At risk of stating the obvious, an automobile dealership earns its net income in the gap between revenue and operational expenses. That’s true for any and all businesses, of course. Exploring the typical automobile dealership group, we find that their direct and indirect operating expenses include primarily advertising, vehicle inventory (used and new purchase and financing), commissions, used vehicle reconditioning and a bunch of lesser expenses that all add up including floorplan interest, freight & destination charges, vehicle inspection & PDI Costs, doc prep & title costs and more – all aspects of the business that are visible and provide core value to its customers. Leadership and staff eyes and ears are on these regularly.
There are also many additional indirect expenses necessary to support the group that are often taken for granted by customers and staff alike and are thus not eyeballed as often by staff, including the group’s common-area utilities – electricity, waste/recycling, uniforms/rags, merchant processing fees, leased copiers, insurance, and property tax.
The ongoing management of all of these expenses, plus expenses associated with service, rent & finance payments, recalls, client satisfaction, staffing, changing regulations, and broader economic forces, exerts constant pressure on their owners and operators. As these pressures mount, ownership groups often respond by seeking creative ways to reduce costs and increase margins — such as optimizing inventory levels, evolving commission plans, renegotiating DMS vendor contracts, leveraging GPO services, installing energy-efficient lighting and solar panels, automating payroll, accounting, and scheduling software and, of course, raising automobile prices where possible.
With eyes on these visible top or near-top-line expenses – expenses that are very tied to the cars they sell, often not much attention is paid to those below-the-line but necessary indirect expenses – utilities – electricity, waste/recycling, uniforms/rags, merchant processing fees, copiers, insurance, and property tax. Management often assumes that the prices and bills provided by vendors and tax assessors are “fixed,” the final word, and cannot be negotiated. The truth is, though, with few exceptions, almost all of these expenses are negotiable.
Smart car-buyers will attempt to negotiate for the lowest out-the-door price and lowest APR on their auto loan. Smart auto group owners should do the same with their “fixed cost” indirect vendors, too, but most auto group owners simply accept the quoted rates from their vendors as the final word on price and terms, except for perhaps Property Tax. Some owners, as hesitant as they may be, might attempt to negotiate the rates offered by their vendors and be quite satisfied to negotiate a 5-10% discount.
But that is actually what every auto group owner should do – ask for lower rates, perhaps in exchange for longer terms or in exchange for not going to their vendor’s competitor. The worst that will happen is that the vendor will say no, and they are back to where they left off. In many cases, though, they will get better rates – 5% or more discounts.
Their electricity or gas rates may not move as easily, especially if they operate in a regulated energy state – but dealerships with locations in deregulated states may benefit from alternative energy suppliers.
Waste services are almost always negotiable – by as much as 30-40% or more, unless the dealership is in a franchised (closed) market, but how would they know unless they knew to ask? And what are they going to do about open waste market negotiations? Negotiate what to where? In closed waste markets, the common refrain is, ‘The rates are the rates,’ as if there’s nothing to be done about them. While this is mostly true, their dealership might be geƫng over-serviced, or with the wrong bin size for that location, or the wrong pickup schedule. Over-zealous waste collection vendors contracted with their local municipality are not incentivized to optimize their waste service. They get compensated by the haul – perhaps more hauls than needed.
Is the dealership leasing or did they purchase their group’s copiers? What about the maintenance package they purchased with the copiers? Does it include toner, parts, and labor? For how long? Did they run an RFP or just make two phone calls to two copier resellers in town? How does this price compare to the vendor’s cost? A dealership with 10 locations likely has 3 or more copiers per location or 30 total copiers – possibly spending as much $700K over 5 years for those copiers. It is deceiving at only $1,166 per month per location, but it adds up quickly. A mere 20% reduction in price, closer to the vendor’s cost, would save the group $140K or more.
It’s true that most customers don’t purchase their cars on credit cards, and dealerships likely limit the amount of their customers’ transactions to ~$5,000 for their down payment, but it does happen. Service and parts may be only 15% of the dealership’s revenue, but represent more than 80% of its credit card transactions. Dealership groups probably think they have the best merchant processing fees available – they may or may not – but how does it compare to the dealership up the street? What rate is the dealership charged for its commercial fleet customers or for local mechanics purchasing parts? Aren’t they the same rate as their consumers’ rate? Probably not. Do they affect their consumer purchase rate? Probably so. Does the average dealership even know how much its total monthly credit card fee is, or is that even well-listed on its merchant processing invoices?
The property and casualty insurance for a dealership group, while probably at the proper coverage levels, might be over-billed. Insurance companies are in the business of making money for their investors rather than providing their clients with inexpensive coverage. Most insurance brokers also earn more money by selling more coverage – as a percentage of premiums, but what if their customers negotiated these rates down and brokers were incentivized to save their clients money rather than to sell expensive insurance?
Property tax is based on a percentage of an ever-increasing assessment of the local municipality’s [biased] value of the property. Many times, auto group ownership groups lack the understanding that the underlying assessed values may be appealed, thus lowering their tax liability, but they likely lack staff with skills and understanding to take on the appeal, or they may ask their attorney to handle the appeal. That’s a good start, but does staff or the attorney have the deep comps (comparables) and assessment experience to file such an appeal, and will it be accurate? Likely not, thus leaving more money on the table.
Let’s now do some math. If each of a dealership’s locations is spending $20,000 per month on utilities, waste, uniforms/rags, merchant processing fees, copiers, insurance and property tax (It’s probably more) – or $240K per year, negotiating with its vendors and municipality might save the location perhaps 5% which equates to $12,000 per year saved. If the dealership group has 10 locations in the group, that is $120K cash straight to its bottom line.
How many cars would it need to sell to net $120K cash?
The rub here is that dealership groups likely do not have anyone on staff who is an expert in utilities, waste, uniforms/rags, merchant processing fees, copiers, insurance, or property tax negotiations – to say nothing of the amount of time their team does not have available for this task.
No doubt they know the bond rating for their insurance company and the names of their insurance broker’s children, but do they know what percentage of their premium their broker is earning for a few minutes of work each year on an inflated policy? How much does it cost the dealership’s waste vendor to haul their waste? How many different electricity suppliers are available for their location? What is the correct PAR level for their service department’s rags?
In fact, studies show that despite the confidence of the dealership group procurement teams at negotiating the best uniform and rag rates for their dealerships, nearly 100% of these dealerships are overpaying for their uniforms & rags by nearly 50%.
Who remembers their Cost Accounting class from their MBA program? Business success stems from knowing and managing costs. The same is true for waste pickups and the rest. A dealership’s waste vendor may be charging them $1500 per month for each of their 10 locations. That’s a bargain compared to hauling the waste themselves, but what is that dealership across the street being charged for basically the same service? Is $1200 a fair number? How about $400? How much are they paying for their rags or for their insurance? The dealership should go ahead and ask for price reductions. They may get some. They may not. Even if they do get a price reduction, their prices may start to creep back up without them even realizing it – regardless of what their contract says.
By now, you may be thinking that it’s not worth it. I will only get a few dollars and the ROI is not there and I need to focus on switching over the inventory to the new model year, mitigating the impact of tariffs, handling the latest manufacturer recall, resolving the damage one of your technicians did to your customer’s car, todays’ responding to today’s bad Yelp review, oh my god… You may be right – if you do it all yourself.
Who does your accounting, files your taxes, represents you in court, and runs your social media? I bet it’s a financial analyst, a tax preparer, an attorney, and a social media agency – all experts in their fields and able to perform the required work effectively and efficiently. The same is true for these indirect vendor overcharges.
Many auto group CFOs take great pride in their negotiation skills — and rightly so. It’s a key part of their role. But when it comes to specialized vendor categories like waste, merchant processing, or insurance, even the most capable internal finance teams may not have the same depth of knowledge, cost transparency, or audit tools that a focused cost reduction consultant offers. In these areas, outside experience can complement internal efforts and uncover savings that are mostly impossible to spot from the inside.
So, find yourself a cost reduction consultant with expertise in these industries – utilities, waste, uniforms/rags, merchant processing fees, copiers, insurance, property tax, and more. They will work on your behalf – with their deep industry experiences – to perform forensic audits of your invoices, renegotiate contract terms and conditions in your favor, and will work to reduce your vendors’ rates 10%, 20%, 30% and sometimes as much as 75% from where they were. The most experienced cost reduction firms are able to achieve 30-40% average cost reduction across a business’s indirect vendor spends – for as many as 90% of their clients. Further, the industry standard fee structure is a contingency fee – their fees are contingent upon finding savings – there is no fee if they cannot reduce the spends with your current vendors, and they share in the savings found if they do. There really is no risk, no service interruption, nor burden on your staff – the ROI is virtually infinite.
Is your auto group one of the 10% that has all of its vendor rates at cost-level, or are even some of your vendor rates in the 90% part of the market who are overcharged?
Let’s go back to that example from before of the auto group spending $20,000 per month or $240,000 per year on this group of expenses. A 30% reduction results in a $72,000 annual increase in net margins for that location and perhaps $720,000 increase for a group of 10 locations – every year– all without a change of service quality, pickup schedule, insurance bond rating, or broker.
Now, how many cars would it need to sell to increase its net margin by $720K? I bet it can’t.
Stop overpaying. Every day you delay is money left on the table. Partner with a cost reduction expert to uncover and recover 30–40% in vendor overspend — and put that money back where it belongs: your bottom line.
