Smart Buying Essentials

Behind the Scenes - How does a dealership work?

There are more than 23,000 car dealerships in the U.S., employing more than 1 million people.

Approaching an auto dealership can be as intimidating and confusing as arriving to pick up a date at her parents' house. Who are these people and what do they do? Whom should I speak with? Will I make it out of there alive?

We see dealerships everywhere, and most people eventually visit at least one. But other than "They make money by selling us cars," most of us have little knowledge of the nuts and bolts of the business. To give you better insight into how a dealership works, we've broken down and dissected the various parts that make up the whole.

An auto dealership is a model of division of labor: Each department has its own distinct tasks and responsibilities, as do each of the employees within those departments. According to Carl Ragsdale, COO of dealer services at the National Automobile Dealers Association, most dealerships, even the mammoth, shopping-mall-sized ones, are structured similarly, with either five or six different departments. And virtually all of them have converted their dungeons to wine cellars. That's a joke; everyone knows dungeons are too dank to store wine in.

The typical departments include new-car sales, used-car sales, service, parts, accounting, and sometimes a body shop. According to the NADA, there are more than 23,000 car dealerships in the U.S., employing more than 1 million people. When we consider dealership employees, usually only salespeople and mechanics (the p.c. term now is "technicians") come to mind. But there's a wide variety of jobs at a typical dealership, including administrative positions such as accountants, cashiers, and receptionists.

The highest-profile activity at any new-vehicle dealership is sales. New car sales, are, after all, the raison d'être for the whole operation, right? But while sales might attract all the attention, the dealer runs profitable business through its other departments, as well. Each of these departments fits into the dealer's overall structure like the pieces of a puzzle. Some pieces might be bigger than others, but the picture would be incomplete without each of them.

Showroom as Lifestyle Boutique

As you enter a dealership, you probably already know what brand of vehicle it sells-it's why you're there. Regardless, the manufacturer works hard to encourage its dealers to follow similar formulas in designing and decorating their buildings, hoping to create an identity that customers can associate its products. Land Rover, for example, takes this to the extreme, with its modern dealer showrooms resembling an exotic lodge, with wood-clad walls and regal adventure trappings.

Each manufacturer has a signature theme and style aimed at making shoppers feel like they're participating in an brand-related lifestyle experience rather than just shopping. Ultimately, the goal is to encourage the purchase of vehicles and brand loyalty.

This strategy reins in the chaos that ruled in the '80s and '90s, when many dealerships conglomerated into large chains that lumped several brands into the same location, often on the same showroom floor. Such dealerships had all the atmosphere of Costco and added little to the featured automakers' reputations. Worse for the manufacturers, their cars often were sitting right next to the competition.

Today, automakers not only want their dealers dedicated solely to selling their brand of cars and trucks, but they also have them pushing brand-labeled golf shirts, sunglasses and the like. MINI Cooper dealerships are extreme example, but even high-volume brands with less-defined images, such as Hyundai, are on a march to establish standalone dealerships.

New Cars Rule

Overseeing the new-car sales department is the sales manager, who's more than just the mythical guy behind the curtain who can approve or disapprove a sale for the price you've offered. A big part of the manager's job is ordering new cars for the dealer's inventory, with the goal of having enough cars on the lot with the right colors and options to appeal to the largest number of customers. It might sound easy, since you know what model, color and options you want, but try guessing combinations that will meet the needs of virtually any buyer with many models having dozens upon dozens of options, packages and colors. Typically a dealer wants to maintain about two months of new-car inventory. According to Ragsdale, there should be enough cars for customers to choose from, but not so many that they sit un-purchased for a long time. "It is critically important that he keep the proper day supply of cars," he says.

The sales manager orders vehicles through the manufacturer's computerized system, which not only allows him or her to specify models and options, but also to check on the status of orders already in progress and make last-minute changes to vehicles that aren't already on the assembly line.

Everyone is familiar with the oft-cited "dealer invoice" price of new cars, but like the Manufacturer's Suggested Retail Price, that's really just a starting point for pricing. Dealers receive a percentage of the invoice price back from the manufacturer-like a rebate-called "holdback." Holdback (also referred to as a "pack") is usually two or three percent of invoice or MSRP, which is why a hungry dealer can sell a car at invoice and not necessarily lose money, though they are rarely considered negotiable by anyone in the business. Since dealers must pay the manufacturer when they order the car, not when it's sold, the holdback is supposed to cover the cost of financing the vehicle during this time. All or part of the financing cost will be recovered through the amount held back by the manufacturer if the car is sold in less than 90 days. The longer the vehicle is on the lot, the more of the holdback profit gets eaten into. But again, most dealers won't disclose this amount, and unless highly motivated, certainly won't begin negotiations on the basis of invoice price less the holdback, though it can give you some wiggle room if the salesperson insists that the deal you're asking for has him losing money. Though these hidden are frequently part of everyday business for the sales department, not all vehicles have holdbacks, check the pricing page of the vehicle you are interested in to see the Base holdback amount.

For vehicles that aren't moving as quickly as the manufacturer would like, there are also rebates-not the retail rebates that go to the customers, but wholesale rebates that go to the dealer. Manufacturers and dealers both prefer these rebates to retail ones because they aren't advertised, and thus don't erode the brand's image and residual value with a fire-sale atmosphere. They also give the dealer more room to negotiate discounts with consumers, leaving the buyer feeling like a hero for "talking them down." Meanwhile the dealer can still pocket some of the money.

The first responsibility of a new-car salesperson is to introduce customers to the dealer's products, highlighting their key features and encourage a test drive. Then, if he's successful in his pitch and sells a car, the salesperson will show the buyer how to operate all of the car's controls. There are so many new electronic gadgets and doodads on today's vehicles that instruction is needed for a buyer to get full use of his new purchase. Why pay thousands for a navigation system, a high-end entertainment system with a DVD player, and/or advanced climate control system and not know how to use them?

Buyers also need to be made familiar with the normal operation of safety features, so when, for example, the brake pedal vibrates during antilock braking, or when the engine's power is reduced by the traction control system, the driver knows what is happening and why. Customer satisfaction will be poor if the owner finds his car confusing or unresponsive. Because salespeople are key to customer education and satisfaction, manufacturers send trainers to dealerships to keep the sales force informed about the latest models' features and specifications.

Of course, the salesperson's main job is to close the deal, so plenty of training focuses on encouraging hesitant customers to buy a vehicle. A good auto salesperson convinces shoppers that he's on their side, rooting for them against the sales manager, employing the classic good-cop/bad-cop strategy. But don't be fooled, salesmen are paid by commission, which means their income depends directly on how many cars they sell at how much profit.

In-store promotions and sales races can give salespeople incentive to move an extra unit or two, at little or no profit-especially if they are close to reaching a particular sales goal that would put cash in their pocket or earn a weekend in Vegas. This is why shopping at the end of the month is a useful negotiating tool for savvy shoppers.

Once a sale is made, the salesperson sees the vehicle through its final preparation by the service department, while the buyer sits in the finance and insurance office arranging financing, if he didn't do so beforehand.

If a customer wants a car that isn't on the lot, the sales manager has a couple options for getting the buyer together with his or her dream machine. The quickest solution is to check other dealers of the same make to see if they have the combination the customer is looking for. A quick check of the computer shows what cars other dealers have in inventory. If the right car is found, the dealer who made the sale buys it from the other dealer's stock normally for the same price that dealer paid. A hot property might command more, or a dealer might not let it go.

Import automakers allow dealers to grab cars other dealers have ordered to match their needs when they come into port. The grabber then substitutes a similar model for the other dealer. When ordering cars for inventory, rather than to fill specific orders, dealers are not overly concerned with which exact car they get, as long as it has the popular options and isn't saddled with something no one wants. Import manufacturers tend not to offer the extensive option lists domestics do. This means fewer variations are possible, all of which should be available from somewhere in the U.S.

For domestic brands, custom-ordering from the factory isn't the months-long ordeal it used to be, as the sales manager always has a stack of orders at the manufacturer, constantly replenishing his dealership's inventory. And because automakers have increased their manufacturing flexibility in recent years, a sales manager can contact the manufacturer and change the specifications of a car that was already ordered but not yet built. Thus, a green sedan with cloth upholstery and no sunroof can become a red one with leather and sunroof only days before the factory starts assembling the car. By substituting these custom orders for existing spec orders, a sales manager can obtain the exact car a customer wants in only a week or two, depending on the distance from the dealer to the factory. Prior to the widespread dealership computerization, it was difficult to make such last-minute changes, and custom orders simply had to wait their turn to be built.

Financially, dealers are able to maintain large inventories of new cars because they don't usually pay for the cars until they're sold. The dealer maintains a line of credit through the manufacturer's finance company, which pays the manufacturer when a car is delivered to the dealer. Then, in turn, the dealer pays the finance company when the car is sold. Meanwhile interest accumulates, but the rate is usually very low, encouraging dealers to keep a large selection of vehicles on hand. Many manufacturers' finance companies even waive interest for the first 20 days a car is on the lot.

The Importance of Pre-Owned

The used-car sales department is also critical to a dealership. It not only provides products for customers who may not be able to afford a new car, but also serves the essential role of handling trade-ins from new-car customers.

Running this department is tricky. The manager has to decide which of the trade-ins will appeal to the kinds of customers who are interested in the store's new cars; you don't go looking for a nice, used luxury sedan at a Jeep dealer. Trade-ins deemed unsuitable are sent to auction, while the rest are inspected and prepared for resale. To round out the inventory, a used-car manager also buys cars at auction. "That inventory is more volatile than the new-car one," says Ragsdale. "That must be an even lesser supply because a high-priced used car will depreciate $100 to $200 per month sometimes."

Wholesale auctions are open only to licensed dealers. They're where the real action is, and they most assuredly are not the local so-called wholesale auctions held weekly by dealers and auction companies clearing out police impounds, bank repossessions, or charity donations. If you don't need a dealer's license to participate, it isn't a wholesale auction.

The very best used cars are available at wholesale auctions, as cars coming off lease are auctioned only to dealers. This gives dealers the chance to get the newest, lowest-mileage cars available and put them on their lots for their customers to consider.

Vehicles at wholesale auctions are sold at or near-surprise!-the wholesale price listed by most major used-car buyers guides, including IntelliChoice. Thus, dealers don't sell these cars for that price, because that's what they paid for them-before they had them trucked back to their location and prepped for sale with such possible expenses as a fresh set of tires and brakes. At a minimum, the dealer has the cost of a complete wash, wax, and detail job to spiff up its appearance in addition to the shipping costs. Figure the better part of a day's labor to detail an auctioned car for retail sale.

Because dealers have to pay cash for cars at these auctions, most have a significant amount of money tied up in used-car inventory. This isn't like putting cash into mutual funds or bonds; used cars depreciate from the minute the dealer buys them. So the goal is to sell the cars as quickly as possible to beat the depreciation and to free up the cash sunk into them.

Used-car sales are sometimes handled by the new-car sales staff, but at most larger dealers, the used-car department will have dedicated salespeople who can spend time getting familiar with the cars in inventory.

During slow parts of the day, a dealer's salespeople may spend time in training, studying product information and the details of finance, insurance, and warranty. The NADA even has a certification process that tests salespeople in ethics, laws regulating dealers, customer satisfaction, professional sales practices, and manufacturers' product training.

The Money Guys

Because few customers who buy a new car have a wad of cash to pay for it in full, the sales department maintains a finance and insurance (F&I) staff to provide buyers financing on the spot. Of course, customers can arrange financing through their own bank or credit union, but the majority of buyers use the dealer's financing. This specially trained staff has to track interest rates and shop for markets for customers of differing credit ratings. Some lenders offer better rates for customers with good credit, and others may specialize in bad credit customers, so they have to know where to look. Although this department also can obtain insurance for customers, most buyers cover their cars through their own insurance agent or direct company.

At Your Service

Every new-car dealer needs a service department-for more reasons than you might think. Of course, the service department fixes your new ride when something goes wrong; new-car dealers must be able to provide warranty service to keep their buyers happy. But the service department also serves an even more immediate role: preparing the new cars that arrive from the factory for sale. When cars roll out of the factory and travel across the country or halfway around the world to a dealership, they don't look much like the popular image of new cars. When they arrive at a dealership, they may be dirty, and partially wrapped in protective plastic. Cars that don't have alloy wheels may need to have their plastic hubcaps installed. Removing the plastic, washing and waxing the car, shining the tires, and cleaning the windows requires considerable effort. This job falls to the "new-vehicle get-ready technician," who may also renovate and prepare used-cars being offered for sale and detail service customers' cars.

Dealer-installed options are also added by the service department before a vehicle leaves for its new home.

Eventually your new car will need maintenance. All vehicles require periodic replacement of oil, tires, brakes, belts, and hoses over time. The service department performs this routine maintenance, affecting not only customer satisfaction, but also generating a steady income to supplement that of the sales department.

Although new cars are increasingly reliable, they still sometimes need repairs, and the manufacturer's warranty commits the company to providing these repairs at no cost to the buyer for a set period of time after the sale. Through its service department, the dealership handles warranty claims by customers. The manufacturer pays the dealer for such repairs based on an agreed-to price list.

Making certain the service department has all the parts it needs to properly repair customers' vehicles is-you guessed it-the parts department. This department maintains an inventory of parts that customers are most likely to need, ensuring that service technicians can make repairs immediately when a car comes in for service. Customers don't like waiting for parts to be ordered, so this inventory is usually kept large.

But parts cost money, and if the department stocks up on parts for unpopular models, or replacements for parts that rarely fail, it ties up more of the dealer's money than necessary. The parts manager must maintain the right inventory for the dealer's particular market. Texas dealers, for example, likely stock a lot more brake pads for pickup trucks than, say, Manhattan dealers, while those Big Apple dealers probably keep an abundant supply of touchup paint on hand.

One growth area in the parts department is sales of aftermarket-style parts and accessories with which owners customize their vehicles. Many dealers are also adding tires and wheels to their inventories, so customers don't need to look elsewhere for any part their car might need over its life.

Body Shop

A body shop is the only piece of the dealership puzzle that's optional. Body repairs aren't needed to sell new cars, and they aren't included in service warranties. Collision damage is common, however, so according to the NADA, most dealers maintain a body shop. This is an expensive investment, so most dealers usually have one common body shop, located either at one of the dealerships or a standalone low-rent location, to service customers of all its brands. After all, why have a body shop occupying pricey real estate on the local "Motor Mile" alongside showrooms, when you can locate it in a nearby industrial park, where the overhead is lower?

The Paper People

Finally, each dealer maintains an administrative staff that serves as the glue that holds all the other departments together. Someone has to track employees' timesheets and cut the paychecks, ring up customers' service bills, and keep the big windows clean. While the accounting department doesn't contribute the dealer's bottom line, it keeps all the other departments working by handling the flow of money into and out of the dealership.

You may not be planning to open your own dealership anytime soon, but understanding a dealer's inner workings will help demystify the process when you go shopping for your next new vehicle, relieving some of the anxiety about the unknown. But you'll still want to decline any invitations to see the "wine cellar."

-Dan Carney
A veteran automotive journalist, Dan is a regular contributor to IntelliChoice and Motor Trend.