Automobile Dealers - Luxury
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Industry Overview
In the US, about 1,500 of the over 20,000 new car dealerships sell mainly luxury cars, with combined annual revenue of about $50 billion. Luxury cars (those costing more than $40,000) account for 10 to 15 percent of all cars sold. Major luxury brands sold in the US include BMW, Lexus, Cadillac, Mercedes, and Lincoln.
Competitive Landscape
Consumer income and wealth drive sales of luxury cars. The profitability of individual dealers depends heavily on volume because so many costs are fixed. Large dealers have an advantage in larger inventory selection and the ability to provide post-sales car service. Small dealers can compete by providing better customer service. While a typical regular car dealer may sell 800 new cars per year, a luxury dealer usually sells far fewer.
Products, Operations & Technology
Car dealers usually have four profit centers: new car sales, used car sales, service and parts, and financing, (including insurance and service contracts). Luxury dealers are more likely than regular dealers to make a good profit from new car sales because their customers must make a greater effort to comparison shop. Luxury car buyers also are more likely to order high-margin optional features and extras that add to dealer profits, and are less interested in price than in good service. Car buyers may buy what is on the lot, but often specify options that force the dealer to order a custom-made car from the manufacturer. Delivery times for a foreign car can be several months.
Used cars, which typically have higher markups than new, are also profitable for dealers, especially luxury dealers, who typically sell luxury cars coming off leases. Dealers can sell used luxury cars at fairly high prices because the cars tend to be only a few years old and are often well maintained. A high percentage of luxury cars (perhaps 60 percent) are leased, producing a steady flow of sellable used cars that leasing companies (usually affiliates of the manufacturer) must get rid of.
Service and parts are very profitable for most dealers, especially for luxury dealers, who essentially have a monopoly on spare parts and factory-authorized technicians in a large sales territory, and whose customers are more likely to service their cars often to keep them in top condition. The main goal of most luxury dealers is to entice new buyers to return for service work, which can be difficult if customers live far from the dealer. Dealers use free pickup and delivery services, free loaner cars, and spacious waiting rooms equipped with telephones and modems to bring customers in.
Financing, insurance, and other services are less profitable for luxury dealers because so many buyers lease rather than finance cars, and because manufacturers’ warranty policies are now so generous that extra service coverage often is not needed.
