A Rosy Used-Car Sales Outlook? Not Necessarily, Independent Dealers Say

The Challenge of Limited Revenue Streams

Cheryl Miller

For most independent dealers, the core focus is on selling used cars. While some have service shops, and “buy-here, pay-here” shops also have a revenue stream from financing vehicles themselves, the majority of these dealers don’t have the benefit of a diversified revenue base. A 2016 Cox Automotive survey of independent dealers found only 35% had service departments and only 14% offered a parts department, whereas these offerings are a key money-maker for franchise peers.

This disparity has the largest impact on the smallest dealers, the so-called “small retail independents” defined as those dealers selling five to 25 cars per month. Of those surveyed for Cox Automotive research, 71% indicated that they made zero profits from their service operations, which may be because their service shops really focus on reconditioning cars to get them ready for retail sale.

This collectively puts the independents at a competitive disadvantage from a business perspective, given most franchise dealers have new and used vehicles to sell along with fixed operations businesses, incentives driving new and CPO sales and captive financing options that may be subvented — all working to ultimately support profitability and smoothen out fluctuations.

The incentive space is perhaps the biggest difference-maker for independents. Independent dealers miss out completely on the benefit from the industry’s roughly $40 billion incentive spend annually. Virtually all of this money goes to fuel the new car market as the captives work to move the metal.

Finding the Winning Formula

Clearly, independent dealers face a number of critical obstacles to remaining competitive with franchises. However, there are several concrete steps they can take to reduce the impact of these foundational challenges.

First, on the lending front, independent dealers should strive to build relationships with multiple lenders. This will increase the likelihood of getting competitive rates for their customers and help them understand where the lenders like to play in the credit tier spectrum.

Second, the natural vehicle aging process will actually work in independent dealers’ favor. Today’s nearly-new fleet will soon move into the five- to eight-year-age class that represents independents’ sweet spot. By planning for this coming influx of inventory, independents will be poised for growth.

Third, independent dealers should consider going on offense through expansion into other offerings. Consider investing in a dedicated fixed-operations offering or partner with a third-party service organization as a first step, potentially garnering referral fees and laying the groundwork for a dedicated fixed-ops function down the road.

Finally, dealers need to spend time to truly understand the economics of their business. For instance, what does the dealership make when selling and financing a vehicle? What are the acquisition fees, dealer reserve, gross profit, and other key indicators? What levers can be pulled to maximize profitability?

In a challenging environment with inherent disadvantages, independent dealers need to take the reins of their operation. Smart planning and a deep understanding of business dynamics can close the franchise gap and spur growth in 2018 and beyond.

Cheryl Miller is vice president and general manager of F&I solutions at Dealertrack, a Cox Automotive brand.

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