Island’s First Auto Dealership Study Reveals Shift to Used Vehicles
The first-ever study on the financial condition of Puerto Rico’s automobile dealerships points a grim picture where these operate on very thin profit margins despite being subjected to very high tax and operating costs.
The study also pointed to a shift on local consumers to prefer pre-owned or used vehicles over new units, as evidenced by the industry’s total sales volume versus number of new units sold.
The Puerto Rico Automotive Dealers Association (PRADA) commissioned the “Portrait of Puerto Rico’s Automotive Dealership Industry” study to local accounting firm Aquino, DeCórdova, Alfaro & Co. LLP, which collected and analyzed the information of a survey sent to PRADA members, explained PRADA President Pedro Luis Benítez.
To bring transparency to the process, Benítez said PRADA created the Portrait of the Automotive Dealership Industry Committee, which worked on creating and administrating the survey. An independent firm, IPSOS, tabulated the information provided by the dealers, assuring total confidentiality and transparency in the process.
“Presently, the information available from our industry in Puerto Rico consists mainly of the sale of the new units (provided by the or GUIA by its Spanish acronym). Those of us, who want to measure our business and make comparisons, only had available some U. S. publications such as the data published by the National Automobile Dealers Association (NADA),” Benítez explained during the press conference had at PRADA office in San Juan’s Bechara sector.
The Committee sent surveys to PRADA member dealership companies (17 dealership groups) plus another group of dealerships, and received back a total of 36 surveys. These groups of companies operated 103 stores including Japanese, domestic, Korean and European vehicles.
The participants reported total sales $1.379 billion, which represented about 40% of the $3.453 billion market according to the Puerto Rico Planning Board (PRPB).
In terms of new units sold, the participants reported sales of 29,971 new units, which represented approximately 37% of total new units sold on the island. Eduardo González-Green, Committee president and partner at the local accounting firm, labeled that percentage as a very good representation of the total industry.
As explained by González Green, there is a major shift between new units and pre-owned units sold on the island.
Total auto sales per PRPB in 2005 (including new and used vehicles) were $3.3 billion with new vehicles sold that year amounting to 140,400 units.
In 2015, total new units sold by the industry were 81,357 and total sales were $3.45 billion as per the PRPB. For González-Green, this is an indication that the sale of pre-owned units is increasing.
Unfortunately, there are no statistics on the number of pre-owned units sold on the island.
The fact that new-unit sales are decreasing is affecting the collection of excise taxes. As indicated by González-Green, if the government incentivizes the industry, the Puerto Rico Treasury Department (Hacienda) could collect more excise taxes.
One finding of the study was the difference in the selling price of a new unit between the mainland U.S. and Puerto Rico.
According to NADA, the average selling price of a vehicle in the mainland U.S. is $33,419 while in Puerto Rico and based on information provided by Hacienda, the average selling price is $26,825 (comprised of a taxable price of $23,035 plus an excise tax of $3,790).
“The above difference is an indication of our weak economy compared with the mainland U.S.,” González-Green commented.
The average dealership in the mainland U.S. is bigger than Puerto Rico, the study also showed. Even considering that a dealer in the mainland U.S. reported bigger sales than Puerto Rico, the average dealership in Puerto Rico employs about 9 people more than in the mainland, the study revealed.
“The average dealership in the mainland U.S. employs 67 people, while in Puerto Rico that number is 76. One of the reasons for that is the additional staff needed to deal with the bureaucracy at Hacienda and the Department of Transportation and Public Works,” commented Charles Vaillant, PRADA board member and president of Triangle Dealers and of Lexus de San Juan.
Another important finding from the study is that the average compensation per employee per year in Puerto Rico is approximately $39,000, which is significantly higher than the federal minimum wage.
The dealerships that participated in the study also revealed that their net income before income taxes was lower than those reported by dealerships in the mainland U.S.
Very thin margins
The dealerships in Puerto Rico reported a net income before taxes of only 0.95% whereas in the mainland, it fluctuates between 1.9% and 2.2%—depending whether the source is NADA, the Risk Management Association (RMA) Annual Statement Studies, or the Almanac of Business and Industrial Financial Ratios, González-Green indicated.
The participants in the study indicated new tax laws and increases in general costs/expenses as the main factors affecting their operations.
In fact, Vaillant indicated some dealers were forced to shut down as a result of the added taxes, such as the Gross Receipts Tax or Patente Nacional, as the dealers were not able to afford the added tax burden.
“The study also showed that local dealerships have a level of capitalization of over 20% (capital/total assets), which means this type of business seems to be a little bit capital intensive. On the other hand, it’s normal that banks that offer floor-plan financing to the dealers have restrictions regarding distributions/dividends,” Gónzalez-Green said. “Nevertheless, this also means that owners of dealerships are committed with the company and its employees and keep the money in the company.”
As part of the study, the Committee presented a scenario representing the net income (aftertax) of a typical selling price of $26,825, in which the dealership held only $170.93. This represented only 0.64% of the selling price, while the government and its agencies collected $4,389.30 or 16.36% of the selling price.