A Closer Look At Stabilizing Dealership Profitability

This week’s Automotive News brings great news: As of the mid-way point this year, dealership profitability appears to be stabilizing, according to the National Automobile Dealers Association’s (NADA) mid-year financial report.

The piece and related report show that dealership net profits have tracked closely with 2018 totals through the first half of this year. In August, the average dealership’s net profits rose to 2.4 percent, up from 2.3 percent from the same time in 2018.

This is good news because the year-to-date performance marks the first time since 2015 that net profits have not declined.

The piece notes that the improvement in net profit owes to dealers cutting expenses, and focusing more intently on their service and used vehicle businesses, where margins and sales activity are more robust than new vehicle departments.

The finding made me wonder just how much used vehicle net profits might be contributing to the increased net profit stability, and slight uptick.

I was disappointed to see that, while used vehicle net profits have improved somewhat from where they were in the beginning of the year, they still lag the net profits dealers achieved through August of 2018.

For example, the NADA data shows that through August of this year, dealers achieved $91 in retail net profit per used vehicle retailed. For this period, dealers retailed an average of 511 vehicles.

For the same period in 2018, the retail net profit per used vehicle retailed ran $104, and dealers retailed an average of 503 vehicles.

In other words, dealers retailed more used vehicles through the first eight months of this year at transaction prices roughly $500 higher than they were a year ago, and made less money.

To be sure, it’s outstanding news that the average retail net profit per used vehicle retailed is a positive number.

But I wonder where the average retail net profit per used vehicle average will land as of December 31 this year.

In 2018, dealers closed the year with $6 in average retail net profit per used vehicle retailed—almost a cause for celebration after it had dropped to -$2 in 2017.

From my work with dealers, I’ve come to recognize that the net profit trends in used vehicles owe partly to two important realities of today’s market that dealers either haven’t noticed or they choose to overlook:

Used vehicles lose their net profit juice faster than ever before. Back in March, I wrote about what I call the New Math of today’s used car business. I shared how a detailed analysis of dealer inventories shows that used vehicles typically reach a 90 percent Cost to Market percentage somewhere between 30 and 45 days in inventory.

Two years ago, used vehicles reached a Cost to Market threshold of 90 percent after 60 days. This faster pace of Cost to Market appreciation means that if dealers are retailing vehicles after 30 days, a sizable share may well amount to net profit losses after you’ve accounted for sales commissions and other expenses.

Stocking more to sell more isn’t as effective as it used to be. Dealers believe that if they stock more used cars, they’ll sell more used cars. It’s a belief that’s proven true for nearly the entire history of the used car business.

But there’s a rub in today’s market.

While dealers can still stock more cars and reasonably count on selling more units, they also need to account for the faster pace of Cost to Market appreciation. If a dealer typically carries about 50 percent of inventory older than 30 or 45 days, you can be assured that, without a concerted effort to move the troubled units among the additional inventory more quickly, the dealer has put an even higher number of vehicles on a path to net profit losses.

Given this reality, I’ve been encouraging dealers to stock their inventories based on their rolling 30-day total of retail sales. The formula’s intended to move dealers to understanding that you can no longer stock vehicles to sell them; you have to sell vehicles to earn the right to stock them.

To be sure, some of the pressure on used vehicle net profits is simply a sign of the times—we’re in an environment where price awareness, transparency and competition have never been higher.

But that’s more reason for dealers to commit themselves to managing their used vehicle investments in a manner that maximizes, rather than undermines, each used vehicle’s net profit and return on investment potential.

This is the two-part question I encourage dealers to answer as the year nears its close: Is my average retail net profit per used vehicle retailed higher than it was a year ago, and what can I do to improve it?

It’s especially important to ask this question if you’re banking on a stronger used vehicle department to drive your total dealership profitability.