I had a GREAT caller on last Saturday’s Car Pro Show who wondered how Dealers make money. My article the week before about the lack of margins in the new cars prompted the call. He recounted how dealers talk about losing money on new cars all the time. He also knew a new car dealer who lived in a really nice home. It dawned on me that a lot of people might have this same perception.
The truth is, rarely does a dealership make money on its new cars. As I pointed out last week, the difference between a dealer’s net cost and MSRP is getting thinner and thinner. All this at a time when their cost is going up. It costs more to advertise, to hire and train personnel, to pay their insurance and health care for employees. It even costs more to turn the lights on every day.
You have to remember a couple of other things too. Only with cars can you go on the Internet and find out what the dealer paid for its products. No other business operates this way. In addition, it is the automakers who not only set the MSRP (window sticker) of the new vehicles, they also set the price the dealers pay. It’s been a definite trend over the past decade for the carmakers to raise the dealers cost more than they raise the MSRP every year. This is why the spread between the two continues to narrow.
Inside a dealership, there are multiple departments which operate as separate businesses under one roof. There is the new car department, and as noted above, most dealers lose money in this department. However, there are also used cars, finance, service, parts, and in most cases a body shop. In almost every dealership, all these departments are profitable.
All the additional departments I just mentioned are fed by the sale of new cars. Without new vehicles, there are no trade-ins, there are no cars to be repaired, and there is no money to be made on the financing of vehicles. So the sales of everything except new cars is the reason that most dealerships make a profit.
Logically, the more new cars you sell, the more the other departments are fueled, especially finance, used cars, and service. Although the dealers would like all the parts of their dealerships to make money, the result of all of this change has been good for the consumers.
When I bought my first dealership in 1986, things were much different. Profits per new car sold were actually quite high and that was how you made your money. Used cars were something you had to deal in to be competitive, but it was not your main focus. In service, you made your money from the warranty repairs the automakers paid you to perform. As cars got better and better, that income stream dried up. This too was good for consumers as dealers improved their services and had to get competitive on service prices, starting with oil changes and tires.
Bottom line here is you may know car dealership owners who live in nice houses, and they all drive nice cars. They make good money and most are extremely charitable with their giving. However, their money wasn’t made on the sale of new cars, trucks, vans, or SUVs.