Dealers Make Money on Used Cars and Lose Money on New Cars, says NADA
By Brendan Moore
The NADA (National Automobile Dealers Association) recently released a study showing that the average auto dealer in the United States makes an increasing amount of money on used vehicle sales and a decreasing amount on new vehicle sales. In fact, the study concluded that the average franchised dealer in the U.S. loses money on new cars overall while making money on used car sales.
The report also showed that the difference between profits on a per-unit basis between new and used sales is the greatest it has been in 25 years.
What is the difference in dollar terms? Although you could never get a consumer anywhere in the U.S. to believe it, the NADA says their data shows that the average used car sale nets an all-in profit of $306 and the average new car sale registers a loss of $17.
Although finding themselves in this situation may be a new experience for some dealers, many of their brethren that have a new car franchise for a slow-selling brand have been coping with this stagnant profit environment for years. Some dealers that have owned franchises like Saturn, Mitsubishi, Izuzu, Buick, Mercury, Suzuki, Saab, and others for the past five years have been keeping the lights on by selling used cars and selling their new cars as a not-for-profit side business, hoping for a nationwide turnaround in fortunes for the brand. And that is precisely what has happened for the Saturn dealers lately, and for some percentage of Buick dealers – GM’s efforts to recharge those brands have succeeded to the point where the new car side of the house no longer needs to be propped up by the used car side. No such luck for the other brands mentioned.
Geography also plays a large role in whether new cars are profitable for a dealer. Areas depressed economically or areas hit hardest by the sub-prime mortgage fallout are seeing new car sales shrink as people tighten their belts. In these areas some dealers are reporting that used car sales at their dealership average 400% of new car sales.
For a dealer, used car sales are generally a little bit easier than new car sales. First of all, customers tend to be less demanding of a used car in terms of condition and performance. Second, there is not only more room between wholesale and retail in used cars as compared to new cars; there is much greater variability in condition as opposed to new cars, in which there is none. When a consumer looks at a five year-old Toyota Camry at one place and then looks at another five year-old Camry at another place, there will probably some differences. Maybe its paint, or mileage or door dings, or interior condition or the original options that came with the car or something else. A new Camry is a new Camry is a new Camry. Every dealer pays the same price from the factory and every Monroney/MSRP sticker on the window is the same, except for destination charges between regions. There are no differences in quality or price. The variability between the condition and mileage of any two used cars that are the same model and year gives the dealer that much more room to make a profit. The differences get even bigger when a customer starts bouncing around between a three-year-old car, a four-year-old car and a five year-old car. Many car salespeople and sales managers prefer being on the used side of the lot for this reason. Lastly, many consumers really, truly believe that there are several thousand dollars worth of profit in new cars costing as little as $25,000 and bargain accordingly. No such hurdle regarding consumer perception exists for used cars on a widespread basis.
Given the increasingly competitive landscape of new car sales in the U.S. and, the fact that new car sales volumes are forecast to fall in calendar year 2008; this situation is going to get worse for many new car dealers, not better.
But, it should be a good year for the big wholesale auctions.
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