First the good news: 2008 has finally ended. Let's hope the auto-industry meltdown is at end, too.
All of us, including dealers (domestic, import, high-line, new and used), manufacturers and suppliers, have a chance to start anew.
From a dealer standpoint, after living through this gut-wrenching experience of right-sizing our organizations, we all have a real opportunity to capitalize now.
When the market begins its rebound, we are positioned to maximize our profit. What each of us must now do is remember what we learned from the experiences of 2008, and ensure those lessons remain firmly implanted in our minds as we move forward.
In the past few years, fortunately, I've had the opportunity to speak with and learn from dealers and auto industry executives from around the world.
Two of my most memorable conversations were with dealers in Mexico and in South Africa. They said their primary function at their dealerships was to manage the cash and assets of their organizations.
Even though I acknowledged and have remembered their specific comments, never did I realize how many times in the future those conversations would be replayed in my mind in conjunction with the U.S. business model.
As a veteran of hundreds of meetings with dealers in my career, I can assure you the subject and measurement of return on assets (ROA) has never really come up.
Sure, at each meeting we discuss gross and superficially hit on the subject of inventory turn, but never as in-depth topics. Maybe or probably it's one of my shortcomings for not communicating the need for us, as independent businesses, to concentrate more on asset turns and returns on those assets.
So, one of my resolutions for 2009 is to carry that message to as many corners of the dealer world as I can.
Also sometimes referred to as return on investment, ROA tells what earnings were generated from invested capital (assets). It is an indicator of how profitable a company is relative to its total assets.
ROA gives an idea as to how efficiently management uses its assets to generate earnings. ROA is calculated (and displayed as a percentage) by dividing a company's annual earnings (net income) by its total assets.
In October, I and some of our NCM staff spent two days with Paddy O'Brien and Dennis Anderson, from the consultancy firm of Sewells of Australia and Sewells of South Africa, respectively.
Sewells tries to enhance the performance of franchised auto dealers. In this vein, we often communicate and share ideas about ways to assist our respective clients.
We discussed and compared the auto-industry business models across the world and the various measurements used in different regions.
O'Brien presented the DuPont Cascade Model and its applicability to the auto industry. He presented what he believes are the critical drivers in auto retail:
- Activity. The amount of throughput we generate from the capital we employ.
- Cost-Income Ratio. The relationship between what we earn and what we spend.
- Mix. Across every dimension.
- Customer Satisfaction. Getting it right the first time, every time.
- Capacity Management/Productivity. The effectiveness of the people we employ (Input: Output).
New industry data indicates our future model will be composed of fewer but larger dealerships with greater market responsibility.
Along with this added size and responsibility, this model will dictate the usage of measurements many of us in the private sector in the U.S. have failed to relate to the car business and the management of these indicators numbers.
As O'Brien and Anderson noted (and I concur), two of our essential measurements will be strategic margin management and strategic asset management.
Tony Noland is the president and CEO of NCM Associates, Inc. He is at [email protected]