It is very interesting to me to watch a management company (upper management not physically in a store) try to turn around problem dealerships. Over the last 13 months business has been very difficult for car dealerships (and other businesses) and many of them have needed turnaround and workout services.

I have personal experience operating dealerships in severe economic conditions from a time when I ran a dealership in California. Conditions then were similar to what we have now.

The downturn caused me to focus on expenses, after all customers just weren’t coming in like before. After severe cuts in expenses including personnel, I thought I would enjoy incremental positive improvements in net income. Unfortunately the store experienced a drop in gross profit below the level we were at when we started cutting. This was extremely trying for me. The more I cut, the more gross would drop.

The problem I had was this: was the economy getting worse or was I cutting my own throat? Panic cuts have an adverse effect on the business for sure but with training, a good attitude and decent leadership the employees hopefully will continue producing even if it is at depressed levels. I expected the sales and productive people to at least maintain the new recession levels we were trying to adapt to. Unfortunately, to use a developer term, our dealerships weren’t very scalable.

An automobile dealership organization I know currently has a few struggling outlying stores. Management groups controlling dealerships are often headed up by administrators. When a store starts slowing down, they tighten it up. They make the GMs cut people and reduce inventory in an attempt to reduce expenses so the stores turn a profit. Unfortunately the focus of the GM and the employees of the stores is then on cutting and not selling. Employees spend their time cutting and the pursuit of customers seems to be not so important.

These administrators force the GM to reduce inventory because "it is not justified". Business dictates inventory levels right? To these administrators it does. Due to the recession sales have dropped but rather than focus on ways to improve sales (promotion, advertising, financing etc) they take away stock in trade. In the car business nothing turns off a shopper like a sparsely stocked lot. Typically customers will drive by a sparse lot and stop at the lot with a large selection.

Here’s a direct quote from a numbers guy:

• "The number [referring to used car sales or some such statistic] just tells you, you have too much inventory (or people or whatever) for what you are selling."

This makes sense if you believe that the dealership is capturing all the business possible. That is if everyone is focused on selling and advertising and inventory levels are adequate he would be right. To sell a car you need people. We are not order takers. If people came in and demanded to buy cars I would say his statement would probably be right. However we need to ramp up for business, and if we aren’t interested in doing business, shut it down. Otherwise let’s get to it and sell something. In one store they cut the staff to 12 people! Can you run a dealership with 12 people? Yes, if you don’t need to sell anything.

The GM running the 12 people store was recently replaced. Why? Because he just couldn’t make money with the very small inventory, very small ad budget and 12 people. Could you?

When the administrators eventually replace the GM the replacement may have to operate under the same constraints or not. Typically the new guy will flounder until he wins some relief from the constraints which almost always happens if they are more assertive. If the new guy gets what he wants, he improves things and is dubbed a better car man than his predecessor. The only way a GM stays in the store and weathers the storm is to stock the store with people and inventory and sell cars, service and parts.

The point is that when cutting expenses remember; without sales, no amount of cuts will work. Without continuous push for sales the last cut is locking the doors.