Our firm gathers financial data from our dealer clients each fall for our year-end tax planning meetings. Using data compiled from our dealer clients’ fall 2012 financial statements, we have discovered the following trends.
Dealers Increased Overall Sales
Over 74% of our dealer clients saw overall total dealership sales increase year over year. On average, smaller dealerships showed a minimal (less than 1%) increase, while larger dealerships averaged an 8.75% increase in total sales. Larger dealerships have a decided advantage because they can sacrifice margin for volume.
New Vehicles
Approximately 71% of dealers sold more new units year over year with an average increase of 31 units. As would be expected, smaller dealerships experienced smaller increases (averaging between 7 to 11), while larger dealerships saw unit sales grow between 30 and 80 units. It is anticipated that this trend will continue as consumer confidence in the economy improves and financing becomes more readily available.
While larger dealerships led the way in the increase of unit sales, they also had the greatest drop in margin. Smaller dealerships were better able to maintain their new vehicle margins, averaging approximately a 5.5% margin. In contrast, larger dealerships saw their margins drop almost 18% to an average of under 4.5%.
Used Vehicles
Our analysis confirms what we have been hearing from our dealers – used car sales volume is down, especially for smaller dealers who, on average, sold approximately 16 fewer used vehicles than in the prior year. Larger dealers showed nominal increases. The decrease is primarily due to the increase in the wholesale price of used vehicles due to the diminished inventory of used vehicles and the increased incentives for new vehicles. There are a few reasons for the lack of inventory. First, consumers are holding on to their current vehicles longer. It is estimated that the average vehicle is held for over ten years. Secondly, the drop in sales and leasing of new vehicles since 2008 translates into fewer vehicles available for trade. As more and more vehicles come off lease and more vehicle trades relate to new vehicle purchases, we anticipate the supply of used vehicles to increase and prices to decline.
As would be expected, the higher cost of used vehicles adversely affected the dealer’s sales margins. Especially hard hit were smaller dealers which saw used vehicle margins decrease on average 12%. For used retail (non-wholesale) sales, smaller dealerships had an average gross profit of approximately 9.5% while larger dealerships, whose average margins remained flat, averaged approximately 9.25%.
Parts & Service
Factory response to consumer demands for more reliable and easily maintained vehicles has translated into a decrease in both parts and service business across the board. On average, dealers experienced a drop in parts sales of approximately 4.5%. Service business has decreased on average 4%. Especially hard hit were smaller dealers whose service business dropped approximately 12%. Better built vehicles mean less warranty work and fewer mechanical issues with vehicles. Expanded maintenance schedules necessitate fewer visits to the dealership. Not only does the dealer miss out on the frequency of maintenance but also the opportunity to diagnose other potential issues on the vehicle. In spite of all this, dealers should see an uptick in their parts and service departments as new vehicle sales rise.
Dealers appear to be able to maintain their margins in both categories. On average, dealers generated a gross margin on parts of approximately 31.3% and 64.7% on service. Smaller dealers fared better on maintaining their service margins than larger dealers. This may be attributable to larger dealers having more unapplied tech time than their smaller counterparts.
Overall Profitability
It should be no surprise with the decrease in overall margins in the front end and the decrease parts and service sales that fewer dealers would be as profitable as they were relative to the same period in 2011. Smaller dealers were particularly hard hit with a combination of the aforementioned decreases and rising expenses. On average, less than a third of smaller dealers were more profitable in 2012 as compared to 2011 with an average drop in profits of nearly $140,000. In contrast, over two thirds of larger dealers showed increased profits for the same period posting and average increase of over $50,000. This seems to be the industry trend. 2013 projected new vehicle sales are expected to eclipse the 15 million mark for the first time since 2007. Dealers need to plot a course to have their dealership seize on this opportunity to make 2013 a successful year.
If you have any dealership management questions, please contact Charlie Paolino at CPaolino@DowneyCoCPA.com.
