For WEDA members who listened to the webinar hosted by Farm Equipment Magazine, Dealer Institute trainers Trent Hummel, Gord Thompson and I talked a lot about the bounce back from 2018.
As noted in the 2019 Cost of Doing Business Study, we found an increase in gross profit margin percentage, a decrease in operating expense percentage, an increase in operating profit percentage, and an increase in income before tax percentage in all categories except the middle volume group. The middle volume group ($25 million to $75 million in sales) did have an increase in gross profit percentage but saw a bigger increase in operating expense percentage, which resulted in less income before tax percentage.
The decrease in income before tax for the middle group dropped from $512,165 to $370,668. This kind of drop will affect all kinds of ratios. The total inventory did not drop from the 2018 study. In fact, inventory as a percentage of assets went from 79.65% in the 2018 study to 83.12% in the 2019 study. This created a decrease in inventory turn, return on assets and even affected the return on equity percentage
for the middle volume dealer.
Some other factors that created some pain for the middle volume dealer was gross margin per employee. It went from $116,018 in 2018 to $94,755 in 2019. Some of the bigger decreases from 2018 to 2019 came from parts gross margin and service gross margin. We saw a drop of 4.74% for parts and 7.34% drop in service. In looking at a decrease in gross margin percentages, we noticed the parts aftermarket and service
aftermarket absorption also decreased from 2018 to 2019.
The other noticeable effect on the middle volume dealer was the increase in debt. Current liabilities went from 61.88% in 2018 to 66.87% in 2019. Since we saw this increase of 4.99% in current liabilities,
we hoped to see a decrease in long-term debt. However, long-term debt increased from 7.49% to 14.40% in 2019. Th is is an increase of 6.91%. So, unfortunately, the equity percentage dropped almost 12% from 2018. The other two categories stayed relatively the same or improved.
Some of the expenses that caused the lower-income before tax percentage and the increase in operating expense percentage for the middle volume group from 2018 to 2019 included:
1. Employee salaries went from 6.14% to 7.10% in 2019, an increase of nearly 1%. The biggest change was in sales salaries, which increased 0.33% or $236,683. I don’t know if we had carryover commissions/
bonuses from 2018 to 2019, but this was a pretty dramatic increase.
2. Repairs and maintenance costs increased $30,741 from 2018. I know we had some bad weather in areas served by WEDA and other associations that participated in this study and this probably led to the increase.
3. Utilities increased $52,349 from a year ago. This increase likely ties into the reason for repairs/maintenance increasing, mother nature was not so nice.
These three expenses were the biggest part of the total operating expense percentage going from 15.79% to 16.59% in the 2019 study.
We know the middle volume dealer did not have a good performance in the 2019 study compared to the under $25 million volume and over $75 million volume dealers. However, if your dealership was in the middle volume group, hopefully you outperformed these numbers and ratios. If your numbers were the same or similar, you were not alone. Following are some of the reasons for the numbers we saw from middle volume dealers:
1. We saw lots of mergers in 2018 that involved many upper-middle volume dealers to move to the higher volume dealer category. We think this is the reason for operating expenses being a larger percentage and income before tax being a lesser percentage than a year ago.
2. We also saw many dealers under $25 million in volume merge with groups in the middle volume category. We all know the first few years of adding locations can cause a decrease in bottom-line profit and an increase in operating expenses. This could partially explain the increase in repairs/maintenance. The dealers were getting some facilities up to speed to match the current facilities in the entity.
3. There was an increase in participation in the study by higher volume dealers, which increased efficiency in ratios and bottom line percentages for that category.
As we look ahead to 2020, we think we will see an improvement in the middle volume dealers for next year since some of the activity will have another year under the new entities. Hopefully, we will also see the same performance or better from the under $25 million dealerships and over $75 million dealerships. Keep positive.
For more information on the 2019 Cost of Doing Business Study or for more details on the specific results from other geographic areas of North America, please contact your local association office or contact
Curt Kleoppel at email@example.com or Lonnie Finch at firstname.lastname@example.org.
EDITOR’S NOTE: Most of the figures in the study are averages. Canadian financial statements were converted into United States currency to compare North American averages. In addition to reports from WEDA members, dealer reports were submitted by the Deep Southern Equipment Dealers Association, Far West Equipment Dealers Association, Iowa-Nebraska Equipment Dealers Association, Midwest-SouthEastern Equipment Dealers Association, Northeast Equipment Dealers Association, and United Equipment Dealers Association.
Article Written By Curt Kleoppel
CURT KLEOPPEL is the treasurer of WEDA, and president of Equipment Dealer Consulting, LLC.