Why Investing into a Car Dealership may be your worst nightmare ever

Thinking of selling and servicing cars as a business? As most new entrants into this business have found out, it may not be such a great idea after all.

OEMs will typically demand that your dealership needs to be situated in a "prime" location. Now, any property agent will tell you that rental values are prohibitively high in a "prime" area. Things could get even worse if you happened to be in a country that's land starved. Now to rub salt to wound, OEMs will demand that you build a massive showroom, complete with a service center, stock parts, buy overpriced imported furniture and fixtures, pay an annual fee equivalent to the retail value of 3-4 mass market cars for the use of an online diagnostics system, and if you do not fulfill the sales target given, you are threatened with the termination of your dealership. So, to summarise, if you really want to get involved in this business, you have to:

1. Be extremely lucky to have an ancestor that left you a huge piece of land that happened to be situated in a prime location today (but then again, wouldn't it make more sense to use it for a commercial/residential development project rather than a car showroom?). Either that, or you're rich and own plots of land everywhere that you have no idea what to do with and thought: "Hey! I wanna have a shiny car showroom!"
2. Readily have a few millions in USD, doesn't matter which country you are in, as building material cost does not discriminate by geographical location. Depending on the construction method, it may even be more expensive to construct a showroom in a developing country than in a developed one. I was once presented with a business plan proposal with a 13-year ROI period. Pure madness.
3. Make sure that you are able to secure a license to operate the business from the local council. Nothing would make a grown man scream like a little girl to find out that they can't run a business they invested millions in.
4. Have a good financial record to secure floor-stocking facilities from the banks. This is critical as by the time you have build your 3S or 4S or 5S center, you won't have much cash left to buy stocks.

Still not intimidated? Here's the kicker; get ready to sell cars at a loss. I'm dead serious. From fairly new markets like China to US, dealers of various brands from luxury to mass are subsidising car sales either by sacrificing their margins or worse, their own money. Why do they do it? Well, first there's the sales bonus that OEMs offer upon meeting the targets. This may be an additional 1% or more above the standard margin. They believe that the additional discounts given to customers can help them secure a sale against other dealers and they can recover the loss later. Secondly, there's the fear of losing the dealership under termination for non-performance. Imagine the loss you'd have to incur under that scenario.

Generally OEMs can be quite sensible business people but in the last 5 years, they have been nothing but ruthless in making sure that they pass the risks over to the dealers and meeting their annual sales target. Look at what happened in China recently. Dealers are finally up in arms and pushing back telling the OEMs to take their stocks and stuff them up where the sun doesn't shine after years of having cars pushed down their throats and left fending for themselves. The OEMs have now agreed to share the burden of price cuts. Today I have seasoned auto dealers from different brands contemplating if they should start operation after the building has been completed. The loss is lower compared to actually running the business.

Typically a dealer can hope to recover their upfront losses from the aftersales operations, and that's what most do actually until the Chinese government started to clamp down on "profiteering" by dealers with large profit margin on parts and services. If you are cash-rich, you should definitely get into the financing and insurance business, where the real money is to be made from auto sales. Again, you need to have a license for this. The fact is, finance companies are really those that make a ton of money from auto sales, much more than manufacturing. So make sure you are in a position to cash in on this business.

Is it all gloom and doom? Well, not exactly, but what I'm saying is, there are more profitable business to sink your money into with better returns and shorter ROI period. If you're not already in the auto business, chances are, you never will. If I told you that a typical car dealership is looking at 1-2% of net annual profit margin (if you're lucky), you would and should think twice, or thrice.

The auto OEMs really need to focus on making the dealers profitable. Only then can an automotive brand grow and the consumers will not suffer when a business closes down. Stop demanding that a dealership must be of a certain floor size and forcing dealers to spend an insane amount of money making them look grand. We should instead focus on being efficient and display only models that are suited for a specific customer profile in different parts of the city in a smaller footprint. Look at the Japanese showroom model; I have always been fascinated by compact Toyota dealerships that can only fit 2-3 display models. You know how many models Toyota build and sell; there's no way they can fit them all in at the same time. This also explains the sub-dealership brand strategy like Toyopet focusing on specific models for specific customers group. In this way, you can rent smaller showrooms and lower your overheads but increase your touch points at the same time. 

On that note, I'm gonna go visit my favourite cafe, where profit margins are very likely in the double digits.