For car dealers, workshop revenue can drive profitability

PASSENGER CAR AND UTILITY VEHICLE dealerships can boost profitability by shoring up their workshop revenues, an analysis of over 100 such small and medium enterprises rated by CRISIL indicates.

Commission on showroom sales from original equipment manufacturers or OEMs (i.e. car-makers) and workshop revenues are the two main revenue streams for these dealerships. Showroom sales commission includes dealer commission on vehicle sales, finance payouts, insurance and registration commissions, while the workshop revenues comprise general servicing and sale of accessories/ spare parts.

Lately, intense competition has compelled OEMs to cut costs, including reducing the dealer commissions. As such, these dealers operate in narrow geographies, which constrains their size and significantly limits their bargaining power with the OEMs. Also, the trading nature of operations, without any significant value addition, results in low profitability. This creates the need for sharper focus on increasing workshop revenue.

The analysis reveals that workshop revenue accounts for two to 12 per cent of total revenue of the CRISIL-rated dealerships. Dealers with higher share of workshop revenue had superior operating and PAT margins compared with their peers.

As can be seen from the chart, this revenue stream translates to bigger profit margins and can a give significant boost to the bottom line. Providing superior workshop services can also help dealers retain customers and grow their business. Hence, CRISIL believes that creating a value proposition by focusing on customer-centric workshop services will help dealers remain both profitable and competitive. Operating margin Pat margin <5% In % >5%