Used Car Dealer Profits: The Real Story

Understanding the Profitability of Used Car Dealerships in the UK

The world of car dealerships, particularly those specialising in used vehicles, is often shrouded in a certain mystique. Many consumers harbour the belief that car dealers, especially when selling pre-owned cars, operate with exceptionally high profit margins. However, the reality, as is often the case, is far more nuanced. While dealerships do indeed make a profit on each sale, the figures are not always as astronomical as public perception might suggest. This article delves into the financial workings of used car dealerships in the UK, exploring their profit margins, the factors influencing them, and how buyers can approach the negotiation process.

New Cars vs. Used Cars: A Profitability Comparison

It's a common misconception that dealerships make the most money on new cars. In fact, the opposite is generally true. While a new car sale might attract customers with its pristine condition and the latest features, the profit margin for dealerships on these vehicles is typically quite modest. Reports suggest that dealers often keep approximately a 7% profit margin on new car sales. This figure can sometimes be even lower, as manufacturers often offer incentives and bonuses to dealers that can influence the final profit calculation.

The used car market, on the other hand, presents a different financial landscape. On the proceeds from used car sales, dealerships tend to hold a more substantial profit margin, generally ranging from 12% to 15%. This difference is a key reason why many dealerships focus heavily on their used car inventory. Several factors contribute to this higher margin, including the fluctuating acquisition costs of used vehicles, the potential for reconditioning and refurbishment to add value, and the often-more flexible pricing structures compared to new cars.

The Dynamics of Used Car Pricing and Negotiation

Understanding how used car prices are determined is crucial for any buyer looking to secure a good deal. The price tag on a used car isn't simply a reflection of its acquisition cost plus a fixed markup. It’s a complex equation that factors in the vehicle's age, mileage, condition, market demand, and any costs associated with preparing it for sale. These preparation costs can include servicing, repairs, valeting, and even minor cosmetic enhancements.

One of the most frequently asked questions is about the percentage a buyer can negotiate off a used car's price. While there's no magic number, as it varies greatly depending on the specific car, the dealer, and market conditions, buyers in the UK who are prepared to haggle effectively can often save a significant amount. Studies suggest that buyers who negotiate well can save an average of 11% on the purchase price, which can translate to hundreds, if not thousands, of pounds. For instance, on a car priced at £10,000, a 10% saving would be £1,000.

How to Haggle Effectively

Haggling is an art form, and approaching it with the right mindset can make all the difference. Here are some tips:

• Do Your Research: Before you even set foot in a dealership, research the market value of the car you're interested in. Websites like Auto Trader, Parkers, and Glass's Guide can provide valuable insights into current pricing.
• Inspect Thoroughly: A detailed inspection of the car, ideally with a trusted mechanic, can reveal potential issues that can be used as leverage during negotiation.
• Be Polite and Positive: A friendly and respectful approach often yields better results than an aggressive one. Start by expressing your interest in the car.
• Ask the Right Questions: Instead of directly asking for a discount, try phrases like, "Is there any flexibility in the price?" or "What's the best price you can do on this car?"
• Know Your Budget: Be clear about how much you are willing to spend and stick to it. This prevents you from overspending.
• Be Prepared to Walk Away: This is perhaps the most powerful negotiation tactic. If you don't feel you're getting a fair deal, be ready to leave. Often, a dealer will reconsider their offer if they see a genuine prospect of losing a sale.

What About Salesperson Commissions?

Car salespeople typically earn a commission based on the profit made by the dealership, not the overall sale price of the car. This commission is usually around 20% to 25% of the dealership's profit on that specific sale. For example, if a dealership makes a £7,000 profit on a car and the salesperson's commission rate is 20%, they would earn £1,400 from that sale. This structure incentivises salespeople to focus on securing profitable deals rather than simply moving as many cars as possible at the lowest price.

The Impact of Market Conditions on Profits

The used car market in the UK has experienced significant volatility in recent years. Factors such as the shortage of new cars, stemming from global supply chain issues and the semiconductor chip crisis, have driven up demand and prices for used vehicles. This imbalance between supply and demand has meant that many used cars are not only selling well but are also holding their value, and in some cases, appreciating. This trend has allowed dealerships to capitalise on the situation, potentially increasing their profitability.

For example, used car sales saw a growth of just over 4% in the first three months of 2023, following previous quarters of declining sales. While prices have remained high, indicating a strong market, there is little immediate sign of them easing significantly.

Popular Used Cars and Their Market Value

Certain models consistently perform well in the used car market due to their reputation for reliability, affordability, and low running costs. While the provided information specifically mentions popular used cars in Australia (Toyota Corolla, Hyundai i30, Ford Ranger, Mazda 3, Mazda CX-5), similar trends are observable in the UK. Cars like the Ford Fiesta, Volkswagen Golf, and various Nissan and Vauxhall models are perennial favourites. The demand for these vehicles ensures a steady stream of potential buyers for dealerships.

The Role of Trade-Ins

When a customer part-exchanges their current vehicle, it presents another avenue for profit for the dealership. Dealers can often be more flexible on the price of a part-exchange than on the selling price of a used car. This is because they can acquire the vehicle at a potentially lower price than its retail value and then recondition and sell it, adding another profit layer to their business model. The convenience of trading in a car also holds value for many consumers, who might accept a slightly lower offer for their old car in exchange for a simpler transaction.

Understanding the Margin Scheme for VAT

For VAT-registered dealers selling second-hand goods, the Margin Scheme is a significant factor. This scheme allows dealers to account for VAT only on the profit margin (the difference between the purchase price and the selling price of the vehicle), rather than on the full selling price. If a vehicle is sold for less than it was purchased for, no VAT is due on that specific sale. This can be a considerable advantage for dealers, especially when dealing with lower-margin vehicles.

Are Garages Profitable?

Beyond car sales, garages themselves can be profitable businesses. A well-run garage can generate a healthy income, with owners potentially earning around £45,000 annually in the initial years, rising to £55,000 or more as the business grows and gains recognition. Garages make money not only through servicing and repairs but also by marking up the parts they sell. The average hourly labour rate charged by independent garages in the UK can range from £47 to £80, depending on the region and the services offered. While there's no legal requirement for a license to operate a garage, qualifications and good business practices are essential for success.

Can You Buy Back a Written-Off Car?

The question of buying back a written-off car is also relevant. Depending on the category of write-off assigned by insurers, it can be possible to purchase a car directly from an insurer or salvage yard, either for parts or with the intention of repairing it. However, this is a complex area, and buyers should be aware of the regulations and potential challenges involved in getting a repaired vehicle back on the road legally and safely.

Conclusion: A Realistic View of Dealer Profits

In summary, while used car dealers in the UK certainly make a profit on their sales, the margins are generally more moderate than many assume. The 12-15% profit margin on used cars is a reasonable figure, influenced by various market factors and the costs of preparing vehicles for sale. For consumers, understanding these dynamics and employing effective negotiation strategies can lead to significant savings. The strength of the current used car market, driven by supply constraints, has undoubtedly benefited dealerships, but the fundamental principles of supply and demand, coupled with smart consumer behaviour, continue to shape the profitability of this vital sector of the automotive industry.

Frequently Asked Questions (FAQs)

How much profit do car dealers make on used cars UK?

Dealerships typically hold a profit margin of around 12% to 15% on used car sales in the UK.

Can you haggle with used car dealers UK?

Yes, absolutely. Haggling is a common practice, and buyers can often negotiate a lower price, potentially saving around 11% on the purchase price.

What percentage can you negotiate off a used car UK?

While it varies, aiming for a negotiation that results in a saving of around 5-10% is often realistic, though some buyers achieve higher savings.

Do second-hand cars still hold value?

Yes, due to supply shortages, many second-hand cars are currently holding their value well, and some may even be appreciating.

How do car salesmen make money?

Car salesmen typically earn a commission of 20-25% on the dealership's profit from a car sale, rather than a percentage of the total sale price.

Is car dealership profitable in the UK?

Yes, car dealerships, particularly those with a strong used car inventory, can be very profitable businesses in the UK.

How does the Margin Scheme work for second-hand cars?

The Margin Scheme allows dealers to pay VAT only on the profit margin made from selling a second-hand vehicle, not the full selling price.

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