By Don Ray, Portfolio
I was asked the other day by a Honda dealer, “Why would someone want to buy a franchised car dealership?” He was basically asking, “Why did I want to put myself through all the brain damage needed to own and operate a dealership?” Keep in mind this was a Honda dealer, not a Volkswagen dealer. How does a guy with a CPA background answer that question?
Let me count the reasons:
- Return on equity – According to the Kerrigan Blue Sky Report, the average dealership return on equity over the last ten years had an annual low of about 12% and a high of over 30%. How many of us did that well in the stock market over the last ten years?
- Reliability of earnings – Looking at NADA data back 10 years from 2014, dealerships (in constant 1982 dollars) earned an average pre-tax low of $128,679 (actual of $277,045) in 2008 and a high of $465,822 (actual of $1,093,805) in 2014.
- Diversity of earnings channels
- New Vehicles – Margins are largely driven by the popularity of particular vehicle models. While gross margins are declining, the over 17 million new cars sold in 2015 are fueling other dealership earnings engines including F&I activity.
- Used Vehicles – Typically annual used vehicle sales are about 3 times that of new vehicle sales with MUCH higher margins. These sales are divided approximately equally among individuals, independent dealers and franchised dealers. These sales by franchised dealers drive not only F&I activity but also service and parts as these vehicles are reconditioned to the dealer’s standards.
- Service – Due to the sophistication and specialization of today’s vehicles, dealerships are in a great position to take advantage of their relationship with new and used vehicle customers to continue to service those cars and trucks with a nice margin of about 70%.
- Parts – This profit center is driven by the success of the service department. While a typical gross margin of 30% is less than half of that of service, it is still much greater than vehicles sales margins.
- F&I – Yes, much is being bantered around about predatory lending including disparate treatment and even disparate impact. Frankly this is another example of government (CFPB) excess. Have some auto dealers employed deceitful/discriminatory practices? Of course. Is that the standard in the auto retail world of today? Absolutely not. Today’s dealership is shifting its focus from rate to products in part due to the government’s unreasonable profit-killing tactics.
- Reinsurance – An often overlooked profit opportunity, this is an auto dealer’s opportunity to make money twice in one transaction (i.e. sell an F&I product at a profit to a consumer AND make the underwriting profit on that same sale). It is a very powerful wealth-building technique. Additionally, when properly structured, cash paid by the reinsurance company for repair claims is paid to the dealer’s own service department, thus recycling the dealership’s own cash.
- Platform on which to do good in the community
- According to the US Bureau of Labor Statistics, auto dealers provide more than 1.2 million jobs at an average wage of over $20 per hour
- The Center for Automotive Research reported in 2013 that $38.9 billion was generated from taxes on the sales and service of new and used vehicles
- Ally Financial, sponsor of the Time dealer award program, conducted a 2012 survey of U.S. dealers that found:
- Nearly 64 percent donate more than $10,000 annually, with most going to local causes.
- More than 63 percent of dealership staffers volunteer in their communities.
- More than 50 percent volunteer more than 50 hours a year.
The Honda dealer that asked me that question ending up taking over an additional Honda point in a highly dense market, and made it into a 350 new car unit sales per month dealership and is reaping the benefits. Guess he answered his own question, but why would YOU want to own a dealership?