The average U.S. dealership's profits rose sharply last year despite lower overall revenues and fewer unit sales industrywide.
The average dealership's net pretax profit margin rose to 1.5 percent in 2009 from 1.0 percent in 2008, the largest year-over-year jump since 1983.
Net pretax earnings for the average store increased 44 percent to $398,067 last year despite an 8 percent fall in overall revenues to $26.4 million, according to the National Automobile Dealers Association's annual profile of the average dealership.
"Cost cutting was the most important reason that net profit improved from next to nothing to 1.5 percent," says Paul Taylor, NADA's chief economist. "The percentage change off the small base of 1 percent is not the important thing, but the significant movement in the right direction is important."
As new-vehicle unit sales tanked, dealers cut expenses aggressively and focused on higher-margin used-vehicle sales as well as service and parts business, the data show.
Low interest rates dramatically reduced the cost of carrying vehicle inventory. The federal cash-for-clunkers program also helped jump-start profits, Taylor says.
The average dealership's new-vehicle department was in the red for the fourth straight year, but Taylor says the department could turn a corner this year because of an expected uptick in new-vehicle sales and a reduction in dealership expenses.
"Dealers have suggested that breakeven is about 12 million light-vehicle sales," he says. "We are going to get close enough to that this year, so we should see an improvement and hopefully a return to profitability in the new-car department."
The data show the service and parts and used-vehicle departments represented a greater share of overall revenues.
Service and parts grew to 16 percent of revenues from 14 percent a year earlier. Used-vehicle sales grew to 32 percent from 29 percent.
Dealers' reliance on used-vehicle sales resulted in an anomaly in the ratio of used to new vehicles sold, Taylor notes. The average dealership sold about one used vehicle for each new vehicle sold. During the strong sales years from 1999 through 2007, dealers typically sold three used cars for every four new vehicles.
The trend is unlikely to hold through 2010 because dealers likely will sell more new vehicles, and the supply of used vehicles is tight, Taylor says. Dealers took in fewer trade-ins, and the number of off-lease vehicles and rental-car returns are down, making used vehicles difficult to find.
Taylor says the scarcity of used vehicles will help prop up trade-in values and ultimately help fuel a few more new-vehicle sales.