A Word or Two About Car Dealers

by Don Elliott on May 10, 2011

Friends and relatives contact me regularly asking for help getting a good deal on a car (or truck, motorcycle, RV or boat.) Generally, I am more than happy to do whatever I can to help them get the best new or used car value for their money. However, one thing that I won’t do is to deny any car dealer the right to make a fair profit.

Right up front, I have to disclose that I am not now, nor have I ever been, a car dealer or employee at an auto auction. Frankly, it’s a hard job with more risk than I want to take on. After 30 years in and around the automotive industry, I have a good deal of respect for franchise and independent dealers. Some of those car dealers have earned a reputation that I wouldn’t wish on my worst enemy. Unfortunately for the rest of the car dealers out there with lots of business integrity, the very few car dealers with poor ethics seem to have painted the entire industry in a bad light.

Now, a few facts provided by the National Automobile Dealers Association (NADA). There are an estimated 18,458 new vehicle dealerships that make up 13.2% of total retail sales in each state. New vehicle dealerships employ 912,600 workers with an average annual payroll per dealership of $2.35M. NADA reports that in February, the last month that dealership financial profiles are available, the average new vehicle selling price was $29,862. The dealer’s average gross profit was just 4.28% or $1,279. New vehicle dealerships will sell about 13M units in 2011, down from a 17M unit pace just a few years ago.

Independent or non-franchise dealers (typically referred to as used car dealers), are able to show more gross profit per car sold, but on a much less expensive vehicle. The NIADA 2010 Used Car Industry Report shows the average price of a used vehicle sold at an independent dealership was $8,459 with a gross profit of 12.04% or $1,018. The 37,918 independent used car dealers are truly small businesses typically employing 2-5 employees and selling an average of 18 cars per month.

In order to make a profit, car dealers offer a wide array of products and services. The margin on new cars is somewhat limited because the manufacturer provides the M.S.R.P., or manufacturer’s suggested retail price. The new car dealer can sell the car for more or less than the M.S.R.P., but most buyers choose to “negotiate” and pay less, an accepted practice throughout the industry. Used car dealers can price their cars at whatever price they think the market will bear and also negotiate to a final price. Oh, and don’t forget, in this business it is okay to bring in your old vehicle to make a trade. What other business does that AND works on such a slim margin?

The bottom line here is that new and used vehicles are subject to an ever changing marketplace. Negotiating the best deal, deciding on financing, repairs, service contracts, and insurance products are all part of the package. Your Independent or franchised vehicle dealer needs to make some profit in order to stay in business. By being an informed consumer, you will be an effective negotiator, able to get the best car value, a fair trade-in allowance, and receive the right services from your car dealership without paying too much. At the same time, your dealer can make a little money and be happy to see you come back time and again with family and friends as referrals to his car dealership. Do your research so that you know when the deal is fair for both you and your car dealer.

Send us a comment if these few words about car dealers were helpful to you.

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