Are dealer profits in trouble?

Hey, everyone. Happy New Year from my team here at Car Dealership Guy. I’m looking forward to a really big 2024 of tracking the biggest trends impacting the autos business right here, every week. Got any ideas for how I can level up this year? Hit reply and let me know what you have in mind.

—CDG

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Today’s Biggest News

The Service Biz Is Rapidly Changing…and Profits Are on the Line

A few weeks back, I mentioned an interesting stat I found while combing through some data from Cox: Franchise dealerships have been giving up their leadership position in the services business to general repair shops like quick lube locations and tire service centers.

The numbers are telling: Dealership service lanes accounted for 30% of all service visits in the US in 2023, down from 35% two years earlier, according to Cox.

And for the very first time, dealerships are no longer the “most preferred” service provider among vehicle owners, Cox found.

Given that…1) consumer spending in the auto care industry is set to pass $400 billion in the next two years 2) the average owner had their vehicle in for service or maintenance 2.5x a year in 2023, up from 2.3x a year in 2021 and 3) cars are lasting longer and longer which means more and more trips to the service lane…this is worth digging deeper on.

Let’s understand how we got here and what this shift in the service business means for the automotive industry.

How we got here: A major part of this change has to do with trust. Fewer respondents said “trust” when asked why they chose to get repairs done at their dealership in 2023 compared to the last time Cox ran the survey. This could suggest a possible erosion of trust in dealership service lanes as compared to consumers’ other options.

And those other options are becoming more and more attractive to drivers who are increasingly frustrated by the cost of repairs.

• Cox tallied a 45% increase in the average price per service visit since 2021 (FYI, that includes warranty costs, so higher prices didn’t fall entirely on vehicle owners).

• Four of the top five reasons drivers who spoke to Cox didn’t return to a dealership for service were cost-related.

One note on cost: There’s a decent-sized sentiment among dealers that one of the big reasons drivers are going elsewhere for repairs is a fear of being overcharged (Cox’s data suggested as much). But that’s mostly unfounded. The average dealership service visit in 2023 cost $258 compared to a very similar $249 at a non-dealer service provider, Cox found.

Here’s why this big picture is so important: Service business is traditionally what supports dealerships through tough times. And while times have certainly been tougher, we’re in a period of industry-wide normalization that’s led to some erosion of profits, even for the biggest auto brands.

Roll the tape:

• In the third quarter of 2023, Haig Partners found that the average publicly owned dealership made $5.4 million in the 12-month period ended Q3 2023…which was a 17% drop from year-end 2022.

• The dealers and experts Haig interviewed also suggested full-year profits will be down around 20% for private dealers in 2023.

• Reality check: Dealership profits remain more than 2x what they were before the pandemic, Haig found in Q3. But things are simply coming down to Earth.

What I’ve found in talking to dealers: This is the tale of two dealership realities. While some dealership service businesses struggle, others are still notching record months in their service lanes. It’s another solid example of the shades of gray in the auto industry. Fixed operations gross profit—buoyed in large part by service lanes and high repair order counts—rose 9% from YTD Q3’22 to YTD Q3’23, Haig found. That growth rate has slowed from prior years, but 9% is nothing to sneeze at.

Bottom line: Things are cyclical—always have been, always will be. As dealerships lose service lane business due to factors real (trust) and imagined (overcharging), mom and pop and third party auto repair businesses have an opening. If they get aggressive, there’s market share there for the taking as driver preferences shift.

This Week’s Episodes of the CDG Podcast

No days off for the hot takes here at CDG. I published three killer episodes over the last two weeks, and I’ve got the rundown for you here.

• David Meniane, the CEO Carparts.com, told me all the details of building a $200+ million car parts empire, solving the auto repair crisis (extra relevant today), and using cutting-edge tech like AI and 3D printing to build his business. Listen here.

• Alan Haig, President & Founder of Haig Partners, dished on the realistic state of the auto market, including his POV on the most (and least) desirable brands and the future of dealer profits. Listen here.

• David Regn, Co-Founder & CEO of Stream Companies, told me all about ​​managing $500+ million in dealership ad dollars, uncovering marketing budgets, and the truth about gimmicky dealership mailers. Listen here.

You don’t want to miss these episodes.

Catch up on the CDG Podcast here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to our partners—AutoFi, Cars Commerce, Haig Partners, CDK Global, and Stream Companies—for making these episodes possible.

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In Other News

Some interesting news that broke yesterday: Holman Auto is buying all of North Carolina-based Leith Auto Group. The deal includes 30 dealerships and a whole lot of money (exact price hasn’t been disclosed, but I’d bet it’s in the billions).

My POV: Dealership consolidation continues accelerating. Few thoughts:

1. The market is increasingly favoring larger dealer groups. They’ve got economies of scale and operating leverage that smaller dealer groups lack.

2. Tech is getting more sophisticated and more widely adopted—and buying a tech-forward industry peer is a solid way to maximize the impact new tech can have on your business rapidly.

3. Some dealers had super strong years and this M&A is a means of cashing out.

4. Certain brands are facing an uncertain future. Notching an exit can be a smart business move at the right price.

I’m curious to hear what other reasons you think are behind the recent increase in consolidation in our industry. Hit reply and let me know your thoughts. And congrats to all parties involved in this deal—awesome.

The Backlot

• Tesla reported 485,000 deliveries for the fourth quarter, bringing its 2023 total to 1.8 million. That’s delivery growth of 38% and production growth of 35% year over year.

• These days, it takes a dealership around three weeks longer to sell an EV than a gasoline vehicle, according to Edmunds.

• SIXT, Europe’s biggest car-rental company, is phasing out Tesla EVs from its fleet over high repair costs and low resale values.

• Today in year-end data: Full-year 2023 U.S. new vehicle auto sales are forecast to finish near 15.5 million units, an increase of 11.6% from 13.9 million in 2022.

• Vietnamese automaker VinFast opened its first franchised dealership in the US with Leith Automotive Group in North Carolina (big week for them).

• Here’s what to expect from auto tech at CES later this month.

Thanks for reading. I’m really excited for an ambitious year here at CDG Media. Big announcements are headed your way sooner than you think. Have a great start to 2024, and I’ll see you next week.

—CarDealershipGuy

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