Car Dealerships: Some Business Basics

June 24th, 2010

We know: Most people dread car shopping and fear dealers. The reason for most of that anxiety is, frankly, a lack of knowledge about how dealers operate and what to expect in the buy-sell transaction.

In the spirit of being a good knowledge broker, we thought it was time to talk about how dealerships are structured and offer stories and tactics to get you comfortably (we hope) through a sometimes complicated transaction. This is the first of a three-part series we’ll do on Thursdays.

It is not an easy time to be a car dealer. Compared to a projected growth of 11 percent for all U.S. industries, car dealers are looking at consolidation, restructuring, and a 6 percent job decline through 2018.

As dealers will be cutting back on front-line staff, it’s more important than ever to do your homework before you even walk/drive in. First, let’s talk about how dealerships are typically organized.

On the selling side, you generally have one or more sales managers, assistant sales managers, fleet and Internet salespeople (depending on the size of the dealership), and floor salespeople—your contact. Then there are the finance and insurance staff in the back rooms who handle the transaction once your deal is set.

The Front End of the Deal: Many dealerships, like the one I once worked for, are top-heavy on the “front end”—the staff that deals with the customer, closes the deal, and arrives at a final price by subtracting from the invoice price dealer holdback (1-2 percent of wholesale price, paid by manufacturers), and adding in pack (cost to the dealer to sell you the car, e.g., advertising, overhead, etc., which may be anywhere from $300-$800 per vehicle).

As you can see, the so-called invoice price is essentially a fiction and may or may not represent what the dealer actually paid for the car. For “invoice” pricing, Kelley Blue Book and NADA generally work in the dealer’s favor, but they do provide you something to go on to begin negotiations.

The Back End: These folks offer financing options and other add-ons (about most of which you will want to be wary). Here is where the dealership makes most of its money, and here is where you as an educated buyer can really make the most of your negotiating skills. More on this in Part 3 of our series.

Remember that dealers are franchised retailers who must buy their inventory outright from the manufacturer. They also must support (usually) a service facility with trained personnel, a used-car business, counter people, bookkeepers, cleaners, and clerks. Salespeople and some service techs are paid on commission, though a few dealers have adopted a salary-paid sales force.

If you do your homework before buying or trading, you’re going to find a lot of jaundiced online commentary on car dealers, some deserved, some not. As we said earlier, it is a tough business, especially today as the auto world transforms. Selling cars has gotten both easier and more difficult with the advent of Internet pricing and information; those dealers that acknowledge and seek out Internet buyers will be the winners of tomorrow.

The business model of a car dealership often seems designed for another time: Agree or disagree?

—jgoods

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  1. Travis
    June 25th, 2010 at 10:40 | #1

    I think the current dealership business model is more appropriate for the era of selling horses as transportation. Outdated and time for a change.

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