Automotive industry: make a profit
The automotive industry is based on two main principles: the production and sale of vehicles. But once these prerequisites are met, in what ways can dealers begin to make a profit?
“The main goal of manufacturers, their finance arm and their dealerships is to get cars on the road,” says Norman John Hebert, vice president and chief operating officer of Groupe Park Avenue. To spread inventory, some manufacturers use finance departments to offer potential customers better rates than banks. The idea is pretty simple: encourage consumers to walk into dealerships and get behind the wheel of a new car. “They will often use the interest rate or the residual value of the leased car as a marketing tool to attract customers to the dealership,” describes the group’s vice president of operations at 21 dealerships.
However, there is no magic, warns Sylvie Brunelle, senior director of sales for private car financing at Bank of Montreal. “When the manufacturer offers a rate of 2.99% when the cost of capital is between 4 and 5%, it is not as profitable as it is now,” he says. The company must derive its profits elsewhere. »
Yan Cimon, professor of strategy at the Faculty of Business Administration of Laval University, is where the dealer’s profit is found in everything that involves the sale of a car. “In general, margins are not made on the paper, the professor supports. “Where the dealer is interested is financing and insurance,” he said. The margins there can be very, very high. »
A reality confirmed by Jean-Luc Géha, visiting professor at HEC Montréal and director of the institution’s Affiliate Sales Institute. “The role of the car dealer is to close the transaction,” the expert emphasizes. “After this step is completed, the customer is taken to another office, where the finance director is fresh and approachable, tired of his initial meeting, whose job it is to sell related products such as extended warranties, special paint treatments, lifetime rust protection, etc. “, the profitable premium of these financing professionals explains the stressed researcher.
Jean-Luc Geha believes that this transition in the CFO’s office could be costly for the concessionaire. “For example, take a $25,000 extra tax car. If a financial advisor can sell you an extended warranty for $2,500 plus other accessories for an equivalent value, we’ve just added 20% to the bill,” notes the manager.
“The highest profit margin in a group like ours is after-sales service,” says Norman John Hebert. “Our goal is to increase customer loyalty so that they service and repair their cars with us.”
“It’s not for nothing that manufacturers ensure that the maintenance offered to the car includes multiple trips to the garage,” adds Jan Cimon. “This is, of course, to keep the car running properly, but it’s also so that consumers come to the languages more often. This helps to generate income and make the industry more interesting,” emphasizes the researcher.
However, the customer experience suffers from the relatively small number of vehicles in dealers’ yards. “When prices fill up, they leave more profit than sales to increase volume. But there, in empty yards, the prices are firmer, the bargain is less,” said Sylvie Brunelle.
“The situation is clearly in favor of dealers,” says Jean-Luc Geha. “We even come across cases where the purchased car comes with a few less accessories than expected. I experienced it myself! he says.
As new cars are scarce due to global supply chain tensions, “a lot of customers are putting up with it,” the director believes. “In my case, I could have turned down the car because some of the options I requested weren’t available, but we’re stuck a bit with waiting lists and delays in getting exactly what we want, and that puts the dealership in a difficult position. It’s a very advantageous position for a customer who is satisfied with what he’s offered.” .”