Yahoo Autos The Life of a New-Car Dealer
From the May 2017 issue
The headquarters of the 100-year-old National Automobile Dealers Association, with its 16,500 member dealerships representing 1.1 million employees, perches on a hill in Tysons, Virginia, on the outskirts of Washington, D.C. It’s an otherwise nondescript rectangle of coffee-colored glass except for three giant concrete silos arrayed along the southwest face that look like Kansas grain elevators. That odd architectural choice, along with the commanding location, perhaps makes it a navigation beacon for Marine One, the president’s helicopter. When I worked there years ago, it rattled the panes almost daily as it clattered over.
I both met my future wife and became a magazine writer the day I walked into 8400 Westpark Drive on a muggy July Monday in 1994, the newly minted associate editor for Automotive Executive. The association’s now deceased house magazine had such a quaint title, evoking images of dashing young chaps in smart double-breasted flannel steering happy couples into new Fairlanes and Chieftains. By the time I arrived at NADA, many of those young fellows were multimillionaire owners of large dealership groups with hundreds of employees, hundreds of millions in sales, and acres of prime commercial real estate. I knew nothing about them beyond the stereotypes of shakedown artists in polyester, but in my three years at NADA, I learned much.
I learned that like all stereotypes, there were kernels of truth behind this one; such as the time a photographer at one of the annual NADA conventions I covered told me he had a shot of members throwing dice in a hotel stairway. But I also learned that auto retail is an intensely complex business whose successful practitioners are virtuosos of entrepreneurship. You see, while most small-business owners have only one type of trade to think about, a typical franchise car dealership has at least five separate businesses under one roof, including new-car sales, used-car sales, parts, service, and finance, each with its own distinct reams of federal and state regulations and its own unique way of losing lots of money quickly through ineptitude by the department manager. If the dealer has a body shop as well, that’s yet another enterprise and one that throws you into the embrace of those friendly, charitable guys in the insurance industry. And in the vast majority of places that don’t have blue laws restricting weekend trade, it all runs dawn to dark, six or seven days a week.
I learned that auto retail is an unnervingly cash-intensive business. While covering the massive daily overhead of the facility, the equipment, and the staff, dealers lay out millions of dollars for new-car inventory from the manufacturers and typically finance it through the automaker’s captive lender, paying an interest rate or “floorplan” on each vehicle until it sells, while also stocking the used-car lot with trade-ins and auction buys. Dealers know that if your lot isn’t overflowing with vehicles, you don’t sell as many because buyers don’t like to wait. Yeah, car-company execs sometimes talk a big game about factory stores à la Tesla, but they love the fact that the dealers, not the factory, carry the huge costs of the unsold inventory.
And while they are hourly paying out, dealers are often waiting to be paid on sales contracts by the lenders who finance the deals and who can run on their own leisurely schedules. A dealer once told me that so much cash is in transit every month, flowing in and out, that the difference between solvency and bankruptcy can be but a few days at the end of the month.
I learned that because the margins on new cars are so slim, today averaging less than 4 percent, the majority of dealers make most of their money on used cars and what’s called the “back end,” or financing, parts, and service. I watched dealers paying for the mistakes of others as car companies leaned on them to swallow truckloads of sales losers by threatening to shortchange them of supplies of the popular models.
Every so often, a new factory exec showed up keen to make a mark by slashing costs. They’d unleash spot audits meant to squeeze the dealers on finance or warranty work, resulting in “chargebacks,” or demands that the dealer reimburse the automaker for deals or warranty jobs rejected after the fact. The automakers would also try to chisel dealers by trimming warranty reimbursement, saying that a CV-joint job once billable for four hours’ labor was now only billable for three. And when the big recalls happen but replacement parts are scarce, guess who gets to face the mob of angry owners?
And along you come, intent on buying this month’s new cute-ute and armed with a stack of internet printouts. You’ve got your financing already lined up, you want the sun and moon for your hooptie trade-in, you want the invoice price, you’re willing to walk away over $50 to a competitor, and you wonder why the dashing automotive executive behind the desk looks exhausted. Well, working at NADA, I learned why.
