TedH

Markup In The Automobile Business

Recommended Posts

10 hours ago, kevin1221 said:

...In many dealerships, the service departments provide the most gross profit, but the expenses are staggering. Equipment and training are very expensive....

 

Can someone address the high hourly rates charged by

dealers' service departments?  They have specialized knowledge,

but around here, independent mechanics are $50-60 per hour,

while dealerships are at least $90 per hour.  And the dealers

charge FLAT RATE, at which they bill more time than they may spend,

making themselves even more expensive than their hourly rate would indicate.

 

I assume the dealers' big and upgraded buildings--often forced on them

by the manufacturers--mean extra expense that they must pay off.

In Carlisle, Pa. in the 1990's, the Chrysler dealer moved from

downtown to a newer, larger place outside of town, and the hourly

rate immediately jumped from $36 to $52 per hour, a 44% increase.

 

Give me a small dealership, honest and knowledgeable, or an

independent mechanic in a modest garage, any day!

Edited by John_S_in_Penna (see edit history)

Share this post


Link to post
Share on other sites

Service hourly rates are determined by a variety of factors. Our dealership is currently at $125.00 per flat rate hour, for both customer pay and warranty work.

 

While I did say the service department produces the most gross profit, that doesn't equate to excessive net profit. Gross profit is sales, less technician wages. Net profit is sales dollars, less all expenses, including tech wages.

 

Technician wages are a factor. Out techs have extensive, specialized training and many have tens of thousands of dollars invested in tools. Our technicians have an average of 17 years of service at our dealership. Next, the dealership owns hundreds of thousands dollars in tools. Tool requirements are constantly being updated. Rent is also a factor, and the newer facilities are more expensive than an older building. We are currently doing a manufacturer required update that is costing in the area of  $2,000,000. Property taxes also must be covered, along with utility cost. Many newer built facilities are air conditioning the shop area, in an attempt to attract top technicians. Advertising cost are also significant for a franchised dealer. Other cost to consider are employee benefits, workers comp, garage insurance, administrative salaries, and employee training.

 

The above items are just some of the line items from a financial statement that highlight the structure of a franchised dealership.

 

Can an independent shop, in a rural setting, charge less than a franchised shop in a metro area.....ABSOLUTELY! The issue lately is the technology on many of the new vehicles requires specialized training and equipment that the smaller independents can't provide.

 

Hope this helps......

 

 

Kevin

  • Like 3

Share this post


Link to post
Share on other sites

I work at the dealership and there are plenty of things I either do on my own or take to the local mechanics for because I simply don't need the technology (and price) involved. But when it comes to my new car under warranty I take it in. While I am the owner of the car, and it's my satisfaction they are concerned about on their surveys, technically Ford or my 3rd party warranty is the actual customer. I can't tell them to perform this or that test, or just do this and that unless I want to pay for it. Ford tells them what they can and can't do. In order to meet Fords standards, we have to have the equipment Ford says we need. As a dealership we get certified in different lines. We need lifts for F550s, and the ability to service F650s. Other shops can do more than us, and others do less. It all cost quite a bit of money to meet those requirements, and with the warranty company paying for most of the service we perform, it just makes sense to follow their rate guidelines. I'm uncertain if we'd get in trouble charging a cash rate and warranty rate. It's sorta like going to your doctor without insurance. There is always that old lady down the street with her medicinal herb garden, and you know what, there are plenty of times her mixtures work just fine.

On a note of the surveys, I truly hope the manufacturers shift away from them for bonus money. Ford just took up that as well and it's horrible. There is not a moral way to attach money to a survey. I want a bad survey to be honest, so we can make improvements, or at least chuckle at how unrealistic the customer was. Instead we're forced to delete email addresses and coach customers on how to answer the survey. For Fords weighted system, 4/5 is actually a 50%! Go figure that math out. One of the questions we have to get full marks for is "do you love [insert dealer name]". Come on! It's a bunch of fluff, I deal with many out of state customers who just came to me because I happened to have the right utility truck for their job, not because they love me. Ford tells us not to coach folks, but now we have to consider hiring someone to do that specifically (like the big dealerships have). The customer doesn't realize it's effect, but they should be the ones most outraged (hence this comment posted on page 2 of a old car thread). Your voice is manipulated to meet what Ford says they want to see, they don't actually want to hear your critiques, or methods of improvement. You simply can not have integrity on a survey where money is attached.

Interestingly, when I sold retail units, I found I never once got anything less than a perfect survey from folks who paid full sticker minus rebates, but folks like the OP who are convinced that we are making tens of thousands of dollars off them, but I had to break even on to close the deal, give bad surveys because they simply hate buying a car.

Edited by Frantz (see edit history)
  • Like 1

Share this post


Link to post
Share on other sites

From what I have seen over the years,

the hourly rates for dealers' garages

have gone up MUCH more than the inflation rate.

I can provide anecdotal documentation.

 

When prices of necessary items increase

faster than inflation, it's an unsustainable process.

As a result, fewer people can afford it;  fewer people

use that service.  Eventually, no one would be able to

afford the service.

Share this post


Link to post
Share on other sites

Shop rates are relative, and I think one area people can make a decision on.  Personally, I think $125 per hour is reasonable - I know from friends who wrench a dealer mechanic is generally making more than their counterpart in an indy shop.  Some folks might not see it this way but to me, I think looking at the rate alone is penny wise and pound foolish.  My daily is a Euro car - Mercedes, who have a reputation as being a bit complicated to service.  Once out of warranty, I decided to continue seeing the dealer.  It costs 30% or so more to do that.  So far, zero surprises, returns or issues with service performed.  When I sell or trade, someone might like the idea of "serviced consistently by the dealership" - I like the fact the folks in the shop know these cars inside and out.  But if I wanted to save $50 or so badly enough I could always poke around for an independent.  I wonder how many times though, the customer pays for them to figure out the issue  - the meter is running where the dealer guy may have seen it 3 times in the past couple months.

 

plus, if I happen to pick up a part or two for the SL (which I do not take to the dealer using different logic - you want an old timer familiar with these cars, most mechanics in dealerships today were not of working age when these cars were showing up less and less for service.  I use a couple of indy specialty shops but rates are not that much less than the dealer) the nice guy at the counter puts the parts in a shopping bag like you get at Nordstrom's which always makes me chuckle.. :D

 

To me it is not unlike restoration rates.  People have no problem shelling out $50K, $75K or more for a custom kitchen and usually do not even ask how many hours are involved in the process (I know as I was in that business) but for some reason think you should be able to restore a car for $10K.

 

 

Share this post


Link to post
Share on other sites

Thanks to all who have commented on this topic.  Lots of helpful replies.  I'm sorting through the posts now, doing additional research, and putting together questions.   Thanks, TedH

Share this post


Link to post
Share on other sites

The dealer may have a higher hourly rate.The factory time at the dealer is usually less time than the Chilton time or whatever brand used by independent shops. These surveys that are so common today are awful. They are useless and don't gather any valid infoormation. The only conclusion they can come to is that whatever problem you have with your company experience has to be caused by bad employees not a bad or mismanaged corporation.

Edited by misterc9
More (see edit history)

Share this post


Link to post
Share on other sites

In reference to matters discussed earlier in this thread, I spent much of my career in the apparel business where the norm was to retail price at twice the wholesale price. The term for that doubling is called "Keystone" markup. That sounds wonderful, but you don't sell anywhere near as many items as, say a grocery store or a hardware store. It's my understanding that grocery stores have nightmare markup structures. Very narrow margins on some things, profits on other and some things sold at loss. I did do a few other things for a living along the way. In 1980 I sold Chevrolets for a time. At that time the margins on new cars was fifteen percent of the sticker price. In other words, a car with a sticker price of, say, $10,000 cost the dealer $8,500. Trucks had a twenty percent margin. That was the extent of the knowledge that the sales people had. Our commissions were a percentage of that fifteen or twenty percent margin.

Edited by Hudsy Wudsy (see edit history)

Share this post


Link to post
Share on other sites

Grocery stores are hard to pin down, although they might have slight margins, the move tons of merchandise, AND the secret to really making money is "slotting fees".  That is, the manufacturer of certain foodstuffs or other merchandise sold in the grocery store pays a slotting fee, basically renting the shelf space to sell their product.  I was in the food business for many years, and slotting fees could make or break a "new" product brought to market.

 

As far as mechanic's pricing, I think 75 to 85 is probably the norm, 125 would be high.  Also, as mentioned, a lot of things are billed flat rate, so the book says it takes 1.5 hours to remove and replace the instrument panel in a Suburban, when in reality it's half an hour to someone who's done it before.

 

In old car restoration, 50 an hour is a low end, most shops I hear of now are in the 65-85 range, and I can tell you from a lot of restoration experience, not a lot gets done in an hour when working on an old car!

Share this post


Link to post
Share on other sites

I have a friend who used to sell diagnostic equipment to new car dealers. They were constantly looking for qualified techs. He said they mostly looked for guys who were good with computers since it was easier to train a computer geek to change parts than it was to train a mechanic to operate computers.

  • Like 1

Share this post


Link to post
Share on other sites

trimacar, I wasn't even going to bring up "slotting fees". Yeah, it gets incredibly complicated because it's so incredibly competitive. Still, in these times what isn't?

Edited by Hudsy Wudsy (see edit history)

Share this post


Link to post
Share on other sites

another factor of "holdback", is if the dealer has to get the car from another dealer, he gets no holdback. generally you can make more money on finance than on the actual car.the only one who makes the worst part of the deal is usually the salesman, the guy who does the most work on the deal. in fact, the more work you did to put a deal together, the less money you made.today the sales floor is mostly a revolving door, as they will hire anyone to sell cars. they get them pumped up, and they stay until they can't afford it anymore. they don't get paid on the price of the car, like real estate agents, they get a percentage of the net profit, usually about 25%. but before that, the dealer will put a PAC on the car. PAC stands for protection against commission. and it's not the same on every car. the cars that are in high demand, or sell for prices above sticker can have a pac of a couple thousand bucks. so if he sells a unpopular model for lets's say $300 over invoice, and it has a $500 PAC on it, he might get 50 bucks on a $40,000 car.and many times after a deal is made, when the buyer gets into the finance office, they might balk at the payment, so the finance guy might cut the profit on the car, yet raise the finance rate(so he still makes his cut), and the salesperson gets screwed again.also, any assesories that are added on as part of the deal, are charged against the car at full price by the service/parts department, lowering the commission even more.one thing i have learned in 48 years in all phases of the car business, if you feel you got screwed on the deal, you probably didn't, and if you feel like you stole it, you probably got screwed.

Share this post


Link to post
Share on other sites

We have 8 guys in our retail showroom. 4 of them have been here at least 4 years (4, 10, 10, 22), 1 has been here a year, and the other three are new guys. We pay our guys on the front and back of each deal, so they still make a living giving the car away but making money from finance. It's a pretty fair way to do it, and I think we gain by having a more committed sales force. Certainly it helps with repeat customers. Frankly, giving my generations tendency to jump jobs every few years, I'd say we have a very stable sales floor. I would guess other dealers try for similar tenure with varying success. There is always a revolving door at the bottom, but not everyone is cut out for sales either. Some folks can't do it. Some folks don't like to do it. 

  • Like 1

Share this post


Link to post
Share on other sites

Most service departments hire a service manager at a base pay with a monthly bonus paid on the ratio of what the car came in for versus total work added from the base service call, The pressure to bump the bill is intense through the whole food chain. I know one service manager and three mechanics whom have left working in the dealer networks for ethical reasons. Just a casualty of the business. You get those odd balls once in a while, part of the normal turn over when they don't fit in.

My daily drivers have been new purchases for the last 20 years. I haven't used dealer service. I buy GM, which helps. And I stick with the more durable design of separate body and frame, longitudinal engine mounting, with rear wheels driving, a truck. That keeps me out of the shop as well.

To leverage my pricing I buy out of stock, at the end of the month when quotas are being pushed. I ask for a couple of dealer installed accessories because the salesman gets a bigger cut from those. I ask for dealer financing at a longer term. I make one payment on the loan and pay it off through my regular funding source, usually a credit union. My last truck came out at 80% of the MSRP without a lot of monkeying around. It made me happy.

 

I don't do car work but I strive for about $125 per hour. I faithfully put 10% of each payment into a separate warranty account to assure funds for non-billable time or just plain customer satisfaction. I have given away hats and pens.... but never carpet protectors.

Bernie

Share this post


Link to post
Share on other sites

Flat rate can work both ways. Good friend of mine worked for a Mopar dealer. He loved doing head gasket replacements. He found that using the air impact driver and counting "1,2,3, tight enough" really sped up the process. Who needed a torque wrench? He made good money. His other regular job was to each night hook up the "black box" to whatever car needed the odometer rolled back,

 

 

 

 

 

Share this post


Link to post
Share on other sites

Are GM shops still using "ShopTrack" ? 

Share this post


Link to post
Share on other sites

There is the new car business and there is the used car business that comes from the new car trades. Then there are the specialized niche business of sports, exotics, antique, classic and collectibles. I know we all like to help people here, but I wonder why would someone come to the antique car forum looking to learn the inner workings of todays new car business?

Share this post


Link to post
Share on other sites
4 hours ago, Digger914 said:

There is the new car business and there is the used car business that comes from the new car trades. Then there are the specialized niche business of sports, exotics, antique, classic and collectibles. I know we all like to help people here, but I wonder why would someone come to the antique car forum looking to learn the inner workings of todays new car business?

Well, gosh darn it, Digger914, you are correct!  I didn't think of that, although I do think it's a fun topic, it's not about antique cars.

 

The subject of selling antique cars, both by dealers and privately,  has been discussed on this forum numerous times.

Share this post


Link to post
Share on other sites

After being a wholesaler for several years, I decided to never enter a car dealership again with the intent of purchasing.  Out of the 65 dealers I sold to, 2-3 might have been honest with their numbers and books.  I really don't understand how the manufacturers didn't catch what they did during audits.  The stories go on and on, from hiding cars to cooking to books.  They would brag about it to me since I wasn't really part of their business.  They would ask me to do things that I simply wouldn't do in terms of title and checks.  Some wouldn't deal with me because I wouldn't help them play their games.  This is mostly related to used cars, but in that also included factory sales and dealer trades.  By all means, if a person can afford a new car and wants to buy one, that keeps a lot of people working, but not me. 

  • Like 2

Share this post


Link to post
Share on other sites
6 hours ago, Digger914 said:

There is the new car business and there is the used car business that comes from the new car trades. Then there are the specialized niche business of sports, exotics, antique, classic and collectibles. I know we all like to help people here, but I wonder why would someone come to the antique car forum looking to learn the inner workings of todays new car business?

 

Probably because a lot of people here are knowledgeable:

Many people who like old cars are involved in automobiles generally.

We occasionally discuss here models newer than antique.

And, significantly, this has become an informative thread.

  • Like 2

Share this post


Link to post
Share on other sites
41 minutes ago, 39BuickEight said:

After being a wholesaler for several years, I decided to never enter a car dealership again with the intent of purchasing.  Out of the 65 dealers I sold to, 2-3 might have been honest with their numbers and books.  I really don't understand how the manufacturers didn't catch what they did during audits.  The stories go on and on, from hiding cars to cooking to books.  They would brag about it to me since I wasn't really part of their business.  They would ask me to do things that I simply wouldn't do in terms of title and checks.  Some wouldn't deal with me because I wouldn't help them play their games.  This is mostly related to used cars, but in that also included factory sales and dealer trades.  By all means, if a person can afford a new car and wants to buy one, that keeps a lot of people working, but not me. 

 

Most people fail to realize that car dealerships are independently owned businesses.  The car manufacturers DO NOT own the businesses.  They have basically the same status as the local grocery store except they have a sales & service agreement with the particular manufacturer which states that the business will sell and service a particular brand exclusively and the manufacturer will provide that product.

 

The independent business can run the finances any way they want just like each of us can run our own family finances.  Example, I have seen a Rolls Royce in the used car inventory.

 

The manufacturer might recommend best practices but it is still up to the owner to how they want to run the store. 

Edited by Larry Schramm (see edit history)
  • Like 1

Share this post


Link to post
Share on other sites

Very true Larry, and that is a huge reason many people are brand conscious based on a dealer experience.  They are truly 2 separate entities.  I do know some dealers that lost their franchises because of bad and immoral business practices (now they are just used car lots), but that has nothing to do with the product they were selling.  A bad dealer does reflect poorly on the manufacturer, and a lot of that has to do with the fact that consumers don't understand what you pointed out.

Edited by 39BuickEight (see edit history)

Share this post


Link to post
Share on other sites
5 hours ago, 39BuickEight said:

After being a wholesaler for several years, I decided to never enter a car dealership again with the intent of purchasing.  Out of the 65 dealers I sold to, 2-3 might have been honest with their numbers and books.  I really don't understand how the manufacturers didn't catch what they did during audits.  The stories go on and on, from hiding cars to cooking to books.  They would brag about it to me since I wasn't really part of their business.  They would ask me to do things that I simply wouldn't do in terms of title and checks.  Some wouldn't deal with me because I wouldn't help them play their games.  This is mostly related to used cars, but in that also included factory sales and dealer trades.  By all means, if a person can afford a new car and wants to buy one, that keeps a lot of people working, but not me. 

i've been on both sides of the wholesale business. when i was used car manager(this was back in the 80's) i knew when i did an appraisal, what i was gonna do with the car. back then it was hard to stay honest because a lot of the wholesalers would toss hundred dollar bills around to get a better price. the owner was a good friend of mine, so i resisted. when i wanted to send them a message, i would detail the car myself, and take it to the same auction they had planned to take it to. after a couple weeks of that, the offers started going up.when i went out on the road to buy from other dealers, i had a simple plan, i would buy my imports from domestic dealers, and vice versa. it usually worked out pretty well that way.

 

Share this post


Link to post
Share on other sites

From the highway the car business looks pretty much the same as it has for years, flags still fly over the used car lots, new car show rooms are still decorated with helium balloons and a giant inflatable gorilla is still sitting of somebody's roof. There are still some factory owned stores and there are still some single store family owned dealerships. In metropolitan areas, the small owner operated dealerships are more and more being absorbed by the multi store dealership corporations and as it is with any business, the owner is the personality, integrity and conscious of how the business runs.

 

A few years back we had a dealer with a chain of stores that he ran his way and every other dealer in town had to compete with him or close up shop. Long story short, he has served his time and gets out of prison this year.

 

An article about the inside details of how new car sales profit margins are figured won't sell a newspaper and won't draw people to a free online blog. An article about how a specific new car sales organization works, could get the writer a Pulitzer Prize 

Share this post


Link to post
Share on other sites
8 minutes ago, Digger914 said:

...A few years back we had a dealer with a chain of stores that he ran his way and every other dealer in town had to compete with him or close up shop. Long story short, he has served his time and gets out of prison this year....

 

Digger, that's one story not to shorten!

How did he run afoul of the law?

Knowing more detail will shed some light on

what to watch out for, for businesses and customers alike.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now