By on April 8, 2019

U.S. light-vehicle dealers reported an operating loss for the first time since the National Automobile Dealers Association (NADA) began collecting data in 2009. While everyone continues reporting pretax net profits, concerns are beginning to swell around their dependency on factory incentives, which are not included in operating tabulations.

NADA’s analysis of 2019’s first-quarter auto sales shows that incentive spending is down compared to the same period a year ago. The group expects above-average discipline from automakers in terms of incentive spending throughout the year. According to J.D. Power, average incentive spending per unit was down $119 to $3,821 through March 2019 — with the brunt of that going toward trucks. However, if sales remain low, spending may creep back up to help clear out languishing inventories. 

NADA’s own report (which can be found here) states that operating results shifted to an average loss of $13,338 in 2018, compared with a gain of $91,774 in 2017. Meanwhile, cumulative pretax profit slipped by 2.6 percent to $1.36 million.

Automotive News, which examined the issue in a recent article, noted that the gap between net and operating results has grown significantly — indicating an increasing reliance on incentives. Back in 2015, average net profits were estimated to be 3.1 times greater than operating profit. In 2016, the difference had grown to 5.3 times. By 2017, average net profit was estimated to be 15 times greater than operating results. But now dealers groups are reporting operating losses.

“Dealers are willing to dig deeper in their own pockets — sometimes operating at a loss — to go after those incentive targets that are set each month or each quarter,” Patrick Manzi, senior economist for NADA, told Automotive News in an interview. “That [operating] loss is indicating that almost all the profit comes from OEM money.”

Dealers are expected to slash their advertising budgets and cut costs wherever possible while leaning increasingly on servicing and parts to help them endure a less-than-optimistic 2019. Average advertising expenses already declined 3 percent last year and were down 1.4 percent in 2017 from the previous year.

[Image: Nissan]

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70 Comments on “Dealer Check-up Reveals Widespread Profit Loss...”


  • avatar
    ToolGuy

    3% drop in incentives is not huge.

    When looking at “average” dealer results, keep in mind that the top dealers have dramatically better results than the marginal ones.

  • avatar
    mzr

    The poor things, I really do feel for them. Really.

  • avatar
    SCE to AUX

    The mfrs are probably secretly jealous of Tesla’s direct sales model.

  • avatar
    87 Morgan

    Nissan stores are getting hammered right now. Fenton Auto group is another large group that went south in a hurry and had multiple Nissan stores along with the other roof tops they had. We are in the early stages of the pain period in terms of dealer profitability.

  • avatar
    aja8888

    A few large Ford and Chevy dealers here are literally stuffed with 2018 and 2019 pickups. They are taking full page ads in the paper here in Houston trying to unload these monsters, but it doesn’t appear they are moving @ around $60,000 per unit.

    • 0 avatar
      CKNSLS Sierra SLT

      aja8888

      A loaded “High Country” truck is about $65,000.00 dollars (MSRP). For a 2018 $10,000.00 off is very doable-and you can get even more if your a savvy negotiator. Bottom line-if they want $60,000.00 that’s why they are not selling.

    • 0 avatar
      SD 328I

      That’s par for the course with big trucks. They overprice the MSRP and offer big incentives to help people think they are getting a great deal.

      Profit margin is huge on those things.

      Also, it’s the only segment that hasn’t taken a big dive yet. So if they aren’t moving big trucks in your area, can’t imagine what’s going on with other segments.

  • avatar
    Vulpine

    Personally, I’d like to see NADA go away as they have become serial abusers of both their customers and their OEMs.

    • 0 avatar
      trackratmk1

      It would be nice if NADA didn’t feel like the franchise model is the only acceptable method of doing business with the OEMs. Other than their member’s religious adherence to that, NADA actually publishes a ton of useful research and “state of the retailer” type of reports.

      It’s a voluntary association, dealers don’t have to be a part of it but they benefit from its perks. I do blame NADA for their war against direct to consumer sales and the absolute BS claims that protecting the franchise model is actually to protect their customers. NADA should let it go – D2C sales may not be the right answer either, but at least give OEM’s the ability to do business as they wish and see if it ends up a positive or negative. Let the market decide.

  • avatar
    dwford

    84 month financing and record 90 days late statistic point to an affordability crisis, yet buyers continue to gravitate towards the much more expensive crossovers vs the equivalent sedans. As more and more buyers find themselves upside down when they try to trade in half way through their 84 month loans, it’s going to get harder and harder for dealers to sell cars.

    • 0 avatar
      sgeffe

      The captive financing arms aren’t making things easier!

      Sunday, I checked out Honda Financial Services’ offers! On new Accords, the rate on a 60-month note shot up to 4.49% from 2.9% last month! Most other offerings for other Honda vehicles are either 1.9% or 2.9% for the same period (with the exception of there being no financing offers on Civics, and no offers at all on Passports, finance or lease.)

      Why they would do that on vehicles that are practically glued to the lots is beyond me! My dealer finally unloaded their remaining 2018 Accords (including that Touring 2.0T I drove a week ago), and one of their nine 2019s in stock, so they probably had a productive weekend! But now those eight remaining 2019s are gonna sit and sit and sit!

      As I’ve stated, I’m blessed beyond deserving that I can afford a new car every six years or so. But still, this’ll cost me more a month, and roughly $1,500 more over the course of the note. Ain’t chump change!

  • avatar
    Superdessucke

    This can’t be correct, or it’s going to quickly reverse, right? Automakers are increasingly abandoning unpopular cars for more crossovers and light trucks. So how could profits be declining, since these are higher profit vehicles and the public can’t get enough of them to quench its thirst – which standard logic might dictate would mean higher dealer markups and fewer incentives?

    Can one of you sharp industry types explain this to this non industry insider? It really doesn’t make sense to me. Not trying to be smart, it just truly doesn’t make sense. Thanks.

    • 0 avatar
      DenverMike

      I’m guessing fewer incentives means more profits for automakers, but when buyers still demand huge incentives, it’s the dealer that have to step up.

      When new car buyers keep walking away from negotiations, what are dealers left to do? And if they’re not even showing up at dealers?

      • 0 avatar
        Superdessucke

        That makes sense. But how are they in any position to be demanding big incentives when CUVs and light trucks are so popular? When you went in and bought a Diesel Rabbit or Honda Accord back in 1980, you paid over MSRP and ponied up for the Rusty Jones and pinstriping with a smile and a thank you, if you didn’t get your block knocked off in the stampede first

        • 0 avatar
          DenverMike

          Automakers have their finger on the pulse, and build to demand. Yeah if there’s an unscheduled shortage, automakers and dealers lose (from lost sales), but then everyone loses at that point, especially bargain hunters.

          I’m guessing dealers would rather “lose” from lack of profit per vehicle than lack of volume sales, since they lose leads for future parts, service, body shop and used car trade-ins, trade ups.

          I’m not sure why there was a shortage in the ’80s, or which shortage, but the game is rigged to favor automakers before dealers or ultimately, buyers (end users).

          • 0 avatar
            bumpy ii

            “I’m not sure why there was a shortage in the ’80s”

            Import quotas.

          • 0 avatar
            trackratmk1

            @denvermike well said.
            @ superdessucke you may be surprised to learn that average net profit per car is between 1-2% (net profit meaning after all expenses involved in the sale are accounted for). So on a $40,000 SUV the dealer might make $600-800. MIGHT. The dealer relies on corporate incentives to help them make deals. Talk to any sales manager about what helps them make sales, and they’ll tell you it’s “the programs.”

            With the programs shrinking, DenverMike nailed it with his observation that the dealer is trying to kick in more of their own money to keep sales together.

            OEMs are likely pulling back incentives because they know the 18M car/year market has passed, and volume is decreasing YoY now, and they have to keep their profits somehow. Incentives will stabilize when it has a material effect on dealership conversion rates… either that or the dealer councils will rebel if they feel they can’t stay in business without the OEMs customer subsidy programs.

            One last point – dealers usually want to keep their volume at any cost because the volume bonuses paid by the OEMs are huge (as noted in the article). The Fixed Ops side of the dealership also benefits from continued sales, which is much more profitable than the new cars themselves.

    • 0 avatar
      glennmercer

      I am not sure how sharp I am, but the confusion may arise from the use of the word “incentive.” Most people, myself included, hear “incentive” and think that is a discount provided to the consumer, the buyer of the car. E.g. “This month only $5,000 off.” But the article is actually discussing incentives to the DEALER. E.g. “If you sell X cars and score Y on your customer satisfaction survey, we will pay you $300 per car at the end of that month.” These don’t show up in operating income, but in net income. Operating income is (simplistically) price sold to customer net of CUSTOMER incentives, minus expenses like salesforce commission. Net income takes operating income and adds in all the rest e.g. taxes, interest in debt, and incentives paid to the dealer by the factory, at the end of the month or quarter or year. Thus a dealer can simultaneously LOSE money on the car from one view (“I sold it for less than I paid for it”) and MAKE money (“But then I got a payment from the OEM.”). Example: sell car for $30K, buy it from OEM for $32K, OEM pays you $3,000. Operating loss of 2K, bottom line gain of 1K. (Don’t get me started as to why this situation has evolved, but believe me it is the factories’ idea, NOT the dealers!). Dealers don’t like this situation, even if at the end of the day they are still making money, because what the factory giveth the factory can taketh away. Dependency on the factory incentives is problematic. As a VERY weak analogy, imagine that you were a salesperson selling brooms and made a commission of 15 cents (15% commission) on every one. You sold $100,000 worth of $1 brooms and took home $15,000. Now Broomco cuts the commission to 5% and provides a $10,000 annual bonus. You are now dependent on Broomco’s good will, its own profit health, etc. With the 15% commission you have more room to maneuver. You could, say, cut broom price to 80 cents, sell 150,000, total revenue $120,000, 15% commission, pay $18,000. You get my drift. Sorry for lengthy answer.

      • 0 avatar
        DenverMike

        From what I understand, ALL incentives go to the dealer, not the buyer (end user), unless it’s “Cash Back” or similar, provided the buyer qualifies, and the dealer just lowers the transaction by that amount.

        Automakers want to deal with the general public as little as possible as it is. That’s what dealers are for.

        • 0 avatar
          glennmercer

          You are absolutely correct, IMHO. We may need a further division of terminology, to offset the confusion.

          Incentive type A: direct to customer (like “Cash Back”), from the OEM or from its captive lender; this being a minority of total incentives, as you imply

          Incentive type B: to dealer, to use specifically to move metal; e.g. “$500 per car for the Spring Sell-a-Thon.” Dealer will try to give as little of this as possible to the customer, of course, but OEM and dealer expect most will indeed go to the customer.

          Incentive type C: to dealer, but to maintain profitability (though never explicitly stated this way). THIS is the category that is fastest growing. An example of one of these: exclusivity bonuses. Let’s say Dealer A has an Alpha-brand store and on the same lot a Beta-brand store. Alpha pays A $200 per car for X years, if dealer closes Beta store, to avoid local competition for or dilution of Alpha brand.

          Yes, of course the dealer can pass the $200 on to the customer if she or he needs to. But this $200 is not discoverable on the usual websites (e.g. Edmunds), might only be paid annually, and is not “tied” to a particular unit. So a bit different. Customer usually can’t see it, and salesperson usually doesn’t know the dealer is getting it. Partly in place as the factories seek to maintain dealer profits as the hammer of the internet beats them down to near zero “on the front end” (that is, after the customer discovers and claims the customer incentives (Type A), and the dealer’s Type B incentives.

          To use a weak analogy, IF a customer tried to haggle down a Starbuck’s, they might say “I know what you pay for beans, for labor, and for rent, I will give you 10 cents above that total.” But they might not be able to see (and ask for) the annual $5,000 check HQ sends the store. (I am obviously making up the Sbux numbers.)

    • 0 avatar
      Superdessucke

      @ glen – Thank you. That was a good explanation. When I hear the word incentive, I usually take it to mean something that an automaker, in this case, needs to do in order to motivate something. In this case, that would be to encourage dealers to sell more vehicles. And why offer that incentive if the vehicles are selling like hotcakes?

      Short answer, they are not. Automakers are sticking all these incentives on the dealers’ table so that the dealers can sell there vehicles at a low enough price to where people will buy them. These products lack passion and will not sell themselves. They are appliances, and most people do not care which one they buy.It’s all about the price and who has the better deal.

      I am increasingly coming to the conclusion that automakers, and their mouth piece automotive journalists, are trying to steer the market to high profit crossovers. Those vehicles are easier to engineer because performance is not a priority for their buyers and they can be sold for more money, though apparently those prices need to be reduced by heavy incentives that apparently are not getting the job done for the dealers.

      I don’t think the plan is working out as well as they intend so they are incentivizing and dealer still are not making money, probably because they have to discount the products way below invoice in order to get people to buy them, and the incentives are barely covering that. As you said, the dealers are getting the short end, as are the consumers.

      The automakers believe they will ultimately benefit. I predict the plan will backfire at the end of the day but only time will tell that.

      • 0 avatar
        ToolGuy

        Super,

        A few points:
        – Manufacturer profit on a given new vehicle sale is very different than dealership profit on that same transaction
        – There is some significant “crying wolf” in both the referenced NADA report and the Automotive News summary – they each have an audience and an agenda
        – The “Net profit before tax” figures are much more stable (pg. 3 of the report)

        General observations/opinion:
        – What you are essentially seeing is the manufacturers trying to better control (or ‘push around’ depending on your perspective) the dealers through various programs
        – As I understand it, looking at the “Total operating profit” figures would be roughly analogous to studying the “Dealer Invoice” without considering Holdback
        – My level of “sympathy” is about as high as for the bottled water vendors at the airport (captive audience, lack of competition, yada yada)

        • 0 avatar
          Superdessucke

          Thanks tool guy. That isn’t inconsistent with what my suspicion is. Automakers are trying to prop up the CUV craze. It’s working, for now, but I think it’s going to backfire at the end of the day. It’s not sustainable and automakers are taking themselves out of position to make adjustments when the market starts to shift more.

          It’s been fashionable to cr– on enthusiasts. Maybe they don’t buy cars in large numbers, but they maintain brand enthusiasm. This trend has none of that.

    • 0 avatar
      sportyaccordy

      It’s very simple. Instead of looking at how you can bash crossovers/SUVs/trucks and the people that buy them, look at the data and think logically for a change.

      Car registrations in the US increase at a measly ~1.5% a year. Amazingly, that outpaces US population growth by 50BPS. More importantly, the average age of the cars on US roads keeps increasing, indicating that cars are becoming more reliable/durable, and have more life in them before hitting the junkyard. So the legitimate need for new cars- to replace old cars coming off the road- is decreasing. Even in a booming economy it’s hard to justify dumping a car w/few problems for something new. There are other factors as well like the growing affordability gap, urbanization, demographic shifts etc.

      So IMO annual car sales of 16-17 million units is insane, and it will take insane incentives to keep that going. The real number is probably closer to 10 million units a year and falling, with whatever industry implications come of that. I agree that most people buy cars as appliances, which means a lot of models and brands don’t need to exist. So it has nothing to do with crossovers or whatever… it’s about the basic need and replacement rates of vehicles on US roads.

      • 0 avatar
        Superdessucke

        Sporty Accord, you raise some good points there. But I still think there’s an element of trying to shift the public into more profitable vehicles that are easier and less expensive to engineer and that need to be updated less frequently to remain competitive.

        I’m sure the plan is working great for manufacturers right now, less so for dealers. But I think it’s going to blow up in their face sooner or later because it’s going to dilute their brand appeal. I think that will be particularly true of companies like BMW and Honda that always depended on strong support from driving enthusiasts to push their brand. I understand car makers need to build to the market but I think there’s a better way they could be doing this.

      • 0 avatar
        arach

        Sporty accord.

        The provided explanation of average age of the cars on the road I have a problem with, but the rest is good data.

        The average age of a car on the road will always increase. Its not primarily because cars are lasting longer, its primarily because the law of averages.

        you can never get “newer” than 0 years on the road, but every year the “oldest” cars on the the road get more extreme. This causes significant growth in outliers by the very nature of the estimate.

        How many new cars on the road today do I need to sell to offset ONE 40 year old car on the road? If I buy 3 cars TODAY, brand new and have 1 old 40 year old car, the average age of my cars on the road is 10 years. In 10 years, if I have the same cars, how many NEW cars do I need to buy to keep the average age at 10 years? Now I have 1 50 year old car, 3 10 year old cars, so I need to buy FOUR (4) new cars to offset those other 4 cars to maintain the same average.

        So even if new cars sales increase by 2% per year, the average will continue to decline.

        There is one more factor which undermines the whole thing, and that is cars taken off the road. The issue is there is a window for cars being taken off the road. That 50 year old car will never be taken off the road unless its totalled, but its not driven much, so odds of it being totalled are low. the sub 8 year cars actually have the highest odds of being totalled because they are driven the most, so that takes some of the newer cars off the market. The 8-20 year cars however leave the roadways when they are past their serviceable life. While that is true, the other impacts above are more significant when measuring this statistic.

        The tough thing with annual car sales numbers is that when more new cars are sold, that means more used cars are scrapped, and when less new cars are sold, less used cars are scrapped.

        I think having more high dollar cars on the market (SUVs, Trucks) will actually reduce new car sales over time, and keep more used cars on the market.

        If car companies were embracing the $13,000-18,000 sedans, they are almost throw-away cars then with more scrappage and easier new car buying.

        It is definitely going to be an interesting show to watch :)

        • 0 avatar
          sportyaccordy

          Superdessucke- the days of enthusiasts driving sales has been dead for some time now. Honda sold on the basis of reliability- the fact that they also made their cars phenomenal to drive was kind of a secret handshake.

          arach- I don’t know how the calculation is done, but I’d wager they use a geometric average… i.e. the average of the inverse of the ages. So new cars would skew more heavily than old ones. Something like a 40 year old car is such an outlier I doubt it moves the needle much though- I really think that metric is being driven by cars people actually use and depend on.

          I don’t think there’s a direct connection between new cars bought and old cars sent to the junkyard in the sky… most new car buyers are not trading in 20 year old clunkers.

          And I wholly reject the idea that manufacturers are driving the market. Customers drive the market… manufacturers either anticipate customer tastes or respond. If manufacturers could control what customers wanted mainstream cars wouldn’t exist.

        • 0 avatar
          sgeffe

          It would be interesting to know how many cars are junked every year, whether from accidents, or just wearing out.

          • 0 avatar
            glennmercer

            I can answer part of that, the total scrap rate (I don’t know the crashed out / worn out split). From Experian, who scrapes state DMV records.

            End of 2017: 271 million usa light-duty vehicles on the road (excluding medium- and heavy-duty trucks, like 18-wheelers)

            Sales/registrations in 2018: 17 mm

            Scrapped or otherwise removed from operation (see below): 13

            End of 2018: 271+17-13=275mm on the road

            (“Removed from operation” can include things like exported to another country or de-registration (e.g. a rancher in Wyoming decides to make an SUV purely for use on the ranch, not on public roads).

            In almost every year since 2000 sales have exceeded scrappage, so the fleet grows. In the late 1960s for example the fleet was about 100 million.

  • avatar
    ToddAtlasF1

    I don’t get it. Low margin affordable cars are practically gone. We all know that regulations and CAFE haven’t added any cost to new vehicles, yet average transaction prices are higher when adjusted for inflation than any time since the creation of the Model T. Somehow, dealers are worse off than ever. Must be Trump’s fault.

    • 0 avatar
      Superdessucke

      Or demand isn’t what they’re saying it is. I’m getting to be kind of an old one now. The way they describe the industry, at least on this website, harkins me back to the late 1970s and the demand for economy cars. People were getting into fist fights over those things. So in my mind I was picturing demand for CUVs being like that now given the breathless reporting about them.

      This story is completely incompatible with that. So I’m either missing something or we have some irresponsible journalism going on.

    • 0 avatar

      Low margin cars are not gone yet. Main abusers – Japanese Big 3 still selling a lot of cars. D3 did not sell that many cars anyway.

      • 0 avatar
        Superdessucke

        There you go. So once they get rid of the remaining cars they’ll have bigger profit margins right? I mean given the amount of cuvs and light trucks (does any major automakers have fewer than 5 now?), I’m stunned they’re not making money now, but maybe we just need a little more push?

        • 0 avatar
          arach

          Automakers ARE making a killing.

          Its the dealerships who aren’t making as much.

          We can’t convolute the two… Ford made 3.7 billion dollars last year. Some ford dealerships lost money last year.

          • 0 avatar
            sportyaccordy

            Ford is not making a killing. Supposedly they make $10K on every F150 sold. I don’t know the breakout from the F-Series but even if half the F-Series sales are F150s… that means Ford nets $4.5B from them, meaning the majority of cars they sell are sold at a loss.

    • 0 avatar
      sportyaccordy

      “Low margin affordable cars are practically gone.”

      Are they? What do you call mainstreamers? Especially compacts and subcompacts?

  • avatar
    SaulTigh

    The wife and I test drove a Lincoln Navigator a couple weekends ago. Sticker was $86,360. They were already offering Ford X-plan pricing to anyone (though I do actually qualify) at $81,000 and some change. I offered $75,000 and walked when they wouldn’t deal. They’ve been texting off and on and today offered me A-plan pricing at $78,000. I declined. We’ll see where this goes.

    Did like it quite a bit. Not a lot of vehicles I’d pay that kind of money for, but it ticks all our boxes.

    • 0 avatar
      SCE to AUX

      If they offered $78,000 so quickly, there’s still some fat in that price. Your $75k may not be far off the actual closing price.

      My local Hyundai dealer played that game with me last fall (used Ioniq EV), but we were talking numbers 1/3 of yours. :) I eventually bought (leased new) from someone else, and I suspect the first car went to auction because it was such a unicorn.

      • 0 avatar
        SaulTigh

        It is expensive for sure. We make up for it by being very frugal in other aspects of our lives, which allows us to splurge occasionally. My daily driver at the moment is 24 years old. I get my TV on an antenna and maybe a $30 Netflix gift card a couple times a year. Total cost of both our cell phone plans? $55 a month.

        I’ll be the first to admit that we have a really nice income…now. It’s double what it was when we first got married, and we’ve both been completely broke in our adult lives. Hard lessons stuck with us and it’s payed off.

  • avatar

    Is Nissan heading to bankruptcy now that Ghosn is gone?

    • 0 avatar
      sportyaccordy

      I’d wait to see the updates coming to their lineup. All the non QX50 Infinitis are at least 6 years old. Many Nissans are just as old. New Altima is not my cup of tea styling wise but it makes big improvements on the hardware front.

  • avatar
    ToolGuy

    (Duplicate post because computers – lol)

  • avatar
    eggsalad

    If it wasn’t a profitable business, why would Autonation be buying every dealership they can get their hands on? 360 and counting, according to their website.

    • 0 avatar
      danio3834

      Since the Great Recession, there has been a big rebound in new auto sales that provided for better than market average returns in dealerships. Now that SAAR is leveling and falling, competition will increase, margins will fall and we’re likely to see some divesting of less profitable stores.

      The fact that the average transaction price of a dealer point has fallen substantially in the last couple years is a good indicator.

    • 0 avatar
      arach

      Autonation made 5.26 billion last year.

      Like in many industries, the Walmarts are making billions, but the mom and pop shops are going out of business.

      The big guys are getting bigger and making a lot of money in dealerships, but the small and independent shops are running on fumes- same thing thats happened in most other industries.

    • 0 avatar
      saturnotaku

      I think we’re going to be seeing a lot more consolidation over the next several years. Single, often times family-owned dealerships are being sold left and right to larger groups at every geographic level. In my area, local Ford and FCA stores were sold to a guy who already had Honda, Toyota, and Hyundai/Genesis in his portfolio. The same is going on at a regional level with magnates like the McGraths, Napeltons, and Rohrmans expanding their empires beyond the Chicago area. Then of course, there’s AutoNation at the national level. Some of this is certainly due to current and future market conditions. I suspect another reason is that the descendants of the dealership patriarchs and matriarchs want nothing to do with the business, so they’ll take the money and run.

  • avatar
    deanst

    I think the biggest influence is industry volume. Every dealer expects to sell a few more vehicles in the coming year and plans accordingly. When that volume doesn’t come, but higher expenses come as planned, there’s a mad rush to move the metal. Hence the collapse of margins.

    • 0 avatar
      arach

      This is actually a good point.

      If everyone orders 2% more product, but demand declines by 2% instead, then there’s essentially 4% too much product on the market. Basics of Supply and Demand supports cutting prices to move that metal. With everyone cutting prices trying to move some extra inventory, yet reduced product demand, it quickly becomes a race to the bottom.

  • avatar
    danio3834

    That NADA report is a good overview and commentators here should read it if they ever wondered why automakers don’t actually want to own the sales channel.

    • 0 avatar
      sportyaccordy

      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.

      • 0 avatar
        ToolGuy

        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…)

        • 0 avatar
          sportyaccordy

          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.

        • 0 avatar
          danio3834

          “Dealership profit margins are higher than manufacturer profit margins.”

          Not typically they aren’t.

          • 0 avatar
            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.

          • 0 avatar
            PrincipalDan

            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.

          • 0 avatar
            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.

          • 0 avatar
            ToolGuy

            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.

          • 0 avatar
            danio3834

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

          • 0 avatar
            danio3834

            @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.

        • 0 avatar
          Scoutdude

          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.

          • 0 avatar
            ToolGuy

            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.

          • 0 avatar
            danio3834

            @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.

            If you understand how the OEM/dealer relationship works, you’d see there isn’t much to be consolidated or saved. The cost of sales is still there, but the OEM would take them on. Recession hits and now it’s the OE taking the losses, which is the crux of the article. That many dealers are losing money.

    • 0 avatar
      trackratmk1

      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).

      • 0 avatar
        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.

        • 0 avatar
          glennmercer

          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)

      • 0 avatar
        glennmercer

        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.

  • avatar
    PrincipalDan

    We’re getting back to “stacking ’em deep and selling ’em cheap” time again. Judging by the lots around here it doesn’t even seem like “Tax Refund Time” made much of a dent in dealer inventory.

    GM rolled out 0% for 72 months a few months back and I’ve been supersized to see it hanging around.

    Good for me that I’m planning my next vehicle purchase within the next 3 or 4 months.

    • 0 avatar
      trackratmk1

      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.

      • 0 avatar
        ToolGuy

        Unpopular thing to say out loud: If the only reason you can swing the down stroke on your new vehicle purchase/lease is because of a tax refund, you might want to re-evaluate your life choices, including that same new vehicle transaction.


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