Squeezed by higher borrowing costs and expensive showroom renovations, dealers saw their profits decline to a five-year low in 2005.
According to data compiled by the National Automobile Dealers Association, the average dealership reported a net pretax profit of $531,033, or 1.6 percent of total sales. That's the lowest profit margin since 2000.
"Hopefully, it will not go below 1.6 percent this year, but we can't be sure," NADA industry analyst John Thomas told Automotive News. "Sales volume will be lower."
Dealers cite a variety of factors to explain shrinking profits. They include rising interest rates, financing costs for carrying larger inventories, the expense of showroom renovations and cuts in dealer discounts.
Seeking to bring sticker prices closer to transaction prices, some car companies - notably General Motors - have cut dealer discounts on new vehicles. Last month, GM reduced its dealer discount by 1 to 3 percentage points. Before that, the company's gross discounts ranged roughly from 11 to 14 percent.
Robert Leffler, owner of B&L Automotive in Shamokin, Pa., says GM's decision to cut the dealer discount has cost him $500 per new vehicle. He sells Chevrolet, Buick and Pontiac brands.
The sticker-price cuts are "going to come out of the dealer's pocket, mostly the domestic brands," adds Todd Turner, president of Car Concepts, an industry consulting firm in Thousand Oaks, Calif.