Automobile dealerships have always played a vital role in the automotive sector, providing a wide array of services such as the sale of both new and used vehicles, vehicle financing, as well as maintenance and repair services.
However, in recent years, the automotive dealership industry has undergone substantial growth due to advancements in technology and shifts in consumer behavior.
If you’re in the car dealership sector, you know that car dealerships are presented with a distinctive set of challenges and opportunities today. As technology continues to advance, these establishments must adapt to remain pertinent and competitive.
This adaptation includes the incorporation of new tools and systems to enhance operational efficiency, elevate customer experiences, and stimulate revenue growth.
DealerPRO Training goes into the realm of automobile dealerships in this blog. We explore their fixed operational dynamics so that you can have a better idea of how automotive dealerships work and recognize the true worth of your dealership.
Defining Automotive Dealerships
An automotive dealership, whether it’s a business or an individual, acquires new vehicles to sell or lease them to customers. These establishments may engage in the retail sale of both new and used vehicles.
Typically, a dealership maintains a contractual relationship with an automaker or a sales subsidiary. In addition to vehicle sales, many automotive dealerships also offer auto parts and deliver automotive maintenance services.
An Explanation of How Automotive Dealerships Work
Certain corporations frequently grant franchises to operate auto dealerships for the sale and servicing of their vehicles. These dealerships typically feature physical showrooms where both new and used vehicles are showcased for sale, designated areas for providing mechanical services, and facilities for repairs.
It’s worth noting that State Law in the US generally prohibits car dealerships from purchasing directly from the manufacturer.
Let’s take a deeper look at the operations of various departments within a car dealership:
Pricing on Vehicles
Negotiation is possible for certain prices, but for other vehicles, dealerships must adhere to rigid pricing standards. Automotive dealerships may receive “hold-back” funds from the manufacturer, in addition to other bonuses and discounts on new cars. When it comes to used cars, the selling price is determined by the cost of acquiring the vehicle and the expenses incurred in refurbishing it.
The Inventory of Vehicles
Pre-owned vehicles are acquired through trade-ins or direct purchases. Dealerships employ floor plan financing to procure inventory and incur interest expenses for the duration a car remains in their inventory. Hence, the faster a car is sold, the more favorable it is.
Discounts come into play when attempting to sell cars that have been in the inventory for an extended period since the primary objective shifts from maximizing profit to clearing out older inventory.
The Finance Department
The finance and insurance department, commonly known as F&I, handles customer financing needs. Its revenue generation involves selling cars by facilitating loans, utilizing the dealership reserve, and earning profits through interest rates.
Additionally, the F&I department manages the sale of insurance, warranties, and all the paperwork related to vehicle purchases. It’s often referred to as the dealership’s “front end.”
The Servicing Shop
While F&I constitutes the dealership’s “front end,” the service, parts, and body shop departments represent the “back end” of a car dealership. These departments handle vehicle maintenance and repairs after a sale has been made to a customer.
Their activities can enhance customer engagement and contribute to dealership revenue, although it’s worth noting that not all dealerships have these departments. Nowadays, car dealership DMS (Dealer Management System) software is available to assist in managing these functions.
The Management and Sales Teams
When a single dealership is owned, the proprietor functions as the dealer principal, while in the case of multiple dealerships, managers are appointed. These managers oversee the daily operations by their arrangement with the principal.
In many instances, a manager may be required to become a minority partner by investing in the dealership and may receive bonuses for achieving specific targets or exceptionally high profits.
As you embark on your automotive journey with the beginner’s guidebook to dealerships, it’s essential to understand the ways in which AI is revolutionizing car dealership business model, shaping the future of the industry, as explored in the related article.
Characteristics of the Automotive Dealership Sector
Automobile dealerships serve as intermediaries connecting car manufacturers with consumers, offering a diverse selection of vehicles at various price points. In this context, we aim to gain insights into the business model of a car dealership by examining its characteristics and operational context.
Organization of the Industry
The automotive dealership industry is divided into two main segments: new car dealerships, which specialize in selling brand-new cars, SUVs, passenger vans, and cargo vans, and used car dealerships, which deal in previously owned, rented, or leased vehicles.
According to NADA (National Automobile Dealers Association), new vehicle sales account for over half of the total sales revenue. Used car dealerships are also expanding and establishing new locations across the country.
The Selling of Goods and Services
Automobile dealerships are responsible for the majority of cars, vans, and light trucks commonly found on the road. The demand for vehicle sales can fluctuate based on consumer preferences. In addition to selling vehicles, dealerships provide auto-related services through their aftermarket sales departments, such as repairs, refinishing, and painting.
This not only generates revenue but also enhances customer satisfaction. During slower periods, dealerships offer incentives, financing options, and rebates to customers as strategies to sustain sales and minimize inventory levels.
The profitability of used car sales is on the rise, whereas the profit margins for new car sales are diminishing. Auto malls are now presenting certified pre-owned vehicles to cater to customers seeking warranties for their used cars.
The expansion of aftermarket services, such as vehicle maintenance, repairs, and financing, is enhancing operational efficiency and adaptability. Beyond sales, dealerships are also incorporating car rentals and leasing options, where customers make monthly payments and eventually return the vehicle.
This strategic diversification aims to boost profits and attract a broader customer demographic.
When diving into the world of automotive dealerships as a beginner, it’s essential to separate common misconceptions from the realities of the industry, as discussed in the corresponding article.
Contact DealerPRO Training to Start Your Team’s Training Program Now
Whether you’re interested in starting your own business, or you want to increase the skills and expertise of your existing team, we have you covered at DealerPro Training. Arrange an operations training program with us today and ensure everyone on your team is well-informed about the ins and outs of automotive dealerships, opening the doors for increased revenue. Contact us now!