Why Rural Acquisitions Makes Sense 2 – GP Improvement
All business people should know the definition of gross profit, but just in case, here is how Google defines it: “gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company’s income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales).”
Simple. Gross profit is the same for all businesses, no matter what you sell or where your business is located. But improving your profitability can be very different, depending on where your business is located.
Consider this, it is a law of business that there are only 3 ways any business, including a car dealership, can increase their profitability. They are to 1) sell more products or services, 2) make more from each product or service you sell by reducing your COGS or 3) spend less, reduce your expanses.
So, when you are trying to grow your profitability by reducing your COGS, dealers in a major market are at a disadvantage over dealers in more rural areas. Rurally located Dealers have the same issues, but on a smaller scale, much smaller. For example, closing deals in a rural business is not as cutthroat as a major market, so you maintain more of the gross profit. Lower overhead costs come from having typically smaller stores. Internal processes to satisfy your customers are more of a personal touch and hands on from everyone in the store, so your internal policy account will be much lower. There are many other examples, but I hope you get the point, that well-run businesses in rural markets can be highly profitable and can make an excellent investment.
Living and working in a rural market is a lifestyle choice, having lived in Newfoundland for many years, I get that, but due to the COVID crisis, rural areas are seeing a significant up-tick in people moving out of cities and re-locating in less populated areas. So, with populations rising and with significant profitability opportunities, why wouldn’t a growth hungry dealer or dealer group consider this option?
Consider this, and I am using real numbers, you could invest in a major metro market, the land, the building and operations and spend $15 to $20 million for a single point small store. In Atlantic Canada, a good size profitable store, all in, could cost as little as $1.5 million. Would you be more profitable in the small major metro store or in the rural store?
Finally, if you are an Independent used car dealer or an experienced General Manager, the chances of any OEM allowing you to purchase your first store (no matter how much money you have) in a major metro market is minuscule. Some OEM’s, even to experienced current franchised dealer owners, won’t let you purchase your first store for them in a major metro market. In both cases, rural markets are where you must start. Low cost of entry, lower risk, but the potential for very high rewards.
If you are interested in discussing the rural acquisition opportunities DSMA are currently representing, please give me a call or text on 709.697.4324 or email me at Kevin.Leslie@dsma.com.