Two Main Reasons Why Gross Profits Are Under Pressure

September 16, 2014

One of the greatest challenges facing dealerships right now is that profit margins are increasingly under pressure. Several factors are at play, but it’s clear that the Internet is making it increasingly difficult to earn strong retail gross profits per vehicle.

NADA reports that the average retail gross profit for used cars in 2013 was $2,361, up 13 percent from the previous year. But dive a little deeper into the numbers and you get a different picture. When you look at six of the top publicly owned dealerships, gross profits at five of them fall between about $1,470 and $1,900 per vehicle. Only Lithia beats the NADA average at more than $2,500 per used car.

Market-Based Pricing
What’s notable about those figures is that the five public dealership groups with average gross profits below NADA’s reported average are disproportionately concentrated larger in metropolitan areas—Lithia is the exception, with more stores in smaller markets. When I ask larger metro dealers why they are seeing margin pressure, I consistently hear about Internet-driven price competition from “market-based pricing.”

Market-based pricing is certainly a necessity given consumers’ unprecedented visibility into pricing through the Internet.  With consumers able to compare prices across hundreds of dealerships during their online research, there is more pressure than ever on dealers to price their vehicles competitively.

Bad Timing
Unfortunately while market-based pricing and the internet are pressuring pre-owned margins, dealers’ cost structures have climbed. The dealership building boom driven by the factories has created beautiful facilities (ironically at a time when people stopped visiting dealers in person as much) but the result is a higher cost structure.

Furthermore, changing compensation for sales staff is also having an impact on dealerships’ cost structures. The average salary of a sales person was nearly $64,000 in 2013 vs. $46,000 in 2002.  With more expensive rent and higher salaries, less gross profit is getting to the bottom line.

And the really big news is that we are about to see a seismic shift in pre-owned profitability that every dealer needs to plan for.

In my next blog post, I’ll explain why.