Before you pop the Champagne and celebrate, most dealerships will look back at the year, we’re about to close out, with sobering thoughts. The automotive dealership landscape has undergone significant changes in recent years, and those who were riding high on the tailwinds of a hot market are now faced with new challenges. As dealerships look for ways to navigate these changing tides, one area stands out as critical in the quest to create stability and growth: fine-tuning the service and parts departments. With margin compression in new and pre-owned car sales, maximizing fixed operations becomes more important than ever.

The Changing Landscape of Automotive Sales

During the COVID-19 pandemic and for 2022 and most of 2023, auto dealerships realized record-breaking profitability. Supply shortages meant that dealers couldn’t get enough cars to sell. Profits surged as dealers capitalized on limited inventory and high demand. But as the economy shifts, dealerships now face a normalized supply, higher interest rates, a decline in markups, and a slowdown in both new and used car sales.

Recent months have seen a dramatic drop—over 20%—in gross profits from car sales, with the margin compression affecting the dealer community at large. In this new environment, dealers must pivot to sustain their profitability.

As we are about to jump into 2025, one question implies what lies ahead: How can dealerships thrive when car sales alone can no longer carry the business? The answer lies in optimizing service and parts operations. What becomes paramount in offsetting the margin erosion is how dealers go about solving that challenge, and the operative question is – do you have a plan?

The Role of Service and Parts Departments in Today’s Market

A dealership’s service and parts departments provide a steady revenue stream, often offering higher margins than vehicle sales. Dealers that have focused on maximizing the potential of fixed operations will be better positioned to weather the storm. Let’s dive deeper into the pros and cons of focusing on the service and parts operations.

Pros of Focusing on Service and Parts:

1. Revenue Stability and Predictability
   Unlike the volatile nature of car sales, which can fluctuate with market conditions, service and parts revenue tends to be more stable. Regular maintenance, repairs, and part replacements create consistent demand, providing a reliable income source even during slow sales periods.
2. Higher Margins
   Service and parts departments generally offer higher margins compared to vehicle sales. Labor costs in service are often relatively fixed, and parts markups can significantly contribute to profitability. By optimizing these areas, dealerships can offset the margin losses from car sales. The key point is – if you don’t have a plan to optimize fixed ops, you need one!
3. Customer Retention and Loyalty
   An efficient service department encourages repeat business, leading to long-term customer loyalty. By offering exceptional service, dealerships can build relationships with customers that extend beyond the car purchase, keeping them coming back for repairs, parts, and future vehicle needs. Ask yourself: are we treating our service customers transactionally, or do we truly have a relationship with them?!
4. Increased Absorption Rate
   Absorption rate refers to the percentage of a dealership’s overhead costs covered by service and parts income. A high absorption rate means the dealership can offset more of its operational costs, reducing reliance on car sales to break even. Dealers that achieve near 100% absorption are significantly more resilient to market shifts. Do you know what your absorption is? If the answer is no, why don’t you?! You need to know, and more importantly, you need a plan to increase the absorption rate by your fixed ops.

Cons of Focusing on Service and Parts:

1. Initial Investment and Training
   Investing in the necessary infrastructure to maximize service and parts departments may require significant capital. Upgrading equipment, hiring skilled technicians, and implementing efficient processes can be expensive. Additionally, staff must be properly trained to ensure high-quality service, which can take time and resources.
2. Operational Complexity
   Managing service and parts operations requires a different skill set than car sales. The process involves scheduling, parts inventory management, and customer service, which can be more complex and time-consuming. For dealers who have been primarily focused on sales, adapting to these demands may pose challenges.
3. Customer Expectations
   While focusing on service can improve customer retention, it also means managing high customer expectations. If a service department isn’t properly staffed or well-organized, it can lead to delays, unsatisfied customers, and ultimately, a loss of business. Maintaining a high level of service quality is crucial for long-term success. Analyze your CSI reports and your score – you can tell a lot by customers’ feedback and how they rate their experience. Is your performance adequate, or good – when it should be great?!
4. Competition from Independent Shops
   Independent repair shops and aftermarket parts retailers are often able to offer lower prices than new franchise dealerships, which can lure customers away. Dealers must find ways to differentiate their service offerings, whether through superior customer service, specialized services, or competitive pricing.

Ensuring Success in Fixed Operations

To thrive in today’s market, dealerships must ensure that their fixed operations are running at full capacity. This means focusing on the following key areas:

1. Optimize Service Scheduling and Efficiency
   Improving service department efficiency can significantly boost profitability. This includes maximizing technician utilization, ensuring proper scheduling to avoid downtime, and implementing streamlined processes for customer intake and service completion.
2. Enhance Customer Experience
   Exceptional service drives customer loyalty. Offering convenient service options, providing transparent communication, and going the extra mile to exceed expectations can help retain customers. A positive experience in the service department can lead to repeat visits for future maintenance, repairs, referrals, and even future car purchases.
3. Leverage Technology and Data
   Modern technology can help dealerships improve fixed operations. Tools for tracking parts inventory, managing service appointments, and even automating reminders for regular maintenance can make a significant impact on efficiency and profitability. All of us live with our mobile phones glued to our hands. Are your techs set up to provide service work directly to your customers using video? It is a tried-and-true method to increase service and repair work on every RO. And – it increases customer satisfaction as well.
4. Focus on Parts Sales
   Parts departments often offer high margins and ensuring that parts are readily available for service technicians can lead to faster repairs and increased sales. Dealers can also explore opportunities to sell parts directly to consumers, both in-store and online.
5. Train and Retain Skilled Technicians
   Technicians are the backbone of any service department, and a skilled team is essential for success. Investing in ongoing training and providing competitive compensation can help dealerships attract and retain top talent, ensuring high-quality service.

Call to Action: Assess and improve your service and parts departments

The changing dynamics of the auto industry make it clear: the dealerships that succeed will be those who focus on maximizing their fixed operations. If your service and parts departments aren’t running at or near 100% absorption, it’s time to act. You can no longer afford to neglect these areas if you want to stay competitive and profitable in today’s environment.

I invite you to take a closer look at your dealership’s operations. Let’s analyze where improvements can be made and uncover opportunities for growth. With the right adjustments, you can ensure that your service and parts departments not only survive but thrive—helping you offset the margin erosion from new and pre-owned car sales and providing a stable foundation for future success.

Now is the time to invest in your fixed operations. Let’s get started.

Author: Sam Abergel

With over four decades of automotive industry experience, Sam’s impressive career began in sales at a Chrysler Plymouth dealership, where he was promoted to Service Manager within 18 months. Noteworthy achievements include leadership roles as the President of the Parts and Service Managers Guild in Los Angeles and representation on the Porsche North America Round Table. Sam’s extensive experience and track record of performance improvements includes orchestrating successful dealership transitions, managing and growing service and fixed operations as a transformative leader at Chrysler-Dodge, Audi, Lexus, and Porsche dealers. At Mach10, our clients benefit from Sam’s expert knowledge in driving dealership profitability through strategic guidance, coaching, and creating tailored client solutions.