Dealer Check-up Reveals Widespread Profit Loss

Car companies aren't dumb. If owning the sales channel made sense for them, they'd have done it. Imagine owning a new car dealership and managing its inventory today. Planning out your capital expenditures etc. As with many things the B&B has no clue.

@sportyaccordy Car companies can be dumb - examples available upon request. Dealership profit margins are higher than manufacturer profit margins. If manufacturers owned the sales channel they could increase profits or lower prices (each 1% reduction in price will generally yield around 3% higher sales). Why did Ford try running some of its own dealerships for 3 years? And what was the main obstacle they encountered? sportyaccordy - Regarding inventory, what is "floor plan"? (Because I have no clue...)

@ToolGuy Are the margins really that much better? From what I'm seeing dealership margins are even thinner than many of the manufacturers'. Dealerships face allocation games & forced investments from the manufacturer's end and increasingly informed customers on the sales end. There's nowhere for them to hide.

@ToolGuy "Dealership profit margins are higher than manufacturer profit margins." Not typically they aren't.

@danio3834 Even if it was, it's difficult to manage for a variety of reasons, namely inventory. The automaker doesn't want to hold the bag on billions in finished goods. The way things work with the franchise model is that as soon as a vehicle ships from the plant, the dealer's account is billed and the automaker is paid. It can sit on a dealer's lot for 600 days while they accrue floor plan interest (line of credit) and it's immaterial to the automaker aside from the ability for them to build another to take its place. Though they will likely do so anyway.

@danio3834 Yeah I would think even with our current stacked deck system the manufacturers goal would be to maximize their own profit. Danio's point gets to why its nigh impossible for the layman to find out the true cost to manufacture the car or what the dealer actually pays.

@danio3834 If you manage to get a copy of a dealer invoice for the car, there will be a line on there that shows you what the dealer paid. What's hard to know is what, once the paper is hung, what the car/deal *cost* the dealer. There are usually manufacturer incentives that the dealer will have to claim back, floor plan credits, floor plan interest, volume incentives that the dealer can qualify for, advertising funds etc. etc. It's hard for even dealers to keep track.

This is an excellent thread. Agreed on all points about why manufacturers generally don't want to own their sales channel, however I think OEMs are entitled to making that choice for themselves. Why do we have state by state franchise laws in place that are nigh on impossible to break at a national level? The answer is NADA. While they are an extremely informed organization and very good at protecting their member's interests, the fundamental issue with them is they prohibit competition with their member dealers by the manufacturers themselves. Perhaps an OEM does want to own their sales channel - IE Tesla. There is empirical evidence of success in other countries with a direct to consumer model, GM in particular. Link: https://www.cnet.com/news/will-gms-internet-direct-sales-model-catch-on/ Some reasons OEM's might LIKE a D2C model include greater ability to build-to-order, expedited logistics, better customer service, and immense profits from owning the service and parts channels. There are plenty of downsides already mentioned, but seems to me like the manufacturer should at least have the choice. It may be impossible for an existing automaker to own their sales channel in the US due to NADA's lobbying, but those same laws also make it impossible for any NEW auto companies to start their own sales channel in the US, and that is flat out wrong. A final point - the European sales and distribution model allows for both franchises and OEM company owned stores. Typically the company owned stores cannot be within X distance of any of their franchises (fair enough), and they don't carry huge inventories. They can easily stock a few models for test drives, then build to order from the factory or ship-to-order from large regional distribution facilities that are capable of installing accessory-type personalization options (spoilers, side steps, diff wheels/tires, etc).

@trackratmk1 Fact checking myself here, I found GM actually discontinued their direct sales model in Brazil of their own volition. Interesting update on the subject. https://www.washingtonpost.com/news/fact-checker/wp/2015/02/24/key-report-in-battle-over-car-dealer-sales-is-bizarrely-outdated/?noredirect=on&utm_term=.745476f720f4 It still drives me nuts that automakers can't make their own decisions due to protectionist laws, even if most of the evidence points to the current system making the most sense.

@danio3834 danio, Look at page 3 of the subject NADA report, then scan down to "Net profit before tax" and then "As % of total gross" (the gross figure is the relevant one which is why the corresponding gross figure is referenced in the Automotive News summary). The *average* light vehicle dealership earned a margin of 19.7% in 2018. Mainstream OEM's don't get anywhere close to that figure.

@danio3834 Gross and net are very different things. Dealers don't take as much net margin to the bank.

@ToolGuy Floor plan is the financing for the dealer's stock. Most dealers do not own the vehicles on the lot. Occasionally the mfg will give them a credit for sitting on dogs for too long.

@Scoutdude danio, Net is all there is on page 3 - did you look at the report? The choices are Net as a % of total sales, or Net as a % of total gross. But we don't have to work in percentages. If dealerships on average are profitable at *all* (i.e., positive "Net profit before tax"), the manufacturers could increase their own earnings by consolidating those operations. (The further reality is there are significant potential savings from consolidating - e.g., I don't have to pay my people to work with your people which you no longer have to pay to work with my people.) Scoutdude, Thanks for replying but I was being sarcastic. sportaccordy said I didn't have a clue and that managing inventory would be a nightmare for the OEM's. The issue with inventory isn't primarily inventory, it's the carrying cost for that inventory. The majority of that cost for most dealers is covered through "floor plan" by the captive finance arm, i.e., the OEM themselves. Wash out all of the dealer/captive/OEM stuff, and covering the inventory cost for an OEM-owned store would be the same difference.

@trackratmk1 Good find! And here is more on that experiment, from Jupiter Media Metrix, in 2001: "So far, the most successful online initiative by an automotive manufacturer has been GM’s Celta. According to GM, more than half of the 14,500 Celtas sold in the six months after the model launched in September 2000, were sold over the Internet. During the next six months, GM expects 80 percent of Celta sales to take place online. However, it is crucial to read the small print under this impressive statistic: 90 percent of those online transactions were actually carried out in kiosks at GM dealerships. Consumers visiting a GM dealer can test drive a Celta and then configure and order one directly from GM with significant tax savings, to be delivered either to them or to the dealership. Although the dealer receives a slightly lower fixed commission for the online sale, it avoids the burden of having to anticipate demand and keep a deep supply of Celtas on the lot. This mixed-channel strategy accomplishes two key objectives: First, it acknowledges the importance of touch and feel in car buying—most Brazilians are not ready to purchase even a simple model such as the Celta without visiting a dealer. And, more important, rather than alienating dealerships—on whom GM depends for the vast majority of its sales—it creates incentives (e.g., stocking cars) for them to become involved in online sales." Always gotta read the fine print..... (grin)

@trackratmk1 One minor point: the regulations/laws on OEM direct sales to consumers are set at the state level, not at the national level. So we get examples like Texas blocking Tesla and Ohio allowing them. There are state-level dealer associations who lobby at the state level... NADA generally doesn't act at the state level. Thus for example, California (among other states) DOES seem to allow incumbent/existing OEMs to own their own stores, as long as they are not within the assigned market area of an existing dealer, thus competing with it. Since these market areas were set up long before the internet was around, they are determined by physical miles. So, yes, Ford or GM could find a remote spot somewhere in California (for example) and own their own store there, flinging cars across the state via internet orders. I think it is a ten-mile radius. Check California Code, Vehicle Code - VEH § 11713.3, sub-part (o). This code section also seems to indicate that if an incumbent OEM started a NEW vehicle brand (um, how about... let's see... call it Jupiter?) it could compete anywhere. I will leave it to you to speculate why an incumbent OEM would not take advantage of this ability granted in law. Please note I am NOT a licensed attorney, so am not speaking with any authority -- but a licensed attorney DID point this out to me.

@ToolGuy Yes I read and understood the report and dealer financials. Dealer net profit as a % of sales is listed as 2.2% where automakers are 3-4x that amount. Your assertion that it would be a benefit to automakers to shell out billions in inventory and overhead for 2.2% when they could use that same money to make 8 in their current vested business is a bit silly.

We haven't seen the full effect of "refund season" yet, but early signs are a big slice of NOT GOOD for dealers. I owe thousands for the first time in a decade, and I'm not alone.