WASHINGTON -- The historic low interest rates that helped prop up dealership profits last year failed to mask other growing expenses in the first quarter of 2003.
The average dealership's profit margin before taxes sank to 2.0 percent in the first quarter of this year from 2.4 percent for the year-ago quarter, according to the National Automobile Dealers Association's dealership profile.
The average dealer earned $151,135 before taxes, down 13.7 percent from the first quarter of 2002. Revenues rose 0.8 percent to $7,432,216, thanks to increases in used vehicles and in parts and service business.
High unemployment, war fears and a severe winter hindered sales of new vehicles.
"People wait until the weather is what they expect for the time of year it is," says Paul Taylor, NADA's chief economist. "Particularly after two mild winters, the low temperatures and heavy snow put a damper on sales."
Competitive pressure boosted advertising expenses 7.7 percent to $80,720, or $491 per new vehicle. At the same time, the average new-vehicle gross profit shrank 5.8 percent, to $1,490 per vehicle.
Overall expenses rose 4.8 percent to $888,090, driven by higher promotional costs, facilities rental expenses and floorplan interest expense - the cost of financing vehicle inventory.
Slower sales resulted in heavier inventories, causing dealerships' floorplan expenses to inch upward. Last year the average dealership was paying such low interest and turning new vehicles so quickly that it more than offset the cost of financing inventory with floorplan assistance. Floorplan assistance is an incentive that manufacturers pay to help reduce floorplan costs and induce dealers to order more vehicles.
In the first quarter of 2003, the average dealership paid $14 per vehicle in floorplan interest. But in the same quarter of 2002, the average dealership made $14 per vehicle in factory assistance after subtracting interest expense.
Although floorplan expense historically has been $100 to $150 per vehicle, the small increase signals trouble for dealers. Taylor expects interest rates to rise as the economy stabilizes toward the end of the year.