Are dealers walking into a profitability trap?

Hey, everyone — I polled my audience on X about whether a Trump presidential victory will be good or bad for legacy automakers. And the results were… interesting, with ~63% saying good. Want to know my take? Hang tight — because you might see it in a future CDG newsletter 👀

—CDG

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It seems like everyone’s ready to crown 2024 as the year of “normalization” in the auto market. The story goes: after years of supply chain chaos, record profits, and tight inventory, we’re supposedly sliding back into familiar territory, blah blah blah. But let’s get real —

Remember pre-2020? Dealers were drowning in high incentives, fighting margin compression, and sweating over bloated inventories. It was a grind for every dollar, with cars piling up and losing money fast. Nostalgic yet?

Now, as we tiptoe back toward the last time things were 'normal,' it’s clear — a full-blown return to the old ways spells trouble. And the best outcome for long-term dealership profitability is breaking with tradition. 

The reality is dealership profits are declining – but it isn’t a freefall.

Profits are leveling off and are still well above pre-pandemic averages. In other words, it could be a hell of a lot worse.

• The average new car profit margin was $2,326 through the first nine months of the year, a 33.5% drop, NCM Associates and The Presidio Group reports.

• And new car inventory has increased meaningfully from last year — leading to more options for consumers but way fewer new cars selling for over MSRP — aka lower profits per vehicle. 

• But dealers haven’t lost all of their pricing power – inventory levels are still around 20% shy of 2019.

Yet – the rising vehicle supply has also brought about higher floorplanning and advertising costs for dealers. Through Sept., the average dealership posted net floorplan interest expense of nearly $109,000 – a far cry from the $24,000 profit for the same period in 2023 as floorplan assistance from automakers offset interest costs.

All things considered — the average dealership’s net pretax profit last year was still more than 1.8x what it was in 2018 when inventories and discounts were much higher… and that’s pretty strong.

But not all brands are created equal and nuances make a difference.

Some automakers haven’t learned their lesson from the past 5 years. For example: Nissan. In the first half of 2024, profitability at U.S. Nissan dealerships plummeted to its lowest point in nearly 15 years as the brand continued to battle excess inventory and the loss of market share. Despite Nissan making some of the most affordable cars out there… fewer people want them.

On the other hand, dealers with high-demand brands, lower / more manageable days’ supply, or dominance in their local market have a clear advantage.

Toyota and Lexus, with their strong brand loyalty and consistent demand, are keeping margins and throughput high, reports Haig Partners.

And luxury brands are holding their ground better than most with a hefty average gross profit of $5,573 – only a 17% slide. Makes sense — higher-net-worth clients (and those with more disposable income) can easily absorb a few hundred dollars on a monthly payment.

So, what does all this mean for dealers?

Safeguarding store profitability is priority no. 1.

All four major dealership profit centers — new car sales, used car sales, finance and insurance, and service and parts — saw gains during the height of COVID disruption. 

But the landscape has since changed and new vehicle margins will likely keep dropping… But for a different reason: many dealers think that — in addition to obvious factors such as higher inventory levels and cooler demand — the latest cohort of dealership personnel hires (from 2021-2022) is part of the challenge.

Sentiment around the industry is that these “pandemic-hires” only know high demand, easy sales, and big commissions. And with that type of economic environment mostly gone, many stores with inexperienced talent find themselves “weak and bleeding,” as one dealer told me.

In the used car market, things have been more challenging since prices have corrected much faster. But they are starting to level off and become more predictable (prices can only go so low when quality used inventory is tight).

So, how are dealers protecting their used car profits?

Despite absorbing heavy depreciation, the most progressive dealers are managing their operations using a long-term perspective.

I recently spoke to Jack Ballinghoff, COO at Ourisman Automotive Group, on the Car Dealership Guy podcast and he told me about a rule he has for his stores: No "stealing the trade" (offer a lowball price on trade-ins) or skimping on reconditioning costs.

Instead, in the long view, he’s prioritizing sales volume, repeat business, and quality customer experiences. Sure, this means lower front-end profits, but this is typically balanced out in the finance office.

Yet even there, profits are squeezed. High interest rates and vehicle prices make financing more expensive for consumers, tempering interest in F&I products like GAP insurance and vehicle service contracts.

But blaming the economy is a lame excuse. Working in the finance office has always taken some creativity. Hell — just showing buyers an insurance quote boosts F&I gross profit by 18%.

This leads me to the service and parts department — the backbone of dealership profitability and arguably the biggest reason why profits haven't fallen as far.

See — the increase in costs of parts and labor (driven by inflation and a shortage of skilled workers) is high. And drivers are keeping their cars for longer and logging more miles before trading in or buying something new.

So – what’s next for dealership profitability? 

Sure, profits are cooling off, but supply and demand are settling into a natural groove (if automakers and dealers stay disciplined). And trying to recreate 2019’s bloated inventories and high incentives won’t do the industry any favors.

The smart play now for dealers? Embracing the balance by sticking to fundamentals like aggressive pricing, lean inventory management, and doubling down on customer retention (especially in service departments). The days of hitting easy home runs may be behind us, but steady singles and doubles will win the long game.

Dealers, is your inventory at risk?

From rising holding costs to automated markdowns, carryover inventory is at risk of massively affecting your bottom line.

But you’re not alone.

On average, dealers carryover 45% of inventory every month, with each unsold vehicle adding thousands in costs. Identifying carryover inventory risk can reduce days on lot by 7-10 days and prevent a $1,500 hit to gross profit per unit,

Meet Lotlinx Sentinel. The only solution designed to predict and manage carryover risk—before it impacts your bottom line.

Click here to see which cars on your lot are at risk right now.

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We’ve got tons of great jobs hitting the CDG Job Board right now:

• Edmunds: Account Executive in Wisconsin.

• Ron Marhofer Auto Family: Hyundai Sales Consultant in Ohio.

• Sheehy Auto Stores: Sales Manager in Maryland.

Looking to hire? Add your roles today—it’s 100% free.

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Thanks for reading. See you on the next edition…

—Car Dealership Guy

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