Two Troubling Trends For Tradition-Minded Dealers

July 28, 2015

This week’s Automotive News brings word that while dealers may be selling more new vehicles, they are making less money on the cars they retail.

The front page article’s headline deftly summarizes the dynamic: “As Dealership Sales Climb, Margins Slide.”

But I was most struck by what the article, which quotes executives from public dealer groups that reported front-end margin declines in new vehicles during the second quarter, does not address. You won’t find much mention that margin compression has, and will remain, a fact of life for dealers.

On some level, I can understand that the dealer group executives might shy away from public stating what seems pretty obvious—making money in this business is no longer as simple as selling more new cars. To their credit, however, the executives do relay their confidence that a “total gross” strategy, where you may concede front-end margin to build volume and F&I, service and parts revenues, will result in shareholder-friendly balance sheets.

This story follows other profit-unfriendly news—the recent consent order from the Consumer Financial Protection Bureau (CFPB) that requires American Honda Finance Corporation to limit dealer mark-ups on loan interest rates to 1.25 percent or less.

Much of the industry coverage focused on reaction from dealer associations, which decried the agreement as bad for consumers and dealers. Some observers dug deeper, questioning whether CFPB used faulty data to justify the order.

But I didn’t see much discussion of how the ever-growing effort to restrict reserve income in the F&I office is yet another troubling fact of life for automotive retail.

Taken together, these news stories highlight trends that should serve as a wake-up call for dealers. This wake-up call is especially relevant for dealers who have opted to make up for lost front-end margin by pulling two levers that have traditionally worked—increasing sales volumes and leaning more on their F&I managers to increase production/profitability.

Let’s remember that dealers are, by design, blessed with five profit centers—new vehicles, used vehicles, F&I, service and parts. Looking ahead, the most successful dealers will be those who maximize efficiency, production and profitability across all departments, not just those where it’s typically been easiest to move the needle.