For many, buying a new car is a complicated, stressful, and harrowing experience. Aggressive sales tactics, inconsistent information, imperfect stock availability, a bajillions of forms, and a general operating speed best described as ludicrous leaves many wondering what they just signed, and why. It’s not fun for the consumer, and, according to a new Automotive News report, not fun for dealerships either, which are relying more and more on automakers’ incentives to turn a profit.
According to Patrick Manzi, senior economist for the National Automobile Dealers Association (NADA), dealerships are becoming more reliant on the “below-the-line” money.
Data from NADA revealed U.S. dealerships, on average, turned an operating profit of just $91,774 in 2017. Net profit, which includes incentive payments, averaged $1.4 million. That makes the net profit 15 times greater than the operating profit, a significant increase from 5.3 times greater in 2016 and 3.1 times greater in 2015. But what does this mean?
Well, not all dealerships are suffering the same, with domestic stores faring much better overall. In fact, domestic-brand dealerships turned an average operating profit of $244,258 in 2017 and a net profit of $1.1 million. That means General Motors dealerships selling GMC, Buick, Cadillac, and Chevrolet don’t have to chase factory incentives as much as their foreign and luxury competitors to turn a profit. That really marks a significant about-face from a decade ago, when GM and its dealers were among the worst offenders when it came to abusing incentives, and is a testament to the strategy implemented by the “New GM” to do business without relying on incentives.
Dealerships will continue to seek factory incentives as new-car sales decline and competition grows. One of the most common incentives dealerships strive for is a volume sales target. If a dealership hits a specific sales volume figure, it gets a bonus. If that target is missed, it often gets nothing. In some rare cases, the dealer gets a small portion of what it could have made if it hit or exceeded the objective.
Thin profit margins are never comforting when running a business, and operating a dealership is as about as far from a walk in the park as you can get. Traditionally, dealerships have relied on service departments to help turn a profit, but those trying to save money often elect to service their vehicles elsewhere in hopes of saving a few bucks. If anything, the thin profit margins could mean that dealerships may be willing to lose money on a sale so it can hit its sales target, and that – ultimately – is a win for the consumer.