How Far Can New Vehicle Gross Profits Fall?

The most consistent statistic in the dealership industry over the past twenty years is the continued decline of gross profits in the new vehicle department.  I do not see this trend reversing itself in the near future.  There is inordinate pressure from vehicle manufacturers to gain market share at the expense of new vehicle gross profits.

The average gross profit per new vehicle sold for a Honda dealer for 2010 is approximately $500.  That translates to 2.5% of the purchase price.  A few years ago, the average grosses for a Honda dealer were around $800 per unit, and we all thought that amount could never go lower.  I am using Honda as my example however this trend is evident with all brands.

This trend alerts us to the importance of the F & I department.  Each new vehicle sold provides the F & I department the opportunity to sell their menu of products.  If your F & I department is weak, the dealership will struggle to maintain overall profitability.  You need to capture significant revenue from this department to overcome the low grosses that you are realizing on the vehicle sale.  With the information that consumers receive via the internet, new vehicle salespeople have been reduced to little more than order takers.  I would argue that the more talented salespeople should be working in your F & I departments.

The new vehicle department is still the engine that drives the store.  The new vehicle department feeds the used vehicle department with trade-ins.  Generally, fresh trade-ins sell quickly and generate high gross profits.  The most important function of the new vehicle department is providing a steady customer base to your service and parts operations.  These departments are the backbone of most stores' profitability.  The gross profit percentage in your service departments should exceed 70%, while the parts department grosses should exceed 35%.

So what does this all mean?  Dealers should not give away new vehicles at grosses below regional averages for their brand.  As long as your grosses meet or exceed regional averages, you must accept that fact and sell as many units as possible.  New vehicle sales feed the more profitable departments of your store.  Most dealers will operate their new vehicle departments at a net loss.  This loss should easily be offset by profitability in the used, service, and parts departments. 

If you have any dealership management questions, please contact Paul McGovern at pmcgovern@downeycocpa.com.