The Economics of Auto Dealerships

Overview of Auto Dealer Industry

Franchise agreements grant dealers exclusive geographic territories, creating local monopolies. While customers may travel for a cheaper car, they won’t for service, which is where most dealer profit comes from. This discourages aggressive new car pricing outside a dealer’s region since it won’t lead to recurring service revenue. New car sales are legally required to go through dealers, limiting online disintermediation.

Public dealer groups make up just 9% of locations. Most of the industry remains fragmented, dominated by mom-and-pop stores with weaker operations. With dealer count down ~40% over the past 30 years, the market is consolidating—allowing stronger players to gain share in sales and service. Public groups benefit from scale in purchasing, marketing, inventory management, and CRM. They can sell more used cars off the lot via shared inventory, avoiding auction losses. Faster turns and stronger back-end performance drive higher margins. OEMs are increasingly supportive of larger, better-capitalized dealers. Once wary of public groups, they now prefer fewer, stronger partners to ensure consistent customer experiences.

OEM Brands and Dealer Locations are the Value Drivers

Value in this industry is driven more by which brands and locations a dealer owns than by management quality. Good operators deserve a premium, but it’s relatively modest. You can run a dealership more efficiently, improve P&S retention, and lift margins, but only within limits. These are franchises; owning one is like owning a McDonald’s: you can run it well, but you don’t control the menu, pricing, or advertising. A BMW dealer in Atlanta is largely at the mercy of overall demand in that market, BMW’s brand strength, and how many BMWs are already on the road driving service volume. Those are macro and OEM-driven factors. No dealer, no matter how skilled, is going to sell to someone not in the market or to someone wanting a Mercedes.

You Want to Own Luxury Brands…

Luxury brands are the most stable and show the strongest secular growth. European names continue to take share from mass-market brands, especially at the high end. They also generate more service revenue. Luxury customers are more likely to return to the dealer for service—BMW retains ~80% through warranty, compared to ~30% for Hyundai. OEMs are increasing service retention with offerings like prepaid maintenance on new and certified pre-owned vehicles. Beyond service, luxury brands spend less to acquire customers, enjoy higher repeat business, and earn more on used vehicles due to greater lease penetration and younger trade-ins. In private market transactions, luxury dealerships trade at roughly double the EBITDA multiples of mass-market stores. Yet in public markets, luxury-heavy dealer groups receive smaller premiums.

… Located in High-Income, High-Growth Markets

You want to be in areas with strong population growth, such as places like Texas and Florida, and have high incomes. These markets see more new car sales, which drive future parts and service revenue. The most profitable period of a car’s life is the first three years, when service needs are highest and customers are most likely to return to the dealer. In contrast, rural and lower-income areas tend to see more used car sales, which come with significantly lower servicing opportunities.

Overview of The Business Segments in a Dealership

Front-end contributes ~50% of gross profit, but EBIT contribution is lower, as most SG&A (commissions, advertising, floorplan interest) is tied to car sales.

New Car Sales: ~50% of sales, ~20% of GP
Car dealers earn profit per vehicle sold, which varies by vehicle type, but currently average around $3,000 (and was $2,000 pre-COVID). If they know they can make more on F&I (finance and insurance) when a deal closes, they’re often willing to be more aggressive on price—managing to a target dollars-per-transaction metric rather than just gross margin. Dealers typically carry about two months of new car inventory, financed through floorplan programs. Dealers typically don’t have interest on new vehicles for the first 60 days.

Used Car Sales: ~30% sales, ~10% GP
Used cars are sold either retail, where dealers typically earn ~$1,600 per unit, or wholesale, where margins are negligible. Quick turnover is critical as vehicles not sold within 30 days are often sold wholesale. This favors scaled dealer networks, which benefit from broader inventory, more foot traffic, and faster turns. Used car inventory is financed via floorplan programs, like new cars. Franchised dealers are also seeing rising volumes of certified pre-owned (CPO) vehicles, which drive higher service retention and deliver better per-unit profits than non-dealer channels. Finally, dealers have a sourcing edge: they acquire desirable used inventory at attractive prices through trade-ins and off-lease vehicles, providing a consistent and cost-effective supply.

Finance & Insurance (F&I): ~5% sales, ~20% GP
Dealers earn similar fees on both loans and leases. Roughly 40% of F&I income comes from financing spreads and flat fees paid to arrange the loan, while the other 60% comes from high-margin products like insurance, extended warranties, and service plans, which have grown significantly. Service plans are especially valuable: they generate upfront profit and create a long tail of high-retention service revenue. F&I revenue is typically recognized with a lag, spread over about six months following the vehicle sale. F&I also has high SG&A drop-through, as the finance department incurs lower sales commissions than the vehicle sales team.

Parts & Services (P&S): ~15% sales, ~50% GP
Parts and service is the core profit engine of a dealership. Costs are mostly variable, as technicians mostly paid as a percentage of billed labor. Revenue is driven by the stock of 0–5-year-old vehicles under warranty, with initial service retention around 80%, dropping to ~60% at BMW and ~35% at Hyundai by year 3–4. Older, second- or third-owner vehicles rarely return to the dealer, though the repairs they do retain tend to be higher value. Dealers are steadily gaining service share as newer cars become too complex for independents. Brand-specific tools and software are expensive and often not worth the investment for smaller shops. At the same time, dealers are improving CRM systems, competing more aggressively on off-warranty work.

Public Dealer Descriptions

Lithia Motors: Most effective M&A operator. The only public dealer with exposure to rural markets. Operates in the U.S., Canada, and the U.K. Least pure-play, with expansion into RVs and adjacent segments.

AutoNation: Most shareholder-oriented, with a focus on compounding long-term value per share. Less aggressive on M&A but still has second-largest dealerships. Concentrated in Sunbelt metros and operates only in U.S.

Group 1 Automotive: Strong operator but has a history of overpaying for acquisitions. Heavy exposure to Texas and Toyota, which could prove advantageous. Focus is improving parts and service. Operates in the U.S. and U.K.

Asbury Automotive Group: Most cost-disciplined operator. M&A has typically involved large deals. Focus is on growing through M&A and reducing SG&A and upgrading technology at acquired dealerships. Operates only in the U.S.