In the 1990s, a craze swept the nation, turning once kind and caring individuals into fervent enthusiasts willing to invest time and money in hope of a long-term payoff. Yes, I am talking about the Beanie Baby phenomenon.
What does opening a new location have to do with Beanie Babies, you might ask. I often see dealers collecting dealerships like people used to collect Beanie Babies. These dealers are using about the same amount of logic as those collectors did to grow their collections.
So, how do you know if you are ready to open a new location? As we work with dealers in our Dealer Success Group program, we ask them these seven questions to gauge whether they are prepared to open additional locations.
- Can you walk away from your dealership for six weeks at season and have it operate as if you were still there?
This is the most important question. If you answer “no,” you should end the conversation about opening a new location for now. Seriously, do not pass go, do not collect $200.
If you cannot walk away from your dealership for six weeks at season, the response tells us you have not fully developed the people you need to grow your business, and you do not have strong enough processes.
You cannot grow a dealership empire based upon processes existing only in your head.
- Can you cashflow a new location without pulling cash from your existing location(s)?
Yes, a new location will require a lot of cash. If you are unprepared to throw dollar bills around as if you are at Disney World, then you are not ready to open another store.
At the core, your plan to fund the new dealership should never depend on income from your existing ones. I do not care that you can afford the investment because you have had a wildly good year. Just because you had one (or two) good years, does not mean every year going forward will stay on that trajectory.
Putting your current dealerships at risk to open a new location is never a smart move. If this is your plan, you have reached the time to rethink your strategy.
- Will a new location pull any customers away from your current location(s)?
Customer erosion must be on your radar when you open a new dealership.
We were working with a dealer a few years ago who had a manufacturer ask them, in not-so-nice terms, to open a new location. The manufacturer told the dealer if they did not open a new store, it would put another dealership in the dealer’s area.
After the dealer ran the numbers and looked at the company’s structure, opening the location made sense for them … until they looked at their customer base. The new customers would just as likely go to the existing location instead.
Sure, the new location would attract some new customers, but most people who would buy there would have bought from the dealership anyway. Opening the new store dd not make sense for them without an expanded customer base.
On the flip side, if your new location pulls in a different customer demographic than your other dealerships do, that needs to be on your radar, too! Attracting different customers requires building a different marketing strategy, possibly a different customer experience and even different customer communication plans, just to name a few differences.
- Will you be able to take all your brands from your current location(s) and sell them at your new location?
Every brand you add to your lineup will take your floorplan space and time. Although you may not be able to bring every single brand to your new location, you should avoid adding new brands.
Anytime we add a new brand to a dealership, the goal is the brand will be complementary to the existing ones at the dealership, not competing against them. If you decide to offer a new brand at your new location, you have to keep in mind long-term parts availability and training for that brand.
If you commit to bringing on a brand, you are responsible for carrying that brand’s wear parts for five years after you stop selling the brand. Doing so is only fair to your customers who will buy from you.
The training time required to add a new line creates a compounding effect in most dealerships. You must account for the extra work, time and attention.
- Do you have someone trained to manage your current location?
I will shout this from the rooftops. You cannot hire someone to manage a second or third location. If you are the dealership owner, you need to manage the new store.
Why? Because a second or third location requires several spending decisions, and no one will spend your money like you. Yes, you should be training a general manager to run the location after the first 12 months, but those first 12 months are critical for the dealership’s overall and long-term health.
Now, if you are going from 197 to 198 dealerships, this does not apply to you. Once you grow past three locations, stores become easier to manage because you have consistent processes, training and structure in place to manage the growth.
Consistency in all these areas should be your goal if you are looking to add more stores. However, for most dealerships, consistency is not the reality.
- Do you have a clear understanding of the staffing needs at your new location?
Sure, you could run this dealership on your own or with a team already stretched too thin. However, doing so is a recipe for burnout for everyone involved. Before you open another location, you must have a clear understanding of the new store’s staffing needs.
When you look at the staffing needs, you need to think about what you can afford to pay each department. In parts and sales, you can allocate a maximum of 25% of your gross profit (revenue minus cost of goods sold) to employees’ salaries. In service, you can earmark 30% of every labor dollar produced to technician pay and 15% to management costs.
Sure, you may not know exactly what will come through the door regarding revenue, but you can make an educated guess by asking the right questions.
- Do you have a sufficient floorplan and the ability to extend your credit line, if needed?
Cash is king, and this statement will never be more apparent than during your growth. Most costs relating to growth will always be more than you initially assumed. Typically, you can take whatever you think your cost to open a new dealership will be and add an extra 50%.
Being extremely conscious about your cash holdings is key when preparing to open a new location. Specifically, we are talking about your floorplan and your credit line.
A few years ago, I was working with a dealership that wanted to put more vehicles on its lot. The dealership owner reached out to the floorplan company to see whether it would increase the dealer’s limit to do so. Before the dealership could snap its fingers, the floorplan company gave the owner a big, giant rejection.
The owner could not wrap his mind around why. The dealership was wildly profitable. Management burned off cash at the end of the year and paved the parking lot, costing about $100,000.
When we dove into the owner’s situation, we began to understand the finance company could not extend the dealership’s credit line because the company had no other usable assets to minimize the credit risk. The $100,000 the dealership spent on paving could have turned into an increased floorplan if it had invested the money in an asset, such as land, rather than having the nicest parking lot south of the Mississippi.
Regardless of what your dealership’s growth journey looks like, our goal is to make every dealership we work with healthy and strong. Growth for the sake of growth should not be your focus. At the core, your business’ growth will continue to give you the life you want, not take your life.
If you fail to ask the right questions before you open another location, you may be like those collectors during the ’90s Beanie Baby trend. The collection takes all your time and money and leaves you without much to show for it.
Sara Hey’s new book, “The Dealership Equation: How People, Processes & Profits Can Make or Break Your Business,” was released at the end of August.
