Automobile Dealers
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Industry Overview
The US automobile dealer industry includes about 45,000 new and used vehicle dealers with combined annual revenue of about $625 billion. Major companies include AutoNation, CarMax, Penske Automotive Group, and Sonic Automotive. The industry is highly fragmented: the top 50 companies generate less than 15 percent of revenue.
Competitive Landscape
Consumer spending and interest rates drive demand for cars. The profitability of individual companies depends on the volume and mix of cars and services sold. Large companies can offer a wider selection of cars and have advantages in marketing, purchasing, and finance. Small companies can compete effectively by offering superior customer service or serving a local market. The industry is capital-intensive: average annual revenue per worker is about $615,000.
For vehicle sales, auto dealers compete with private market sellers, who are increasingly using the Internet to bypass traditional retail channels. Companies compete with various retail outlets, such as oil change centers, tire stores, and independent service shops and chains, for service revenue.
Products, Operations & Technology
New car dealerships account for 90 percent of industry revenue, used car dealerships make up the remaining 10 percent. In addition to cars, dealerships commonly offer parts and accessories, maintenance and repair services, financing plans, extended warranties, and insurance.
New car dealers have franchise agreements with car manufacturers, which give dealerships nonexclusive rights to sell certain brands of cars and offer related parts and services within a specified market area. Franchise agreements typically impose various requirements for operations, including inventory levels, working capital, sales practices, showrooms, service facilities, and monthly reporting. Multiple franchise agreements with different car manufacturers allow dealers to offer a broad range of vehicles.
Dealers acquire new vehicles from manufacturers through an allocation system based on historical sales, and typically have limited influence over the colors and features of cars received. Companies buy used vehicles from a variety of sources, including trade-ins, auctions, other dealers, leasing companies, and rental companies. To set a price for a trade-in, used dealers consider a car's age, mileage, and condition to develop an appraisal. Used vehicles may require reconditioning prior to sale; vehicles unfit for retail resale are generally sold through wholesale auctions. Some manufacturers allow dealers to sell certified pre-owned (CPO) vehicles with extended warranties.
Service and parts operations may offer repair, maintenance, body work, and warranty services. A typical service department has 18 service bays and handles over 13,000 repair orders annually at an average value of just over $200 per order. Car manufacturers may authorize dealers to perform warranty work.
Auto dealers rely on computerized information systems to store vehicle information, track vehicle movement, and process sales transactions. Inventory management systems help companies optimize the supply and mix of vehicles, and are especially useful for companies monitoring inventory across multiple dealerships. Customer databases store information on existing and potential customers and help dealerships develop marketing programs. Radio frequency identification devices (RFID) capture test drive information.
