||Bigger Sales, Smaller Margins
As sales rebound from last year's earthquake-constrained levels, dealerships' new-vehicle revenues are soaring.
But there's a wrinkle in the good news: Since the second quarter began, many dealers say gross profit margins per new vehicle sold have been falling back to more normal levels, down from the inflated levels of a year ago.
Last year, with few popular Toyota, Honda or other Japanese brands available, dealers were able to command prices close to sticker. That's not true now.
Dealership profits remain high as expenses remain under control and higher volume softens the reduced per-vehicle gross profit.
The slide in new-car margins is "not enough to really get us worried, since we have another two quarters to go, but it's definitely weaker than it was last year," says Morrie Wagener, owner of Morrie's Automotive Group in Long Lake, Minn., which sold about 17,000 new and used vehicles last year. His 10 stores sell Bentley, Maserati, Mazda, Ford, Lincoln, Kia, Subaru, Cadillac, Hyundai and Nissan.
He says his per-car profits are down on average by about $150 per vehicle.
Customers who were willing to pay top dollar last year, when Japanese brands were short of inventory, are looking for deals now. On average, consumers are paying $500 less for a new vehicle today than a year ago, Kelley Blue Book says.
That widespread drop sent margins at Rick Case Automotive Group in Fort Lauderdale, Fla., down in June from year-earlier levels. Rick Case, CEO of the 15-store group, estimated that margins dropped by $300 to $400 per vehicle for Honda and $100 to $200 for Hyundai and Kia.
"Last year, when we couldn't get Hondas, our unit sales were down dramatically, but our margins were way up," Case said. "This year our volume is way up but the margins are down dramatically from where they were last June. Everybody has got more inventory."
Phil Porter, who owns three Subaru stores, in Florida and Connecticut, said: "When people cross-shop, they expect more for their trades and larger discounts." He said those expectations are fueled in part by other makers' "significant incentives."
Paul Taylor, chief economist for the National Automobile Dealers Association, which tracks dealership financials, said rising inventories, manufacturer incentives and falling gasoline prices are contributing to lower new-car margins.
Retail gross profit for new cars in April, the most recent month for which NADA has data, dropped noticeably -- but by less than $100 -- from year-earlier levels, Taylor said.
"And that was a month when many inventories were still tight. That's no longer the case," Taylor said.
For June, he said, "I would not be surprised if it's down by a couple of hundred (dollars) when there is an excess" of inventory for most manufacturers and for most models.
As inventory levels climb -- to a 58-day supply as of July 1 -- dealerships are discounting more, he said. Falling gasoline prices have undercut dealerships' ability to hold prices on small vehicles.
Manufacturers' stair-step incentive programs, which pay dealers escalating bonuses for meeting unit-sales targets, boost revenue when targets are achieved but also can contribute to sharp reductions in new-vehicle gross profit, Taylor said. If dealerships cut prices to try to hit stair-step targets that they eventually miss, he said, "you've simply sold the vehicle at a loss."
Both Wagener and Case say today's new-car margins are on par with those of June 2010, a more normal comparison point than last June when the effects of the March 2011 Japanese earthquake distorted results.
Beau Boeckmann, president of Galpin Motors Inc. in North Hills, Calif., said, "It doesn't matter where we turn; we are definitely seeing pressure on margins, particularly at our Honda store. And we are seeing the same old low-ball pricing from other dealers online. There is more margin pressure on import stores everywhere -- Jaguar, Aston Martin, Ford."
Galpin Motors sells Ford, Aston Martin, Jaguar, Honda, Lincoln, Volvo, Lotus, Subaru, Volkswagen and Mazda.
Boeckmann says the drop in margins has been accelerated by automakers' "turn and earn" sales programs. "There's an emphasis on that more than ever, so dealers are trying to sell as much as they can as fast as possible. It's not all bad from a manufacturer perspective, but from a dealer perspective there is pressure on profit margins."
(Source: Automotive News, 07/16/12)
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