Auto dealers losing money on operations, trade group says

Dealers on average lost money on operations last year for the first time in at least a decade, leaving the retailers more dependent on automaker incentives for profits.

In 2018, U.S. light-vehicle dealers reported an operating loss for the first time since the National Automobile Dealers Association began tracking the data in 2009. Dealers are still reporting pretax net profits, but those are largely driven by automaker incentives, which are excluded from operating results.

Operating results swung to an average loss of $13,338 last year, compared with a gain of $91,774 in 2017, according to the NADA Data 2018 report, the annual financial profile of U.S. franchised new-vehicle dealerships from NADA. Net pretax profit slipped 2.6 percent to $1.36 million.

The gap between net and operating results is widening, indicating greater reliance on factory incentives. In 2017, net profit was 15 times greater than operating profit, which was still in the black. In 2016, net was 5.3 times greater that operating profit, and in 2015, it was 3.1 times greater.

"Dealers are willing to dig deeper in their own pockets — sometimes operating at a loss — to go after those incentive targets that are set each month or each quarter," Patrick Manzi, senior economist for NADA, told Automotive News. "That [operating] loss is indicating that almost all the profit comes from OEM money."

That incentive money could be customer cash, rebates, volume-based targets or incentives to keep dealerships aligned with the brand image, via a dealership improvement, for example.

Operating profit declined across the board with dealerships that focus on import or luxury brands falling to a loss. Stores selling domestic or mass-market brands remained operationally profitable, on average.

Average gross profit for all U.S. light-vehicle dealerships increased 1.3 percent to $6.88 million, but the expense increase outpaced it, growing 2.8 percent to $6.89 million.Dealers made just a 2.2 percent profit margin before gains from finance and insurance in 2018. That margin has halved since 2011 when it was 4.4 percent and dipped slightly from 2.5 percent in 2017.

To cope with mounting expenses, narrowing margins and declining volumes, dealers are cutting costs where they can, such as on advertising.

Average advertising expense declined 3 percent to $562,575. In 2017, it was down 1.4 percent from the year earlier. Per new unit sold, dealerships spent an average of $624 on ads.

"If you can trim some of your spend there, that's certainly one way to do it. It also could be that there's less money coming in from manufacturers" to support advertising, Manzi said.

The decline in ad expense is "probably indicative of the whole market, but that's one of those things that's going to be a dealer-by-dealer decision," he said.

Other cost-cutting strategies weren't apparent in the NADA Data report, but Manzi said dealers could be decreasing their spending on food in the store, modifying cable packages or even thinning their inventory. Overall, dealers are making marginal reductions to push costs down, he said. In February, one dealer told Automotive News he stopped providing bottled water and saved $6,000 per year.

Dealers are also focusing on areas of the dealership that can more easily turn a profit. Declining margin and profit are mostly a result of challenges on the front end — new- and used-vehicle sales. "In response to that, dealers have put more focus on that service and parts operation and are doing a very good job on it," Manzi said.

Dealers on average made $3.2 million on $6.95 million in service and parts department sales last year, Manzi said. That's a whopping 46 percent gross margin, on revenue that grew 2.3 percent from 2017.

If dealers home in on service and parts as new-vehicle sales decline, Manzi said, they "can still remain successful in this business."