I was reading through this months Car Magazine and noticed a feature on the “Top sellers for 2008″. This had a list of how many cars were sold in the year and I was stunned by how low the amount of cars sold were. I wasn’t stunned by the fact that there were so little cars sold in total but rather it made me wonder how car companies survive.
Take a well selling company such as Honda; relatively affordable with a lot of the mod-cons yet this is how many they sold:
Small/Light Cars: Jazz with 4833 sold
Compact Cars: Civic with 3010 sold
Executive Cars: Accord with 1549 sold
Sports Cars: S2000 with 30 sold
SUV’s: CR-V with 1809 sold
Minibus: FR-V: 553 sold
Grand total of 11784 vehicles sold throughout the whole of 2008. A cursory glance of the Honda South Africa website then tells me that there are 33 dealers in the country. What this means is that each one sells and average of 357 cars. Let me finally explain as to why I find this totally fascinating.
Running a dealership must be extremely expensive. There’s rent, salaries, utilities and telephone bills to name a few. The reality is that we’re looking at a couple of hundred thousand rand per month just to keep the doors open. Sure, a lot of costs are defrayed by the servicing sections but a lot of cars have motor plans so this isn’t exactly a major profit center. This is all before a single cent is spent on marketing, an expense that I must imagine is quite substantial in the car market.
So here’s the thing, if each dealer sells roughly 357 cars and spends hundreds of thousands on expenses a month then what on earth is the markup on each vehicle? If they make on average R10000 per vehicle that’s a mere 3.5 million rand a year, not enough to make a profit. A R20000 profit isn’t much better with a profit of only 7 million. Bear in mind that this is merely a pre-expenses profit.
This brings me to my final point: How on earth do car companies make money? I assume the only way is to add a massive markup to their cars and that’s pretty fascinating. I wonder whether most people wouldn’t need massive, double-story dealerships that are lit up like the sun at night if they could save twenty grand off the price of their car? I understand that these costs need to be added on so as to support the service the dealer offers but ultimately I feel as though this seems like a pretty archaic method of running a business.
With the car companies in such a slump it’s time for the industry to catch a serious wake up call and realise how they’re wasting money on unneccessary frills.
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Get stats rather from http://www.enatis.com, they’ll have number of new cars registered.
I think salaries usually are a big expense, so that’s probably why most sales people work on commission.
Also these companies make money off car servicing. Have you even noticed getting your car done at the dealer that it’s more expensive and usually a more rushed job?
When I bought my car two years ago I was thinking similar thoughts. I asked around a lot and found out that on a R200k car, they mark up at least R40K, some is negotiatable some is dealer profit and what you bargain down is the salesman’s commission.
But you are right, the numbers don’t make sense. Two things I can think of, either they make real money on car services or on second hand car sales. Frightening. I’d still rather have fewer dealerships and bargain less.
P.S. i only got 10k off and 10k worth of options for free.
I have no way of actually confirming this but a few years ago a friend of mine who is now living in America was shocked when he walked into a BMW show room and discovered that the previous 3 series was cheaper in America than SA. The major reason for this shock is that the previous 3 series was manufactured in SA and exported to the States which surely incurs more cost.
Think of a ridiculously overpriced car like the Citi Golf. It’s R&D finished 3 decades ago. It has virtually no safety features. Out of all new car sales it has more returns on faults than any other entry level car yet it costs a fortune compared to other entry level cars that at least have safety ratings/ ABS/Air bags/crumple zones/side impact bars etc.
Yet peoples perception of the car is such that sales continue because of great marketing. I guess some manufacturers are just able to completely over inflate the price of their vehicles based on popularity. How is it that an entry level Yaris is not much more than the Tazz use to be?
Manufacturer subsidies, maintainance plans, the extras fitted to cars, second hand sales, and direct sales all add up quite a bit.
Dealerships have set minimum sale values and purchase prices that are dictated by the manufacturers, they then add their markup, comm and everything else. They allow you to negotiate this fluff so that you feel as if you got a good deal and they are doing you a huge favour. This is textbook sales techniques!
But I agree, they have been taking a huge knock lately and worse times lay ahead.
Surely those are sales per month? check out http://tinyurl.com/bvdw5w for figures on one months worth of sales.
Gavin: This is apparently the number for the entire year. Seems totally tiny but the entire industry sold half a million cars.
Gareth: Yip, VWSA still sells a car that is 30 years old and is basically a death trap. Rather buy a Chevrolet Spark than a Citi Golf.
DChetty: The auto industry needs to wake up and realise that this is not an acceptable way to sell their products!
Hi SaulK,
Well this makes quite an interesting topic of conversation. In truth, I have many times found myself asking this very question about many companies out there. They are sometimes complex, other times you merely need to understand a bit more in depth of how the business model works.
Obviously sales are down now, so atm I find myself back in the same seat, asking the question of how are they gonna survive right now!?
My brother has shown me audits they have done on companies and some of them astounded me!
Companies I tried to put logic to principle, but merely could not figure out the logistics or answer my own question of “…this is how they make money, this is their expenses, so where the F is the money coming from?!”. They sometimes baffle me and do not add up whatsoever.
Keep in mind, this was still all before Lehman brother’s cause the total spin and semi-collapse of Wall street. I have only come up with the answer that monetization is key and they all add up.
Somethings are meant to keep us in suspense.
Keep in mind marketing budgets are often carried by head office. Not local head office but international.
For example Honda Japan covers spend to market Honda products, which fuels demand and in return Honda South Africa purchases more vehicles from them.
No doubt car sales are taking massive knocks. I wouldn’t underestimate after sales value though, parts and servicing etc. I would imagine this to be a large portion of profits.
Interesting observation. Quite a headscratcher indeed!
The only thing I can think of is that their production cost to retail price ratio must be something like 1: 1-gazillion
In the good times the laws of supply and demand have been in their favour but now the grim reaper has come knocking. Most of them are still in business so the business case for doing so must still be valid (i.e. they are still profitable but they have to trim their operating costs in order to remain profitable).
Just my 2cents worh
Hi Saul,interesting times for us in the motor industry. Complex business as many different models applied across the industry. I own a VW franchise dealership ie. independent, family-owned,and currently under huge pressure to invest in upgrading our premises. The question is would you prefer to buy a new car at a flashy new dealership or from a reasonable facility offering you the best personalised attention if the price was more or less on par at both places?