[drmohitg]

Related Threads

Cost of setting up a dealership

Dealer Profits

Hi BHPians,

I have been wanting to ask this from a long time now but was not getting time to post the thread.

In today's market economics how does a dealer make money? My query pertains to new car companies who are yet to establish themselves or came with a lot of noise and hyped but have not been able to match the same in terms of sales. Some of the companies that I can think of in particular are:
1. Fiat
2. Renault
3. Mitsubishi


The average number of sales of the above 3 have been less then a thousand units more or less in the last few months consistently. There is also no hope of anything positive happening with these brands anytime soon which can make the sales figure go up. Now in such a scenario how does a dealer survive and make profit? Maintaining a dealership these days is no easy task. The customer is getting ever more demanding in terms of the quality and experience that they expect while making a purchase. Some of the major costs I can think of are the Logistics involving huge rents, maintaining an inventory, ensuring a smart and professional work force and many more smaller areas. So then are these dealers making any profit at all? A particular case I am interested in is Fiat trying to open exclusive dealerships. Now any layman would also try to do an analysis of what they will get after investing in such a venture. The company's sales have been spiraling down at an alarming rate.

Would love to read some of your views on the same.

Disclaimer: The car makers mentioned in my post are some random examples that I could think of. It is not my intention to make it a uni-polar discussion against one particular car maker.

[Hashim]

Maybe from some other business like servicing other brand cars. We do see that these showrooms don't shine (bells n whistles) as much as maruti and tata showrooms do. Also these have less staff to cut on monthly expenses.

[ajmat]

Fiat - most of the dealers are Tata dealers and have some kind of volume to support their operations. The lack of dealer aupport - parts availability etc. makes it easy for them to keep Fiat on the sidelines. They would probably ditch the Fiat franchise if not for the Tata relationship.

Mitsubishi - I still do not understand why a new dealer in a central location with no service facility (run by someone else) came up!!! Good cars but not matched to our market needs. Most Lancers are so old they are out of the service network. The dealers must be waiting for the HM split. The Pajero Sport could be a turnaround through

Renault - Pulse and Duster as well as the mid-sized "caaar" will turn things around

[condor]

Servicing.
Extra charges like "incidental charges"
Commission on insurance.
Commission on bank loans.
Margins on accessories.

But yes, the dealerships for companies with low volumes, average margins will be hard pressed for profits.

[himavanth_m]

Originally Posted by Hashim

Maybe from some other business like servicing other brand cars. We do see that these showrooms don't shine (bells n whistles) as much as maruti and tata showrooms do. Also these have less staff to cut on monthly expenses.

But cutting down on bells and whistles and lower staff is not the major factor in reducing cost of dealerships.

Can someone estimate the cost of owning a dealership? If we know the costs then we can see the minimum number of vehicles that need to be sold to break even. Also one needs to consider the cars that are sold are serviced in these showroom workshops which is one of main contributors of profit of the dealers.

Also do brands like Mitsubishi have dealerships in prime locations where rents are really high?

[maheshramaling]

Misubishi - the dealer makes money;

1) Handling Charges: Charges anywhere between 15 to 25K per car
2) One dealer one state concept - which means they don't have too much of overheads. Their only showroom across Karnataka is based in Bangalore.
3) I am sure Mitsubishi will also give them some sales commission on each car or certain numbers of cars being sold.

In the case Renault & Nissan - they seem to have a parternship with like how HM & Mitsubishi does business in India.

Fiat is again hand in hand with Tata....so less overheads.

[sidgo7]

very very important point you guys have raised in this thread.would like to give a personal and subjective insight[being a tata motors dealer for 5 decades now]
as far automobile dealership business is concerned returns are not worth the high investments needed due to land intensive nature[read showrooms/workshops] of this business.unless you are well established for a decade or so or more,investing in a new piece of land and starting a new dealership is hara kiri.so u might notice that a lot of new dealerships for the so called low volume brands are actually sister concerns of existing dealers.i woudnt consider any brand other than maruti,tata and hyundai to be high volume to be frank.even if toyota,vw,gm ford sell in the 8k-10k range each month that is still far too low.point is passenger car market is volume driven as margins are extremely low.we thrive only on the commercial vehicle part of the business.passenger car units are like a nice hot blonde gf which you use to show off at society events.but every night you will definitely come home to your homely simple wife[read commercial vehicles-trucks buses]

[amitpunjani]

Spare parts margin are the biggest incentives to attract and keep them in business. Maruti offers spares margin from 10% to 22% ranging from A categgory to D Category of parts. OEMs like Skoda, Renault offers more than 30% for Dealers margin just on A category of parts, which keeps them very happy.

[drmohitg]

Thanks for some interesting viewpoints.

Originally Posted by ajmat

Fiat - most of the dealers are Tata dealers and have some kind of volume to support their operations. The lack of dealer aupport - parts availability etc. makes it easy for them to keep Fiat on the sidelines. They would probably ditch the Fiat franchise if not for the Tata relationship.

+1. And this wants me to put up my primary query once again to you. Do you feel that any new dealer/business house or even an existing Tata-Fiat dealer will be interested in opening up a fully fledged Fiat dealership given the extremely low volumes and company's sagging future? Down south I can still imagine someone to be courageous enough to do this ( since most TBHP members who own a Fiat come from the South so its just my assumption), but up North there is hardly any sales.

Renault - Pulse and Duster as well as the mid-sized "caaar" will turn things around

I hope it does but a lot depends on the pricing. Pulse sounds like a dud to me though given its exact same looks as the Micra and atrocious pricing ( rumours). As of now the Renault showroom in Delhi bears a deserted look for most time of the day.

Originally Posted by himavanth_m

But cutting down on bells and whistles and lower staff is not the major factor in reducing cost of dealerships.

Exactly since the major costs are logistics etc. Also for a new brand like Renault which projects itself like a luxury brand, a customer will always expect a minimum level of professionalism.

Also do brands like Mitsubishi have dealerships in prime locations where rents are really high?

The showrooms of Renault and Mitsubishi in Delhi are bang on in a prime location. That area houses almost all the car makers other then Audi I think. The stretch of road has Toyota, Honda, Merc, BMW, Ford, VW, Skoda, Chevrolet, Nissan, Renault and Mitsubishi all in a radius of 1km. Rents as you would have guessed are sky-high.

Originally Posted by sidgo7

very very important point you guys have raised in this thread.would like to give a personal and subjective insight[being a tata motors dealer for 5 decades now]

Thanks a lot for sharing your valuable first hand experience. Having said that I would like you specially to share your views on the following 2 points:
1. The general perception here is that After sales contribute a lot to the Dealer's Income. How important do you think it is?
2. Also can you share with us a approximate number of units needed to be sold/serviced to get the business going?

Originally Posted by amitpunjani

Spare parts margin are the biggest incentives to attract and keep them in business. Maruti offers spares margin from 10% to 22% ranging from A categgory to D Category of parts. OEMs like Skoda, Renault offers more than 30% for Dealers margin just on A category of parts, which keeps them very happy.

I agree that the margins must be high. But when the total number of Units sold across the country is a mere 100 cars then how much can a dealer earn by these margins?

[sidgo7]

1. The general perception here is that After sales contribute a lot to the Dealer's Income. How important do you think it is?
2. Also can you share with us a approximate number of units needed to be sold/serviced to get the business going?

1.with regards to contribution from after sales-it does form a major margin contributer.spare parts is one important aspect so much so that it commands a separate vertical of business.as for the actual servicing of cars,again a potential good contribution opportunity but fixed costs are high in this aspect.starting a new workshop accessible to all with enough space to service a large volume of cars is downright terrifying for finance dept guys.
2.as for breakeven volumes it would vary from manufacturer but if talking about the big three maruti tata hyundai i would expect each dealer does a minimum of 100 cars a month otherwise they shouldnt be running.in terms of audis,merc,bmw 30-40 should be apt.

MARGINS are not as high as customers assume it to be.on one hand OEM's try to squeeze the dealer by dumping stock[evryone from bajaj to bmw will do the same] and on the other hand consumers try to squeeze maximum discounts[fair enough].but bottomline is that the dealer has to take punches from both sides[OEM and customers] but still keep a smile on his face while greeting both of them.cant live with them,cant live without them.

Note from the Team-BHP Support Team : Please use "Multi Quote" option for quoting Multiple posts, instead of creating another back-to-back post.

[sparsh]

My understanding of the business is that they make money in Insurance and after sales service. Apart from that another area where they make money is accessories namely car audio, speakers, central locking, sun film, matting, teflon coating etc. Spares also contribute to their margins. I believe they do get the cars at a lesser price than the Ex Showroom cost which will give them a slight cushion. There are times when I ponder as to how the non top 3 makers are surviving in this competitive market which is extremely tough.

[malq]

This is an interesting question, and one of the answers I got is that real estate is going to appreciate anyways, so put it to use - especially if the real estate has been held for generations OR acquired on largely cash considerations.

But more than that, the bigger question is - why aren't more manufacturers providing us with internet purchase options? Why must we go to dealers anyways - especially when the vehicle is bought on hire-purchase or lease-rental? For me, going to the dealership to complete "formalities" (means, sign blank forms . . .) is the most distasteful part of the transaction.

[sidgo7]

Originally Posted by sparsh

My understanding of the business is that they make money in Insurance and after sales service. Apart from that another area where they make money is accessories namely car audio, speakers, central locking, sun film, matting, teflon coating etc. Spares also contribute to their margins. I believe they do get the cars at a lesser price than the Ex Showroom cost which will give them a slight cushion. There are times when I ponder as to how the non top 3 makers are surviving in this competitive market which is extremely tough.

its a very complicated revenue stream this dealership business.you can say that all the allied stuff such as after sales,spare parts,insurance,finance/loans and accessories added to the dealer markup on each car from the OEM contribute to the overall health of a dealership.there is no one single source of profit.
and yes ofcourse there is a difference between ex showroom price and price at which cars are sold to dealers by oem's.

[drmohitg]

Originally Posted by malq

But more than that, the bigger question is - why aren't more manufacturers providing us with internet purchase options? Why must we go to dealers anyways - especially when the vehicle is bought on hire-purchase or lease-rental? For me, going to the dealership to complete "formalities" (means, sign blank forms . . .) is the most distasteful part of the transaction.

But wouldn't you want to go to the dealer once and see the car in flesh, check each and everything in detail? For instance you will not be able to judge the seating comfort of the car, the head room etc etc.

[arjab]

Very interesting topic.

Selling a car in today's competitive market actually do not leave the dealer with much money in their hands. Typically for a mass market OEM dealership, the margins are to the tune of 3% of the model/variant price. But in reality, this is very tough to retain because the OEM makes sure that the dealer has to share an "x" amount of their dealer margin as per that month's sales scheme - which leaves precious little cash in hand for the dealership.

One area where a dealership makes money is when the vehicle is registered on behalf of the customer by the dealership.
When you buy a new car you will find you are charged typically (let's take a hypothetical figure) Rs 100 for registration, tax etc. Out of this you will get a proper receipt of say Rs 85-90 (this will include the official Tax Token & the RTO slip for registration). However for the balance , the dealership will not give you an official government receipt but instead issue you with a dealer system generated "debit note" which will be simple one liner stating "Handling Charges for Registration etc". And this is the real McCoy, which brings in quite a bit of revenue for any dealership in India.
Other areas of revenue generation are the usual one's:
a) Accessories b) Extended Warranties c) Anti Rust / Teflon Coating
d) Volume incentives given by OEM on meeting monthly sales targets
e) Incentives given by OEM in meeting JD Power SSI/CSI targets etc
f) Logistics charges
g) Per vehicle PDI charges

In after sales service not all areas generate healthy margins.
As cars nowadays are becoming more and more reliable, the frequency of spare parts replacement is longer. Here the maximum margins come in from the bodyshop -specifically paintshop