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Dealership Profit Margins
During spring cleaning at our dealership, my brother found his 1981 new car sales commission book. Flipping through it, he noticed some familiar customers? names ? then something peculiar jumped out at him.
In 1981, when vehicles typically sold for $5,000 ? $9,000, our dealership was making approximately the same profit per car as it makes today. Twenty-four years later, the average price of a new car has more than tripled ($25,000-plus), and yet, the amount of profit that dealerships and sales reps make on cars sold has remained virtually unchanged.
How do other industries fare when it comes to profit margins? According to Statistics Canada in 2002, the gross profit margin of all retailers was 26.6%. Shoe, clothing, accessories and jewellery stores, combined, enjoyed the highest gross margins among independent retailers at 44.3%. Retail chain stores and independent retailers had gross margins of 32.9% and 22.2%, respectively.
So, how much is the average dealer profit margin? It varies slightly from manufacturer to manufacturer. The full profit margin, if consumers paid the Manufacturer Suggested Retail Prices (MSRP), is approximately 10-12%. But, dealerships rarely realize that profit margin on new vehicle sales.
We constantly hear that dealerships are ripping off purchasers of new vehicles. Automobile brokers and consumer advocacy groups? sole reason to exist is to convince you to buy their services, based on the premise that consumers need protection from dealerships that are trying to squeeze unreasonable profits out of new car purchasers. New cars represent a sizable outlay for most people, but dealerships, even if they receive full MSRP, retain only a small fraction of the overall selling price.
Customers may claim that a 7% markup on a $20,000 dealer cost car is better than a 44.3% markup on a $300 coat. But, the high cost of maintaining new vehicle inventory and other dealership operational costs easily defeat that rationale. For instance, the monthly interest cost to inventory just one $20,000 car is approximately $100 per month (depending on the interest rate). What if that car is in stock for many months? What about the cost of carrying 150 or more cars in stock so that you, the customer, can view a large selection of vehicles before you purchase? Admittedly, some manufacturers provide their dealerships various forms of wholesale interest assistance or holdbacks of 1-2% of invoice cost.
Most new-car departments actually operate at a loss. The bulk of dealerships? profits come from the Parts and Service departments, which is why the best dealerships realize that they need to be incredibly focused on delivering top-notch service.
Successful new-car dealerships annually earn an overall net operating profit (before taxes) of between just 1% and 3% of total sales; every year, increasing competition and the rising costs of doing business make it more difficult to earn that profit.
To make matters worse, as dealerships struggle to survive in an increasingly competitive business environment, auto manufacturers continue to lower our available profit margins on new vehicles.
With so many consumers comparing cars online, auto manufacturers are reluctant to raise MSRPs on their vehicles. Manufacturers feel the need to post their MSRPs as low as possible to avoid having Internet shoppers ?click on by? to their competitors.
When auto manufacturers want to increase their profits, one of the methods they use is to raise the dealers? invoice prices of cars to their dealerships, while often leaving the MSRPs of vehicles alone, thereby shrinking profit margins for the dealerships. We object to these constant increases, but our manufacturers don?t listen.
Manufacturers respond to our concerns by offering an unconvincing argument that these margin reductions are good for consumers. They say that customers claim that they don?t really want to negotiate anyway. With smaller margins between the MSRPs and the ?dealer?s invoice cost prices?, manufacturers argue that there is less opportunity for consumers and dealerships to negotiate, which ultimately pleases customers by saving time and aggravation.
If consumers want to complain about cars costing too much money or that dealer discounts are too small, please don?t blame the dealerships. We?re caught in the middle, with manufacturers squeezing dealership margins, while consumers continue to make offers that are frequently below our invoice costs.
Ken Shaw Jr. is President of the Toronto Automobile Dealers Association and is a new-car dealer in Toronto. E-mail comments to president@tada.ca
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