The Unintended Consequences of Auto Retail's Profitable Era
Babak Rosenthal Mohammadi
? General Manager | Automotive Retail & Fixed Ops Strategist | Profitability & Process Optimization | NADA Academy
As the dust settles on a period of remarkable profitability within the automotive sector, a sobering truth emerges: the high-profit margins of recent years fostered a sense of complacency that permeated beyond new car sales, seeping into the practices of used car transactions and finance and insurance (F&I) services. The anticipated dip in new vehicle profits has become a reality, as evidenced by recent quarterly reports. Yet, the wider impact of this lax era on dealership operations and their foundational processes was not as readily predicted.
The Good Times: A Double-Edged Sword
During the peak of the market upswing, dealers enjoyed the luxury of high demand and limited supply, allowing them to command premium pricing for new vehicles. As this trend reverses, we're not just seeing a normalization of new car profits but also a revealing drop in used vehicles and F&I gross profits.
Table 1: The Group Average Gross Profit Per Retailed Unit
The Q3 2023 reports from the top publicly held auto dealers clearly reflect this shift. While the industry braced for a reduction in new car profits, the concurrent slight decreases in used vehicles and F&I profits were less anticipated. This can be attributed to a lack of focus on traditional sales processes and education within the dealership environment.
The Data Speaks
The numbers are telling. AutoNation, for example, saw a 32.2% decrease in new vehicle gross profit in 2023 compared to the previous year. Penske Automotive Group and Lithia Motors also experienced a decline in new vehicle profits by 13.3% and 15.1%, respectively. This pattern is consistent across the board, with each major dealer group reporting significant decreases.
Table 2: New Vehicles: Gross Profit Per Retailed Unit
The used vehicle sector and F&I departments, typically bastions of dealership profit, were not immune to this trend. Margins in these departments have tightened, indicating that the processes and training that drive profitability in these areas may have been neglected.
A Wake-Up Call
This downturn serves as a wake-up call. During the profitable period, it seems that rigorous sales training and adherence to proven processes took a back seat. Now, as the market corrects itself, the importance of these fundamentals is coming back into sharp relief.
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Crafting a Forward Strategy
To navigate this transition and lay the groundwork for future success, dealers must double down on training and process refinement. A recommitment to these principles is vital to shore up the profitability of used vehicle sales and F&I departments.
Investing in employee education can lead to more effective sales strategies, better customer service, and ultimately, healthier margins. Additionally, reevaluating and streamlining F&I processes will be critical in maintaining profitability in this traditionally lucrative area.
In Conclusion
The decline in gross profits per unit for new vehicles was anticipated, but the implications for used car sales and F&I gross profits were not as clearly foreseen. The data from the Q3 2023 reports highlight the urgent need for dealerships to refocus on core operational excellence. Only by reaffirming a commitment to process and education can dealerships hope to weather the normalization of the market and build a foundation for enduring profitability.
The moment is ripe for a strategic recalibration, and the dealerships that act swiftly and decisively will be the ones who thrive in the evolving landscape of auto retail.
The data was collected from the following sources:
This analysis is based on the reported figures and trends observed in the Q3 2023 earnings summaries of these dealerships.