Protect Your Profit from Floorplan Expense
- For the first time in nine years, floorplan is an expense.
- Dealers are now paying on average $61 per vehicle sold.
I don’t have to tell you every dollar counts in this business, and for years, the cost of capital and the cost of inventory have balanced and have not been a concern day to day. Manufacturers typically reward larger inventories with hefty assistance payments as incentives, so the lot is always fully stocked. When a dealership sells a car, it gets funded in a week, sometimes longer, and the incentives cover the accrued interest. For dealerships I talk with, this has been the case for the last decade.
However, I saw an article in Automotive News about shrinking margins and higher interest rates on floorplan. Soon dealerships may be absorbing an expense they have not worried about in nearly a decade. For the first time in nine years, floorplan is an expense rather than a source of revenue.
Let’s dig into this a little more. In 2016, the average dealer made a healthy $86,000 on floorplan, when the federal funds rate was between 0.5-0.75%. But in 2017, that revenue plummeted 80%… and it has only continued to decrease.
Another way to look at it is that now dealers are paying on average $61 per vehicle, compared to making $22 per vehicle the year before. If you sold 125 vehicles in 2017, you would’ve made $2,750. But, if you sell those same 125 cars now, you’re going to be paying $7,625. That’s a difference of $10,375 for every 125 cars sold. Ouch.
Did you know that in 20 months, the Federal Reserve has increased its benchmark six times and it now stands at 2.5%? Penske Automotive Group stated the interest rate hikes have led to $8 million in additional interest costs, mostly driven by floorplan. All signs indicate interest rates will stay up for the foreseeable future. Can your business sustain floorplan as an expense and not as a profit center?
Additionally, money is constantly being shelled out to keep dealerships running – office supplies, employees, building updates, utilities, interest payments, etc. With rising interest rates you cannot control, there is less money to leverage. When money gets tight you might have to cut down on employees because you can’t afford to keep all of them or you might have to switch to subpar vendors that will not function the way you need. Perhaps you delay building repairs because it’s not in the budget anymore. You may carry fewer cars on the lot, meaning if a customer wants a certain vehicle and you don’t have it, they will go elsewhere to find it.
When money gets tight, an uneasy tension develops in your store for both employees and customers. Employees may feel they need to jump ship before it gets worse. Customers might think your dealership isn’t delivering the state-of-the-art experience they expect in today’s age. Floorplanning expenses trigger a domino effect, impacting every single piece of your business.
How can you help protect the profit you’re making and, ultimately, your dealership?
- Speed up payments and reduce interest paid on vehicles already off your lot. Waiting a week to get a deal funded might be the reality now but it isn’t the future. Some dealerships are getting deals funded in less than a day. Because they cut down their CIT, stores are saving thousands of dollars a month. And with that profit back in the dealer’s pocket, he is able to renovate buildings, invest in new technology, keep his lot full, and provide the experience his employees and customers deserve.
- Create a consistent process where you never miss a signature on documents and never have to redo any contracts. Contracts don’t have to be returned due to mistakes. You don’t have to snail mail every deal to a lender. Your contracts-in-transit time reduces significantly, meaning you pay less on floorplan interest.
It’s time to start protecting your profit by reducing the amount of interest paid on floorplanning. Don’t wait until money is tight before you make a change.
Industry experts are predicting that used vehicle demand (and prices) likely won’t start coming down until spring 2022 at the earliest.