By Troy Ottmer | LearningWithoutScars.com
What is Absorption?
In the modern dealership landscape, absorption remains a critical measure of success. Defined as the percentage of a dealership’s total operating expenses covered by the gross profits from parts and service, it underscores the importance of back-end operations. Whether managing an automotive, truck, agricultural, or construction equipment dealership, a strong absorption rate is essential for weathering economic fluctuations.
This metric reflects the back-end’s ability to sustain the dealership’s overall financial health, independent of variable income from new or used vehicle sales. High absorption rates ensure stability and profitability, especially during periods of economic uncertainty or reduced sales activity.
Why Absorption Still Matters
The economic and technological changes of the past decade have only amplified the importance of absorption. Challenges such as supply chain disruptions, inflationary pressures, and shifting consumer behaviors demand that dealerships maximize profitability from service and parts operations.
The rise of electric vehicles (EVs) or Alternative Fuel Vehicles, Connected Technologies, and AI-driven Diagnostics has reshaped the service landscape. While EVs require less frequent servicing than internal combustion engine (ICE) vehicles, the complexity of repairs and the specialized tooling required have made dealership service departments indispensable. These industry changes underscore the need for a sharper focus on absorption.
A Historical Perspective
Historically, dealerships relied on gross profits from new vehicle sales as their primary revenue source. Higher margins and steady demand allowed parts and service operations to function to some degree as secondary gross profit generating departments.
By the 2000s, however, the industry began shifting: