I would like to explain how dealerships operate and profit based on a sales model. Sales models are what dealerships utilize to determine the specific types of inventory necessary to maximize potential profit.
Not every sales model is perfect. There may be shifts in customer needs, such as unanticipated rises in gas prices. This could possibly affect the sales of trucks or S.U.V.’s that were proven past performers. But what if the investment was already made prior to the shift in needs?
Usually, the unit sits on the lot waiting for a buyer. The longer the unit sits on the lot, the less potential profit will be realized. Vehicles are a little different than stocks. They are considered depreciating assets. New, as well as some used units are financed or “floored” through the dealership’s bank. Some examples of flooring banks would be Ally Bank, formerly GMAC, Ford Motor Credit or Toyota Motor Credit.
These flooring banks finance the units for the dealer. Usually there is a grace period, such as sixty days, where no payment on inventory is due. This gives the dealer time to sell the unit, realize a profit, and pay off the flooring bank when the unit is sold.
If it goes beyond the sixty days, used in this example, the dealer pays a flooring charge against that unit. This would reduce the amount of profit the dealer was anticipating. Whether it is a new or used unit, this cycle continues month after month, flooring charges being applied to that specific unit that continues to sit on the lot, all due to a rise in gas prices in this example.
But that’s not the only thing that occurs. Remember, vehicles are depreciating assets. As time marches on, and the unit continues to remain on the lot, it loses value. This applies to new units as well as used units. If you were the dealer, would you be motivated to find a buyer for that unit? Would it be safe to say you might take a loss on that unit to avoid a potentially larger loss down the road? We will discuss this subject in detail in a later chapter.
The Parts Department has generally three profit centers. The first one is retail sales of parts to the general public, or over the counter sales. The second profit center is the wholesale side. The Parts Department supplies parts to independent auto mechanics, auto parts stores and some municipalities. The third profit center is supplying parts to the Service Department. Parts are usually supplied at wholesale to the Service Department, and marked up on the customer repair orders.
The Service Department’s main source of revenue comes from warranty work. This may include new car warranty work reimbursed by the manufacturer or through an extended warranty sold through the Sales Department on used cars. There is also revenue generated through “customer pay” repair orders called “R.O.’s.” Customer pay R.O.’s may include work not under warranty, oil changes etc.
The objective of the Service Department is to build a repeat clientele. The Sales Department is a huge player in building that clientele. Customers, as a rule, usually have warranty and repair work done where they purchased the car. This creates a continuing stream of income from that customer and also retains the customer for the dealership for future car sales.
Now that you have a general understanding of how dealerships operate and create profit, let’s take a detailed look at how the Sales Department generates profit. In the next article, you will learn about the various selling systems, tactics and practices dealerships use to sell you a car and create profit.