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I’ve been doing some mid-year check-ins with dealers.

So far, 2015 is treating dealers pretty well. For most, new and used vehicle sales volumes are healthy; some dealers would like to see more volume, and they’re working through the challenges that come with softer demand in some segments. F&I continues to be a key profit center, even as lenders limit discretionary reserves. Parts/service remain robust, particularly so for dealers who’ve made customer pay work and retention a high priority.

Underneath this generally good news, however, there’s a problem. Across the board, dealers report increased margin compression in new and used vehicles.

In new cars, front-end gross profits are lower than they were a year ago, creating a scenario where many dealers sell more expensive vehicles but make less money. Indeed, most of the public dealer groups reported front-end margin declines as demand has softened in sedan segments, and stair-step programs become a higher priority.

In used vehicles, it’s a similar story. An increasing supply of wholesale vehicles puts downward pressure on retail margins, particularly for volume-focused dealers.

But margin compression by itself isn’t the real problem. After all, it’s impossible to expect that dealers can make the same money in today’s more competitive and transparent automotive retail marketplace.

No, the real problem rests with the way dealers respond to the margin compression challenge. Many believe they can simply do what they’ve always done. They’ll sell more cars and make up the difference in margin through increased volume.

But what happens if/when buyer demand slows even further? For many dealers, the answer will be even less margin, as lower prices become necessary to spur buyer demand and maintain healthy new and used vehicle inventories.

The good news is that I’m seeing some dealers take margin compression by the horns. Their efforts typically follow three strategic imperatives:

An Emphasis on Total Gross

I liked the way AutoNation CEO Mike Jackson described his company’s plans to analysts who asked about a future with persistent margin compression: “I was very clear with the team several years ago that total variable gross is our final report card … I want to see and the company wants to see a steady increase in total variable gross … Front-end grosses will move around … but if you then take those opportunities and are able to package it with your financial services and products and come out ahead, I think it’s a good business plan.”

I think it’s fair to say this “total gross” strategy eludes many dealers who have been highly successful using front-end margins on new and used vehicle sales as their primary lever to drive profitability. Over time, it’ll become increasingly important for dealers to recognize that every new or used vehicle sale represents multiple money-making opportunities. In turn, their jobs will be effectively managing the give-and-take between departments and managers to ensure a profitable and prosperous outcome for the dealership.

A Focus on Efficiencies

Dealers intuitively understand that a higher level of efficiency drives a higher degree of profitability. Unfortunately, the time is fast approaching when dealers must turn this understanding into action. They’ll need to instantly know the new/used vehicles that are right for their inventories and market. They’ll need to ready these vehicles for retail sale in a matter of hours, rather than days or weeks. They’ll need to quickly match cars and customers, using more efficient pricing and sales processes to hasten the pace of sales. They’ll need to repeat this cycle of efficiency over and over again. For dealers, these opportunities will require more astute, consistent, purposeful and technology-aided leadership to realize the productivity and profitability gains that a higher level of operational efficiency offers.

An Embrace of Customer Expectations

The more dealers understand how to meet and exceed the expectations of their customers, the better off they’ll be. Companies like AutoNation and Sonic Automotive are spending big to shift a greater portion of the car-buying experience online — where tomorrow’s buyers will expect to complete the bulk of their vehicle purchases. The same goes in service, where progressive dealers enable customers to self-direct their service visits. Perhaps the best part of this customer-focused strategy is the pay-off: Car buyers and owners are no different than you or I when we’re highly satisfied with a retail experience — we don’t mind paying a little more, and we’re more likely to return.

Dealers who embrace these strategic imperatives gain an advantage beyond managing margin compression — they’ll be ready to react quickly when market conditions are far less favorable than they are today.

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