A Quick Look At Car Dealerships

by Don Elliott on June 21, 2012

Right up front, I have to disclose that I am not now, nor have I ever been a car dealer. 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 car dealers. Some of those dealers have earned a reputation that I wouldn’t wish on my worst enemy. Unfortunately for the rest, these few car dealers, or their employees, paint the entire industry in a bad light.

Now, a few facts provided by the National Automobile Dealers Association (NADA). There are an estimated 17,540 new car dealerships that make up 14.5% of total retail sales. New car dealerships employ 912,600 workers with an average annual payroll per car dealership of $2.61M. NADA reports that in April 2012 (the last month that car dealership financial profiles are available) the average new vehicle selling price was $30,286. The dealer’s average gross profit was just 4.42% or $1,340. New car dealerships will sell about 14M units in 2012, down from a 17M unit pace just a few years ago.

Independent or non-franchise car 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 car dealership was $8,459 with a gross profit of 12.04% or $1018. 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 auto financing, repairs, service contracts, insurance products and an auto loan is all part of the package. Your Independent or franchised car 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 the right services from your car dealership without paying too much. At the same time, your car 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.

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