Profit margins on new vehicles are slipping for the nation's largest dealership groups as manufacturers and retailers slug it out for market share.
New-car margins dropped for all the public dealership groups during the first quarter of 2013. Despite the margin decline, total new-car gross profits rose during the first three months of the year for the public groups on higher overall volume.
Still, "We're dissatisfied with our front-end margins and have the ambition to improve them," said Mike Jackson, CEO of AutoNation Inc., the country's largest dealership group. "We're fighting tooth and nail not to go down."
Jackson said stair-step incentive programs -- something that many retailers are complaining about this spring -- can significantly lower new-car margin as a dealership cuts prices to reach the escalating sales targets it needs to hit to maximize manufacturer bonuses.
Some retailers look at the margin decline as a game of trade-offs. Despite the lower margins on the new-car sale, a dealership can make up for it with additional profits in the finance and insurance and service departments. They also could win an attractive trade-in to sell through the used-vehicle department.
Lithia Motors Inc. is prepared to sacrifice margin for those additional opportunities.
"We don't mind pushing volume because it means greater market share," CEO Bryan DeBoer said. "We're willing to do that for the gains in trade-ins, finance and insurance product sales and the annuity in service in the future."
Like AutoNation executives, Sonic Automotive Inc. President Scott Smith says he thinks there is room to improve the new-vehicle margin, especially as investments the company has made in technology start to pay off. But he's not managing the company based on margin.
"I can't take margin to the bank," Smith said. "What I can take to the bank is profit."
Asbury Automotive Group Inc. executives anticipate holding off further erosion in the new-car margin this year. But after a decadelong decline, improving the measurement is a tall order.
"Pushing that rock back up that mountain is an almost insurmountable task," Asbury COO Michael Kearney said.
Penske Automotive Group Inc. CEO Roger Penske noted that margins were elevated for much of 2011 and the beginning of 2012 because of the shortage of new-vehicle inventory caused by the Japanese earthquake and tsunami.
"We're now getting back to where we were [on margins] a number of years ago," Penske said. "But we're watching that."
Jamie LaReau and Vince Bond Jr. contributed to this report