Report: Dealerships leaning more on incentive money to turn profit

Dealerships are relying even more on automakers' incentive money to turn a profit, rather than on day-to-day operations, an annual report on dealership finances from the National Automobile Dealers Association showed.

The average U.S. light-vehicle dealership had a total operating profit of just $91,774 last year, and a net profit of $1.4 million, the NADA Data 2017 report found. Net — which included those incentive payments — therefore was 15 times greater than operating profit, up from a 5.3 times difference in 2016 and a 3.1 times difference in 2015.

"Dealers are more and more reliant on that below-the-line money every month. They're really chasing those factory incentives," said Patrick Manzi, senior economist for NADA. "When we get these monthly sales numbers, we don't always see all that incentive money, but it does get tacked on into net profit."

"Dealers are more and more reliant on that below-the-line money every month."
Patrick Manzi, NADA senior economist

The widening gap was mostly driven by luxury and import-brand dealerships. Both groups posted, on average, an operating loss, while domestic and mass-market brand dealerships turned an operating profit. All groups were in the black on a net basis.

The average domestic-brand dealership's total operating profit was $244,258 in 2017, still 4.5 times smaller than its net profit of $1.1 million. Net profit at the average import-brand dealership, however, was $1.6 million, vs. an operating loss of $28,728.

The average mass-market and luxury-brand dealerships showed the same trend. Mass-market brand stores made $112,772 in operating profit, 11 times smaller than their net profit of $1.3 million. Luxury-brand dealerships, on the other hand, posted an operating loss of $49,181, against net profit of $2.4 million.

"Certain [brands] are less reliant on factory incentives than others," Manzi said. "The ones that are very reliant seem to be driving that gap when we take it to the average."

Regardless of the brand, dealerships' overall reliance on factory incentive money at the end of each month or quarter has expanded the net vs. operating profit gap, Manzi said. Those incentives could come in the form of customer cash, rebates, volume-based targets or incentives to keep dealerships in line "with the factory direction," he said. The most common incentive: "If you hit [a volume sales target], you get a nice payoff. If you don't hit it, you don't get anything," he said.

The profit gap will likely continue to widen as new-vehicle sales decline and competition to sell new vehicles heats up. "Dealers are going to pursue sales a little bit more, so they might be willing to take further losses on the front end in order to qualify for that back-end money from the OEM," Manzi said.

Net profit as a percent of dealerships' total sales has steadily declined since at least 2015. Last year on average for all dealerships, net profit represented 2.3 percent of total sales, off from 2.5 percent in 2016, 2.7 percent in 2015 and 2.6 percent in 2014. NADA cautioned against comparisons across too many years, noting that the methodologies and data sources used in the annual report have changed over time.

The compression is mainly due to increased competition in the Internet age, Manzi said.

"Now a consumer can walk into a dealership, draw up and negotiate out a deal. And while they're sitting in the chair, shoot an email out to two or three other dealerships and have them competing for price in real time," he said. "Now that we are in a declining market, dealers are willing to dig deeper to make the sale."