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I have bad news to share about the upcoming year.

It’s not that 2016 won’t be good for dealers. Most signs suggest we’ll have another robust year of new and used vehicle sales.

But here’s the problem: Dealers won’t necessarily be making more money in 2016, even if they’re able to sell more new and used vehicles than they did in 2015.

I make this prediction based on three factors that will shape dealer destinies in the coming year:

1. Margin compression

The past five years have seen front-end margins decline by double-digit percentages in new and used vehicles — a trend that will no doubt continue in 2016. This ongoing margin compression owes to ever-increasing levels of competition, operational costs and price transparency in the auto retail market.

2. Supply/demand imbalances

As we’ve closed out 2015, we’ve seen rumblings that factories are purchasing demand for new vehicles by increasing incentives. On the used vehicle side, everyone’s aware that wholesale supplies are growing, a rise that’s expected to continue in 2016. Both trends will make it difficult for dealers to maintain, if not surpass, the level of new/used vehicle performance and profitability they achieved in 2015.

3. Market volatility

Dealers who over-rely on F&I income will face increased profit pressure as captive finance companies, lenders and regulators reduce dealer discretion in loan mark-ups. It’s also likely that dealers will face difficulties if interest rates rise, or if the economy takes a hit from as-yet unforeseen circumstances in the coming year.

In light of this outlook, I’ve been encouraging dealers to take an honest, no-holds-barred review of their dealership operations. The goal is to identify, and then work to eliminate, operational inefficiencies that currently impede dealership performance and profitability — and will only get worse if left unaddressed.

Here are three areas that often pose efficiency challenges for many dealers:

  • Inventory age — Aging units remain a persistent problem in both new and used vehicles for many dealers. As the market becomes more challenging, dealers will need to become even more age-aggressive. In new vehicles, this mandate means striving to retail at least 50 percent of your inventory in 60 days or less — a bigger challenge (and opportunity) for dealers who traditionally haven’t regarded aging new vehicles as a problem.

    In used vehicles, I advocate that dealers maintain at least 50 percent of their inventory under 30 days. The best-performing dealers actually retail half of their used vehicles in this timeframe. As dealers become faster and more efficient new/used vehicle retailers, they typically find that speed minimizes the risks from inventory supply/demand imbalances and maximizes total dealership profitability.

  • Transaction times — I would encourage dealers to aim for average new/used vehicle transaction times of 90 minutes or less. At traditional, negotiation-based dealerships, this benchmark may seem completely out of reach. If so, strive to reduce your average transaction time by 25 percent. Dealers who reduce transaction times see two key benefits. First, they provide a more satisfying experience for customers, who have long wanted an easier, more convenient way to purchase cars. Second, they enable their sales associates to sell more cars in less time, which increases their production and profitability.

    Dealers achieve transaction efficiencies by re-thinking the stages or steps in their sales processes, and shifting a greater portion of each transaction online.

  • Employee turnover — It’s not uncommon for dealers to see at least 50 percent turnover in their sales teams — a statistic that suggests dealers would sell more cars and make more money if they weren’t always trying to fill empty seats. I would submit the industry’s persistent turnover problem results from a mismatch between candidates, job responsibilities and the in-store culture that greets them on their first day of work. Dealers who address this problem have reinvented their hiring process, invested in management and mentoring programs, and implemented clear-cut career paths that pave the way for longevity and loyalty.

I should note that these areas of inefficiency are not the only ones that merit attention and scrutiny. Each one, however, represents an opportunity for dealers to improve their performance and profitability as retailers, and to capitalize on the challenges and opportunities in the months ahead.

Here’s to hoping that everyone has a great holiday season and an even better New Year!

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