What's Happening?
U.S. car dealerships are increasingly relying on their parts and service departments, as well as finance and insurance (F&I) offerings, to drive profits. This shift comes as new vehicle sales, which saw
soaring prices and profits during the pandemic, begin to show signs of softening. According to a Kerrigan Advisors analysis, the average pretax profit per dealership more than tripled from $1.9 million in 2018 to $6.8 million in 2022, largely due to tight supply and automakers manufacturing more expensive, higher-margin vehicles. However, since that 2022 peak, average gross profits for dealerships owned by public groups fell to about $3.9 million in 2025. In contrast, the average dealership's parts and service gross profit rose from $3.3 million in 2020 to $5 million in 2025. Finance and insurance packages, while a smaller percentage of revenue, contribute a significant portion of gross profit, with one public dealership group reporting F&I making up 23% of its gross profit despite being only 4% of revenues. This strategic pivot highlights the resilience of the auto retail model, which can adapt to market fluctuations by leveraging multiple revenue streams.
Why It's Important?
This trend is important for the U.S. automotive industry as it signifies a fundamental shift in dealership business models and profitability. The increased reliance on parts and service, which boast a 50% margin compared to new car sales' 5% margin, provides a more stable and resilient profit stream for dealerships. This stability is crucial, especially during economic downturns or periods of fluctuating new car demand, as demonstrated by dealerships remaining profitable even when automakers faced bankruptcy during the financial crisis. For consumers, this could mean a continued focus on service retention strategies from dealerships, potentially leading to more competitive service offerings or bundled maintenance plans. The softening of new vehicle sales, particularly among the 'mass affluent' who lease high-end vehicles, indicates a potential shift in consumer spending habits and economic conditions. Dealerships are adapting to a 'K-shaped economy' in the car business, where demand for lower-priced vehicles remains strong due to necessity, while purchases of mid-level luxury vehicles can be postponed. This strategic adaptation ensures the continued viability of the dealership network, a significant employer and economic contributor across the U.S.
What's Next?
Looking ahead, U.S. car dealerships are likely to further invest in and optimize their parts, service, and finance and insurance departments. This could involve enhanced customer service initiatives, expanded service offerings, and more aggressive marketing of maintenance plans and extended warranties. Dealerships may also explore new technologies to streamline service operations and improve customer experience, aiming to capture a larger share of the aftermarket service market. The competition with chain service centers, which have seen their share of primary service providers grow significantly, will likely intensify, prompting dealerships to innovate and differentiate their service offerings. Automakers may also adjust their strategies to support dealership profitability in these areas, potentially through training programs or incentives for service excellence. The ongoing economic landscape, particularly the spending habits of different income brackets, will continue to influence new vehicle sales, reinforcing the importance of diversified revenue streams for dealerships. This strategic focus will be key to maintaining profitability and stability in a dynamic automotive market.
Beyond the Headlines
The shift in dealership profitability extends beyond immediate financial implications, touching upon broader aspects of consumer behavior and the automotive ecosystem. The increasing importance of service and F&I highlights a deeper consumer need for vehicle longevity and protection, especially as car prices remain elevated. This trend could foster a more service-oriented relationship between dealerships and customers, moving beyond transactional sales to long-term vehicle care. Ethically, the emphasis on F&I products, while profitable, necessitates transparency and clear communication with consumers to ensure they understand the value and necessity of these offerings. The competition from independent service chains also underscores a changing landscape in vehicle maintenance, where convenience and cost-effectiveness are significant drivers for consumers. This could lead to a re-evaluation of traditional dealership service models and potentially drive innovation in how vehicle maintenance is delivered. Ultimately, this evolution reflects a maturing automotive market where the entire lifecycle of a vehicle, from purchase to maintenance and eventual trade-in, is being strategically optimized for profitability and customer retention.
