Do New Vehicles Make Dealerships Money?
The nature of car sales can be a tricky thing – we all know the stereotype of the “used car salesman” who is trying to rip you off. However, those of us who work in car dealerships know that this is not the norm. The average person would probably assume that car dealerships make most of their money from new car sales, but things are much more complicated than that.
Of course, newer vehicles are shiny and all over the commercials that you see on TV, but they are far from being lucrative to your average dealership. A profitable dealership needs several sources of income in order to function successfully. In fact, you might be surprised to learn that much of the income for a car dealership might not come from car sales at all!
Newer vehicles “sell like hot cakes” – everyone is interested in updated technology and a shiny exterior. However, they also have the lowest profit margins. Customers come through the door, but buying a newer vehicle does not bring much profit on its own. In fact, NADA states that net profit margins for new vehicles dropped .4% in 2015.
This might lead you to the question: why is the profit margin so low?
The answer is simple. The manufacturer (companies like Honda or Volkswagen) sets a minimum retail price for their newer cars. If a dealership were to set their price much higher than that, customers would find a better deal for themselves elsewhere. Luxury brands do sometimes offer higher profit margins, but they also have higher wholesale costs, which limits the number of customers who are interested in buying the cars.
Additionally, there is also the matter of “holdback money”. This is money that the manufacturer pays the dealer, but only after a car is sold – this allows the dealer to sell the car at a lower price, so that they can draw customers in with competitive pricing. Although, if the car never sells, the manufacturer holds onto the money, and the dealership is short a few hundred dollars or more, depending on the pricing of the vehicle.
New vehicles also have a shorter shelf life than used vehicles. Theoretically, dealerships have less than one year to move their entire “new” inventory, before the next year models are released. We live in a fast-paced world, and it is very easy for a recently released car to become antiquated.
However, consumers don’t usually wait seven months and then buy the latest model – rather, a customer who is considering looking for a new car in the summer will probably just wait for the fresher models that are going to come out in the fall. This means that a dealership has around six months to sell their entire “new vehicle” inventory before it becomes… well, not so new anymore. Unfortunately, dealers may eventually have to sell these cars at a steep discount or maybe even a loss.
These are just some of the reasons why dealerships don’t make a majority of their profit from new vehicles. A successful dealership has multiple streams of income, and new cars would only make up a fraction of it.