New Revenue Streams As A Bulwark Against An Uncertain Sales Environment

New cars were flying off dealership lots in March and April as consumers rushed to buy before the anticipated tariff-induced price hikes. Sales began to moderate in May, and that slowdown is expected to accelerate.

With new car sales becoming an unpredictable revenue source, dealerships are exploring potential revenue streams outside of traditional avenues. While some may be successful, deviating from what you know is not easy and can be risky.

Leasing for the win

Sometimes, dealerships do successfully create new profit centers. Tamaroff Auto Group, a Michigan-based group with six rooftops, was an early innovator in the search for new sources of revenue. In 1971, the group launched a vehicle leasing business that has grown to include leasing of both commercial and luxury vehicles.

The business is profitable … now. “It took a few years to become profitable,” Eric Frehsee, the Group’s president, says wryly.

To go into the leasing business, a dealership group needs capital, proper insurance, product knowledge, underwriting, and an understanding of taxation in all 50 states and how to properly title and register vehicles, he says. It also needs clientele.

“To start today would be extremely challenging and would require a lot of organizational structure, manpower, marketing, and the right team who understands leasing just to get off the ground,” Frehsee tells Getting to Go!.

After establishing the business, achieving profitability takes time and additional investments to, for example, create lease contracts and secure contingent liability insurance policies. Getting capital from banks requires “all sorts of cross collateralizing of dealership operations, potentially real estate, and even personal guarantees,” he says. “It’s a long-term business model, not one that you’re in and out of.”

A capital-lite sideline

While tariffs are impacting dealerships’ inventory right now, it may be a transitory situation, Dave Thomas, director of content marketing at CDK Global, tells Getting to Go! However, dealers are “settling into the idea that we are going to have 10% tariffs forever.”

While they may not expect a “worst-case scenario” from tariffs, dealers are always looking for new sources of revenue, he says. Expanding into fleet sales and service is one possibility, as is getting into the collision repair business. Both are quite capital-intensive, though.

On the capital-lite side, Thomas says he knows of a few dealerships offering paint protection film (PPF) wraps as an F&I product that can be wrapped into monthly payments.

While PPF wraps been more popular in the luxury car space, buying any car is becoming somewhat of a luxury. With the Average Transaction Price topping $45,000, PPF may become popular for volume brands, as well.

Riskier sidelines

Other dealerships are looking at risker revenue streams to boost the bottom line. Paul Sansone Jr., owner of Sansone Jr’s 66 Auto Mall in New Jersey, is also in the Lease Here Pay Here (LHPH) business.

Sansone finances the leases through his own company, NJ Auto Lending.

NJ Auto Lending will generate some $200,000 in sales gross in May, Sansone tells Getting to Go! The business model is less risky than buy here pay here because his company not only finances the lease, it works with the customer to improve their credit and improve their credit score, he says.

For risk reduction, “the number one thing is underwriting,” he says. His dedicated LHPH team structures the deal at the dealership and follows it up with a “welcome call” to the borrower to confirm all the information a client has provided, Sansone says. The default rate is in the single digits, Sansone says.

For a dealer with available capital, creating a LHBH business is a better use of the capital than acquiring another franchise, he argues, because they receive revenue as the lender, the tax benefits are significant, and “sixty percent of the customers I write (a loan for) today are back at my door two years later making another deal,” usually buying out the lease, Sansone says.

Appetite for risk

While Sansone swears by his process, LHBH is a risky business model based on the risk associated with the Buy Here Pay Here business, Stuart McCallum, founder and president of advisory firm McCallum & Co., tells Getting to Go!

A lender in the BHPH space told him that “when someone gets into the space (the lender) spends the first year trying to get them not to buy a yacht or a jet. He spends the second year trying to get them not to commit suicide.”

Another alternative revenue source McCallum has encountered is providing warranties on customer pay work in the service department. For example, for small extra fee a dealership could warranty a repair for life.

On its face, it sounds like it could work, McCallum says. But what if the technician made a mistake?

“What I am hearing is that dealers are willing to take on more risk to try to get just a little bit more earnings. Is it worth it?” he says.

McCallum does like what he has been hearing about another revenue stream – dealership reward programs. Much like rewards programs other retail businesses, they reward customers for using a dealership for many types of services. That brings customers back to the dealership more often.

“Maybe you don’t need to be creative or innovative with products,” McCallum says. “Maybe you need to be creative or innovative with your customer retention. You need to be stickier with your customer relationship.”