New car dealers not as profitable as they once were

Despite record new car sales and higher average transaction prices, new car dealers aren't the cash cows they once were.

The National Automobile Dealers Association (NADA) released its midyear report last week, and it’s not great news for dealers as intense competition eats into their earnings.

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Through the first half of 2017, the average dealership is making just over half the profit it made a year ago, at 3.4 percent, down from 6.2 percent in 2016 and 8.9 percent in 2015.

The average price of a new vehicle in 2017 is up $114 from last year to $34,335, but after all the costs of running a business are accounted for, including paying for advertising, financing the building itself, paying employees, and the like, dealerships are losing nearly $400 on every car sold overall.

Used cars, meanwhile, remain profitable, but barely. The average profit on a retail used vehicle for the same period was just $116, down from $228 last year.

Interestingly, expenses for dealerships have held relatively constant, with only slight increases in administrative, rent, and advertising expenses and a roughly 50 percent decrease in floorplan interest over the first half of 2017.

A deeper look at the numbers reveals a shift in ownership patterns as a potential root cause of the drop in per-unit profitability, with more dealerships but less dealership owners overall. Translation: the mom and pop dealership is taking a back seat to large chain dealers that can leverage sheer numbers to weather lower profit per car while still turning an acceptable overall profit.

The secret? Service centers now account for 48.5 percent of total dealership income, continuing a steady upward trend, and warranty service now accounts for nearly a fifth of all service income.

At that point, it’s a simple numbers game: sell more cars even at break-even prices, and make more money on the back end when owners bring them in for service.