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- U.S. vehicle dealerships are seeing parts and service departments and finance and insurance arms become more important sources of profit.
- A dealer is a pretty well hedged business, since it can make money by either selling vehicles or servicing them.
- But there are potential threats, as chain repair shops are grabbing a larger slice of the pie.
watch nowVIDEO03:55Why car dealerships are a ‘hedged’ businessAutos
When people buy new cars, auto dealerships make money. When they don’t, dealerships still find a way to make money.
A dealership typically has four profit streams: new vehicle sales, used vehicle sales, parts and service departments, and finance and insurance offices. This gives dealers some kind of product or service to offer in good times and bad.
Now, parts and service departments and finance and insurance packages are becoming more important sources of profit for car dealers, as profits from new vehicle sales show signs of softening.
“The auto retailer remains one of the more attractive hedged business models,” said Erin Kerrigan, founder and managing director of Kerrigan Advisors, a sell-side advisory and consulting firm for dealerships.
“If you lose $10 of new vehicle revenue, you only have to pick up $1 of service to have your gross margin remain flat,” she said. “It’s 5% new car margin, 50% service margin.”
This is why dealerships were still profitable even in the financial crisis, while automakers such as General Motors and Chrysler, now part of Stellantis, went bankrupt, she added.
More than just car sales
During the pandemic, new car prices soared, due in large part to tight supply. The average pretax profit per dealership more than tripled from $1.9 million in 2018 to $6.8 million in 2022, according to a Kerrigan Advisors analysis of publicly traded dealership group filings.
Facing supply constraints, automakers manufactured more expensive and higher-margin vehicles. That trend has continued for years, but is starting to show signs of buckling.
“If you look at the weakest part of auto sales right now, it’s what we call the mass affluent,” said Jeff Lick, managing director at Stephens. “Those are the people that generally go off and lease the high-end Lexus. Everyone talks about the K-shaped economy in the car business. You’re actually seeing relative strength in the lower part of the K, because that’s the need. The mid-level [BMW] 5 Series, that’s the want. And you know, that consumption can be postponed.”
Since that 2022 peak, average gross profits for dealerships owned by the public dealership groups fell to about $3.9 million in 2025, according to Kerrigan Advisors.
But over roughly the same period, the average dealership’s parts and service gross profit rose — from $3.3 million in 2020 to $5 million in 2025, according to Kerrigan Advisors.
Finance and insurance, often abbreviated to F&I, often contributes an outsized share of gross profit compared with revenue. Finance and insurance revenues for Asbury Automotive, one of six publicly traded dealership groups, was only about 4% of revenues from January to June, according to the company. But it made up 23% of the company’s gross profit.
“F&I has proved very stable, if not continued to grow slightly,” said Glenn Chin, senior equity analyst at Seaport Research Partners. “I do think there’s true value in some of these products, as much as people poo poo them. If you’re spending $50,000 on a new car, a lot of people don’t feel comfortable leaving that fully exposed. So they will buy a bumper to bumper warranty or they will buy a prepaid maintenance plan.”
Because dealerships are just conduits for these contracts, that transaction is almost pure profit, he added.
Dealers versus chain service centers
There is a potential challenge to this. While service revenues and profits might be up in raw numbers, dealers are getting a smaller share of the pie.
A Cox Automotive report from April found dealer share of service visits dropped from 33% in 2017 to 29% in 2025.
Another 2026 report, by global consulting and merger and acquisition advisory firm Ducker Carlisle, found that from 2020 to 2025, the share of customers who considered chain service centers, such as Jiffy Lube, Meineke and Walmart, their “primary” service provider grew from 20% to 42%.
“A 22-point swing in five years does not happen by chance, particularly because the trend has been regular and consistent,” the report said.
There is a perception among consumers that dealers charge more for service than independent repair shops and chains, although some auto industry groups say the evidence supports the opposite, according to Cox Automotive. The group said the average consumer spend for parts at a dealer was $261, versus $275 at a general repair shop.
“The franchise dealers have come to realize the importance of service and parts,” Chin said. “They are taking great effort to dispel that notion and try to become more competitive on pricing. They have all grown mid-single digits since Covid. Part of that is due to elevated warranty and recalls, but also because of their efforts to become more competitive.”
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