Dealership profitability has been falling for months as sales come down from the high prices induced by inventory shortages over the past few years. However, the latest Presidio-NCM Average Dealership Performance Benchmark Report suggests the decline in profitability is slowing and may be stabilizing.
The Presidio Group and NCM Associates discussed the report, based on data from 3,900 dealerships, with WardsAuto. “There is a positive trend in terms of the erosion of profitability,” says Paul Faletti, president and CEO of NCM Associates. While erosion “is still significant,” it’s starting to level off, he adds.
The headline numbers for the first nine months of 2024 seem discouraging: Profits fell 30.4% compared to the same period last year. Revenue was down 2%, used-vehicle volume dropped 0.2%, gross profit per used vehicle fell 19.3% and gross profit per new vehicle plunged 33.5%. New-vehicle sales were the only bright spot, up 1.6%.
But Faletti notes that comparisons are to the unusually strong results of a year ago. “There might be some pretty large percentage decreases,” he says. “But you’re coming off of Cloud 9 in many metrics. It’s still a positive retail environment.”
The report highlights the resilience of fixed operations, where gross profit rose 5.4% in the first nine months, helping limit the overall decline to 7.7%. The average fixed absorption rate increased to 70.4%, compared to 68.2% in the same period in 2023.
“When variable goes down, fixed sticks around,” says George Karolis, president of The Presidio Group.
As vehicles become more sophisticated and more electronics are available, consumers are returning to dealerships for repairs instead of independent shops. Consumers are also keeping vehicles longer as new-vehicle transaction prices rise. Labor rates have increased, boosting service department income.
“All of that is lending to a stable floor that fixed operations are creating,” Karolis notes.
However, Karolis also points to a potential anomaly in Q3’s positive fixed operations numbers. Anecdotally, some dealers reported that last summer’s CDK outage may have caused a “pull forward” effect, with repairs being completed later than expected.
Dealers are also grappling with rising costs due to internal and external factors. Increased inventory and higher interest rates have shifted floorplan interest from a credit in 2023 to an expense in 2024.
The average dealership saw nearly $109,000 in floorplan interest expenses in the first nine months of 2024, compared to a gain of nearly $24,000 in 2023.
“Interest rates aren’t going back to zero,” Karolis says, adding that while floorplan assistance from manufacturers can offset some costs, it often depends on quick inventory turnover. With inventory rising across most brands, floorplan interest costs are likely here to stay, though they remain manageable.
Variable gross profit fell 33.2% in 2024 compared to 2022while personnel expenses only dropped 3.8%. “We were surprised that personnel expenses did not change materially given the decline in margins,” Karolis says. He attributes this to challenges dealers face in managing labor costs amid a tight labor market.
The report also delves into the buy-sell market, where sustainable earnings heavily influence dealership valuations. Some automakers are better at managing production, inventory and incentives than others. For example, domestic brands had a 95-day supply at the end of September, while Toyota had 33 days and Honda had 51 days, according to Cox Automotive.
“The earnings drive value much more than the multiple,” Karolis explains, indicating that profitability impacts a dealership’s valuation more than other factors. The market remains a seller’s market but with more disciplined and analytical buyers. Buyers now focus on sustainable cash flow and growth prospects rather than peak profits when assessing franchise values.
Sellers have been asking for high prices based on peak levels, but that is changing. “There is still a bid-ask spread in the buy-sell market, but it is starting to narrow,” Karolis says. As the business normalizes and profits come down, so do values.
A “new level of normal” in the retail automotive world is emerging. The pre-COVID years saw industry growth of a few percentage points annually, driven by steady used sales and improved new-versus-used ratios. But the pandemic brought unprecedented profits as dealers tripled earnings.
Despite the recent declines, average dealership profits remain 1.8 times higher than pre-COVID levels. The report highlights ongoing uncertainties that could influence trends, including inflation, reduced consumer savings, potential interest rate cuts and the upcoming U.S. presidential election.
Still, The Presidio Group analysts believe the new normal could be better than the pre-pandemic model of “slow, steady growth.” Karolis concludes that the long-term outlook for the retail auto sector remains positive, albeit more balanced than the recent boom years.
