Following a profit warning by Sonic Automotive Inc., fellow public retailers Penske and Group 1 said this week that they also felt a profit pinch in the second quarter because of incentive changes at BMW and Honda.
Roger Penske, CEO of Penske Automotive Corp., the nation's second-largest dealership group, told Automotive News that the worst of the changes came at the company's Honda stores.
New-vehicle margins at Penske's Honda business fell about 9 percent in the quarter, even while new vehicle sales rose 1.5 percent, the company said, largely stemming from moderate incentives compared to competitors.
"There's no question there was big erosion there, and that's driven because of the Accord, which we had hoped would bring us some real margin," Penske told Automotive News. "There just wasn't any support on that vehicle for a number of months."
Likely increases to Accord incentives should bring better results in the third quarter, Penske said.
Penske downplayed the BMW effect at the dealership group. New-vehicle margins for the BMW business fell 5 percent on flat sales. He said in a call with analysts Thursday that the margin drop represented an estimated $200 to $300 per vehicle, later telling Automotive News that it wasn't a significant impact for the company.
Group 1 Automotive Inc. felt margin pressure from BMW's incentive shifts at its stores in the U.S. and the United Kingdom, CEO Earl Hesterberg told analysts Thursday.
"Yes, we did experience the same situation. On BMW, we had a significant margin pressure and a bit less on Honda," Hesterberg said. "We also had margin pressure quite a bit on BMW in the U.K."
The retailer offset some of that compression with stronger margin performance in the U.S. among its domestic-brand and Toyota dealerships, he said.
BMW and Mini made up 12 percent of Group 1's new-unit sales in the second quarter, down about 1 percentage point from the year earlier. Honda and Acura made up 8.9 percent of the group's new-vehicle sales in the quarter, compared with 9.6 percent a year earlier.
Sonic updated analysts in a call Friday about its challenges with BMW and Honda in the quarter. On July 17, the company had warned about a drop in new-vehicle gross profit per unit at its BMW and Honda stores.
Sonic CEO Scott Smith pinpointed factory-to-dealer incentives.
"There's tons of customer incentives that are out there, but the margin that we're getting squeezed on the most is coming from the lack of the factory-to-dealer incentives," Smith said in the call.
Sonic's gross margin on new vehicles fell 0.4 percentage points to 4.7 percent, while its gross profit per new-vehicle dropped by $97 to $1,877. About 40 percent of Sonic's profits are tied to BMW and Honda stores.
New-vehicle sales also slipped 1.4 percent, and new-vehicle gross profits fell 6.3 percent to $56.9 million.
Sonic said the changing mix of incentives at BMW dropped its new-vehicle margin by $575 to $600 a vehicle. Honda's margin drop of $250 to $300 a vehicle resulted from reduced incentives on the Honda Accord that ranged from about $1,200 to $2,000 a car vs. a year ago, Jeff Dyke, Sonic's executive vice president of operations, told analysts. That margin drop cost the company's Honda stores about $1 million a month, Dyke said.
Dyke said he expects margins at BMW will improve by the fourth quarter, aided by new vehicles coming to market.
Hannah Lutz contributed to this report.