In era of tight new-car margins, retailers dream up ways to free up cash

Despite years of near-record sales of new cars and trucks in the U.S., dealers are increasingly being forced to diversify into new business enterprises to stay profitable. The culprit: new-car margins that don't pay the bills anymore amid intense competition.

Automakers have stepped up their certified pre-owned programs. Service departments are looking at tire sales and body shops.

Some retailers say they preload vehicles with F&I products or accessories to add some margin to each sale.

Some retailers have even experimented with creative, nonautomotive ideas: One Montana store sells firearms ammunition and hunting bows.

But they need to dig deeper, according to dealership consultants, who are urging retailers to look at every aspect of their business for more cash. They need to get involved in store operations such as marketing, warranties and insurance rather than relying only on vendors — and some stores are doing just that.

"They are a retailer when it comes to new and used cars, but think about everything else that goes on in there: new, used, F&I, parts and service," said Thomas England, a partner at DHG Dealerships.

"When you look at the total sales and all the cash that goes through dealerships, a good portion of that cash is getting paid out. Well, how do I get my hands on more of that cash? That's what a dealer should be thinking. From expense control to different business transactions, there's just so many opportunities to be part of that transaction," England said.

The obvious go-to source for new income is expanding sales of used vehicles, but even that has to be done right, said Stephen Dietrich, a dealer lawyer and partner at Holland & Knight law firm."There's more margin, especially if you have some folks who really understand the market, because it's a different market of who are buying your new cars versus who may be able to purchase your used cars," Dietrich said. "Someone who understands that market can really add to the bottom line of the dealership because they can get the right inventory" and turn it quickly.

In the Dallas-Fort Worth market, Lewisville Autoplex has leveraged its ground-up Mitsubishi facility inaugurated last year to include its used-car business that stocks quick-turn vehicles such as Toyota Camrys and Ford Explorers, but also higher-margin ones such as Teslas bought at auction in California and pickups lifted in their own service bays.

"We started buying lifted trucks, and then we started building lifted trucks at shops around town that did the custom work, but we were outsourcing all that work," said David Baum Jr., the 35-year-old general manager. "So, then I realized we should be building these trucks in-house, helping our service and parts department, because there's only so many Mitsubishis to service and fix."

The dealership is averaging about 50 new-car sales a month compared with about 110 used vehicles, Baum said. The average sales price on a used car is now $43,000 compared with the average sales price of a new Mitsubishi at $25,000, he added. Lewisville Autoplex also sells prepaid maintenance plans and serves all makes and models to diversify its income stream.

At the national level, many brands are expanding their CPO programs to address the twin issues of dealer profitability and vehicle affordability at a time when average transaction prices for new vehicles are rising even if margins are not.

American Honda reported record certified-used sales at its Honda and Acura brands last year and just launched a national CPO ad campaign. Overall, dealer profits at the two brands was up 6 percent last year thanks in part to the CPO boost.

There are dealers who sell nonautomotive products and services inside their store, such as the Montana store selling ammo and bows. Dealers often have coffee shops or food service. But it's rare that those noncore activities become an important source of income, England said.

On the other hand, there are some businesses more closely related to the core enterprise that can generate real income. Body shops can play that role, but only if the operator understands the business and how to get paid quickly by insurance companies. Dealer-installed leather seats or rear-seat viewing screens that allow customers to upgrade without buying pricey trims can be a win-win.

Offering additional service products, or simply making customers aware of maintenance needs without the hard sell, is a logical extension of the fixed operations business.

England gave one example of a dealer using commercial equipment that scans the tires of vehicles automatically in the service lane for tread wear. The information is given to customers, who can then decide whether they want to add tires or alignment to their service request or plan to do so in the future.

But England also thinks that getting involved in a bigger part of day-to-day operations and focusing on expense control are perhaps the first things that dealers should consider when they want to have more cash at the end of the day.

"I would think about sharing in the risk of warranty and reinsurance, and potentially self-insurance. That could be health insurance for your employees. That could be workers' compensation insurance. Looking at the overall structure of insurance or reinsurance of my warranty products," he said. "That's an area where pretty much all of our dealers need to be looking."

Advertising is also a big expense that can be consolidated, refocused and made more efficient. "There can be a lot of dollars wasted at the dealership" in marketing, England said. Sometimes dealers can save money by hiring someone in-house to take on that function rather than handing it over to vendors who may not be as cost-conscious or effective.

Peter Lanzavecchia, who owns Genesis of Cherry Hill in New Jersey along with Hyundai and Buick-GMC stores, brought some advertising in-house with his daughter as chief marketing officer, focusing on digital channels. Last year, his ad budget fell by 30 percent while sales rose 14 percent, he said last month.

"She has a digital agency that she works with, and she has a couple of other partners that she works with. But all of the strategy of our retention and conquest marketing is all developed in-house," Lanzavecchia said.

Dietrich agreed that one of the more attractive paths to increasing profits is looking at in-store operations.

Dealers can not only take on some functions done by vendors, but essentially become vendors themselves by offering their in-house services to other dealers who are also looking to cut back on expenses by switching to more efficient providers.

"If you can bring an outsider vendor service in-house, that would be helpful," Dietrich said. "One of the examples I've seen even broader than the marketing, per se, is bringing in the technology piece."

Given that dealers are relying more on online efforts to drive business, having an IT team at a dealership group can cut vendor expenses and become an income source by offering IT services to other dealers or dealer groups.

"One client actually owns its own company that does that, and that company then contracts out with smaller dealerships," Dietrich said. "Not only have they saved the third-party cost of hiring their own vendor, they're actually covering that cost if not making a profit on that service."

Another dealer group does the same with title processing. "They will work typically with local used-car dealers — not the new-car dealers — but the used-car dealers who sometimes have more lean operations. And they'll process and do all the paperwork and shuttle the titles and do all that service for them, so that a smaller company doesn't have to pay the salary and the cost of having their own title clerk," Dietrich said.

One other side gig starting to get attention from retailers, he said, is buying stand-alone car-wash operations that they can brand with their dealership name for marketing purposes. "It's both a marketing concept," he said, "and also they can use that service in their business — depending where it's located — and also drive their brand name."

Dietrich has also seen dealers open service centers that are separate from their dealerships and branded generically to avoid any conflicts with the automaker. The off-brand centers can market to a variety of brands since the business is separate from the franchise.

"Those are some of the larger paths that I've seen folks try to take to diversify some of the income stream," he said.