The Vanishing Margins

I wish I had the all the answers, but I unfortunately don’t. The automotive industry is going through a tough time right now and after speaking with a number of my automotive clients, I decided to write an industry overview this week.

Auto dealers, much like other franchisees, are being put in a difficult position as the large brands are charging dealers more to purchase their vehicles, yet dealers can’t charge the same amount more to customers as many people are earning less than they did 5 or 10 years ago. It’s reminiscent of the aviation industry where fuel prices rose and rose and the airlines had to fight with consumers and the media to justify their increased surcharges.

Furthermore, while only a few airlines fly to certain cities, there are currently a vast amount of choices available to consumers when it comes to choosing a vehicle to purchase. The result has been that each auto dealer is fighting even more than before for a small percentage of the dwindling consumer purse.

Let’s look at a few of the major issues facing automotive dealerships and the solutions some sharp dealers have come up with.

·        Market share is driven in large part by vehicle quality and corporate marketing, but there are a number of external factors that can’t be controlled by dealer owners, such as consumer taste and the economy. This can make it feel like dealers have few options available to them when trying to maintain market share, profitability and sustained growth.

·        To complicate matters further in this scrambling market, manufacturers have a number of programs that dealers have no say in but have a direct impact on dealers.

·        Many dealers have combatted this trend by acquiring numerous dealership points as a way to spread overhead amongst the different dealerships. The end result is similar margins, lower overheads and thereby same or higher net income. This is a strong model and likely sustainable for the short term. However, this too will eventually become ‘old news’ and dealers will have to become even more creative.

·        Other standalone dealers have explored the idea of offering additional services at their dealership such as a collision center, used car department, stronger F&I department, etc. The additional services offered at the dealership allow for diversification of risk in times when new car sales are not as strong.

·        The government also has a number of programs that can help dealerships – corporate tax rates have been coming down consistently, apprentice tax credits have increased, HST harmonization has improved cash flow

·        Auto dealers can also take advantage of various tax planning arrangements in order to maximize their corporate and personal after tax returns, for example the family trust (a formal discretionary family trust governed by a trust agreement drafted by a lawyer, not to be confused with an “in trust” account provided by your bank).

If my overview leans toward the dreary side, let me know what you think – will margins increase again in the future? Will the cost to produce automobiles stop increasing or decrease?

- Dave