Car Dealerships Wrestle with Business Challenges
RALEIGH, N.C. – In 2008 car dealers selling new vehicles were financially the hardest hit of all car dealerships, according to Sageworks Inc., a provider of financial and business information tools. As a result, new car dealerships went under in record numbers.
Having built data platforms that crunch business financial figures, Sageworks Inc. is able to aggregate private retail shop data. Those numbers reveal some interesting trends, such as a 12% decline in sales for new car dealers. But there are some raised eyebrows on their published numbers.
Paul Eisenstein of The Detroit Bureau, an independent auto news service, tells Blue MauMau, “The market was down more than 12% last year. I’m not so sure how they came up with a number that appears to be less than the actual market decline.” Indeed, the Le Monde newspaper of France reported in March that annual sales in the United States had collapsed 18% in 2008.
According to Sageworks, while all private auto dealer sales decreased in 2008 by 10%, sales per employee decreased 28% in the aggregate, from $540,680 down to $388,694. What is amazing is that during such downward sales pressure, dealerships were actually able to squeeze out an increase in profits per employee of a hundred dollars. Car franchises pushed hard to keep costs in line with plummeting sales.
A veteran reporter on the auto industry of almost 30 years, Eisenstein gives the timeframe of when things got tough for the industry. “The US car market was clearly on a sharp decline through the end of September. It was the fourth quarter when everything really went to hell. And it has stayed pretty bad since then.”
While car sales have drastically slowed over the last year in the downturn, new car profits decreased at an even faster rate over high fixed costs such as inventory and real estate. Sageworks says that these private dealerships saw profits crash from $4,173 per employee last year to just $349 this year.
But there are bright spots.
Sales from used car dealers only dipped 4%. That shows a rare ray of hope for the battered market. One reason may be that car shoppers are more watchful about how much they spend. That fact seems confirmed by Oregon-based CNW Marketing Research, which says that a whopping 13% of car shoppers in 2008 gave up new car dealers in favor of used car dealers.
The table below is for the overall US, listing the change in sales percentage growth, sales per employee and profit per employee.
| Type | Financial Metric | 2005 | 2006 | 2007 | 2008 |
| Car Dealers | Sales % Change | 2% | 2% | 4% | -10% |
| Car Dealers | Inventory Days | 65.24 | 63.98 | 67.83 | 71.71 |
| Car Dealers | Sales Per Employee | $556,875 | $543,542 | $540,689 | $388,695 |
| Car Dealers | Profit Per Employee | $10,022 | $11,083 | $17,612 | $17,712 |
| Dealers, New Cars | Sales % Change | 1% | 1% | 2% | -12% |
| Dealers, New Cars | Inventory Days | 69.66 | 70.26 | 74.05 | 78.71 |
| Dealers, New Cars | Sales Per Employee | $596,932 | $615,597 | $620,572 | $465,556 |
| Dealers, New Cars | Profit Per Employee | $5,765 | $4,324 | $4,173 | $349 |
| Dealers, Used Cars | Sales % Change | 4% | 7% | 7% | -4% |
| Dealers, Used Cars | Inventory Days | 53.87 | 51.7 | 56.95 | 58.3 |
| Dealers, Used Cars | Sales Per Employee | $454,789 | $414,362 | $415,159 | $294,752 |
| Dealers, Used Cars | Profit Per Employee | $20,064 | $22,976 | $36,916 | $39,546 |
The economic downturn gives U.S. car manufacturers even more reason to reduce the size of franchise networks that have grown so large as to be harmful to their franchisors. American car manufacturers have been wanting to follow the Japanese car makers lead in significantly reduced franchise systems. That helps preserve price integrity and revenues for the franchisors.
“Having more dealers competing with one another means franchisees are much more likely to battle within a brand as opposed to battling against the competition,” explains Eisenstein. “Ford Dealer A is likely to be competing with Ford Dealer B as much as competing with Toyota, GM or someone else.”
This in-house competition among dealerships puts downward price pressure from within their own individual systems on prices car manufacturers charge their franchises.
“All that discounting tends to not be good for the manufacturer who wants to have a better brand image,” says Eisenstein. “The automotive slump seems to be outpacing the economy and the fact that manufacturers see such troubling times as an opportunity to trim back the number of dealers makes it a tough time for dealers.”
