Dealer's profit is often much lower than you think

Public perceptions about new-car dealers have changed dramatically over the past two decades. Today, consumers are better informed about our business and have a deeper appreciation for how dealers operate.

One of the biggest misperceptions about our industry, however, is that dealerships make excessive profits – especially on selling new cars. That simply isn't true.

A recent article in Automotive News reported that new vehicles in the U.S. averaged a retail net loss of $17 per vehicle, according to a study conducted by the National Automobile Dealers Association.

Although the study focused on U.S. car dealers, it could easily apply to Canadian auto dealers. It may come as a surprise to readers to learn that many new car departments lose money every year.

How can a dealership lose money selling new cars and afford to stay in business? Fortunately, other departments (service, parts, used vehicle sales) are profitable, which allows dealerships to offset the losses from new-vehicle sales.

I'm not trying to solicit sympathy from the public, but I do want readers to understand the financial realities of our business. New-car departments are not huge profit centres for dealers and they haven't been for years.

The price that consumers pay for new cars starts with the manufacturers. They establish dealership invoice prices on all new vehicles that roll off the assembly lines, and those prices are non-negotiable.

They also provide a manufacturer's suggested retail price (MSRP) for each vehicle, and then leave it up to dealers to figure out how to make a profit. If dealers got full MSRP on each vehicle sold, their profit margins would be in the 10 to 12 per cent range.

Admittedly, profit margins on hot-selling vehicles, or popular vehicles that are in short supply, are higher than the average. But these vehicles are few and far between.

The 10 to 12 per cent profit margins are eroded by the cost of carrying the vehicles as inventory, the operational costs of the dealership, competition among dealers and negotiating with the customer.

The longer a new vehicle sits on a dealer's lot, the less profit a dealership makes on it. Dealers often end up paying hundreds (if not thousands) of dollars to keep a vehicle in stock.

Profit margins are squeezed even further by the manufacturers. They occasionally raise the dealership invoice prices without raising the MSRP. This means reduced profit margins and, although dealers object to this practice, manufacturers continue to do it.

What about overall profit margins? Again, consumers are sometimes under the mistaken impression that dealers make huge profits from other departments within their stores. It's not true.

According to the Retail Council of Canada (2003), the average net profit margin for new-car dealers across Canada is 1.5 per cent. Compare that to the 5.6 per cent net profit earned by furniture stores, the 6.9 per cent earned by franchise home centres and hardware stores, the 6.4 per cent earned by jewellery stores, and the 31.9 per cent earned by beer, wine and liquor stores.

New-car dealers, by comparison, earn among the lowest net profit margins of all retailers in Canada. Yet we still hear complaints from some consumers and advocacy groups that dealerships are ripping off the car-buying public.

I understand that stereotypes persist, and that public attitudes towards dealerships can be negative at times. But over the past two decades, dealerships have improved. Vehicles have improved. The new-car buying experience has improved.

The only thing that hasn't improved is our net profit margins.

This column represents the views of TADA. Email: president@tada.ca

or visit www.tada.ca.

Mike Karim, president of the Toronto Automobile Dealers Association, is a new-car dealer in the GTA.

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