Margin Compression

Margin compression in automotive retail occurs when the cost to acquire and recondition a vehicle rises faster than the price consumers are willing to pay at retail. Factors driving compression include high wholesale prices, increased reconditioning costs, competitive retail pricing, and lender restrictions on loan-to-value ratios.

Dealers combat margin compression by tightening acquisition criteria, improving reconditioning efficiency, increasing F&I product penetration, and expanding to back-end revenue sources. Tracking front-end gross per unit sold is the primary metric for monitoring the impact of margin compression.