Dealer's Profitability Surges in 2010

Since 2007, U.S. car and light truck sales are averaging 11 million units on an annual basis.  This is woefully below the figure of 16.7 million realized in the year 2006.

Why then are many dealers recording higher profits than they did back in 2006?  Dealers are stating that sales are sluggish and inventory supplies are way too low.  In spite of these factors, most dealers are profitable.  In fact, we have several dealers that are projected to have record profits in 2010.

The top line, sales figures, are significantly lower than those of several years ago; yet the bottom line, net income, figures are strong.  The reason for this is the dealership’s expenses are lower than they have been in the past.

The most significant expense reduction is in the area of personnel expenses.  Although sales have increased over the last year, dealers have not hired back staff positions that were terminated over the past several years.  This is true for all businesses and is contributing to the high unemployment rate.

Other expense items that are significantly lower than past levels are advertising and interest expenses.  Dealers have changed their advertising strategies to focus more on internet advertising.  Internet advertising is significantly less expensive than print and media.  However, dealers that continue to use print and media are paying significantly lower rates than in the past. In addition, low interest rates and lower inventory levels have contributed to lower floor plan interest expense.

Many other categories of expenses are lower as dealers are spending more cautiously.

Another factor in dealers’ increased profitability is the “back to basics” business philosophy.  Dealers have “hunkered down” and focused on the efficiency of each department to improve profitability.  When the economy is robust, some dealers get distracted and lose that focus.

We all believe that new vehicle sales will improve at some point in the future.  I am not confident that will necessarily happen over the next six months.  However, what I am confident of is that when sales improve to more normalized levels, dealers will produce record profits.   Low expense structures with increased sales equate to huge profits.  This will be a win fall for dealers that have survived these challenging times. 

If you have additional questions in regard to this topic, please contact Paul McGovern at pmcgovern@downeycocpa.com or 800-849-6022.