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A Key Message to Absorb
We’ve devoted a lot of space in Rural Lifestyle Dealer discussing strategies for selling equipment to the rural lifestyle market and being profitable.
We’d like to turn your attention to a different kind of opportunity for revenue growth — your dealership’s absorption rate.
Absorption rate is the percent of fixed expenses covered by gross profit from service and parts. For
example, if a dealership has an absorption rate of 70%, it means profits from parts and service absorb 70% of the business’ fixed operating costs.
Why is absorption important?
Consider the auto industry. Fifteen years ago, with more competition and margins tightening, dealers realized they couldn’t maintain profits just by selling new cars. So they began calculating their absorption rate and looking to their parts and service departments to boost profits.
Equipment dealerships face the same challenges today, with the competitive environment making it difficult to produce margins. So those dealers are measuring absorption to monitor their parts and service departments and turn them into profit centers by adding technicians, tracking their efficiency and bringing in more service work.
Dealer consultant Bob Clements believes that rural lifestyle dealers don’t pay enough attention to this facet of the business. He’s found that most of them aren’t even tracking their absorption rate.
Too often, dealerships’ sights are focused on selling wholegoods and they miss the greater profit opportunities in parts and service. After all, this is the reason many customers prefer dealerships over box stores.
But when dealers can’t repair equipment fast enough in the shop, wait times for repairs skyrocket, angering customers.
“If dealers would focus on service early and get it right in the beginning, it would save them a whole lot of headaches later on,” Clements says.
The heart of the absorption-rate issue, Clements contends, is the efficiency of a dealership’s shop and service techs.
He expects dealerships he’s working with to have every technician logging 8 hours of billable work a day — that’s 40 billable hours a week.
If a tech only produces 20 billable hours a week because they’re working on non-billable tasks, they’re only working at 50% efficiency. Thirty-four billable hours a week — an 85% efficiency mark — from a tech is a better goal to shoot for, Clements says.
Here’s why adding service techs and measuring their efficiency is a no-brainer. A productive service tech should do 2,000 hours of billable work per year, he says. If the labor rate is $70 an hour, that’s $140,000 a year in service sales, and with two techs it adds up to nearly $300,000 a year — plus you’ll have roughly $220,000 to $250,000 in parts sales to go along with the service, according to Clements.
“That’s $500,000 in sales that the shop and parts will generate,” he says, “at a minimum 40% gross profit.”
When it comes to absorption rates, equipment dealerships as a whole are underperforming, with a 62% aftermarket absorption rate compared to the industry benchmark of 80%, according to the 2007 Cost of Doing Business Study by the North American Equipment Dealers Assn. (NAEDA).
“The whole point of absorption is to make sure the dealership is solidly profitable” says George Keen of Currie Management Consultants. “Wholegoods is no longer responsible for keeping the doors open and the lights on at a dealership. It’s service.”
Clements believes an absorption rate of 80% is a realistic goal for rural lifestyle dealerships, especially established operations that have enough equipment in the field to serve as a foundation for increased parts and service sales.
“A lot of dealers wait until the customer calls them, but they must be more pro-active,” Clements says. “Most hobbyists have the cash and don’t want to do the service work themselves, so you can sell the idea of doing service for them on their property, or say, ‘Bring it in and we’ll clean it up and make sure any warranty issues are taken care of.’ ”
The message here is that absorption rates are vital to a dealership’s profitability and prospects for long-term growth. Dealers must do everything they can to promote service sales and make it part of the culture at their business.
— JOHN DOBBERSTEIN, Associate Editor, jdobberstein@lesspub.com
