Dealer profits surge 48% to record in a ‘unique' 2020

Despite a pandemic that shut down some stores' showrooms for most of last spring, U.S. dealerships on average posted their highest profits ever in 2020.

According to the National Automobile Dealers Association, the average U.S. dealership recorded net pretax profit of $2.1 million last year, a 48 percent leap from 2019. The 2020 figure also blew by the previous record of $1.5 million, recorded in 2015.

"There was just an improvement in the returns from your operations [in 2020] due to the unique market conditions that increased scarcity for both new and used vehicles," said NADA Chief Economist Patrick Manzi. Dealers "rose to the unique challenges that [2020] presented and ended up having a pretty good year."

NADA has tracked the data in its current form since 2009. Manzi noted that there could have been years in decades past when net pretax profit would have exceeded $2.1 million when adjusted for inflation.

The money the average dealership earned on operations made an impressive jump in 2020, to $590,996, more than nine times its level in 2019 and a huge swing from 2018, when the average franchised store recorded a loss on operations.

Net pretax profit includes operating profit and the automaker incentive money paid out to dealerships for complying with certain performance targets. That factory support remained roughly the same in 2020 as in previous years, Manzi said.

Though new- and used-vehicle volume and revenue dropped in 2020, individual vehicle profitability rose. The average per-vehicle gross profit rose 22 percent for new vehicles and 13 percent for used.

Other contributors to the profit boon included, according to Manzi:

• Expense reduction. The average store trimmed expenses by 5.6 percent.
• Acceleration of digital retailing. That, along with staff cuts, helped increase sales rep productivity.
• Floorplan gains. Lower vehicle inventories and dipping interest rates combined with credits from automakers to make floorplan interest a profit center in 2020 vs. an expense the prior year. Floorplan swung from a $96-per-vehicle expense on average in 2019 to a $140-per-vehicle gain last year.

Most U.S. dealerships took out forgivable federal loans from the Paycheck Protection Program last spring when the crisis first slowed business. Manzi said he couldn't tell how instrumental those payments were to profitability from the way dealerships reported financial data to NADA.

The program money, however, was generally used by dealers to keep paying staff during the spring months when revenue plunged vs. laying more employees off, he said.

While Manzi said he expected good results for dealers in 2021, profit levels likely won't stay as high.

"I do believe it is kind of a one-time thing," Manzi said. This year "will probably be more of a return to normal."