Car Dealers More Recession-Resistant than Automakers

It's a truism in the auto industry that car dealers make more money from parts and service and from acting as a middleman to arrange auto loans than they do on new-car sales.

Even so, it's a little jarring to be reminded so graphically, as Charlotte, N.C.-based Sonic Automotive did in a presentation at a conference earlier this month, based on results from the first half of 2008. Sonic's numbers directionally are representative for the industry.

Sonic said it gets only 3 percent of its revenues from the Finance & Insurance department, but 16 percent of its gross profits.

F&I departments make most of their money marking up the interest rate on auto loans and leases. F&I also sells insurance products like extended service contracts, to cover additional items not covered by the factory warranty, and to extend coverage after the original warranty runs out. The dealer markup on those can be 100 percent.

So-called "fixed operations," including service and parts, accounts for 14 percent of the group's revenue, but 46 percent of the gross profit. Retailers speak in terms of "service absorption" which means how much of a dealership's expenses are covered by fixed operations. The industry benchmark is 100 percent, which means any additional profit is gravy.

The ratios reverse for new and used-vehicle sales. In Sonic's case, used vehicles accounted for 22 percent of the revenues, but only 10 percent of the gross profits. New vehicles accounted for 61 percent of revenues, but only 28 percent of the gross profits.

The publicly traded dealer groups gripe that investors unfairly lump auto retailers in the same category as the Detroit 3. The retail groups say that when the Detroit 3 are losing money, it doesn't mean the retailers always are, too.

For example, Sonic Automotive net income in the first half was about $25 million, down from $46.4 million in the year-ago period. That's a big drop, but still profitable.

It's also accurate to say that most of the big publicly traded dealer chains depend less on the Detroit 3 domestic franchises than the national average. Only 17 percent of Sonic's revenues came from domestic franchises. The rest are import or luxury brands, including Cadillac, the group said. In contrast, nationally the Detroit 3 traditional domestic franchises had a 47.4-percent market share this year through September, according to AutoData.

The retailers have a good case when they say the parts and service business is recession-resistant. People still need to fix their cars to get to work. However, it's also obvious that even though the retailers rely less on new-vehicle revenues than the automakers, any drop in new-vehicle sales is going to hurt the retailers, too.

If new-vehicle customers aren't coming in to buy autos, they're not coming in for auto loans or extended service contracts, either. And all those new-vehicle revenues count, even if margins are down.

Sonic will report its third-quarter results on Oct. 28.