Dealerships Rely on Parts and Service for Profits
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The Service Squeeze: How Dealerships Are Fending Off Declining Sales
The car dealership industry has long been seen as a stalwart of American commerce. However, recent trends reveal that this sector is not immune to economic downturns and booms alike. As the auto market continues to evolve, dealerships are finding new ways to stay profitable through diversification.
One key factor driving dealership profits is the growth of parts and service departments. These areas have become increasingly important sources of revenue as new vehicle sales show signs of softening. According to Erin Kerrigan, founder of Kerrigan Advisors, dealerships can now rely on parts and service to offset losses in new car sales. “If you lose $10 of new vehicle revenue,” she notes, “you only have to pick up $1 of service to keep your gross margin flat.”
This diversification has allowed dealerships to thrive in recent years. During the pandemic, for instance, new car prices skyrocketed due to supply constraints. Automakers responded by manufacturing more expensive vehicles, which helped dealerships’ average pretax profits more than triple between 2018 and 2022.
However, this trend is showing signs of buckling. The “mass affluent” segment of car buyers – those who typically lease high-end models – are driving a relative decline in auto sales. This has led to a shift towards more affordable vehicles, which affects dealerships’ overall profit margins.
Despite these challenges, dealerships continue to rely on their parts and service departments for growth. The average dealership’s parts and service gross profit has risen from $3.3 million in 2020 to $5 million in 2025 – a trend that shows no signs of slowing down. Finance and insurance revenues have proven surprisingly stable, making up a significant share of gross profit for many dealerships.
Dealerships are also facing competition from chain service centers. The dealer share of service visits has dropped from 33% in 2017 to 29% in 2025 – a trend driven by consumer perceptions about pricing. Consumers often view dealerships as overpriced compared to independent repair shops or chains like Jiffy Lube.
In response, dealerships are taking steps to become more competitive on pricing. According to Glenn Chin, senior equity analyst at Seaport Research Partners, this effort is paying off – with many dealerships seeing mid-single-digit growth since the pandemic began. While some critics argue that dealerships’ high prices are due to their own inefficiencies rather than external factors, it’s clear that this issue will need to be addressed if they’re to remain relevant in an increasingly competitive market.
As the auto industry continues to evolve, one thing is clear: dealerships must adapt quickly to changing consumer needs and preferences. Whether through diversifying their profit streams or competing on pricing, these businesses will need to find new ways to stay ahead of the curve – lest they risk being left behind.
Reader Views
- TCThe Cafe Desk · editorial
The service squeeze is real, and dealerships are relying on their parts and service departments to prop up flagging new car sales. But what about the sustainability of this model? As cars become increasingly complex, do dealership technicians have the necessary training to handle the intricacies of modern vehicles? If not, will profit margins suffer down the line from increased repair costs and warranty claims? These are questions that demand attention as dealerships continue to pin their hopes on service revenue.
- RVRohan V. · home roaster
It's clear that dealerships are counting on parts and service to prop up profits as new car sales slow down. But what about the long-term impact of this strategy? Are they merely shifting their risk from selling cars to selling expensive repairs? If so, that raises questions about whether customers are being taken advantage of through excessive markup on replacement parts or inflated labor costs.
- BOBeth O. · barista trainer
The service squeeze is real, and dealerships are scrambling to make up for dwindling new car sales with parts and service profits. But here's the thing: not all cars are created equal when it comes to maintenance costs. Those pricey luxury models that affluent buyers love to lease? They're actually money pits for dealerships when they come in for repair, thanks to their complex technology and high-end materials. Dealers should be prepared for a double whammy: softer sales and higher service costs.