The following observations are based on recent visits to and discussions with our dealer client base:
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- Dealership profitability remains high, but in many cases lower than 2015.
- Smaller dealers are more likely to have a reduction in profit over prior year.
- Dealer groups with larger stores in metro areas are performing well.
- Effective use of the internet is the key to selling vehicles. Larger stores or dealer groups typically have a better understanding of the internet and use it effectively.
- Sales in the service and parts departments continue to grow. Increased sales of vehicles in recent years are feeding those departments.
- Attaining gross profit on new vehicles is a challenge. Many luxury brands are experiencing significant declines in gross profit per unit in recent years.
- The F & I department is the key to achieving any profitability in the new vehicle department. It is also a critical element of the used vehicle department.
- Dealers are increasing document preparation fees in states that do not apply a cap. There is little objection to these increases from the consumer.
- Off lease units and off loaner units are flooding the used vehicle market place. This factor is hurting grosses for many brands.
- Manufacturers are requiring or strongly suggesting an increase in the loaner fleet. Domestic brands will require loaner fleets.
- Dealer groups are swallowing up smaller groups or single points. Goodwill multiples are high. Prices are high, even for stores that are not generating a profit. In many cases, banks are financing over 50% of the purchase price of goodwill.
- Hedge funds, family offices, and private equity firms are aggressively entering the market. The auto industry is providing them with a higher return on capital than investments in stocks, bonds, and other businesses. They are not afraid to overpay.
- Stores that do not meet facility requirements receive reduced incentives. Dealers are required to upgrade the facilities every eight to ten years to maintain favored status.
- Finding quality staff is a struggle.
In conclusion, 2016 is another strong year for dealers. For many dealers the profitability may be off slightly in comparison to last year. Do not get discouraged as 2015 was a record year for many dealers. Keep plugging away and finish the year strong.
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If you have any questions regarding this article, please contact Paul McGovern at 800-849-6022 or at PMcGovern@DowneyCoCPA.com.
