How Much Is Just Enough?

Building a new facility is usually a good investment; dealers typically see a 15% increase in sales after relocating to a new facility. However, you need to make some careful projections to determine the scope of your project. If you overbuild, the high rent expense will put an unnecessary burden on your dealership. If you build too small, you will have capacity challenges from day one. So what facility

Building a new facility is usually a good investment; dealers typically see a 15% increase in sales after relocating to a new facility. However, you need to make some careful projections to determine the scope of your project.

If you overbuild, the high rent expense will put an unnecessary burden on your dealership. If you build too small, you will have capacity challenges from day one. So what facility should you build?

The most common mistake is over-building and over-spending. The facility may look good, but you must have the sales to cover the rent.

First, gather a few facts. You need to determine the size of your market, demographics and growth predictions for the next five years. Your auto maker can help with this. Contact the market representation department for your franchise. There are key questions that need answers.

  1. How many new vehicles (total) were registered in your sales area during the last calendar year?
  2. How many vehicles of the franchise you represent were registered in your sales area (number of vehicles and market share %)?
  3. How many of these vehicles did you sell?
  4. How many vehicles did you sell outside of your sales area (pump-outs)?
  5. What is the state market share percentage for your franchise?
  6. What is the manufacturer's planning potential or planning volume for your sales area?
  7. What are the minimum facility/land requirements for your dealership's planning potential?
  8. Ask for a map of your assigned sales area with your assigned census tracts highlighted.
  9. Are there additional growth opportunities (future products, untapped segments) for your franchise?

Using all of this information plus your own information about the local market, put together an annual forecast of the number of new units your dealership will sell.

Compare your forecast with the planning potential for the area. Planning potential includes a growth factor, which is important since this is a long-term decision. The manufacturer's facility requirements for your assigned planning potential are a good place to start. You will need to decide if you should expand on the requirements.

Are you or do you plan to wholesale large amounts of parts? Do you plan to have a body shop? Will the showroom be large enough for your selling style?

Once you have determined the ideal facility size, it's time to do a gut check to see if you can afford it. The best way to do this is to back into your maximum rent factor using the following equation and some hypothetical numbers:

Annual new unit sales target or planning potential (i.e., 1,500 units) multiplied by rent-factor benchmark (i.e., $500 per new unit retailed) equals maximum annual rent factor ($750,000).

Divide that by the 12 months of the year, giving you a maximum monthly rent factor of $62,500.

Ask your manufacturer to provide you with the relevant rent-factor benchmark. Once you know your maximum rent factor you need to determine what you can buy and build with this amount.

Many dealers will form an outside real-estate entity to own the land and then lease the facility back to the dealership.

To determine how much total land and facility you can afford, divide the maximum annual rent factor by the rate of return you expect on your real estate investment. For example:

Maximum annual rent factor of $750,000 divided by expected rate of return (i.e. 9%) equals a total land/facility budget of $8,400,000.

When purchasing property, don't short yourself. You are making a long-term investment and the right location will pay off huge dividends.

The most important success factor in building a new facility is choosing the right location. Remember that you can always expand your facility size, but you may not be able to expand your land size. What are the manufacturer's requirements for land? Will this be big enough for your dealership? Once you determine the acreage needed, put together a land cost forecast.

Here's an equation for that, again using hypothetical numbers as a guide:

Number of acres needed (i.e., 6) times market price per acre (i.e, $800,000) equals a total land cost forecast of $4,800,000.

Next subtract your land forecast from your total land/facility budget to determine your facility budget.

It is simply your total land/facility budget ($8,400,000) minus land cost forecast ($4,800,000) equals facility cost forecast ($3,600,000).

Working with your architect/contractor, determine the average building cost per square foot for your area.

Divide your facility cost forecast of $3,600,000 by the average cost per square foot (i.e., $120). That gives you a total square foot forecast of $30,000 per square feet.

Compare your forecasts to the manufacturer's requirements. Do your forecasts meet or exceed the requirements? Yes? Great, start building. No? Double check your forecast for accuracy.

Are you using the right rent per-new-unit-retailed benchmark? Have you adjusted the average land and building costs to your market.

If your forecast is short of requirements, what are your off-site storage options? If you use off-site storage, you will need to add this expense amount to your rent forecast.

Will your manufacturer accept land and facility that are less than its requirements? If you can represent the franchise with a prime location and a state-of-the-art facility, you may be able to negotiate a reduction in the requirements.

However, don't expect to meet your sales targets with land and a facility that is 50% of requirements. You will need awfully good systems in place to work with a land and facility shortage.

Keep to your forecasts and remember the three rules of automotive retailing real estate: location, location, location.

Steve Corle is network implementation manager for DaimlerChrysler Motors Co. Matt Gruss is a product engineer for Webasto Roof Systems Inc.

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