Dealership profits dropping fast despite stable revenue

Author

Colin Velez
August 19, 2024

Dealership profit has continued to decline throughout 2024, but not for the reasons you might expect.

Driving the news: Research published by the Presidio Group and NCM Associates analyzed dealership performance over the first six months of the year. Two findings stood out from the others:

  • Dealer profits are down 33.4% year-over-year. While overall earnings are still around 1.7 times greater than they were in 2018, normalization is setting in quickly.

  • Per-unit profits suffered similar losses. Dealerships made an average of $2,408 for each new vehicle sold, down 32.9%, and $1,404 for each used vehicle, down 22.9%.

The intrigue: Profitability declines aren’t being driven by typical performance issues. Overall revenue has declined only 3.4%, and both new and used vehicle sales are nearly flat compared to last year.

  • The main culprit is spending. Variable expenses rose during the pandemic, but rather than making cuts to accommodate tighter profits dealers have continued to spend high levels of money.

  • The average personnel expense has fallen only 6% from 2022, while marketing expenses are flat with last year.

  • Through the first six months of 2024, the average dealership posted net floorplan interest expense of nearly $74,000, up from about $23,000 for the same period in 2023.

Key quote: “We’re surprised that the typical dealership hasn’t adjusted its spending and variable costs as quickly and appropriately as it should have given the decline in profitability over the last two years. This is a time when dealers must be nimble and adjust quickly to the industry’s changing circumstances, and many of them have not.”

George Karolis, President of The Presidio Group.

Bottom line: Dealers should be acclimating faster to declining profits than they appear to be. At the same time, retailers may not have as much control over their expenses as they once did. The cost of doing business has risen for many industries. Given how widespread the issue is, profit stabilization may take a long time.

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