This will come as a shock to many: car dealers are in business to make a profit. And this will come as an even bigger shock to almost everyone: on average, Canadian car dealers don't earn very much on the sale of a new vehicle.
"The gross profit on a new vehicle sale in Canada is somewhere between $1,000 and $2,500, with numerous outlier data points above and below this average," says auto analyst Dennis DesRosiers of DesRosiers Automotive Consultants.
Now that bit about "outlier data points" is economist-speak for all the variables that can make any discussion of an "average" number confusing, misleading, somewhat unimportant - or totally irrelevant.
That is, profit on a mass-market ride like a Toyota Corolla is very different from profit on a Mercedes-Benz S-Class. Large pickup trucks like the Ford F-Series are more profitable than mid-size sedans like the Honda Accord. Luxurious SUVS such as the Mercedes-Benz GL are worth more to a dealer than a compact crossover wagon along the lines of a Honda CR-V. The gross profit on a finance contract for an Audi A8 is richer than one on a Mazda3 Sport. Some dealers are better run than others, and that makes them more profitable, too.
Nonetheless, DesRosiers does have a number for "average" profit right across all dealers in Canada and for some dealers I am sure it's very discouraging: the average return on sales of a dealership in Canada for 2012, the most recent year available, is 2.25 per cent.
"To make this very clear...for every million dollars of revenue a dealer generated, they made net profits of $22,500. Yes, you read that correctly…$22,500," says DesRosiers. "The average dealer in Canada had revenue per store in 2012 of $22.7-million, so with a return on sales of 2.25 percent, the average dealer in Canada produced net profits of approximately $500,000. Given the size of their operations, I would argue that is not a lot of profit given the amount of risk and work involved in owning and operating a dealership."
You MBA types out there will recognize that a 2.25 per cent return is a pittance. So will any small bike shop owner or plumber. If the "average" Canadian car dealer had put his or her money into an S & P 500 index fund, the return would have been 30 per cent last year. So why sell cars?
Well, dealers make money in other ways. Aside from selling finance contracts, dealers fatten the bottom line by convincing customers to load up "extras" like extended warranties, service contract and, of course, accessories. The good ones also make lots of money on used cars.
And then there is what DesRosiers calls the "annuity" portion of the car selling business.
"This is the revenue and potential profits they make while the owner of the vehicle (both new and used) is loyal to the dealer for parts, service and collision work," says in a note to clients. "I call this an annuity because if a dealer coddles their newly created vehicle buyer they can generate revenue and profit long into the future."
Dealers also can earn a great deal of money reconditioning vehicles for the used vehicle lot. There is coin to be had in the service department, both flogging parts and in labour charges for work fixing, maintaining and upgrading vehicles.
The advice here from Deals of the Week is for every car buyer to be alert to all the many ways dealers turn a profit. The deal on a new vehicle represents a sizeable portion of the potential profit on any new car sale, though not all of it. When negotiating, shoppers are best served by taking each step of the sale carefully.
So yes, of course, get the best price and the lowest interest rate on a lease or finance deal. And then tread very carefully through extended warranties, service contracts, trade-ins and all the rest. Recognize that each of these represents potential profits for the dealer and in the end they all add up – for you, the buyer, as a cost, and for the dealer as profit.
As for attractive deals, through the end of 2013 and apparently into 2014, one of the most attractive discounts in the entire Canadian marketplace is the 24 per cent off MSRP in total discounts available on the 2013 Fiat 500, notes new data from Unhaggle.com.
Unhaggle.com co-founder and CEO Andrew Tai points out that going into the end of 2013, Fiat sales suffered an 8 per cent sales decline. Fiat, a division of Chrysler Canada, rushed into 2014 with $2,500 in before-tax rebates and $2,000 in after-tax "Holiday Bonus" rebates, he notes, adding they are expected to remain in effect through at least the very early part of 2014.
Here are details on the Fiat 500 and three others.
Deals of the Week consulted with www.unhaggle.com, www.carcostcanada.com, and other sources on these offers. As usual, pricing information here is subject to change and dealer discounts vary, so consult your dealer for all the final details, including expiry dates for all offers.
2013 Fiat 500 Sport Turbo
- MSRP: $20,995
- Freight, dealer prep, air conditioning tax: $1,795
- Dealer discount (estimated): $600
- Factory discount: $2,500 (Chrysler Consumer Cash Discount factory-to-dealer rebate)
- Taxable subtotal: $19,690
- Total price with 13% HST: $22,249.70
- Factory discount: $1,000 (Chrysler Bonus Cash factory-to-consumer rebate)
- Factory discount: $1,000 (Chrysler Holiday Bonus Cash factory-to-dealer rebate)
- Final price: $20,249.70
- All cash discounts are available with 0.0% financing for three years
2014 Acura TL AWD Automatic
- MSRP: $43,990
- Freight, dealer prep and air conditioning tax: $2,095
- Dealer discount (estimated): $1,700
- Factory discount: $3,000 (Acura Trading Dollars factory-to-dealer rebate)
- Taxable subtotal: $41,385
- Total price with 13% HST: $46,765.05
- $2,000 rebate available with 1.90% financing for 36 months
2013 Honda Civic Sedan Touring Automatic
- MSRP: $24,900
- Freight, dealer prep, AC tax: $1,595
- Dealer discount (estimated): $800
- Factory discount: $1,500 (Honda Trading Dollars factory-to-dealer rebate)
- Taxable subtotal: $24,195
- Total price with 13% HST: $27,340.35
- Factory discount: $500 (Honda Consumer Incentive Dollars factory-to-customer rebate)
- Final price: $26,840.35
- $500 after-tax incentive available with 0.99% financing for 36 months
2014 Toyota Venza 4 door AWD
- MSRP: $30,450
- Freight, PDI, AC tax: $1,795
- Dealer discount (estimated): $2,000
- Taxable subtotal: $30,240
- Total price with 13% HST: $34,176.85
- Factory discount: $2,000 (Toyota Cash Incentive factory-to-customer rebate)
- Final price: $32,176.85
- 0.0% financing available, but not with factory rebate
Pricing information source: www.unhaggle.com and www.carcostcanada.com. Calculations based on Ontario customers. Please note that while the information above is accurate at the time of publication, incentives are given at the discretion of individual dealers, and may be changed or discontinued at any time. Where noted, "dealer discounts" are negotiated with the customer on a case-by-case basis. Unhaggle Savings are actual discounts received by Unhaggle customers.
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