners. Used vehicles generally consume more parts than new.
As shown below, keeping your used vehicle customers can represent around 25% of your service and parts GP – this is very significant.
There are several reasons for falling dealership fixed expense absorption performance. These include increased operating expenses and wages, aftermarket competition, fleet company controls, F&I adding overheads, doing more to vehicles (wash, pickup), extended service intervals, capped prices, better vehicle quality etc.
What is the best absorption my dealership can expect to
achieve? Is 100% realistic?
What if ALL new and used vehicles your dealership sold over the
last five years (in and outside your PMA), CAME BACK to your
dealership for service and repairs using genuine parts. It is a
simple concept, not all customers will return for service
(unfortunately) yet wouldn't this 100% service retention be
your approximate maximum absorption potential (ignoring trade
parts)?
If you knew you maximum absorption potential and current
performance, would it influence your investment decisions, your ROI
expectations, growth plans and customer retention strategies?
We have developed a detailed model to determine a specific dealers maximum absorption potential. Readers may be interested in plugging in some figures into Figure 3 to 'approximate' your maximum absorption potential. We stress this method is only indicative. You may wish to complete this for brands or vehicle types (eg SUV, sedan) that you sell.
Maximum Absorption Potential – An
Indicator
Follow Steps 1 to 10 in Figure 3 to determine your maximum
absorption potential. (Note this is a very approximate method, more
refined analysis which considers model type, pump ins/outs, tech
recovery and trade parts sales contributions can be applied to our
MaxAb computer model. If you seek more information please contact
us).
To determine your 'approximate' maximum absorption potential, enter your dealership data in the yellow boxes below and perform the calculations indicated in each step.
| Step | Performance Indicator | How to Calculate | Your Dealership |
| 1 | Total Number of new vehicles sold by dealership last 5 years | Dealership History | |
| 2 | Total Number of used vehicles sold by dealership last 5 years | Dealership History | |
| 3 | Total Dealership vehicle population New plus Used | (Step 1 + Step 2) | |
| 4 | Average Labour Gross Profit $ per RO | Total Labour GP last 12 months/Total number of RO's | |
| 5 | Average Parts Gross Profit $ per RO | Total Parts GP last 12 months/Total number of RO's | |
| 6 | Total Potential Labour GP (if all vehicles came to your dealership) | Step 3 x Step 4 | |
| 7 | Total Potential Parts GP (if all vehicles came to your dealership, ignoring panel). | Step 3 x Step 5 | |
| 8 | Total Labour & Parts GP | Step 6 + Step 7 | |
| 9 | Total annual Dealership Fixed and Semi Fixed operating expenses | Dealer specific data | |
| 10 | Maximum Absorption Potential (Approximate) | Step 8 / Step 9 | |
| Actual Absorption* | (Actual Service GP+Parts GP) / Total Dealer Fixed & Semi Fixed Exp |
Good luck with the model let us know if it influences your thinking about absorption goal setting. If you would like more accurate analysis please contact us.
Five key things dealerships can do to enhance absorption include (but are not limited to):
- Measure absorption and set a target.
- Measure service retention, set retention targets for new and used vehicle owners.
- Be more efficient - maximise labour productivity and efficiency in service and measure by tech.
- Engage top service advisors who engage customers and load the workshop.
- Market – ie 'chase' service work. Be aware of competitor offerings and be competitive with them.
80% to '100% absorption' is a great and admirable goal and a few dealerships do achieve this. However no two dealerships or PMA's are the same. The world is changing rapidly – start with your maximum potential and go from there. Good luck!!!
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.
