Dealer service departments post record revenues in 2014

June 11, 2015
U.S. auto dealerships have continued to increase new and used vehicle sales, while dealer service departments posted record revenues in 2014, according to the National Automobile Dealers Association's annual report.

U.S. auto dealerships have continued to increase new and used vehicle sales, while dealer service departments posted record revenues in 2014. The National Automobile Dealers Association (NADA) released its annual industry report, NADA Data 2014 in April, and their research shows the industry continuing to make big gains.

Sales at new car dealerships reached 16.43 million units in 2014, and total dealership revenue reached $806 billion, an 8.6 percent increase over 2013. Net profitability remained flat at 2.2 percent for the third year in a row.

"Profitability is complete flat," says NADA Chief Economist Steven Szakaly. "Competition is intense. Anyone can buy a vehicle anywhere in the country, so you don't just have local competition, you have national competition. That interbrand competition among car dealerships is really underlined by the fact we are not seeing profitability increase."

NADA is forecasting sales of 16.94 million new light vehicles this year, driven by low auto loan rates, high trade-in values, falling gas prices, and pent-up demand. Total light and heavy duty sales should top 17.3 million.

The number of dealerships is growing. During the worst part of the economic recession several years ago, big OEMs like GM and Chrysler forced the closure of hundreds of dealerships. In 2014, there was a net increase of more than 200 new car retail locations.

“Consumers clearly feel confident enough in the economic recovery to make big-ticket purchases,” Szakaly says. “While we’ve seen a pullback in investments in other industries, particularly in oil-related industries, automotive retailing remains a growth industry. The automotive-retailing sector is continuing to outpace growth in the overall U.S. economy. Economic and employment growth were slower than expected in the first quarter but vehicle sales remain strong.”

The new vehicle department had the largest share of total sales (57.6 percent), while used vehicles accounted for 31.0 percent, and service/parts made up 11.4 percent of total sales (a slight dip from 11.6 percent in 2013). Service/parts still had net profits that greatly exceeded those in the new and used vehicle departments, however, which has been the trend for the past decade.

Dealership payrolls have also continued to grow. Average payroll is $3.54 million, up from $3 million in 2013, and the industry had total payroll of $58.11 billion. New car dealership employees bring home an average of $1,058 per week.

Service continues to expand

The service and parts departments of U.S. dealerships continue to post record sales. In 2014, total service, parts, and body shop revenue reached $91.73 billion, up 8.4 percent over 2013 when total revenue hit $84.6 billion. (These figures are not completely comparable, because NADA altered its benchmark and data collection methods for the current survey; still, the general trend is an increase in revenue.)

"Service has become much more important." Szakaly says. "It's a profit center, and a way to drive more business into the dealerships. It's a fundamental function of the dealership that needs to be profitable, because there's really no money to be made on new car sales at all."

In 2014, total service labor sales reached 41.03 billion in 2014. Customer mechanical accounted for $16.17 billion of that, followed by warranty sales ($8.45 billion), and internal ($7.4 billion). Customer mechanical also led parts sales ($13.79 billion), followed by wholesale ($13.35 billion) and warranty ($8.69 billion). Parts sales totaled $50.69 billion, an increase of 7.5 percent over 2013, when sales reached $47.15 billion.

In 2013, 36% of dealership had an onsite body shop, and body shops generated $7 billion in revenue. Last year, total body shop revenue reached $7.53 billion, while the percentage of dealers with body shops remained relatively flat.

Total service and parts sales were $5.6 million at the average dealership (compared to $4.8 million in 2013), with a total gross profit as a percent of those sales of 46.14 percent. Net profit as a percent of service/part sales at the average dealer is 6.39 percent (up from 6.09 percent in 2013). The average dealer wrote 17,070 repair orders in 2014 (compared to 14,002 in 2013, an increase of nearly 18 percent) with a value of $255 in sales per order for customer repair jobs (and an average of $230 per warranty repair order).

The increase in repair orders was largely due to the record number of recalls that occurred in 2014. "That has pushed the capacity utilization in the service bays higher," Szakaly says. "It has also led to more hiring and expansion."

Dealers have an average of 17 technicians (including body shop), a slight increase from 2013. The entire industry has 274,984 technicians, an increase of nearly 10,000 techs over 2013. Technicians make up 26 percent of the total dealership labor force.

The average dealership parts inventory increased $328,114 last year, while the total parts inventory for all dealerships now stands at $5.38 billion. The average customer mechanical labor rate stands at $135.

"Dealers are becoming much more competitive on service, even when compared to independent mechanical shops," Szakaly says. "They are much more competitive on non-warranty work than they were in the past."

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