The decline in profitability for the typical U.S. dealership appears to be leveling off, according to the recently released Presidio-NCM Average Dealership Performance Benchmark report.
Through September, net pretax profit for the average franchised store dropped 30.4 percent compared with the same period in 2023— a minor improvement from the 33.4 percent decline recorded for the first six months of this year.
Through the first nine months of 2024, the average dealership retailed 647 new vehicles, up 1.6 percent. It retailed 551 used vehicles during the same period, down 0.2 percent for a total retail volume of 1,198 vehicles. Total revenue per store was $61.6 million, down 2 percent.
New Normal
The overall data suggests to the authors that dealership profitability may finally be reaching a new level of normal after sharp pandemic-era increases made way for steep declines the past two years. If so, a dealership’s profitability new normal is well above what was typical before the pandemic as pretax profit for 2024 through September was 1.8 times 2018’s level, according to the Presidio-NCM data.
“We have been watching the normalization trends closely for signs of leveling off, and the modest improvement seen during the just-completed third quarter is the strongest indicator yet that retail automotive’s profit tumble could end up stabilizing at a level well above pre-pandemic norms,” said George Karolis, president of The Presidio Group.
The average gross profit per new vehicle retailed dropped 33.5 percent during the first nine months of 2024 to $2,326, a slightly lower dollar figure than recorded through June. But the average gross profit per used vehicle actually showed improvement against the first six months of the year.
That measurement dropped 19.3 percent to $1,416 through September compared with a 22.9 percent drop to $1,404 per vehicle for the first six months. Finance-and-insurance income has been steady in recent quarters, dipping only slightly from $1,574 through June to $1,568 through September.
CDK Effect?
The report noted the average dealership’s slight moderation in profit decline for the nine-month period compared with the six-month period may have had a connection to the June cyberattacks on CDK Global.
“It’s encouraging to see the erosion of profit for the average dealership moderating,” said Paul Faletti, CEO of NCM Associates. “To ensure that their operations are ready for wherever the new normal lands, dealers should continue to scrutinize their expenses and other operational metrics and make the necessary adjustments to maximize earnings moving forward.”
The Presidio-NCM Average Dealership Performance Benchmark is based on aggregated financial results of more than 3,900 U.S. franchised dealerships of all brands and sizes that work with NCM Associates, which provides 20 groups, consulting and training to dealers across the country. The number of outlets contributing data represent more than a fifth of all 18,000-plus dealerships in the U.S.
Managing Costs
The need to better manage costs was revealed by new data on personnel, floorplan and advertising expense that was added to the Presidio-NCM benchmark in mid-2024.
The average dealership for the recorded time periods saw variable gross profit drop 33.2 percent compared with the same period in 2022, but total personnel expense fell just 3.8 percent. On a year-over-year basis, personnel cost for the average dealership dropped 1.9 percent during the first nine months of 2024.
“The improvement in fixed-ops performance was a clear bright spot,” said Presidio’s Karolis as the average store’s gross profit from fixed ops rose 5.4 percent for the same period. The gains in fixed-ops gross profit helped drive the average dealership to a fixed absorption rate of 70.4 percent through September versus a rate of 68.2 percent for the same period in 2023.
Uncertain Market
On the volume side, new-vehicle supply for the overall industry stood at 68 days at the end of September. Concerns about affordability and high interest rates, plus economic uncertainty in advance of the 2024 election, have kept some buyers on the sidelines. Analysts added another key issues is if the Federal Reserve continues its interest rate-cutting campaign will help boost sales in the post-election period.
“The overall situation is fluid and should be viewed with caution,” warned Karolis.
The combination of more supply and higher interest rates this year has pressured dealership floorplan interest, which has swung from a credit to an expense in 2024. The average dealership posted net floorplan interest expense of nearly $109,000 through three quarters the year—a gain of nearly $24,000 for the same period in 2023.
On a per-vehicle basis, net floorplan interest cost the average dealership $90 instead of earning it $20 as in the year-earlier period, combining for a total difference of $110 per vehicle retailed.
Same Brand Story
Advertising costs for the average dealership rose 4.1 percent through the first nine months of 2024, an increase of $10 per vehicle retailed.
The Presidio team believes that brand and geography will continue to play a major role in dealership performance and profitability. For example, domestic brand inventories have seen supplies soar this year, ending September at a 95-day supply as a peer group. By contrast, certain Japanese brands such as Toyota and Subaru have extremely tight supplies.
The importance of brand is apparent in Presidio-NCM benchmark data segmented by brand type. All three brand segments saw narrower declines in net pretax profitability for the average dealership during the first nine months compared with the first half of the year. That demonstrates that the leveling off discussed earlier is happening broadly, an important step in finding a new operating normal for the industry.
Gross Profits Down
Average gross profit per new vehicle for domestic stores slid 37 percent year over year to $2,017. Gross profit per used vehicle came in at $1,470, up slightly from midyear but down year-over-year. Average gross profit per new vehicle for import-brand stores dropped 38 percent year-over-year to $1,771. Gross profit per used vehicle was $1,234, up slightly from the first half but down year-over-year.
The report noted that though the import segment experienced the steepest profit slide, certain brands in that segment—notably Toyota, Subaru and Honda—have some of the best-performing dealerships in the industry.
Data Conclusions
As a result of looking at all the data, analysts believe the Great Normalization will prove yet another event validating the resiliency of the dealership model
But they warn plenty of uncertainty persists and could influence this positive trend in either direction, including the impact of inflation and waning consumer savings, the speed of interest rate relief and the outcome of the U.S. election.
“It won’t be clear that we’ve reached a new normal until we’ve seen the leveling off over several successive quarters,” said Karolis. “Even then, that new normal will vary significantly depending on a dealership’s brand and location.”
