Overhead absorption – is 100% achievable?

Overhead absorption, whereby revenue generated by the aftersales department is used to cover the operating costs of the whole business, including sales, is one of the most important factors in maximising profitability.

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In achieving higher absorption, dealers can strengthen the resilience of their business, by focusing on aftersales to minimise the impact of fluctuations in the new and used car market.

Whilst achieving 100% overhead absorption is the ideal benchmark, so that everything sold in the showroom is profit, many retailers face an uphill challenge to get anywhere near to this ‘magic figure’. Ever increasing overheads, such as rising employment costs and investment demands from manufacturers is adding pressure to the bottom line. According to a spokesman from one of the UK motor industry’s leading financial consultants, “While 100% is obviously the ideal, 80% is achievable.”

Data from the same organisation shows that the average absorption rate has dipped below 55% during the past 12-months. This in part is attributable to larger dealers with higher overheads experiencing a rise in direct costs that are not in line with profit growth. Factors taking their toll include demonstrator vehicles costing more to write down, increases in the national minimum wage and infrastructure costs. The spokesman continued: “Some manufacturer brands struggle to get near 80%, whilst premium brands are closer to 80%. However, top performing dealers are smashing 100%, so it is possible.”

While 100% is obviously the ideal, 80% is achievable

The continuing need for dealers to invest has placed the spotlight on driving up aftersales revenue in order to improve overhead absorption performance. In the last couple of years, buoyant market trends such as growth in the 1-3 year-old vehicle parc fuelled by personal contract purchase (PCP) offers and greater uptake of service plans, have been good for dealer profitability. More recently, growing consumer uncertainty regarding diesel, rising interest rates and stagnant wage growth are all factors that add pressure, meaning that securing incremental revenue is an absolute priority.

Measures being taken include the offer of free or low-rate credit to customers requiring major servicing work on their vehicles, or wheel and tyre upgrades, along with fixed price servicing and seasonal promotions, such as winter coolant checks or air conditioning refreshes. Interactive communication such as video to explain work that needs to be undertaken is also being used by Audi, BMW and Volkswagen as an effective means of boosting job conversion rates and revenue to benefit overhead absorption.

Providing customers with a compelling added value proposition that offer clear benefits is equally important for third-party brands in the showroom, such as Autoglym’s LifeShine. LifeShine is proven to add significant value, by enabling dealers to generate exceptional margin with support from a highly recognised and trusted British brand.

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