We have explained how the automobile dealership is manpower intensive in Part 2. In this post we shall be highlighting the ‘Capital Intensive‘ nature of this business. As a layman; it shall shed some light on how much money an automotive dealership makes in India and how difficult is it survive during dull months or if the targeted volumes are not attained.
In short; we will study the Dealership Business Profitability parameters in this post. The post makes all more sense in today’s scenario as the Dealer Profitability is all set to hit an all time low in FY2020-21 (source) and the Covid19 pandemic will have an irreparable impact on the overall business. Do note the automobile dealerships were already struggling with BS4 stocks and the non-operation days during the lockdown will leave the cashflows completely dry.
So; let us see the revenue sources at a New Vehicle Dealership for reference –
SALES OPERATION –
- New Vehicle/Car Sales – Every dealership earn margins as decided by the respective OEMs through every sale. The automobile dealership earns almost 3%-6% margin on each sale.
- Used Vehicle Sales – Majority of the automobile dealership offers exchange facility to new vehicle buyers. The used vehicle procured is sold and margin is earned. Here too the average margin ranges ~5%.
- Finance Margin – The automobile dealerships shall earn a margin on getting a vehicle financed from the respective banker. The banker pays a margin of 0.5% to 2% for every vehicle financed to the dealer partner.
- Insurance Payout / Margin – The Insurance companies releases a payout of an average 18% to the respective dealers. Majority of the Insurance is handled by the brokers appointed by the OEMs.
- Accessories – Dealerships earn an average 20% margin on the accessories sold during a new car sale.
- Target linked Incentives from OEMs – Some Automobile Manufacturers also Incentivise the dealers on achieving the set targets for the particular month/quarter/year. The Incentives form an average of 1%-4% and varies accordingly basis extent of targets achieved.
- Handling Charges – Many dealers charge handling expenses too on the every sale and is primarily the cost of managing the vehicle logistics and stockyard expense. The issue here is that it is not standard and varies across dealers/brands and transparency is a big concern.
AFTER SALES / SERVICE OPERATION –
- Periodic Maintenance / General Repairs – Every time you leave your vehicle for either Periodic Maintenance or General Repairs at a workshop; the dealership earns some money. The earnings depends on the category of the vehicle / extent of work done on the vehicle.
- Bodyshop – All accidental repairs happen in the Bodyshop and is one of the major sources of revenue in the service operation.
- Sale of Parts – Usually parts are replaced and dealerships earn an average margin of 15%-20% on parts sold.
Now that we have studied the revenue sources; let’s see the expenditure an automobile dealership incurs –
Fixed Expenses –
- Manpower Expense – As we mentioned in our earlier post; automobile dealership is an manpower intensive business and a average dealership employs over 100 people (across Sales / Service / Stockyard / Backoffice). Even if you consider an average of Rs.20k / manpower – the manpower expense is ~Rs.20 Lakhs.
- Rentals – These days majority of the automobile dealerships are situated in rented premises owing to the OEMs requirement of situating the business in central locations / automobile line. Also the size of showrooms / workshop / stockyard have to adhere to the OEMs standard (generally termed as Corporate Identity norms). The swanky facilities incur huge rentals every month and can collective go upto Rs.20 Lakhs/month in a Tier-1 City!
- Long Term Loans / Term Loans Repayment – Dealerships avail long term loans from the bankers at the beginning to construct the premises as the cost goes upto multiple crores. The automobile dealership then repays this loan via the monthly business and the interest rates go at an average of 8% by the respective bankers.
- Inventory Loan Repayment – The dealerships generally purchase the vehicle from the OEMs by availing loan from the bankers and this amount is technically known as Inventory Funding / Working Capital. The interest rate goes as high upto 10%. Hence any dealership carrying more stock end up paying more interest rate to the bankers. Similar to vehicle purchase; the dealership also bears cost of carrying the stock of accessories, spare parts, used vehicles etc.
- Depreciation – Depreciated cost is simply intended to gradually reduce the cost of a fixed asset over its useful life, while market value is based on the supply of and demand for a fixed asset in the marketplace. The cost incurs if the dealership utilizes own property anywhere.
Variable Expenses –
- Marketing Expense – An automobile dealership may involve in ATL / BTL operations every month to promote itself and the brand. Car dealerships generally invest upto Rs.2,000-3,000/car in marketing every month to reach to the target customers.
- Maintenance Costs – Electricity, Telephone, Water, etc charges that are used in day-to-day operations of the dealerships. Do note that these days, the showrooms or the workshops are fully air-conditioned and the electricity bill itself rages between Rs.1-2 Lakhs! The dealership also incur costs in terms of repair of infrastructure as well.
- Test Drive Vehicles Expense – The dealership initially incur costs in acquisition of the Test Drive cars and then on a monthly basis incur costs for fuel / repairs of the Test Drive vehicle.
- Miscellaneous Expenses – Right from serving tea/biscuit to customers, to arranging training for existing manpower – The dealership incurs a lot of expense on miscellaneous activities on a monthly basis.
We shall now see the random working of every parameter for better understanding. We will be considering a ‘car dealership’ in a Tier-1 city for the calculations here –
Aspect 1. REVENUE PER MONTH –
- We have considered that the car dealership sells an average of 60 cars per month and the average price per car is Rs.10 Lakhs.
- Used Car Sales have been taken as 15 units / month and the acquisition cost of these used cars is considered to be Rs.3.5 Lakhs / vehicle.
- Average Accessories of Rs.15k/vehicle has been considered in the calculation. Also average OEM incentive of Rs.10k / car has been taken.
- In terms of Service – Average of 22 cars PM/GR (Periodic Maintenance / General Repairs) per day has been taken and 3-4 cars per day for Bodyshop has been considered.
- As per the calculation; the dealership generates a revenue of ~Rs.7.4 cr / month.
Aspect 2. MARGINS / PROFIT –
- As explained earlier; we have considered the New Car Sales & Used Car Sales margin to be 4% and the amount has been calculated.
- *For Finance Margin – We have assumed that 35 out of 60 cars would have got financed (average finance of Rs.7 Lakh per vehicle) and dealership is getting a payout of 1.5%. Hence dealership shall earn Rs.3,67,500 per month from finance payout. Insurance Margin – We have considered 50 cars insurance to be have done by the dealership and average value of each insurance is Rs.30,000. With a payout of 18%, Insurance Margin will be Rs.2,70,000. Hence Finance+Insurance Margin together shall add upto ~Rs.6.5 Lakhs.
- Service Retention we have calculated to be 40% for PM/GR; 62% for labour and 17% for parts.
- In totality; dealership’s gross profit calculated here is ~Rs.65 Lakhs.
Aspect 3. Net In Hand with Expenses or Profit Before Tax Calculation –
- We have taken Overall Manpower count to be 100 and average expense as Rs.20k/manpower.
- Being a Tier 1 city; Rental for Showroom+Workshop+Stockyard is considered to be Rs.11 Lakhs/month.
- Term Loan + Inventory Fund interest is considered to be Rs.16 Lakhs per month.
- Total Fixed Costs will add upto Rs.47 Lakhs / month!
- With such operation; dealership shall end up making just Rs.1.53 Lakhs / month.
Do note that the aforementioned calculation has taken a lot of assumptions considering the sales / service reporting volumes and can drastically change from one dealer to another. However; the fixed costs is the parameter that we want to highlight – Irrespective of the sales/service volumes; this business bears an extremely high fixed costs and some lean months can drown the overall business. No wonder; you hear a lot of automobile dealerships shutting down during slowdown in economy.
A lot of you may ask; Is Dealership Business Profitable?
In a ‘Long-Term’ – Yes! Automobile Dealerships have to be driven by passion and process; rather than short term profit/gain approach. As highlighted in aforementioned calculations; Automobile Business is an amalgamation of multiple profit centers and one needs to have a very close monitoring of the same to make money out of the business. As a very famous hindi saying goes ‘Nazar hati, durghatna ghati’; i.e. the moment you keep your eyes off the road; accident occurs. The principle holds rightly true in this business – One needs to be extremely vigilant and devoted to make it successful.