Do the automakers provide a fixed subsidy per year for each dealership? Is there some overhead with interfacing with each individual dealership? If that’s the case I can’t see how that itself would save a whole bunch of money.
Are the dealers able to return unsold product for credit? I guess since there are minimum stocking requirements to look like a nice dealership I guess that would be the determining factor, but the book industry is the only one I’m aware of where you can return unsold stock without penalty.
In fact if the carmakers did not allow returns of unsold stock I’d think they’d want to keep or even increase the number of their dealers as the dealers would buy more stuff from them!
How does slashing the number of auto dealerships reduce costs, or increase the profits, of car makers? Does it cost them twice as much to support 1000 dealers as 500 dealers? Don’t you want as many people selling your product as possible?
I realize that having 3 different dealerships in one city, compared to just 1 dealership, causes greater competition and perhaps more discounting, but they must have built out their large dealer network for a reason…
But you have to balance that by asking what happens to your income. Unless there is disparity in sales between the two salesmen, your income will go down as well.
The belief is that the dealership market for the American brands is oversaturated - foreign automakers do comparably well in sales, and have 50% or more fewer dealerships
If you want to look at a GM car, you’re not going to hand-wring if you don’t have the decision on which two dealerships to go to. Nowadays, the decision to buy a car is made more on a manufacturer basis, not a dealership basis.
I heard a stat yesterday )sorry, no cite) that the typical Chrysler dealer sells about 300 new cars per year, while the typical Toyota dealer sells about 1,200.
Car dealers buy their inventory from the manufacturer. The manufacturer provides financing for the dealer. With fewer dealerships, the remaining dealers will sell more cars, which means faster inventory turnaround, which means the manufactuer doesn’t have as much money tied up in financing unsold inventory.
Fewer dealers means fewer seminars for salespeople and mechanics, more efficient deliveries to remaining dealers, fewer accounts for regional managers to take care (or fewer regional managers). Finally, fewer dealers mean more sales for the remaining dealers, which means more profit, which means remaining dealers can plow more back into shiny new buildings, more high-tech service equipment, etc., which should attract more customers, which means more sales and so on.
If I understand correctly, Chrysler will NOT buy back the dealers’ inventory. They’ll have to sell it off any way they can. Which does suck for them.
Thanks, I wasn’t aware that they did provide financing for the stock (nor that they wouldnt buy back unsold inventory, which really does suck.) It makes sense to not have your money tied up in non-moving inventory.
Note that dealers also don’t actually BUY their inventory outright. The cars are financed by the dealer through what is called a “floor plan”. Another problem the dealers will have is continuing to maintain credit with their floor plan lenders for their inventory of cars they can’t sell.
Yes, because of the floor plan they want to sell cars on the lot first. If you special order a car that is better for them since it is never really on their lot.
Toyota had 1445 dealerships in 2007. I’d assume that number is fairly stable. In April 2009, they sold 126,540 cars in the US, or an average of 87 cars per dealership for the month. That’s around 3 per day, if it was distributed equally over the week, which is is clearly not. (A year ago, it was quite a bit higher, about 150 per dealership per month, or 5 per day.)
BTW, remember that because of the floor plan, it’s a mistake to figure a dealer’s profit margin based on the invoice price of the vehicle. They don’t put up anywhere near that amount of money. Their actual profit margin should be figured against the money they actually put up, ie. the interest they paid on the floor plan, with their profit being the price you paid minus both the vehicle price and the paid interest. A modest seeming couple of percent profit over invoice will actually be much larger, unless the vehicle sat on their lot for a long time.
I have $100 dollars.
I get a loan from a bank for $100 dollars plus 1% interest
I buy an item for $200
I sell you the item for $221
I repay the bank plus the loan for $101
I have left $120
I made 20% on my $100
I have $200 dollars
I buy an item for $200
I sell you an item for $221
I have $221
That’s only true because in your example you stipulated the ability to borrow money at 1% for an investment opportunity that returns 10.5%. Any time you can borrow money at a lower rate than you can earn, you have the leverage you describe. Conversely if your borrowing costs are higher than your earning potential, the leverage works in the opposite direction. (Or it could be neutral, if the rates are the same.)
So unless we have actual numbers for auto dealerships, there’s no reason to assume that their borrowing ability increases their profit margin.