Warranty Parts: “The Biggest No-Brainer in the Automotive Industry!”

Frank O’Brien Principal, CPA, CIA, CFE

1 August 2018

Over the past decade, state auto associations have worked diligently to revamp their state franchise laws to include a statute that supports retail reimbursement for warranty parts. States like Maine, Florida, and New Jersey laid the groundwork in the mid to late 2000’s, and now more than 40 states have laws that require the manufacturer to reimburse the dealer the same rates it charges its retail customer.  The majority of these favorable laws include a provision that requires the dealer to submit 100 sequential qualifying customer pay repair orders to the manufacturer to substantiate its retail rate. It should be noted that the term 100 qualifying customer pay repair orders may be somewhat misleading as it requires the dealer to include all non-qualifying repair orders. This results in the accumulation of substantially more than 100 total repair orders due to maintenance, internals, and warranty. Based on our experience, it generally takes between 750 and 2,000 actual repair orders to accumulate 100 “qualifying” repair orders. Most state laws also allow the dealer to submit for a warranty labor rate increase using a similar process due to the fact that the manufacturer’s standardized process may limit the annual increase.

Impact on the Bottom Line

The additional gross profit generated for each dealership will vary based upon the warranty parts volume and mark up percentage, but it typically yields approximately $8,000 to $12,000 a month of additional gross profit.  The average dealer’s retail rate typically ranges from 70{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} to 90{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} over cost while most manufacturers only pay 40{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} over cost. If a dealer is approved at an 80{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} mark up over cost, then that dealer would in effect double its warranty gross profit.

Some manufacturers pay list pricing or MSRP, which most dealers perceive to be a 67{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} mark up. However, MSRP is a price matrix determined by the manufacturers. On average, MSRP usually pays between 50{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} and 60{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} mark up over cost and for some manufacturers, such as Subaru, it can be even lower. If your dealership employs a reasonably aggressive price matrix, it is usually well worth submitting for retail rates. Regardless of your situation, it is critical to calculate the impact on the bottom-line to determine the revenue opportunity.

Maximizing the Impact

This process can be very time-consuming. The sooner a dealer is approved, the sooner it can begin reaping the benefits of the higher rate. Due to the labor-intensive nature of this project, it typically takes dealership personnel six to nine months to submit and receive approval from the manufacturer. The manufacturer must respond to the dealer within thirty days of submission.  However, the manufacturer has the ability to reject the submission if material errors exist. This has the potential to prolong the process even more. To avoid this delay, it is highly recommended that an experienced accounting firm or other professional be hired.

To help further maximize a submission’s impact, we utilize advanced analytical software to pinpoint the range of repair orders that will yield the highest rate. This step alone could add thousands to your gross profit annually versus preparing the submission internally. This approach also helps us to identify areas of weakness in the matrix
to assist the dealership to improve its rate in the parts department.

Our Experience

We have helped over 500 hundred dealers in approximately 30 states to obtain retail rate reimbursement for warranty parts and labor. This includes virtually all manufacturers. Because of our extensive experience and
knowledge on this issue, we have a strong understanding of the process and the repairs that each automotive manufacturer will accept as qualifying.

This is truly a no-brainer. In fact, one Honda dealer called it “the biggest no-brainer in the history of the automotive industry.”  Dealers should submit for a rate increase as soon as possible in order to start capitalizing on the additional revenue.

Want new articles before they get published? Subscribe to our Dealer Details Newsletter.

3 + 2 =