Fixed Ops Counters Sales Profit Slide

Fixed Operations continue to act as a strong offset for lower gross profits per vehicle on new- and used-car sales for the six publicly traded, franchised dealership groups – so much so that they’re investing in service-related business areas that cost more in the short run, but generate more sales and service business in the long run.

As a group, the public chains reported $4 billion in parts and service revenue in the first quarter of 2024 on a same-store basis, an increase of 4.5% compared to a year ago. The retailers report they are working on several fronts to support Fixed Ops.

For example, Penske Automotive Group, Bloomfield Hills, MI, reports that as new-car availability has improved in the past 12 months, it has upgraded its service loaner-car fleet to mostly new cars instead of mostly used and shaved the amount of lead time it requires to reserve a loaner to seven days from 14.

Another example is that Asbury Automotive Group, Duluth, GA, reports it is changing its tactics on acquiring used cars to emphasize volume more and profit somewhat less, in part because the additional units in operation generate more service business.

And several of the publicly traded chains, including Houston-based Group 1 Automotive and Sonic Automotive, Charlotte, NC, report they are adding more service technicians and increasing the utilization rate of their service bays.

In addition, Lithia Motors, Medford, OR, , notes that cars and trucks – particularly battery-electric vehicles and hybrids -- are more technically advanced. That means dealerships with factory-certified technicians and OEM parts should lose less business to the aftermarket in the future. That makes Fixed Operations a good investment.

Shelley Hulgrave, Penske’s chief financial officer, says, “We had an additional $34 million in service and parts gross profit, and that’s the result of a lot of efforts

On a consolidated basis, Penske reports service & parts total gross profit of $432.4 million in the first quarter, an increase of $33.5 million, or 8.4%, vs. a year ago.

The upgraded loaner fleet at Penske Automotive contributed to a cost increase of about $4 million in the quarter, spent internally on vehicle maintenance, Hulgrave says. In the long run, “We look at that as very productive.”

Roger Penske, chair and CEO, says loaner cars that go into service as new cars make highly profitable used cars when they are sold. Some brands of those nearly new loaner cars qualify for new-car incentives.

“In BMW alone, we have 2,000 loaners,” Penske says. Each time one is retailed and replaced, it generates an additional sale. “If we can turn those two times or three times, it’s 4,000 to 6,000 more used cars that we can put into the market, zero to four years old.”

Leaders at Asbury Automotive say they paid more money to buy 20% of its used-car acquisitions in the quarter from outside sources as opposed to trade-ins or direct purchases, instead of a more typical average of 10% outside sourcing.

“We announced at the end of Q4 in 2023 that we were going to get more aggressive going after the volume because we know…the benefits that it brings to our internal gross profit in parts and service, F&I and then, obviously, putting another unit in operation out there that we can service down the road,” says Dan Clara, senior vice president, operations.

Lastly, the public groups say that, as always, they’re looking to add service technicians and to retain the ones they already have.

Group 1 Automotive says its U.S. same-store service technician head count was up 6% at the end of the first quarter compared to a year ago. Group 1 offers a four-day workweek, which the company says helps with recruiting.

Jeff Dyke, president at Sonic Automotive, says the company has a goal of adding 300 service technicians.

Dyke estimates that, in effect, Sonic has 1,000 open bays across the organization, considering how much they’re used today vs. what the company considers to be fully utilized. Part of the issue is “cultural,” he says, in that many technicians are accustomed to shifting between two underutilized bays, as opposed to one assigned bay per technician.

“It's a big push for us. I think you're beginning to see some of those (benefits),” Dyke says “Our Fixed Operations business is strong, and we expect that to continue.”