Many of the same issues that plagued dealers in 2021 still exist.
- Vehicles (new and used) are still hard to come by.
- Obtaining needed parts is uneven at best.
- The pool of qualified employees remains thin.
- Across the board inflation is eating into profits.
While these matters persist, dealers are still generating substantial profits.
Source
The following results are based on the compilation of information from our dealer client financial statements for the nine months ending September 30, 2022, as compared to their financial information for the same period ended September 30, 2021.
Bottom Lines Remain Strong
- Over 57% of our dealer clients saw their profits increase year over year.
- The average increase in profits was approximately 7.5%. Considering 2021 was a record year for almost all dealers, this is impressive.
- It should also be noted that the profit increase was in spite of a drop in other income (which mainly comprises doc fees) of 8.8%.
- It appears that the increase in profitability did not favor one group over another. On average, both large (sales >$30MM) and small dealerships reported a similar increase.
Overall Dealership Sales
- It was hard for dealers to sustain the momentum in overall dealership sales compared to 2021 and the results bear this out. 68% of our dealer clients saw sales decline compared to the same period for 2021.
- Our analysis indicates that overall dealership sales declined by over 5.5%. This should not come as a surprise considering the lack of vehicle inventory.
Expenses
- Variable – Over 50% of dealers saw an increase. The most common expense that is in this category is sales commissions for new and used sales. Gross profits on vehicle sales remain robust causing sales commission payouts to rise. Certain manufacturers include items such as floorplan interest and advertising in this category and those have also continued to climb.
- Personnel – A number of factors caused nearly 75% of our dealer clients to report an increase in personnel costs. Managers receive bonuses based on their department’s profitability. Strong gross margins, especially in vehicle sales, has led to greater bonus payouts. The tight labor market compels dealers to increase pay rates to retain and attract qualified employees. Health insurance costs also continue to rise.
- Semi-Fixed – Similar to personnel, a vast majority (approximately 75%) of our dealer clients experienced an increase in this category. For many dealers, this includes floorplan interest. A rise in interest rates coupled with less floorplan credits due to fewer units taken into stock caused the expense to soar. Advertising expense also experienced increases. Many manufacturers set minimums of what a dealer must spend monthly. Typically, a fair portion is offset by advertising credits that are earned when dealers take in inventory. Similar to the floorplan credits, these have dropped due to lack of new vehicle inventory available. This is on top of the effects of inflation which has caused the price of everything to go up.
- Fixed – Approximately 66% of dealers reported an increase in fixed expenses though on average the increase was less than inflation. Dealers are successfully managing those costs that they can control.
Conclusion
Dealer profitability continues to be buoyed by the historically strong gross margins on new and used vehicles. As experienced dealers know, this won’t continue long term. There have already been signs of a softening of the used vehicle market and once the computer chip shortage begins to ease, manufacturers will begin to inundate the market with new vehicles. Operating costs will not be decreasing any time soon either. Dealers should continue to manage their expenses to prepare for the inevitable decline in vehicle margins once inventory supplies begin to normalize.
If you have any questions regarding this article, please contact Charlie Paolino at CPaolino@DowneyCoCPA.com or at 800-849-6022.
