What Dealers Get Wrong About Gross Profit | SDR #228

Welcome everybody to the big show. Today we're going to talk about why you are wrong about gross profit. You're chasing gross profit and you're doing the wrong thing. We're going to unpack that and go into great detail. We also are going to talk about recruiting technicians in this program we're doing which is a live event every couple weeks. It's been really fun and some fun stuff in the news. I'm Chris Collins. This is Chris Joan. That and much, much more. Coming up on Service Drive Revolution.

We have an exciting show. How's it going, Chris Jones?

It's going great.

In a breakdance fight, I'm going to snap, pop and spin you into submission.

That was one of my favorite movies. You remember breaking to Electric Boogaloo? Walk around with your cardboard and my plastic.

Yeah, yeah.

It was good stuff. Speaking of the olden days, there was this three legged dog. He walked into a saloon, looked around and he says, I'm looking for the man who shot my paw.

Right, right off the top, kids, let's.

Not mess around today with the comedy.

Right out of the gate.

Action packed show, start to finish.

Christian and I have had a really good time. We started a new thing which is called Technician Tree Live, which we are helping to mentor and coach managers mostly into how to recruit the best technicians. It will be how to recruit, retain, motivate, all of that. But we're starting with the recruiting because that's the problem probably most important part.

Yeah. I think that most people are in the position where they're trying to grow the team right now.

Were you aware of the fact that there is a shortage of young boys and sometimes girls, not often, but sometimes that want to turn wrenches.

Yes. A staggering number of people that kids.

Are not growing up wanting to get their hands dirty.

No.

And so it's becoming harder and harder and we're good at it. Mostly out of necessity. We have to be. We also have a bunch of. Oh, that's one thing. The elite group. So I was gonna say we have a bunch of elite group in our coaching group managers that are incredible at it. One I was thinking of is Roger.

Right.

But wasn't it interesting on the. So we did Technician Tree Live where we're helping you hire technicians.

Yep.

And the elite members were on there kind of helping and like it felt very much like a community. And like even though they didn't need help hiring technicians, they wanted to kind of send the elevator back down in a way.

It was very clear that that was the case. So also Disclosure, we didn't ask them to do it. They naturally felt like that's just the kind of people that they are. But they talk about been there, done that, And I was thinking of it two ways. One is I think they do want to give back, but I just think that people like that, like our elite members, are doing anything they can to get even the slightest edge. So anywhere they can download extra content for themselves to make the business better. Those are the people you'd expect to be on the call at the end of the day. But it was super cool to have them on people that had hired a bunch of techs.

So for a while now, every other week, we're going to get on. People coming into the Technician Tree Live.

Community that we're doing have a choice. You can just come in and do the virtual classes, or you can also get assigned a personal coach and do the virtual classes. It's interesting that in this first week we gave them homework. The best homework came from people that were in coaching. So you can see the gap between coaching a little bit. Hopefully we can close that gap a little bit. But it is interesting to see the homework as it comes in. And it's going to be a lot of fun. The feedback after was that. Yeah. And I think really you get a lot of credit. The jokes probably were a big part of it.

Unfortunately, the jokes don't always hire the text, but humor, I think, is a part of it.

Yeah. Somebody said in the. In the survey after that, how is it worded? Like the adult innuendos or something, which.

I didn't even know. Like, it's. I'm sorry if that was the case.

I don't remember doing anything like that.

I don't either.

Gotta stop having fun.

That'll be enough of that. The ROI from the time you put into that thing is it's pretty good and it goes really fast.

I like having a thing like that where we go live and we get to interact and. I don't know. I think it's fun.

Yeah. Challenges my technology skills a little bit because I was.

You did great.

Yeah. But I was trying to respond to the zoom. There's a lot of comments in the chat and then trying to do some switching and stuff on the camera.

Yeah. So in Christian's new office, in our new building, the office from day one was built for him to be able to do live broadcast like that. Like, that's why we built it. But you have a switch. So you have cameras there that are on a switch. And then you had to switch between the cameras. The screen. And then you did in screen, camera.

That's right.

We're showing your screen, but we're picture in picture. And I. I thought you navigated that great. There were no technical issues once we went live. There were a couple like, oh, crap, kind of going up to going live. But it worked out really good.

Yeah, I think that Costa did a good job.

You make fun of your technical skills, but you actually usually come out pretty good.

I wonder why.

That is self deprecating.

Yeah.

Sometimes with your childhood. Eventually we're gonna get into that. Unless you wanna do it today. I would love to hear about that.

Childhood trauma episode devoted to me.

I think that the listeners would love it if you just really opened up and were very vulnerable.

Yeah, you know what? I have been. I've been having trouble. I've been having recurring dreams. I don't know you ever had a recurring dream before?

Oh, yeah.

Yeah.

So you know when I know that I'm really locked onto a goal.

Well, I would assume you dream about the goal.

Yeah, yeah. Which is happening a lot lately.

Okay. That's a really, really good.

Another thing that I learned from good old Chase Hughes is I learned how to actually practice visualizing, which then feeds to that, you know, you can practice visualizing.

I did not know that.

Yeah. So they do this thing where you put something in front of you, you close your eyes and visualize it and then open your eyes and then remove it, put it back and you.

Oh, that's a great idea.

You practice visualizing.

Yeah, the. The way that I know, I think one of my favorite things I was worried I asked you about it last week. But one of my ways that I know that you're in the zone is I look at the time on the emails you send to me. And at first I was.

This morning I woke up, I had some stuff I had to write down and so I was up and then I went back to bed, actually.

And then the stuff that you sent me was actually really good too. And this was like 12:30. And just for those of you scoring at home, Chris and I like a good day for us. If we get into bed by 8:30 is really, really good timing. So for him to send out emails at 12:30, it's like, I feel like your subconscious is like awaking you and having you kind of splurge out. All those things that you think about. But that's the cool thing about the dreams. But my dream is it's a little bit different. So to the point I Was so worried, I went to the doctor and I'm laying on the couch.

What kind of doctor do you go to when it's about a dream?

Is a psychotherapist.

Oh, so you call that a doctor? Like, I think when you say doctor, like, maybe it's a podiatrist.

Or like, what I wouldn't do to go to the podiatrist and talk about all this.

Doctor of the mind.

Yeah. So. Doctor of the mind. So I'm sitting there on the couch and I'm like, hey, Doc. And he's like, yes. And I say, I keep having these. These two dreams. In one dream, I'm a teepee. And then in the next dream I'm a wigwam. And then like, and then I wake up a couple of minutes later, I fall back asleep again. By golly, if I'm not a teepee again, let's come out of it, go back in. Then I'm a wigwam. Doctor looks at me and he goes, I know it's wrong. And I'm like, what is it, doc? And he says, you're too tense.

You gotta laugh over there.

I love, I love the guys.

If you can make them laugh.

They're usually my test audience. They just didn't get that one today.

You know what my new kind of my, My new routine has been is I'm getting up around 3am and writing. Then I go to the gym. Then I come back.

How long is the writing?

Two hours, two and a half. Usually, like, I'm leaving for the gym like at 5:30. I get up, I make coffee. You should see this setup I have in my living room. Have you seen it?

I haven't been over there since you started doing this.

I have one of those desks on wheels that look. And you stand up and have three monitors on it. So.

I have all my reference materials around. Bless my fiance that she allows me to do this to the living room.

Because she supports you.

It's a mess, but it's good. It's exciting. So this morning I woke up and I was thinking about that Socrates part of the leadership training.

Yep.

That. That's what I woke up and I had to figure out. Yeah, that was.

What you came up with was pretty cool.

Yeah, so it's good. So leadership book is coming.

It's the only thing I'm thinking about and trying to get done.

Yeah, Keep obsessing.

Writing a book is harder than everybody thinks.

You know what's funny is that I've always thought it was really hard.

Maybe I'm still underscoring it, but I've seen what you have to do.

Those two books, the Millionaire Service Advisor and the Irreplaceable Service Manager, those books are.

Very, very well executed.

There's a lot that went into those, right.

And they're for an audience. Like, if you think about your average service manager doesn't read a lot of books. So they're a book that a service manager could sit down and read over two cups of coffee, have actual tools that they could go implement and see some positive results. Same thing with the Advisor. One is it's in a story.

It'S captivating enough to kind of keep them going. It doesn't go anywhere that isn't necessary. It's very compact and on point. And so I think I hold myself to a very high standard. And so this leadership book is a book that I want to.

Have it be iconic in a sense that if somebody thinks about leadership, they're like, oh, get that book. Like, I want it to be one of those type of books that kind of transcends me and us and all that. So that's why I'm obsessing on it so much. But I think we're close. Like maybe, maybe I'll hire one of those really fancy editors to take a look at it in the end. That's not a bad idea, but we'll see. I didn't do that with the other books.

What's in the news? Chris Jones.

So we have a bunch of stuff.

There's one thing in here that I think that you're really going to enjoy. Maybe you know about it already, but let's just start there. So.

And now for the news.

MSCHF, which kind of spells mischief releases, smells like WD40 cologne, which I think is brilliant. And I would wager to say that 10 to 25% of the male population already sprays themselves with WD40 just to smell like that. So.

They'Ve kind of Mischief is the way that you pronounce that. They do stuff like this where they'll kind of do really crafty releases on this. And the Mischief WD40 cologne totally sold out. And.

The tagline for it is smells like getting blank done. Right.

That's funny, isn't it?

Hilarious. I think it's genius.

Let's unpack this a little bit. So let's say you're a single guy, which you're not, but let's just say you are and you are in the. In the market for a lady.

Special lady friend. Yeah.

The, the idea is that the guys that are your competition for a lady friend smell like flowers and they smell pretty and they're more feminine in their nature. And then you walk in and you smell like WD40, which is like an aphrodisiac for a middle aged female that needs her kitchen remodeled.

That's right. And that's probably the height of it for me because if they actually got me to drink.

You're not going to remodel a kitchen you don't know your way around.

But I sure could Google someone that toolbox. I know a guy.

But this in a sense would be false advertising because you'd be insinuating that you're handy and really you're more like the flowers spice.

It's the male version of a push up bra. Yeah.

You should, you should be wearing like Calvin Klein one or one of those perfumes that could go female, like.

Right.

Could go either way. Androgynous.

So funny.

That would be false advertising. Oh.

So I think good for you. Mischief. I think that's so hilarious. I love that. And then this one, I think we might have a little bit of a chat about this. Ford Mustang Mach E. The electric car has a mile of wires it doesn't need. And it's a big deal. So it goes on to talk about how Ford CEO Jim Farley was talking about some of the issues that Ford was having with both the Mach e and the F150 Lightning, which I think is actually a really cool truck. And I thought they marketed it really well. They both have a long waiting list of customers, but they encountered a bunch of problems. Right. So they had extra mile of wires, which then made the car heavier. And then the car is heavier means it needs a battery that can propel it longer. And then they underinvested in braking technology because now the battery had to be bigger. Like it was just kind of that cascade of junk. Right. And I just think that's amazing that people didn't expect that that was going to happen. But essentially all that stuff that I just mentioned cost Ford about $2 billion in profit.

So unintended consequences of the poor engineering. Why does that happen? Like, how do you end up with a mile more of wires?

Well, my.

Because that would insinuate almost that you're running the wire harness around the outside of the truck like a mile.

Yeah. 5,280ft of wires is extra wire is a ton. Right.

Even a wire harness is what, seven feet?

It depends. I mean, probably at the longest you probably have like 1314, like a main, main body harness. And that would kind of wrap around the inside of the car, would be like a 14, 15 foot.

Even in a truck, the only thing in the bed are like bed lights. Most of where the harness is going is inside the cabin.

Yeah.

It's not like a car where you're going back to the.

Trunk. Right. Or is it.

I don't know. Well, it might be with that thing with the truck, but this is the, this is the utility vehicle. The Mach E is like that little thing that looks like a sport suv. So that would be a more compacted thing, but a mile is a big goof up in my opinion.

Ford also was pretty disappointing with their profits this quarter.

Yeah. So that was kind of another thing that talked about here, is that that's bad for the profit. And they were saying everyone's kind of been talking about Tesla in the news, how they think that the other companies are going to catch up really fast. And this is a really good example of, I think that Tesla, I think it was an episode or two episodes ago when you said that the competition, you can't see it with a telescope or something to that effect. This proves that this is really good. Supporting that Tesla's already gone through a lot of growing pains already in making their thing. It wasn't perfect to market the first out of the gate.

Yeah. I was in a mastermind with somebody who was part of Tesla early on. I think he was on the board and he said early on the rule was nobody from Detroit was allowed in the room. Like they started with a blank piece of paper in their design and they thought of it more, I think from the point of view of like Silicon Valley and how they engineer.

Yep.

So.

I think a lot of times in those, those companies like Ford and gm, the engineers are conditioned that we have to do it that way because it's how we've always done it.

Yeah. Because they've been building internal combustion for 30 years and now all of a sudden we're going to ask them to do electric.

And Ford is thinking, oh, we're going to have an electric car company. We're going to spin it out into its own.

Ticker. Right. They're going to have it traded separately on the stock market. But I wonder how much different their margins will be in the sense that Tesla has.

Way higher margins.

They do. And now the, you know, now Tesla's doing the thing where they're, they're cutting the prices and stuff like that. It's going to be interesting to see how everybody responds. And the last bit of news that I've got for today. Good for my stomach. Future vehicle interiors could be made out of coffee pulp, lentils and eggshells.

What?

Yeah, that's right. As more cars go electric, automakers are also starting to look at the environmental impact of more than just the powertrain. With that in mind, Callum, the design firm founded by automotive designer Ian Callum Resto modded Porsche 911 using interior products made from food waste and other refuse. No, thank you. New car smell at that point. Right.

You know.

This doesn't happen to you because you're downtown, but out where I live. The new thing now is you have to compost.

Really? On your own.

Well, you have to put your compost in your leaf.

Garbage.

Okay. So do you have three cans?

Yeah.

Oh, okay. We just have the recycle and the regular garbage.

But it's like the law now.

No kidding.

Yeah, that's. Now I'm starting to think that's what the car smells like or will smell like. No, I love new car smell.

Do you think we should stay in California or should we move?

You know the answer to this question, right?

You think we should move? Yeah. Yeah. So we've had somebody have their car stolen in the last week and somebody saw somebody get stabbed.

Yeah.

Things are working out pretty good in California. High taxes, high crime. Yeah. Do high taxes usually go hand in hand with high crime? Does that make sense?

I have no idea.

Pay more in taxes. Would you expect the crime to be lower?

So it's funny that you say that, though, because the place that I think about with the highest crime has a ton of high taxes.

Yeah.

Where I used to live.

Illinois.

Yes.

Yeah. Same thing, right? Yeah.

And also there's a. There's a commonality, I think, with gun restrictions. Super.

People have guns. There's lower crime.

Yes. So if there's a state that was. They want.

They don't want you to have a gun here.

That's very true.

They want you to not have a gun. Yeah.

So if there was a state that really, like, embraced gun ownership, I might consider going there.

There's a few. Wyoming.

Wyoming. I think it's gorgeous.

Just walk around with a gun. Can't you walk around with a gun in Arizona?

I don't know about Arizona, but definitely Texas. Oklahoma.

Where would be your spot you would want to move if you could pick any place. And we were going to take the office and we were going to pick it up.

Texas.

What part of Texas?

Dallas.

Because you have cowboy boots.

I Do.

Is that why, though?

No, that just helps because, you know.

People in Wyoming wear cowboy boots.

Yeah. So I think the only thing about, as I think about our company and people are going to be coming in for leadership seminars and Dallas is such easy travel. Plus we get all the business benefits at the same time.

Yeah.

But Wyoming, in terms of like, do I want to walk outside of my house and have land and a couple of horses and see a bear?

Shoot a bear attacked by a bear?

Yeah.

Okay, let's unpack our subject today, which is why.

Does profit trump gross profit or why is gross profit not as important?

We have a situation in our industry where most of the people running the businesses do not have a lot of experience with fixed offs. And so what they say is, get me gross profit, give me gross profit. Right. But what they mean is, get me profit. But they're not the same. They're not the same thing.

Agreed.

And what happens to us, because we're a company designed to go in and focus on profit, a lot of times the accounting firms will recommend us to somebody, and what will happen is they say, hey, two years out, I want to sell my dealership. I need to make more profit. Or they will say, hey, you're leaving a lot of money on the table. You should look into these guys and they will make more profit. And then they'll realize the value of their asset is completely different than what they thought before. Right, Exactly. And so if you are, and I want to explain this to service managers in the sense that I feel like they get blindsided. The reason why there's so much turnover at the service manager position, which in some manufacturers is close to 50%, some we've seen higher than 50%, but I would say the average is 50%.

Why?

Service managers, well intended, come in one day and they get fired and they don't understand why. And it's a trick bag because they've been told, get more gross profit. Get more gross profit.

Which they do.

Which they do. But they do it at the expense of profit.

Correct.

And so the way that it works in business, and I think a lot of people don't understand this, is if you have a business that is making, let's say it's making $1 million a year in profit. Right. That business falls into different categories. So if you have a pharmaceutical business, it might be worth 15 times earnings. If you have a Subway sandwich shop, that might be three times earnings. Right. Oftentimes the.

What do you call those? Like rest homes for elderly care.

Oh, yeah.

Those will Sell between three and five times earnings.

For a while now, the automotive industry, especially dealerships, truck or car, will sell somewhere between 5 and 10 times earnings, but it usually falls closer to 8 to 10 times earnings. Right. So what that means is it's the, it's earnings times a multiple in every industry has a different multiple. And then, you know, if a lithium autonation comes in, they're willing to pay more than maybe your dealer across town that wants to expand because it's public money and they're, they're more about market share than actually making money on the buy. They will overpay for the long term game.

Right. Which eliminates their competition and makes it so they buy more stores.

So if you own a dealership and your dealership is making a million dollars a year and you could sell that for eight times earnings, what is your dealership worth?

Eight million.

Eight million plus assets. So if you own the land, the equipment, the inventory, parts inventory, that sort of stuff. But basically.

You would contend that if you own the parts inventory, you had to put money out. So that's not a real plus plus. Fair enough. Because it's your liabilities versus your assets, right? So you had to buy those parts. If you did it with credit, maybe. But most manufacturers don't allow you to buy the parts with credit. You have to have working capital, right? So your, your business is worth hypothetically $8 million because it's eight times earnings.

Okay?

Correct.

Got it.

Now, if we come into a dealership and they're making a million dollars a year on the front end, but service.

Is making nothing or losing in some.

Cases, or losing in some cases. But let's just say they're breaking even for the sake of this math. So we come in and they start making.

We'Ll just say in a year's time, they make a million dollars in parts and service that they weren't making before. Now the, now the company is making $2 million a year, what is that worth?

16 million.

So when a service manager is focusing on gross profit, when it is calculated how much you pay for a dealership, does the, does gross profit ever come up in the conversation?

Never.

If a, if a dealer goes to borrow money to buy land, apartment buildings, or another dealership, does gross profit come into the equation ever?

Never.

No. What banks, what buyers? Everybody looks at investors. They look at what is the cash to the bottom line, what is the profit? Basically the cash flow. What is this thing making in profit? So now for anybody out there who owns a business, if you go from your asset being worth 8 million to 16 million, that is a pretty substantial.

Increase in net worth, is it not?

It's a good day.

Yeah, it's a very, very good day. And so.

You have to understand as a manager that you're being graded on the owner of that asset's net worth. It's way deeper than just profit. It's actually their power when they go sit at the table to borrow money, to expand whatever it is they're they're trying to do. Now oftentimes back to the equation of some of these accounting firms will bring us in because what happens is they have a client that hires us. They see that that client's now making way more money and so they call us and they're like, hey, what did you guys do? Hey, I got some other clients for you. Or hey, I have a client that wants to get out. But they, you know, they want to increase the value. And so if we come in and add a million, I've thought about this many times because we get used to do this. I wish there was a way that we were getting a piece of that.

Like we were vesting a piece of the improvement.

Yeah, because if they're gonna, you know, they're gonna pay us not that much to do it and they're going to sell the thing for 8 million more or whatever it is. I would love to have an aspect of our company that we went in and did that on commission, almost, you know, almost setting it up.

Now.

Another thing that happens is people will come to us and they're doing okay, but they want to do better. And then somebody comes to the table and says, hey, I want to buy your dealership. And in their mind they have their old numbers in their head and they're like, ah, 8 million isn't worth well, no, we'll give you 20 million. And now all of a sudden they're like, oh, I actually have something here of tremendous value. And so in, in good times and in bad times, the smartest business owners are trying to maximize their profit and fixed stops because it's the, no matter what happens to the new and used car market, it is their leverage in the marketplace and the value of their asset in the easiest way to maintain that is, is through fixed ops, profitability. Right.

It's good.

Why do you think most managers don't understand that and they see it just from a gross profit point of view or a different point of view?

I think because they're in the, they're in what we call that closed loop system. And They're. They're just doing what they told.

Right?

They're told.

Right.

So if somebody. If my GM tells me, go out, we got to make 500,000 in gross this month. And that's a number that I'm focusing on. I'm never even thinking about the end number because I'm just trying to get through the 30 days. I'm not thinking about the owner in terms of a business and everything that we do as an asset. I'm just thinking about, like, how do I keep my job? So I think that's probably the number one thing. And I think that maybe some service managers are afraid to ask a little bit because they think that they're not told information because the dealer's hiding stuff. But I would say that's more the exception than the rule.

I mean, we look at financials all the time, and they're pretty.

Well, a lot of times when people come to our boot camp, it's the first time they've ever been given the financial.

Yeah. And they guess what. They figure it out pretty quickly, don't they?

Yeah. We've always said, like, giving them the information is the start because they're well intended. Like, how many times does somebody say, oh, I'm gonna bring you guys in as soon as I get rid of my manager? And I'm like, well, give us your manager. Don't get rid of them.

Give him a shot first. Please. Please give him a shot.

He. You're telling him to chase. Gross. You know, he doesn't see the financial. He's basically driving without a steering wheel.

Yeah, it's gonna use a. Riding a bike with a blindfold on.

Yeah, same thing. Like you're. Yeah. So it's interesting. So I. I think that this is important for everybody to understand in the sense that business is about making a profit. It's not about just sales. If you're just selling, but you're giving it all away, then it's all for naught. And now there's a lot of things that go into that equation that we help with or teach. One is just the availability to production. So hiring techs, like we were talking about technician tree, you're not going to.

Sell if you don't have the capacity in the shop to sell. Right. If you own a flower shop and you don't have any flowers to sell, you can't increase your sales. You have to have the product. And what we're selling is time. And technicians produce that time. So we need technicians. So that's the first thing in Fixing profitability.

It's the biggest lever by far, I think is production.

And it's hard for the advisors to perform if they can't get it done right. Then the next thing is the pricing and then what we're selling and then the retention of the customers, the systems, the flow, all of that play into it. But it's a complicated puzzle piece and I would say most of the managers out there are chasing gross profit and they're doing things the same way we've always done them. When the industry has changed, the customers have changed, there's new ways to do things that are more efficient, but we're doing them the slow old way.

So what advice would you give that service manager that's never seen a financial before and is told to chase gross? How do you work out of that hole?

Get in it. Get in our coaching group. Like I don't. It's not a, it's not a one size fits all. Yeah, I mean it's, you know, the thing we're doing is we're teaching them how to fish. We're not giving them a fish.

That's right.

And everybody's market and brand is different and their situation and their skill set too at the end of the day. So just understanding how much leverage there is for somebody who owns a business. So the dealer or the group, whatever it is in the fixed ops, profitability and how much it means at the table when you go to expand, sell, get a loan, whatever it is, build a new building. The banks are looking at that.

And then they're looking at you. And they never tell you that, but that's really what's happening behind the scenes. Good stuff, great stuff. So think about that. A little food for thought.

Just a reminder, we do have the technician tree live. We're doing the. We're going to coach you how to get technicians. If you're not in there, email infohriscollinsinc.com and we'll get you a link to that. There's two ways to get in. One is just virtually and the other is to have a personal coach. And we'll go through those options with you. But we'd love to have you in there and be one of the ones that's actually.

Creating the outcome, not a victim to what else.

You know they will win every time.

Yeah. You don't want to be the one in the market that has your competition in the technician tree because they're going to, they're going to get your text probably. So be the one on the, on the inside. Thanks for tuning in. We appreciate it. We'll see you next time on Service Drive Revolution. Thanks so much for watching this episode of Service Drive Revolution. We're uploading new stuff every day, so make sure you subscribe and click the bell icon so you don't miss out. If you have a question you'd like us to answer on the show, call 8333 asksDr and we'll answer your question on the show. That's 8333 ask.