Dealers (Maybe) Using Service Department Revenue to Offset Sales Downturn

For a variety of reasons (the post-recession binge finally cooling off is the biggest), new-car sales are down in the United States. One would expect that would hurt the revenue of new-car dealerships. Not so much, it turns out, as dealers have found other ways to generate revenue. Or at least that’s what a Bloomberg report says. But there are caveats that suggest the Bloomberg piece may be generalizing. In other words, maybe some shops are seeing more revenue from more work, but other shops aren’t, even as they get busier, due to other factors.

Traditionally, new-car dealerships have always generated revenue and profit from their service and parts departments – and those departments outshine sales at many stores. So it’s not surprising to see dealers turning to a reliable profit center when sales slump.

There is one extenuating factor, however. Despite the flurry of post-recession sales over the past seven years, the American vehicle fleet remains old.

“The vehicle fleet is still getting older every single year, in spite of our record sales,” Steve Szakaly, chief economist for the National Automobile Dealers Association, told Bloomberg. “So you’ve got a significantly larger population of vehicles that require service and are coming in for service pretty regularly.”

It also stands to reason that all those new cars sold since the economic recovery began need both routine maintenance work and repairs – and some are out of new-car warranty by now. All those sales almost certainly boosted service volume.

Bloomberg notes that after the Great Recession, new-car stores improved their service business to steal share from independent shops. The article doesn’t really back up that claim – dealers already did a nice service business before the Recession. Regardless, it does make sense that an aging vehicle fleet would provide work for the service facilities at new-car dealerships, along with independent shops. Of course, auto-parts stores are also benefitting from this.

Mark Bilek, senior director of communications and technology at the Chicago Automobile Trade Association, stated that even if there are more cars on the road that may need repairs, new-car warranties last longer now and manufacturers are working to cut flat-rate hours assigned to jobs, especially on warranty work, which has l ong paid less to techs and their shops than customer-pay work. The repair process for recalls has also changed. So those factors may prevent some shops from generating more revenue, even as they become busier.

Perhaps dealers are seeing more revenue from more service work, as Bloomberg says. Perhaps not. Either way, the landscape is different than it was less than a decade ago.

“It really goes to the fundamentals of how the industry has changed since the last recession,” Szakaly told Bloomberg. “It’s becoming more diversified.”