The Surprising Source Of Car Dealers' Profits

car dealership

Photo: offleaseonly via flickr

If you’ve ever had to take your car into the dealer for a new gear box, you’re unlikely to be surprised by this:Using data from the publicly traded dealership groups, Forbes’ Jim Henry has discovered that the most profitable part of a dealer’s business is its service and parts Department.

For the Penske Automotive Group, which operates 326 dealers in the U.S. and U.K., the gross margin for service and parts was 57 per cent, vs. just 8 per cent for new-vehicle sales.

We looked at the 10-Ks for the other dealers and found similar results for their parts and services departments:

  • Group 1 Automotive Inc. 44.3% of gross profits
  • Lithia Inc.: 34% of gross profits
  • Autonation Inc.: 63% of gross profits

Once your warranty expires, a dealer can pretty much hang you out to dry, Henry writes, since you’re unlikely to successfully negotiate a cheaper hourly labour rate.

Henry also says dealers’ finance and insurance departments also produce outsize profits. For the Asbury Automotive Group, he writes, “F &I” represented about 3 per cent of revenues for 2011, but 20 per cent of the gross profits.

So the next time you’re looking to replace your battery, think twice about where you shop. Or just accept the fact that you’re joining the ranks of the eternally gouged.

Now see how to avoid getting hosed by a shady used car dealer > 

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