U.S. dealers more profitable, says NADA

Even with relatively low sales volumes the average dealership’s net pretax profit margin hit a 24-year high last year — even though the new-vehicle department was in the red for a fifth straight year, according to the National Automobile Dealers Association. The net pretax profit as a percentage of total dealership sales in all departments was 2.1 percent in 2010, up from 1.5 percent in 2009 and the highest since 1986, NADA said last week in its annual NADA Data report.

Year over year, the average dealership’s profit rose 60 percent to $642,057.

Strong results in the used-vehicle and service and parts operations bolstered overall results. Dealerships also got a boost from much lower floorplan expense, which plunged because of low interest rates and tighter new-vehicle inventory.

Dealerships that survived the downturn and factory bankruptcies also picked up sales and service business from competitors that shut down, said Paul Taylor, NADA’s chief economist.

The dealership population dropped another 760 in 2010, to 17,700, after declining by 1,550 in 2009 and 760 in 2008, NADA said. Finance and insurance income rose 15 percent in 2010, and service contract penetration was a healthy 39 percent, up from 37 percent in 2009.

But F&I’s performance failed to bump the new-vehicle department into the black as it had prior to the five-year stretch. Though the loss narrowed substantially from 2009, the average dealership lost $92,581 in the new-vehicle sales department in 2010.

The 2006-10 stretch is the longest losing streak on record for new-vehicle departments.The only other years dealers failed to make a profit on new vehicles were during the recession in 1990-91 and in 1995, because of accounting changes, NADA said.

Last year, the average dealership grossed $1,338 on each new vehicle retailed but after expenses had a net loss of $180 per vehicle.The primary reason is depressed light-vehicle sales, though auto manufacturers and price competition on the Internet are partly to blame, Taylor said.

Dealers cut costs and became more efficient during the recession, but expenses such as rent, property taxes and insurance haven’t decreased much, said Richard Heider, a Denver accountant with many dealer clients. Expenses — such as advertising, insurance, utilities and rent — rose or remained constant.Dealer advertising averaged $654 per new unit, and building rent averaged $759 per new unit.

Taylor said light-vehicle sales likely will have to reach about 16.5 million in the US for the new-car department to be profitable. At 11.6 million, light-vehicle sales were still the second-lowest since 1982.

Manufacturers’ pricing policies and building requirements cut into dealership profits, Taylor said. Over the past several years, factories have pressured dealers to upgrade stores, he noted.The factories backed off of the building requirements in 2009 but started making demands again last year as soon as new-vehicle sales started to rebound, he said.

Automakers also have reduced the spread between dealer invoice and sticker price.”Manufacturers have continued to shrink the markup to where in some instances the minimum sales commission exceeds the difference between invoice and retail,” said David Wilson, president of David Wilson Automotive Group in Orange, Calif., one of the nation’s largest auto retailers.

NADA reports that gross profit margins on new vehicles have declined to 4.5 percent in 2010, from more than 6.0 percent in 2000.

Average net profit (loss) per new vehicle retailed
2000: $137
2001: $186
2002: $233
2003: $193
2004: $176
2005: $60
2006: ($31)
2007: ($46)
2008: ($202)
2009: ($386)
2010: ($180)

Source: NADA

About Todd Phillips

Todd Phillips is the editorial director of Universus Media Group Inc. and the editor of Canadian auto dealer magazine. Todd can be reached at tphillips@universusmedia.com.

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