When people buy new cars, car dealers make a profit. If not, dealers will still find a way to make a profit.
Dealers typically have four sources of revenue: new car sales, used car sales, parts and service departments, and finance and insurance offices. This allows dealers to provide some product or service in good times and bad.
Now, with profits from new car sales showing signs of softening, parts and service departments and finance and insurance packages are becoming more important sources of revenue for auto dealers.
“Auto retail 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.
“Even if you lose $10 in new car revenue, you only need to receive $1 in service to keep your gross profit flat,” she said. “The new car margin is 5% and the service margin is 50%.”
This is why automakers, including dealers, were profitable even during the financial crisis. general motors And Chrysler is now Stellantisshe added, went bankrupt.
Not just selling cars
New vehicle prices have soared during the pandemic, primarily due to tight supply. Average pre-tax profit per dealer more than tripled from $1.9 million in 2018 to $6.8 million in 2022, according to a Kerrigan Advisors analysis of filings from publicly traded dealer groups.
Faced with supply constraints, automakers produced more expensive, higher-margin vehicles. This trend has been going on for years, but it is starting to show signs of numbing.
“If you look at the weakest link in auto sales right now, it’s the so-called affluent masses,” said Jeff Rick, managing director at Stevens. “These are the people who typically lease luxury Lexuses. Everyone talks about the K-shaped economy in the auto industry. In fact, the lower part of the K has been relatively strong because they need it. The mid-level (BMW) 5 Series, that’s what they need. And, you know, consumption can be deferred.”
Since its peak in 2022, the average gross profit for dealerships owned by public dealer groups has fallen to about $3.9 million in 2025, according to Kerrigan Advisors.
But over roughly the same period, the average dealer’s parts and service gross profit increased from $3.3 million in 2020 to $5 million in 2025, according to Kerrigan Advisors.
Finance and insurance, often abbreviated as F&I, often accounts for a significant portion of gross profit compared to revenue. Finance and insurance income asbury automotiveThe company, one of six publicly traded dealer groups, accounted for only about 4% of its sales from January to June, the company said. However, it accounted for 23% of the company’s gross profit.
“F&I has turned out to be very stable, if not continue to grow slightly,” said Glenn Chin, senior equity analyst at Seaport Research Partners. “I think as much as people joke about it, there’s real value in some of these products. If you’re spending $50,000 on a new car, a lot of people don’t feel comfortable leaving it bare. So they’ll buy a bumper-to-bumper warranty or they’ll buy a prepaid maintenance plan.”
Since dealers are just conduits to these contracts, the transactions are almost pure profit, he added.
Comparison of dealers and chain service centers
This has potential challenges. While service revenue and profits may be increasing in real terms, dealers are getting a smaller slice of the pie.
According to an April report from Cox Automotive, dealers accounted for 29% of service visits in 2025, down from 33% in 2017.
According to another 2026 report by global consulting and mergers and acquisitions advisory firm Ducker Carlyle, from 2020 to 2025, Jiffy Lube, Meineke; walmart“major” service provider increased from 20% to 42%.
“A 22-point change over five years cannot happen by chance, especially since this trend is regular and consistent,” the report said.
According to Cox Automotive, there is a perception among consumers that service fees are higher at dealerships than at independent repair shops or chains, but some auto industry groups say there is evidence to the contrary. The average consumer spends $261 for a part at a dealership, compared to $275 at a regular repair shop, the group said.
“Franchise dealers have come to realize the importance of service and parts,” Chin said. “Companies are making a huge effort to dispel that notion and become more price competitive. Since COVID-19, companies have all experienced mid-single-digit growth. Some of that is due to increased warranties and recalls, but it’s also a result of efforts to become more competitive.”
