Driving yourself out of business

Editor’s note: David Ensing is strategic consulting director, automotive research group, Maritz Research, Maumee, Ohio.

As has been widely reported, there is an overcapacity of automobile dealerships in the United States, especially for the U.S. domestic brands. This overcapacity is due to U.S. manufacturers’ declining market share over the past two decades and the dramatic decline in the overall vehicle market. According to Automotive News, U.S. light vehicle sales declined from 16.6 million units in 2006 to 16.2 million units in 2007 to 13.2 million units in 2008. This is a decline of 20 percent in two years, with the vast majority of those losses occurring in 2008. Furthermore, U.S. light vehicle sales for 2009 were 10.4 million units, a drop of another 21 percent from 2008.

U.S.-branded dealerships are currently experiencing a weeding out process. Approximately one in every 15 (6.5 percent) U.S.-branded dealerships went out of business in 2008 primarily due to financial difficulties caused by fewer sales and service events. This process continued in 2009 due to both the difficult automotive environment and automotive manufacturers’ planned reductions of their dealership networks.

Maritz Research conducted a study to determine the relationship between customer satisfaction and dealerships going out of business during this period of market decline. We also examined the relationship between retail sales volume and dealers going out of business as a comparison metric because sales volume is often seen as being most important to a dealership’s profitability and sustainability. To examine these relationships we identified 970 dealerships that went out of business during 2008. These dealerships represented the vast majority of all the U.S. dealerships that went out of business during this time period. We focused on 2008 because dealership closings were primarily market-driven, as opposed to 2009 when many closings were manufacturer-mandated.

To conduct the analysis we gathered 2006 and 2007 annual retail sales and customer satisfaction statistics for each manufacturer’s dealerships and compared these statistics for dealerships that went out of business to those that remained open in 2008. Both 2006 and 2007 statistics were used because we felt some dealerships might have begun the process of going out of business during 2007 or cut back on customer service in anticipation of going out of business and that may have affected their scores.

Each manufacturer currently conducts its own unique customer satisfaction program using its own unique scale so it is not possible to directly compare scores from one manufacturer’s dealerships to those of a different manufacturer. To address this problem, we focused on dealerships’ relative rankings within each manufacturer. Thus, two dealers who fell at the 25th percentile within their respective manufacturers’ dealerships were considered equivalent even though their raw scores were likely to be different. We then split dealers into 10 equal groups according to their customer satisfaction rankings (i.e., top 10 percent, next 10 percent, etc.) and annual retail sales and examined the rates at which dealerships went out of business across each decile.

Significantly lower

Dealerships that went out of business during 2008 had significantly lower annual sales, lower customer sales satisfaction and lower customer service satisfaction scores in both 2006 and 2007 than dealerships that remained in business. Interestingly, while dealerships that went out of business were below average on all these measures, they were about twice as much more below average on customer sales satisfaction than they were on annual retail sales volume and customer service satisfaction.

Looking at the rate at which dealerships went out of business depending on their 2006 and 2007 annual sales and customer satisfaction performance provided some interesting findings. We see a fairly linear and dramatic relationship between dealer annual sales volumes in 2006 and 2007 and the rate at which they went out of business (Figure 1). Dealers in the bottom 10 percent in 2007 retail sales volume went out of business at a rate 4.2 times greater than those in the top 10 percent; for 2006 they went out of business at a rate 2.4 times greater than dealers in the top 10 percent.

Using the same technique, we looked at the rate at which dealerships with varying levels of 2006 and 2007 customer satisfaction scores went out of business. The overall results revealed that the bottom 10 percent of dealers in 2007 sales satisfaction went out of business at a rate almost three times that of those in the top 10 percent. For 2006 sales satisfaction those in the bottom 10 percent went out of business at a rate 2.5 times of those in the top 10 percent. Results were similar for 2006 and 2007 service satisfaction but the effect was less dramatic. Dealerships in the bottom 10 percent in service satisfaction in both 2006 and 2007 went out of business at a rate 1.5 times greater than those in the top 10 percent.

What is perhaps more interesting is that in both these cases the overall effects are primarily driven by increases in the rate at which dealerships go out of business when they fall in the last five performance groups. As can be seen in Figures 2 and 3, the rates at which dealerships go out of business are relatively flat over the first five sales and service satisfaction groups. However, rates of going out of business escalate dramatically for the lower-performing groups, especially for sales satisfaction. This seems to indicate that a certain level of satisfaction is enough to maintain a dealership’s sustainability, but low levels of satisfaction are severely detrimental to it.

These charts bring up an interesting question: Why would sales satisfaction relate more strongly to dealerships going out of business than service satisfaction? One possibility might be that a poor sales experience not only affects sales-to-sales loyalty but it also affects sales-to-service loyalty. In other words, if customers are upset with the sales experience, they tend not to return to that dealership for service work. Therefore, the dealership misses out on a vehicle lifetime of service revenues and profits for those customers. This idea is supported by findings from a previous study Maritz Research conducted (the 2008 Maritz Loyalty Study) in which we related customers’ 2002 ratings of their dealership sales experiences to their 2007 reports of where they usually had self-pay service work performed on those vehicles. As can be seen in Figure 4, use of the selling dealership for service work drops precipitously across levels of dealership sales satisfaction.

While these findings show that sales volume, sales satisfaction and, to a lesser extent, service satisfaction are positively related to dealerships’ ability to remain in business during tough economic times, we also wanted to look at the possible interactive relationships between sales volume and customer satisfaction. In other words, when it comes to staying in business, does customer satisfaction matter more for higher- or lower-volume dealers? Indeed, it does. We grouped dealerships into nine groups based on their being in the top-third, middle-third and lower-third of dealerships for 2007 sales volume and 2007 sales satisfaction. In Figure 5 you can see that while lower satisfaction is associated with higher rates of going out of business for all three volume tiers of dealerships, it is especially so for mid- and lower-volume dealerships.

These results make intuitive sense. Larger-volume dealerships probably have more of a cushion to work from - each customer lost due to poor satisfaction is a small percentage of their customer base and therefore affects their bottom line less. However, as these dealerships become smaller and smaller, either due to the overall vehicle market decline or due to customer attrition because of poor customer service, customer satisfaction matters more and more.

Patterns differ

While it appears that both high annual sales volume and high customer satisfaction protect dealerships from going out of business when the vehicle market declines, the patterns of these relationships differ. There appears to be a gradual and linear relationship between annual sales and the likelihood of a dealership going out of business, with smaller dealers more likely to go out of business than larger dealers.

The relationship between customer satisfaction and dealerships going out of business is relatively flat over the top-performing dealerships, but accelerates dramatically as dealers go from mid-performance to low-performance. This is especially true for sales satisfaction. Finally, when it comes to staying in business, customer satisfaction seems especially important for lower- and mid-volume dealers.