Are Your Profits Keeping Pace With the Dollar?

Neither jobbers nor their clients were prepared for the effect that a strong dollar and the declining cost of goods has had on their profit line. It has caused everyone to look closer at the way they price their products and measure their success.

Today’s jobbers have been taught to think, talk and measure in terms of sales and percentages related to sales. This measurement guideline can be very misleading. Consider that 38% gross profit on an item that sells for $20 is a lot different from 38% on an item that has been devalued to $15, which can happen to the same part as the Canadian dollar has risen over the past year. The situation is exacerbated with the influx of low-cost offshore products.

It is obvious that the gross profit dollars are not the same, which can only lead to the conclusion that measuring the ratio of profits to sales is the wrong formula. Measurement to total gross profit dollars of the store is the correct formula.

Staff wages before burden in a jobber store and before the owner’s wages should not exceed 40% of total store gross profit. Due to the devaluation of inventory and proliferation of Pacific Rim parts, cost-based management in a jobber store is working against it, and the dollars are not being produced to support the overhead in the right balance.

Consider that an inferior part may cost $12 and the quality part costs $35. The suggested list on the quality part would produce an approximate margin of 40%, or have a suggested list of $58.33, delivering a gross profit to the shop owner of $23.33 ($58.33 – $35.00). The inferior part with a 60% gross profit would have a suggested list of $30.00 delivering a gross profit dollar return to the shop of $18.00 ($30.00 – $12.00).

This jobber is obviously teaching the shop owner to be price-driven instead of quality- and service-driven.

What can be scarier is when a jobber suggests that the shop sell the inferior product to the consumer at a quality part’s list price, or when the shop owner actually thinks he can get away with it and sells the inferior part for the higher price.

It happens because the shop has not been taught to charge for the knowledge it holds by focusing on the hours of labour it charges for.

Not all parts coming from the Pacific Rim are inferior. In fact the opposite is starting to happen, which is becoming a huge challenge to the North American manufacturer. That being said, our industry had better wake up to the fact that the gross profit pricing structure has changed in our industry, and business strategy must change with it.

When jobbers are considering the price they pay for parts, they should remember that a manufacturer must build the costs of its field representatives and other services into its products, and that these bring value.

Consider that the jobber store owner and shop owner’s time is worth a lot of money per hour, and the value of having this service level close at hand is real. Jobbers and shop owners should not compare the price of their parts with companies that do not have that same service level.

Likewise, a jobber business that delivers personal, customized services to the shop, coupled with one-on-one consultation on industry and shop business matters, must also build these costs into their selling prices. They bring real value to their clients that other jobbers can’t even consider. These enhanced service levels offered by the jobber must be recognized, discussed, and proven as valuable to the shop owner, and shop owners must stop comparing the price of these jobber stores with jobbers who simply flog parts in the marketplace.

In this same vein, shop owners who deliver exceptional service and quality levels by competent and professional staff must build these costs into their hourly door rate. Their door rate reflects their competency and service levels. These shops have learned to build the relationship with the right jobber and are loyal to their jobber. They want their jobber to stock the right parts for their business and they want the right part delivered fast. On average, these shop owners recognize they must pay 4% to 6% more for all their parts from their chosen jobber, but they have done the math and seen the return on this investment. Other shops focus on price shopping and undercutting their competition instead of investing in their facilities and their people.

Jobbers must embrace the best shop owners and preach to all their clients the best shops service/ quality practices.

Our industry must look at the total service levels required today and build these costs into the business. When you really think about it, it makes a lot of sense.

Instead of working around a percentage formula, perhaps we should add in the dollars required to deliver a service level value that gets results with the shops the jobber wants to go after.

Perhaps that means that the jobber requires a 45% overall gross profit percentage. How can one say what the right percentage is? Jobber services must be customized to a given marketplace. Perhaps a jobber’s total store gross profit percentage should be between 38% and 50%. There is your guideline for today. Let the jobber do the math to figure out what they need to get the job done in their marketplace, to be the very best that they can be.

The important message here is to define in writing the value your jobber store brings to its client base! This now becomes the focus of what your store is all about in your market area. As deflation in inventory values continues, and as Pacific Rim parts enter the industry at a lower cost, a jobber must sharpen his business skills and elevate the meaning of his parts business.

Do you just deliver parts or do you bring service level values to your clients’ business? If you just deliver parts, where are the gross profit dollars going to come from this year and in your future? What type of shop owner will you attract? Will you get paid?

I’m confident to make the statement that as your service quality levels rise, and the competency of your personnel improves, the gross profit dollars of your store will improve also. Improved gross profit dollars lead to improved net profit dollars.

Are you going to be stuck working much harder, or is it time to reevaluate your jobber business, get off the price/cost issue and finally work smarter?

Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has 28 years of industry-specific business management experience. He has developed shop business management courses for independent service providers recognized as being the most comprehensive courses of their kind available in Canada. Bob is the first Canadian Business Management Consultant and Trainer to be recognized for his industry contributions when he received the prestigious Northwood University Automotive Aftermarket Management Education Award in November 2003. E. K. Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive aftermarket industry preparing analytical operating statements for management purposes, personal and corporate tax returns and business management consultation. Visit them at www.ekw.ca and sign up for their free monthly management e-newsletter. Automotive Aftermarket E-Learning Centre Ltd. is a leading edge company devoted to developing comprehensive shop management skills through the E-Learning environment. Visit AAEC at www.aaec.ca . Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 and by E-Mail: greenwood@ekw.ca or greenwood@aaec.ca.