Dealership Margins: Finding Solutions to a Compressing Problem

November 22, 2017 Dealertrack Staff

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Margin compression, the gradual decrease in the difference between cost and profit of new and used cars, is becoming a serious problem for many dealerships. 

Download our Ebook, "7 Solutions to Margin Compression," to learn how to fight margin compression

Here are the facts:

  • Dealers retain just 0.4% of revenue earned on new car sales. 
  • In 2005, dealerships sold about 852 new cars per rooftop, at 5% gross profit per transaction. 
  • In 2009, new vehicle sales dropped to 615 new vehicles per year, with a gross 3.61% profit per transaction. 

In just four years, we can see a significant drop of sold new vehicles per year with a 1.39% decrease in gross profit per transaction. 

The Signs of Margin Compression

By carefully watching financial performance, dealerships can spot the signs of margin compression. Dealers should watch for:

  • Increase in employee tendency to discount
  • More aggressive pricing conversations with customers
  • Intense price wars with competitors
  • Longer buying cycles for customers

Finding Solutions to Margin Compression

Take a look at our infographic"7 Solutions to Margin Compression"

Dealerships dedicated to meeting margin compression head-on are:

  1. Focusing on Fixed Operations: the parts and repair services segment is expected to generate 13.6% of dealerships' revenue in 2017, outperforming both new and used vehicle sales.
  2. Focusing on F&I Sales: for every $1 generated through F&I, dealerships retain about $0.70-$0.80, much higher than through the sale of a car. 
  3. Looking Into Process Improvements: make process improvements to retain profits through cost and expense control. 
  4. Cutting Holding Costs: reducing operational expenses, including holding costs, preserves precious profit margins. 
  5. Improving Employee Training: help employees to work more efficiently and to recognize the signs of margin compression.
  6. Adding Digital Retailing: align with customer preferences and save money by moving some of the shopping processes online. 
  7. Implementing New Technologies: modern dealership technologies can reduce waste, streamline processes, improve employee efficiency, and increase profit. 

Download our Ebook, "7 Solutions to Margin Compression," to learn how to fight margin compression


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