Florida's Biggest Companies
Shrinking margins at car dealerships in Florida
Tommy Gibbs is a Florida-based former owner of car dealerships who works as an independent consultant to car dealerships.
Profits: "The reality is if you want to be a great dealership, you have to be really good in used cars," Gibbs says. "A large percentage of people who buy new or used have a trade-in, and you have to be really good at giving the customer the right amount of money so you can dispose of the trade."
"The majority of profits are made in used cars and in the service departments," Gibbs says. "It's very difficult to make money from new cars. Many years ago the amount of markup on a new car was as much as 22%."
Negotiating: The availability of information about car prices on the internet has shrunk margins, Gibbs says. "The internet causes people to go online, find a car they like and get an internet price pretty quickly from most dealers," Gibbs says. "It's taking the negotiating hassle out of the business."
"Millennials like it because it's a much simpler process," Gibbs says. "It's not us having to negotiate and close you. It's cut-and-dry. Still, what really drives the continued negotiating is customers want to negotiate. We in the car business would rather not have to negotiate."
Used cars: Profit margins are shrinking on used cars, Gibbs says. But unlike new cars, there isn't as much negotiating because car dealers price cars aggressively from the start.
"Every dealership in the country is using a software program. There's three big companies that sell them. The dealer can search the internet with this software to determine all the 2010 Malibus in the marketplace within a 25-mile radius. It will pull up for the dealership every car in the internet world. It tells the dealer that there's another dealership up the street that has the same car cheaper than yours. They are pricing them really, really low so they will get that customer in."
The CarMax effect: "I study CarMax a lot. I shop them at least once a month," Gibbs says. "They have the best business model, but they don't have the best prices. They make almost $2,000 per car."
“CarMax does not advertise much. They don’t negotiate — you know that because everybody knows that,” Gibbs says. “If you listen to their ads, they are screaming three things: ‘Hey, this is a really nice place to buy a car. We have lots of inventory. And we’ll buy your car even if you don’t buy ours.’ They don’t scream ‘We have the best price.’ They don’t scream ‘bad or low credit come here.’ ”
Making a living: Almost all car salesmen and women are paid exclusively on commission, Gibbs says. "It's either done based on volume, where you get paid so much every time you sell car, or it's done based on the profit of the car."
"If it's the profit of the car, the dealership might make $1,000 and your commission might be 25% of $1,000, which makes it $250. If it's volume, it's a fat amount. It might go up if you hit certain numbers, like you might be paid $250 for the first five or six cars and then after that $300," he says. Gibbs tells dealers they should pay car salespeople on volume "because a salesman has no control over profit. They just need to do a good job presenting the product and company."
"A really good car salesman can make $120,000 to $200,000 a year," Gibbs says. "The average is probably $50,000 or $60,000. You can make money, but it's hard work and a lot of hours."
Service department: "There is a term in the business and it's called fixed operations. When they use that term they are talking about the service department, the body shop and parts department. In fixed operations, those numbers stay consistent throughout the year. Dealers know they have to be good in those departments because that is what will pay the bills," Gibbs says.
Honda vs. Mitsubishi: "There are some brands that you will make more money on because it's just easier. As an example, there are very few Honda dealerships that don't make money. There are very few Mitsubishis that make money. It's not been a good product."
"When a brand comes into the country, dealers scramble to get it because they don't know if it will be next Lexus or not. They get the brand and then are stuck with it," Gibbs says. Sometimes dealers just walk away from an investment or try to find another franchise to occupy the same building, he says.