[SmartCat]

Ever wondered if it makes sense to quit your job and start a car dealership? Or atleast an authorized service center or an independent garage? Ever wonder what is the average margin on car sales, accessories and spare parts? Is servicing of cars profitable? How small things like number plates, interior/exterior car care, accessories, insurance commission & extended warranty contribute to profits?

To find answers to these questions, I scoured the stock market to see if there are any listed car dealership businesses. And I found a grand total of two!

- Competent Automobiles (Maruti dealership)
- Shinrai Auto Services (Toyota dealership)

All I had to do was take a peek inside their annual reports -

http://www.competent-maruti.com/inve...al-report.html
http://www.oriconenterprises.com/pdf...%202015-16.pdf
www.bseindia.com

[SmartCat]

COMPETENT MARUTI

Is the business profitable?

Competent owns 12 dealerships in and around New Delhi. The financials look pretty good - sales, profits and networth have all grown at around 10% per annum in the past 5 years. This is a 2 to 3% margin business at the operating level.



What are the margins of sales & service departments?

If we consider sales and service departments as independent entities, it is clear that there is a large difference in operating margins. But on absolute numbers, profit from sale of cars is higher than profit from servicing of cars. However, remember that car sales need higher initial investment (real estate, inventory etc)



Sales department revenues include car sales, accessories sales, insurance commission and extended warranty sales. Service department revenues include spare parts & labour charges. Operating profits is called EBITDA - earnings before bank interest charges, taxes and depreciation costs (fall in value of investments made into setting up the dealership)

What are the inventory costs?

At the end of financial year 2017, Competent Auto had an inventory of cars, spare parts & accessories worth Rs. 49 Cr. That is, an inventory of approximately Rs. 4 cr per dealership. Inventory breakup:

Cars: Rs. 40.5 Cr
Spare parts, accessories & lubricants: Rs. 8 Cr.
Goods in transit: Rs. 1.3 Cr

How much investment is needed to setup the business?

Competent Automobiles has a mix of owned/rented properties across its 12 dealerships - so it is a bit unclear as to how much real estate is costing them per dealership. The purchase price of land/building they own is Rs. 38 cr and they pay Rs. 10 cr per year rental for leased properties. However, the cost (at purchase price) of other fixed assets is -

Car servicing machinery: Rs. 14.9 Cr
Office equipment, fittings & furniture: Rs. 13.3 Cr

That is, around Rs. 2.5 cr (28 Cr divided by 12 dealerships) is needed to setup a medium to large sized Maruti authorized sales and service center.

What are the margins on cars, spare sparts etc?



- Maruti offers a decent profit margin of 6.5% on their cars to their dealers. Of course, fast selling and lower priced Alto might have much lower margins than others.
- In addition to the margin on sales, Competent automobiles received a performance bonus of Rs. 34.6 Cr. This is probably linked to sales targets.
- Spare parts and accessories have a margin of 13%. It is quite possible that accessories have much higher margins than spare parts
- Extended warranty seems to be a good business to be in, with margins of 70% plus. In the previous year (FY16), they logged a profit margin on 100%. Here, "purchases" column number is the cost of spares replaced under extended warranty.
- Commission from insurance sales (on both new and old cars) was Rs. 10.9 Cr. And that goes straight into the bottomline.

Other than rentals and initial investment, what are the other significant expenses?

Again, divide the following numbers by 12 to get approximate per dealership numbers.

Employee costs: Rs. 33 Cr
Outsourced job work: Rs. 4.41 Cr
Security: Rs. 1.6 Cr
Cost of 5 litres petrol for every new car sold: Rs. 1 Cr
Maintenance of machinery in service department: Rs. 1.5 Cr

[SmartCat]

SHINRAI TOYOTA

Shinrai Auto services is a subsidiary of a listed company called Oricon Enterprises. Hence, information on the dealership business is not very comprehensive. Also, I could only get my hands on FY16 (not FY17 or FY18) annual report of Shinrai Auto. Shinrai operates two Toyota dealerships in Mumbai and here are their numbers:

Is the business profitable?

Sales growth is decent, but no, Shinrai is consistently making losses year after year. Note that revenues from just 2 dealerships is quite significant at Rs. 300+ crores. That's because products sold by Shinrai (Innova & Fortuner) have much higher average ticket price than Competent (Maruti)



Shinrai Toyota losing money every year and Competent Maruti making profits does not mean anything (with respect to brands). That's because profits are significantly affected by parameters like interest costs, rental expenses etc. Since car sales & servicing is capital intensive in nature, businesses that borrow from banks for working capital, inventory etc will see red on their balance sheets. Businesses that invest their own capital will show profits.

And one more thing - we all know how many Indian businesses operate. It is quite possible that some businesses show marginal loss to avoid paying taxes. They jack up employee & other expenses, and siphon off money from the company in different ways.

What are the rental costs?

Shinrai operates from Lower Parel (or Worli, not sure) and Nariman point. The combined annual rental expenses are Rs. 3.3 Cr per year. Here is the breakup:

Nariman Point: Rs. 1 cr
Lower Parel: Rs. 2 cr
Stock Yard: Rs. 30 Lakhs

What are the margins on cars, spare parts & accessories?



- Toyota offers significantly higher average margins at 11.2% than Maruti (6.56%)
- haha, check out the margins on accessories. No wonder some dealerships appoint Chief Accessories Officer
- Spare parts & consumables have margins of 12 to 15%. Those oil changes we pay for offers good margins to dealers.

What are the additional sources of revenues for a dealership?

- Rs. 62 Lakhs in revenues from 3M car care
- Rs. 9.1 cr as just labour charges.
- Rs. 3.25 cr as insurance commission
- Sales incentives of Rs. 53 Lakhs from Toyota

What are the additional expenses for a dealership?

- Repair of test drive vehicles: Rs. 29.68 Lakhs
- Employee salaries & bonus: Rs. 7.8 cr
- Other miscellaneous business expenses: Rs. 2.12 cr.
- Shinrai had inventory of cars worth Rs. 12 cr and spare parts worth Rs. 2.6 cr by end of FY16.

JAHNVI AUDI

Jahnvi Auto is a subsidiary of a listed company called KPR Mills and operates 2 Audi dealerships (Madurai and Coimbatore). Revenues are stable at around Rs. 100 cr per year but profits are uneven.



Revenue breakup:

- Sale of cars Rs. 102 cr,
- Servicing revenue (labour) - Rs. 3.4 cr
- Other revenue (warranty, insurance, parts, accessories, lubricants etc) - Rs. 9.6 cr

Audi Margins:

A brokerage report by AxisDirect says Audi offers an average margin of 10% on sale of cars.

Setup & Operating costs:

- Looks like Jahnvi owns one property while the other has been taken on rent. (Building + Land) cost at purchase price is Rs. 5.7 cr and rental expenses in FY17 was Rs. 1.72 cr
- Cost of servicing machinery: Rs. 3 cr
- Cost of fitting, furniture, interiors etc: Rs. 2.4 cr
- Salary expenses: Rs. 3.94 cr
- Jahnvi had an inventory of cars, spare parts & accesories worth Rs. 21 cr by the end of FY17.

Information Source:
http://www.kprmilllimited.com/financial_result.jsp

[moralfibre]

Thread moved from the Assembly Line to the Indian Car Dealerships Section. Thanks for sharing!

[moralfibre]

Excellent thread smartcat. Looking at the margins alone a smart investor will run away in the opposite direction. Besides this, the rate at which car dealerships are shutting shop is a clear indicator on how difficult it must be to capitalise on the huge investments one has to make to get started.

Related threads:

Link 1

Link 2

[Shreyans_Jain]

It is fairly common knowledge, and the numbers here corroborate the same, the money lies in servicing cars, not in selling them.

The big bogey is how drastically this will change once electrics start finding traction in the market. The usual shebang of oils and filter changes will just not apply. Although I am fairly certain that companies and dealers will come up with many creative ways to make money, fact remains that electric cars are inherently a lot simpler than ICE engined ones. And then there is the NGT. You never know what poorly conceived, hair brained, stop gap ban will be promulgated and render you as a car dealer helpless

The long term implications of setting up a new car dealership today not that easy to comprehend anymore. Initial capital required is MASSIVE and risk factors are a lot.

[blackwasp]

Originally Posted by smartcat

Ever wondered if it makes sense to quit your job and start a car dealership? Or atleast an authorized service center or an independent garage? Ever wonder what is the average margin on car sales, accessories and spare parts? Is servicing of cars profitable? How small things like number plates, interior/exterior car care, accessories, insurance commission & extended warranty contribute to profits?

Thanks for starting this thread smartcat. I will share some more insights into the overall dealership revenue, but only as an overview.

But before I start, here is a very interesting read. Currently most dealerships own the showroom and the stockyard themselves or is owned by the family members of the owners, group companies and rent is collected from the dealership for the same. Landmark group on the other hand has an asset light philosophy and they only lease their showrooms.

His company is run professionally, with the ownership and management kept completely separate, a rarity in Indian automotive dealership scene, where it is common to see large families manage automotive dealerships.

Unlike most, Landmark is also asset light – it does not own the real estate but takes them on lease even if rentals keep rising. Most dealers today continue to run their shop despite making losses, hoping that the appreciation in real estate will cover up in the long run.

Source - Economic Times

Coming back to the topic...
Now, this might seem highly controversial, but at least in the pre-demonitization era, many dealerships were setup solely to convert black money into white. There are always some exceptions to this, but you can safely assume that the most of them were group companies for people dealing in large sums of unaccounted money elsewhere.

Your observations of revenues are spot on, while the gross profit from new car sales is higher than others, it comes with a lower margin and very high inventory costs. Note that the dealer has to pay upfront for all the cars that get dispatched to him. No money sent = dispatches getting cancelled. So in case of Maruti (multiple dealers in one city / region), some guys always resort to picking up cars from the stocks of other dealers and sharing the margin in some ratio. However, such cars are counted in the numbers of the original dealership so there is no point picking up a WagonR from another dealer, but it makes sense to pick up a red Ciaz. There are targets to be met and allied services like insurance, accessories and extended warranties per car are closely monitored.

Next up is the service. This is a perpetual source of revenue which will only go up. Unlike new car sales, this is a repeat customer business. Thats why you will see dealerships offering pickup and drop, free goodies, once a month discount schemes etc. to attract clients. Major source of revenue here is the body work and warranty claims. So, the next time you have been told that appointments are not available, just tell them you want a panel (or a bumper) painted along with the service and see a slot open up instantly. Insurance claims are also a way to get good money - some dealers do order extra parts and claim from insurance while not actually fitting them into the cars. This is unethical, but most dealers done do this as if caught, the insurance company will revoke their cashless tie-up.

And the biggest of the lot - Accessories. Even here, things like 3M coatings, antirust and engine coating are the biggest margin products. As salesmen, I could earn a lot more by just selling 3M stuff than the actual car. Unlike incentives, the 3M is outsourced and those chaps promptly come at the end of the month for handing out commissions to the sales guys. Just imagine the margins if the salesman gets more than 10% of the total billed amount to the customer. Accessory margins could be anywhere between 30-50%. Again, those with lower material costs, like lamination, seat covers, etc. are the most lucrative.

However, these days, not sure if it makes sense to invest in a big dealership in a city like Mumbai or any metro city. The tier 2 cities on the other hand are more lucrative. Cheaper infrastructure costs, lower salaries, less competition yet the same margins (more or less). Today, it makes sense to open shop in some smaller town, especially if its a Maruti, Toyota or a Mahindra dealership.

Maruti these days is focusing on separate verticals. eg. regular dealerships, Arena, True Value, Commercial and Nexa. So a dealer in Mumbai will have all these within 50 kms of each other, does it makes sense? Is there sufficient demand in all these verticals on their own? Maybe not. Further, one way on ensuring customer service is by forcing dealers to open new things despite not being the demand for the same. A separate Nexa workshop that can't take in regular cars won't sustain itself, especially since large workshops can accept both. Standalone service centres (MASS) can't open job cards for Nexa vehicles, but whats stopping customers to take their cars to them post warranty period?

Related thread (Behind the Scenes: A salesman's life in a car dealership)

[SmartCat]

Key takeaways are:

1) Setup an authorized service center or independent garage, but not a sales center
2) Sell accessories too - both "genuine brand" (like MGA) and other accessories
3) Sell insurance!
4) Tie up with 3M or offer in-house detailing services.

Originally Posted by blackwasp

T So in case of Maruti (multiple dealers in one city / region), some guys always resort to picking up cars from the stocks of other dealers and sharing the margin in some ratio.

That is a good idea. Ideally, Maruti should help out their dealerships by owning stockyards in all major towns and cities. Or bring in a distributor who takes a small cut for keeping inventory (like in FMCG companies). Inventory cost of Rs. 50 Lakhs per year (assuming Rs. 4 Cr inventory) is totally avoidable expense for a dealership if some thought is put into this.

[GTO]

Awesome thread as always, Smartcat . Learned a lot from it.

For those interested in the car dealership business, ETAuto has a lot of videos from which one can gain knowledge. Here's one on how a loss-making dealership was made profitable.

https://www.youtube.com/watch?v=l4oyKi47_VQ

[PrideRed]

No wonder they make a lot of money on accessories. Majority of the dealer nowadays offer almost all accessories which is not shown in genuine accessory list. While products are procured from local market, they are sold at a premium price. Endeavor with oversized 20 inch tires, Innova with Goldsun brand footboard, Swift with custom body skirts etc. You can get these outside at a fraction of a price but dealers play the warranty card.

One important thing that is missing from the list here is Insurance. Is profit from insurance included under profit from car sales? Many a times a buyer gets his own insurance.

[SmartCat]

Bit more info -

1) If employee expenses seem unusually high, that's because Directors' salaries and commission too is included in the number. And it is in multiple crores since family members are usually perched in senior positions.

2) Miscellaneous expenses could be slightly higher because these are publicly listed companies. They need to spend money on compliance, quarterly reporting, hiring a large-ish accounting firm etc.

Originally Posted by PrideRed

One important thing that is missing from the list here is Insurance. Is profit from insurance included under profit from car sales? Many a times a buyer gets his own insurance.

Commission earned from insurance company is mentioned in both the cases - Rs. 11 cr by Competent Maruti and Rs. 3 cr by Shinrai Toyota. It is separate from sales. Oddly, insurance margins are not mentioned in the report - the difference between amount collected from customer and amount paid to insurance company.

Sales profit is "money in the bank" after landing a sale. Pass through items like RTO charges and taxes are not included - although they are mentioned separately in annual report. I have not included them because there are irrelevant and does not affect dealer's balance sheet.

Basically, purchase cost is amount paid to Maruti or Toyota and Sales is actual cash in hand (after giving discounts)

[2000rpm]

Great thread!!

Though the business may seem lucrative, OEMs are very selective in choosing dealer partners. Having a enthusiasts mindset and lots of moolah doesn't cut it.

Auto industry experience and previous track record play a critical role, hence you will find the same dealer happily enjoying dealership status from multiple brands across 2W / 4W / CV / Luxury OEMs. OEMs actually fight over good dealers.

I understand this space very well thanks to my professional experience, however even I wont get a dealership. Majorly because most OEMs have territories allocated and adding a new dealer is not taken kindly by existing dealers.

The funny part is, I know of sales executives who keep switching between dealers selling the same number of same vehicles but keep getting hikes on each switch to the tune of 30 percent. Particularly important in truck business where customers are brand loyal and other OEMs require the relationship as a foot in the door.

I can keep going on this topic but these are my two cents

[SmartCat]

Originally Posted by 2000rpm

Though the business may seem lucrative, OEMs are very selective in choosing dealer partners. Having a enthusiasts mindset and lots of moolah doesn't cut it. Auto industry experience and previous track record play a critical role

I understand this space very well thanks to my professional experience, however even I wont get a dealership. I can keep going on this topic but these are my two cents

There are 2 institutes that offer "MBA" in dealership management. I wonder if a post graduate degree helps?

Vel Tech Business School
https://bschool.careers360.com/node/.../course/153164
It is a 2 year full time course (around Rs. 1.5 Lakhs fees)

Hindustan University
https://www.hindustanuniv.ac.in/mba_automobile.php

The course is also a stepping stone for students aspiring to start new ventures in Automobile Distribution. Equips the students with all skills required to start and run an Automobile Dealership. It provides specialization in those areas where they can take up managerial positions

[ajmat]

Car dealers like hospitals are loss leaders. The car is the vehicle for profits - insurance, parts, accessories etc.

Similarly hospitals - the consulting fee is nothing, the tests, and medicines and the operation procedures reel the profit in!

[PrideRed]

Originally Posted by ajmat

Car dealers like hospitals are loss leaders. The car is the vehicle for profits - insurance, parts, accessories etc.

Similarly hospitals - the consulting fee is nothing, the tests, and medicines and the operation procedures reel the profit in!

Both have same mantra to become profitable- GET MORE VOLUMES. Major difference is- while hospitals mostly rely on age old "Repair" job, the car dealer has moved on and only does a "Replacement" job .