Foo - How dealerships make profit

OK, most reasonably savvy consumers these days are aware that profit centers like dealer holdback (usually 2-3% of MSRP paid to dealer), and occasionally rebates are available so that dealers can make money selling "at invoice." But think about it -- have you ever seen how massive dealerships are in terms of their lots? Think how enormous their expenses must be to air-condition the huge building, lease or own the land for the dealership, and the payroll for many sales and staff.

This leads me to believe -- the cynic that I am -- that there must be SOME other area of profit that isn't public info....something other than dealer holdback or rebates...SOME other area of profit that allows a dealership to remain profitable despite their huge overhead. Even assuming the average consumer gets ripped off and pays close to sticker, and also pays for crap like dealer-applied pinstripes and clearcoat...even then, there's gotta be some other source of income that allows them to pay their overhead AND turn a profit.

Anyone work for a dealer in the past and able to divulge??

I think the service department is a considerable source of revenue. All those flat fee charges where they charge an hour to do an oil change that takes 15 min and 6 hrs for a brake job that they do in 2.

Other profit centers in an auto dealership:

Parts Dept ... generally a significant wholesale business as well as retail across the counter. Most deliver to local shops making their parts accessible. Dealers float accts with small businesses as well.
Finance Dept ... profit is made on the APR that you pay. A Finance manager is generally the sole person in a dealership to generate so much money. That person brokers loans to manufacturer financing (Ford Credit for example) as well as private finances companies and "shops" for the wholesale best rates. Their job is to upsell you on your APR, life and disabilty insurance, GAP insurance and warranties and extended maintance plans.
Used Car Manager and Dept ... not only makes retail profits on the used cars traded and purchased at auction for sale on their lot, they also sell less desirable trades to wholesale buyers, often with decent profits and little effort.
Service depts ... WOW, could I tell you some stories.

Remember too that the large inventories are floated on FlOOR PLAN notes. Usually the Manufacters credit companies hold that note allowing a dealer to only pay interest monthly, paying the vehicles off in full once they are sold to the retail customer.

Other things like DOCUMENTARY FEES (pre-printed at the bottom of your purchase order and having wide ranges of prices) help fund the bottom line.
I could go on further but that might give you an idea.

Used cars and F & I.

F & I means Finance and Insurance - it's the after sell from financing to extended warranties on the cars the dealer sells. Used cars typically have higher gross profits than new in just about every dealer from Chevy to Lexus. At the Lexus store my pal manages (we worked together for 5+ years in the car biz in the 80's) they average about $3,000 gross profit (per car) on new cars, 5,000 gross profit on used. Grosses for chevy dealers are often 80-90% lower than those figures.

It can be a very lucrative business, but often it's very tough. And the pay sucks for much of the industry; adjusted for inflation it has essentially plummeted for sales reps and managers. I left the business in 1991, I'm glad I got out of it alive.

I think the service department is a considerable source of revenue. All those flat fee charges where they charge an hour to do an oil change that takes 15 min and 6 hrs for a brake job that they do in 2.

You are exactly right.
My mate used to work for a dealership in the service dept. He told me all about what happens in there. Absolutely shocking what his joint charged for. :mad:

One of our former elected politicians actually admitted in court that they frequently invoiced the manufacturer for work done on cars no longer under warranty, by attributing it to other cars still under warranty.

Used cars and F & I.

F & I means Finance and Insurance - it's the after sell from financing to extended warranties on the cars the dealer sells. Used cars typically have higher gross profits than new in just about every dealer from Chevy to Lexus. At the Lexus store my pal manages (we worked together for 5+ years in the car biz in the 80's) they average about $3,000 gross profit (per car) on new cars, 5,000 gross profit on used.


Does that gross profit include everything, e.g. the margin between invoice and sales price PLUS the profit on financing and extras....or just the F&I component?


On the service department side, I have these thoughts:
(1) When I own a car still under factor warranty, I love the dealer service for warranty issues, because they have modern shops and are accountable for the work they do. What they charge the factory is their business.
(2) When my car is not under warranty, I love doing stuff myself. For example, my truck had an issue with the turn signal making the clicking sound even when I wasn't using it, so I ordered a new turn signal lever on ebay from a salvage yard for 25 bucks, and installed it myself yesterday using a phillips screwdriver. I bet the dealer would have charged me $200+ had I simply dropped it off.

Dealers sell new cars mainly just to show that they are legit. Only a small part of their profit comes directly from it.

They make money on APR's and extended warranties too...

I think the service department is a considerable source of revenue. All those flat fee charges where they charge an hour to do an oil change that takes 15 min and 6 hrs for a brake job that they do in 2.

My dealership makes 8x profit in service compared to car sales. Profit is +-$400 per car.

From what I saw, dealerships also make money on dealer installed accessories. For example, the price difference between authentic Foomobile (tm) floor mats, and generic $10 ones from Pep Boys.

Personally, with newer cars, some generic mechanic shops don't seem to keep up and their repairs are so-so at best. This is why I lean towards a dealership for cars that are out less than 3-5 years for maintainence, and after that, the garage down the street.

In my former life, I was a service adviser, then service manager, and finally service and parts director. The lines I managed in were Chrysler, Dodge and Dodge Truck, Jeep, and Mercury. Advised at VW, BMW, Toyota and Chevy stores.

So, yeah, dealership money, hmmmm.... A healthy service dept can cover the nut for the whole store, which could easily be over 10 grand a day. Most are flat-rate shops, meaning the tech gets paid a certain number of hours per job, regardless of how long it takes. A good tech will make 60-80 hours/week. That's the tech you want, the one who knows how to knock out a lot of work without it coming back to be re-done (which techs do for free).

Parts depts can be great profit centers, and the stronger wholesale programs out there can crank some awesome numbers. Most of the wholesale money is in sheet metal to body shops.

I had one store where we ran two shifts of technicians (open 7 am to 9 pm, 6 days), a parts dept with a serious sheet metal wholesale program, and we put the sales dept to shame on a regular basis. The F & I guy though, that was another matter.

From what I saw, dealerships also make money on dealer installed accessories. For example, the price difference between authentic Foomobile (tm) floor mats, and generic $10 ones from Pep Boys.

Personally, with newer cars, some generic mechanic shops don't seem to keep up and their repairs are so-so at best. This is why I lean towards a dealership for cars that are out less than 3-5 years for maintainence, and after that, the garage down the street.

One store I worked at the sales dept called them "Cransters". Mats, flaps, paint sealant, rust protection, fabric guard, sunroof wind deflectors, etc. If someone got cranstered, they bought some of these upsell items. Those are all high grossing products.

One of our former elected politicians actually admitted in court that they frequently invoiced the manufacturer for work done on cars no longer under warranty, by attributing it to other cars still under warranty.

I'll go on record saying that happens much less than you would think. The factory guys aren't morons, and they check every claim. Think of where they came from. A hot job for a service manager to move up to is factory service rep. :) Some of the reps show up with hammers, and after they look over the parts used on warranty repairs, they damage them with a hammer so there's no chance of that part making it back into the market in a shady fashion.

Dealers are hard working business people who want to succeed like anyone else. But they are also like everyone else in that they are built on people with the same ethics as you and me. Most of them will treat you well.

One store I worked at the sales dept called them "Cransters". Mats, flaps, paint sealant, rust protection, fabric guard, sunroof wind deflectors, etc. If someone got cranstered, they bought some of these upsell items. Those are all high grossing products.

lol! Yeah, every time I've bought a new car, they've hauled out the cute, big-boobed woman to push the paint sealant and undercoating on me. :lol: They're very good at looking dejected when I don't take it.

Someone mentioned used cars. Yeah, I think it's safe to assume that if you trade in a decent car, it's going to end up on the used car lot for a lot more than they gave you for it.


Speaking of used cars, I have a funny story...

Several years ago, I was on the hunt for a particular used car. I did an autotrader.com search for it, and found a bunch of them in my area. I also went to kbb.com to get the blue book value on the car so I could get a ballpark for how much I could expect to spend.

My travels took me to the local CarMax, where they had in stock a decent example of the car I was looking for. At that time (and maybe still) they advertised that they sold "below blue book". Well, I had the blue book value, and this car was more. $2000-$3000 more. So I spoke with the salesperson, and we sat down at his desk, and he got on his computer and punched up KBB and got the blue book value. He was right, it was below blue book. I figured that somewhere I'd screwed up and entered the wrong info.

So I went back home and kept looking (the CarMax car had a few options I didn't want, so I figured I'd see what else was out there before pulling the trigger) and while looking I went back to kbb.com and re-checked the blue book value. Well, I got my original numbers. I tried it again, and even if I picked every possible option, I got a lower number than CarMax.

I went back to CarMax, and we sat down again. The salesperson re-checked kbb, and got his original number. I stared at the screen, trying to figure out how it could be different (the page looked exactly the same) and then I saw the problem. It was in the address bar. He wasn't at kbb.com, he was at kbb.carmax.com! They have their own fake Kelly Blue Book page set up!! :lol:

So I asked him to go to the real kbb.com and check, but before I could finish the sentence, he blurted out, "We're not authorized to check different sites" and closed the browser. I needled him a bit about the price difference, and he finally said, "You're paying more because it's at CarMax and not some shady, dishonest dealer". :lol:

Guess that depends on what you consider dishonest!

I understand dealerships need to make a profit on new and used cars, and that probably means buying over KBB value. They are sorta providing a service; you need a car, you go to a dealership, and they should have one in stock that you like. No searching ads, no weirdos, etc. If you make things easier for a buyer, its justified to raise the price. But their whole method of bait and switch, APR and payment combo's, lying, trade-in scams are a real turn off. God help me if one of my friends ever become a car salesmen.

was the question about car or bike shops?

By selling you the floor mats separate, even though they are shipped with the car.

lol! Yeah, every time I've bought a new car, they've hauled out the cute, big-boobed woman to push the paint sealant and undercoating on me. :lol: They're very good at looking dejected when I don't take it.

Someone mentioned used cars. Yeah, I think it's safe to assume that if you trade in a decent car, it's going to end up on the used car lot for a lot more than they gave you for it.


Speaking of used cars, I have a funny story...

Several years ago, I was on the hunt for a particular used car. I did an autotrader.com search for it, and found a bunch of them in my area. I also went to kbb.com to get the blue book value on the car so I could get a ballpark for how much I could expect to spend.

My travels took me to the local CarMax, where they had in stock a decent example of the car I was looking for. At that time (and maybe still) they advertised that they sold "below blue book". Well, I had the blue book value, and this car was more. $2000-$3000 more. So I spoke with the salesperson, and we sat down at his desk, and he got on his computer and punched up KBB and got the blue book value. He was right, it was below blue book. I figured that somewhere I'd screwed up and entered the wrong info.

So I went back home and kept looking (the CarMax car had a few options I didn't want, so I figured I'd see what else was out there before pulling the trigger) and while looking I went back to kbb.com and re-checked the blue book value. Well, I got my original numbers. I tried it again, and even if I picked every possible option, I got a lower number than CarMax.

I went back to CarMax, and we sat down again. The salesperson re-checked kbb, and got his original number. I stared at the screen, trying to figure out how it could be different (the page looked exactly the same) and then I saw the problem. It was in the address bar. He wasn't at kbb.com, he was at kbb.carmax.com! They have their own fake Kelly Blue Book page set up!! :lol:

So I asked him to go to the real kbb.com and check, but before I could finish the sentence, he blurted out, "We're not authorized to check different sites" and closed the browser. I needled him a bit about the price difference, and he finally said, "You're paying more because it's at CarMax and not some shady, dishonest dealer". :lol:

Guess that depends on what you consider dishonest!

A Saturn dealership tried this to me and my wife once, I'm sure it is a common practice. I have started using NADA since that is what most of the banks in my area use to finance a vehicle.

Personally, with newer cars, some generic mechanic shops don't seem to keep up and their repairs are so-so at best. This is why I lean towards a dealership for cars that are out less than 3-5 years for maintainence, and after that, the garage down the street.

True up to a point. The dealer I work at however doesn't even have any qualified technicians or mechanics or whatever you want to call them. They are all trades assistants or apprentices. Most of them don't know what to do if you bring your car in with a 'problem' - they'll hook your car up to a computer and if no error codes are found they will just give the car back saying the problem is fixed or there is no problem.

The work truck we use to deliver the parts in had a problem with the exhaust brake not working so we booked it in to get it fixed and when it came back the exhaust brake still didn't work but the brake pads had been changed!

Carmax has every car in stock listed on their website. You don't have to go in person to find that
the price is too high.