Value Added: A Trip To The Auto Dealer

Ed note: Thanks to our alert readers this post was updated to fix a math error in our estimate for profit before taxes and to clarify that we were offering annual estimates for the numbers of Chevys and Toyotas typically sold by dealerships, not monthly.

When I was growing up in Syracuse, N.Y., in the 1960s and 70s, the car dealers were local celebrities. These guys lived in nice houses, sent their kids to private schools, gave away money and were known about town. I was envious.

Their names, TV commercials and jingles are burned into my memory: Pat Bombard Buick. Bill Rapp Pontiac. Koerner Ford. Spector Cadillac. Pepper Auto Sales (Dodge and Plymouth).

Some are still around. Some went out of business, victims of the recurring heart attacks that the U.S. auto industry has undergone over the past four decades. With the Detroit Big Three (General Motors, Ford and Chrysler) now on life support and asking the federal government for assistance that could reach $50 billion or more, I wanted to know how life was for Washington area automobile dealers.

In a nutshell, things are tight but many dealers in this area are still making money, especially those not tied solely to American brands.

I talked to three dealers: One was Tammy Darvish, vice president of Darcars Automotive Group. Darcars is the biggest local car company, selling more than $1 billion a year in new and used cars at 24 dealership across the region. Darcars is the 16th biggest dealership group in the United States by revenues, according to Automotive News.

The second was Geoff Pohanka, president of Pohanka Automotive Group. Pohanka, founded by Geoff's grandfather, is up there too: it's the 40th largest dealership group in the country with just under $1 billion in revenues. Pohanka's Acura dealership in Chantilly is the busiest Acura location in the world. Geoff's pride and joy is his Lexus dealership, which returns more revenue for the money invested than any other of the 12 sales locations in the Pohanka network.

But before checking in with them I strolled a few blocks from my house to visit Sam Weaver, Jr., chief operating officer of a Chevy Chase Acura/Chevrolet dealership. Anyone who has driven south on Wisconsin Avenue through Bethesda knows the company as Chevy Chase Chevrolet, which was founded by the Bowis family in 1939.

Sam started at Chevy Chase washing cars at age 16. His father worked there 51 years. Sam saved and borrowed and bought 30 percent of the company in 1998. He has a side business selling barbecue sauce online named after a family dog, Mr. Slambeaux. The ashes of one-long time employee are kept on site. Could I make this stuff up?

I get the sense that Weaver and Chevy Chase Acura/Chevrolet are betting on Acura sales to drive future growth. Here's why: two out of three new vehicle sales in Washington are foreign brands. And Chevy Chase is no expectation. Out of the 130 vehicles Chevy Chase Chevrolet/Acura sells in an average month, 75 are new Acuras, 25 are new Chevrolets and 30 are used cars of all kinds.

"This is definitely a luxury import market," Weaver said.

A typical Chevrolet dealership in the United States sells about 400 vehicles a year. The typical Toyota sells 1,800. My colleague Kendra Marr said the number of dealers is just too large for GM, Ford and Chrysler's shrinking output. GM's old mantra, "a car for every purse and purpose," has become outdated. Now Detroit's Big Three are attempting to consolidate their many brands.

That won't be easy. The dealership network is protected by state laws and many have invested a lot of money into their franchises. What's more, the automakers depend on them. Dealers buy the cars that sit on their lots and in their showrooms. They provide the revenue through auto sales. That relationship makes it difficult for automakers to dictate the number of dealerships needed.

"Sure there's a theoretical number that can survive, but the market will fix that," said Andrew D. Koblenz, the National Automobile Dealers Association's vice president and general counsel.

Besides, there's a more pressing problem: People aren't buying much of anything right now.

"Business is bad," Weaver said. "We're not making much money, but we are making money."

Where from? Same place as any other profitable car dealership these days: oil changes, tune ups, bumps, dents, wrecks and other repairs.

Here is a quick primer on the auto dealership business. The service, collision and parts department -- known as the "back end business" -- is where the real profits are because they present opportunities for management efficiencies, not to mention that dealerships can charge more per hour than they pay for labor. The same goes for the parts, which are bought at wholesale and marked up for retail just like any other business. This segment has grown over the last few years as dealers have been able to sell cars and then keep the buyers coming back to service their vehicles. Darvish estimates, for example, that nearly two out of every three people who buy one of her vehicles get it serviced at one of her dealerships. That's a lot of visits over the life of a car.

Used and new cars are the "front end business," referring to the showroom, and that's another story altogether. Used cars tend to be more profitable because there is more room for negotiations on both ends of the transaction; when the dealer acquires the car and when it sells it. Pohanka said used cars can be "one of a kind cars" that people will pay more to purchase. They also lose their value faster on a lot than a new car, so that makes them riskier.

New cars often provide less room for negotiation and potentially lower profit margins. In a good economy, a dealer can usually make two to 10 percent between what they pay the manufacturer for the car and what they can charge the consumer. From what I can tell, the front-end business at many local dealerships doesn't have much of a margin right now, while the back end business is carrying many dealerships.

My auto industry sources said the average dealership profit breakdown is 60 percent back office, 30 percent used cars and 10 percent new cars. In Weaver's case, the back end is 20 percent of Chevy Chase Chevrolet/Acura's $75 million in gross revenues but just about all of its pre-tax profits, which I estimate at somewhere around $1 million.

Weaver wouldn't confirm that, but as a general rule, dealership profits before taxes are around 1.5 percent of gross revenue. You gross $1 million; your profit before taxes is around $15,000. There are lots of exceptions to the rule. A really profitable dealership will consistently earn pre-tax profits of 2.5 percent of revenues. In sunny economic climes, the profit margin can climb to 3 or more percent. Selling more cars also increases the net profit margin because the cost to the dealer of making each sale, from paying employees to utilities, drops per car as you sell more cars. The curve really takes off at around 750 units per month.

"Basically, there are very few brands where dealers make money selling new cars," said Pohanka, whose sprawling auto dealership network sells 20,000 vehicles a year under 13 brands. "There's not a lot of margin there."

Pohanka sells lots of fuel-efficient Hondas at his three dealerships, which have helped stem sales slides in big cars and trucks while gas prices reached $4 per gallon. He said companywide sales of new vehicles are down 16 percent through October compared with a year ago.

Geoff's grandfather, Frank S. Pohanka, founded the first Pohanka dealership in 1919, selling Chevrolets at Ward Place, N.W., in downtown Washington. Some 60 years later, on July 7, 1977, John Darvish opened his first Chrysler dealership in Wheaton. He sold 2,000 new and used cars that year, and he still goes to work every day at age 69. Darcars sold 35,000 cars last year.

Tammy Darvish, 45, said revenues are down 19 percent from last year in the Darcar group, which includes 26 dealerships and encompasses nearly every major auto brand, including Toyota, Lexus, Chrysler, Jeep, Dodge, Nissan, Ford, Volvo, Volkswagen, Lincoln Mercury and Kia. Darcars is big. They sold 36,000 vehicles of all sorts last year.

Tammy knows the business. She started selling Chryslers at the Wheaton store 24 years ago. She and her two brothers served apprenticeships in every part of the company, from rustproofing to finance. She can tell you that one in five drivers wreck their car in a given year. She knows her back repair shop segment is pretty flat, up only 3 percent. The number of new vehicle sales are down 21 percent; used vehicles are down 14 percent.

While sales are down, Tammy Darvish said the company is maintaining a close relationship with its manufacturers, whether they are the relatively healthy Japanese automakers or the U.S.-based General Motors, Ford and Chrysler. She said the auto companies are pushing them hard to sell more cars.

It hasn't been an easy year. Strapped for cash, at least two of her U.S. automakers this year have cut back on their contributions to regional advertising. In healthy times, Detroit would chip in 30 percent to regional advertising that helps direct customers to their local dealers. It's less than that this year. Some haven't contributed at all for months at a time, she said.

"That started for some manufacturers in January," Darvish said.

Darcars nevertheless has been a loyal customer of the auto manufacturers' finance companies. When Darcars needed money to buy its fleet and put it on the lot, it borrowed from Chrysler Financial, Ford Credit, Toyota Financial as opposed to banks and non-car company financial firms, even if the car companies were a little more expensive. Same with car parts. Darcars have always bought Toyota parts through Toyota, Ford parts through Ford as opposed to outside parts manufacturers.

That's helping now, as Darcars is having an easier time getting credit than others.

"The dealers that were poor at supporting the manufacturers' finance companies, they are the ones suffering. They weren't loyal."

Darcars is selling some vehicles at break even or even at a slight loss, hoping to create long-term relationships with customers who will return for servicing and maybe even buy their next car from Darcars.

"We could make more on margin, but it depends on how long-term a thinker you are," she said.

I reached Tammy Darvish last week as she was making her way down a street in Chicago. She is direct and non-nonsense, just like she is on her television commercials, where she looks dead-on into the camera and implores customers to e-mail her with praise, complaints or if they just want a deal.

There's no music. No fluff. None of the jingles I grew up with. But I bet in 50 years, grown ups will remember the Tammy Darvish commercials.

By Dan Beyers  |  November 16, 2008; 8:00 PM ET  | Category:  Value Added
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A very informative article about the auto business. There is an error that proves that decimal points do matter:

"dealership profits before taxes are around 1.5 percent of gross revenue. You gross $1 million; your profit before taxes is around $150,000."

$150,000 is 15% profit; in the example, the profit would be $15,000, considerably smaller.

Posted by: DancingChain | November 17, 2008 7:44 AM

Mr. Heath quotes Tammy Darvish as saying Darcars maintains a close relationship with auto manufacturers. I wonder how close. I wish he had asked Darvish what happened to the Mazda franchises Darcars used to have in Silver Spring and College Park.

Posted by: 1994rx7 | November 17, 2008 8:38 AM

You say that "dealership profit before taxes is around 1.5 percent of gross revenue. You gross $1 million, your profit before taxes is $150,000." But 1.5 percent profit is only $15,000, according to my calculator!

Posted by: MarkLRo | November 17, 2008 9:36 AM

Mr. Heath, please be careful with your calculations. 1.5% of 1 million equals 15,000, not 150,000.

I had a negative customer service experience at a Darvish franchise recently, and, consequently, I purchased a new vehicle from another dealer. Based on my experience, I can fully understand why sales are down for Darcars, the poor economy notwithstanding.

Posted by: georgeshepard | November 17, 2008 9:37 AM

I offered this up before, but it's worth saying again: "To offset the loss of sales, the dealerships should tool up to convert existing cars to CNG, per T.Boone's plan to wean us away from foriegn oil. Just think about how much business they could garner if the government offered a tax credit like they do for buying a Prius".

Posted by: ccallure | November 17, 2008 3:11 PM

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