Competition expected to restrain store profits
Dealership new-vehicle profits won't grow anytime soon, predicts Steven Szakaly, chief economist at the National Automobile Dealers Association.
"There is intense competition among the OEMs and just as intense competition among the dealers," Szakaly told Automotive News during a discussion about "NADA Data 2014," the association's annual report on the state of the industry.
"For profits on new vehicles to go up, one of those two fundamentals has to change," he said, "and I don't see that changing."
In 2013, total dealership net pretax profit as a percent of revenue was 2.2 percent, unchanged from 2012, NADA said.
Intense competition among auto companies and among dealers for new-vehicle sales caused average profits per new vehicle retailed to drop to $69 in 2013 from $111 in 2012.
On the other hand, Szakaly predicted that profits on used vehicles and service and parts could improve, making those operations even more important for dealerships' financial health.
Amid those razor-thin margins, labor is one area dealers are constantly evaluating in an effort to cut costs, Szakaly said. Dealers have hired more people since the worst of the recession, but there has not been a large or rapid run up in hiring as seen after previous recessions, he said.
Szakaly: No growth in sight
For the time being, dealerships are benefiting from low interest rates that make vehicle payments more affordable for consumers and enable discretionary ancillary purchases of finance and insurance products, Szakaly said. But he said that will likely change when interest rates rise appreciably, probably in 2015.
"We will see interest rates rise; it's a matter of when," he said. "We're going to see those pressures increase on dealers. We're going to see F&I margins, service contact margins likely shrink in the long term as these interest rates go up."
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