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Friday, September 27, 2013

“Moral Motors” vs the Traditional Franchise New Car Dealer.

First, some ground rules.  This is not to imply that the “traditional” franchised new vehicle dealers aren’t “moral.”  But there is a perception among many consumers and certain consumer watch dog groups that certain “traditional” dealer practices are “unsavory,” at best.

It is a given that a new car dealer needs about a 10% gross profit on each transaction, front and rear combined, about $3000 in today’s market based on an average new vehicle sale for the Dealer to break even and provide a small measure of ROI.  Most consumers and advocacy groups don’t disagree with this, when asked in a survey.  Where these groups differ with the “Traditional Dealer” is when all buyers aren’t charged the same 10% margin.  The idea that one consumer could get away with paying a $1000. gross profit while another pays $5000. to maintain the $3000. average seems outrageous to them.  
Of course, 10% doesn’t seem like much to a consumer until they figure out that that is about $3000. on a $30,000. vehicle.  Consumers tend to have no understanding of the difference between gross profit and net profit.  Perhaps they think the factory absorbs facility overhead, taxes, utilities, staff, etc.  Many consumers also tend to think that new inventory is provided on consignment by the manufacturer.

So let’s do some arithmetic while making the assumption that all other factors are equal.  Let’s assume that two dealers have equal overhead expense, and that their sales staffs are equally adept at product knowledge and “building value.”   The “Moral Motors” dealer never asks for full gross profit and hence, never receives it on any car deal.  After all, they want everyone to pay the same margin.  In addition, the “Moral Motors” dealer passes on the “cheap deals” out of principle, when efforts to justify the price fail in the face of a better price from competitive “Traditional Dealers.”  The “Traditional Dealer” gains extra volume via the “cheap deals” he/she can accept, and gains the additional trade ins, F&I income, and warranty and repair opportunities.  He/she also gains in Units in Operation, which can be leveraged down the road into repeat business.  Plus, there is the additional gross profit that comes with at least making an effort to make full price or additional gross profit and giving everyone the opportunity to pay it.  So add in this extra gross profit to the extra profit from being able to take the “cheap deals,” and the math is easy.  The “Traditional Dealer” sells more cars and makes more money.

Advocates of the Moral Motors business model try to make the case that word of a “no hassle” buying experience will bring additional buyers to their store to make up for the loss of gross profit from the deals and gross profit they turn down.  Great experiments in the past to prove this concept have failed miserably, despite the fact that advocates can always come up with the occasional anecdote.

The comparison gets even more interesting when the two dealers want to buy another dealership.  The additional “cheap deals” of the “Traditional Dealer” translates into additional market share.  Auto manufacturers look at 3 primary factors when considering the approval of a buy/sell agreement.  First, does the purchasing dealer have a record of consistent profitability and the money available to properly fund and operate the additional dealership?  Second, does the purchasing dealer maintain a satisfactory CSI score?  And third, how does the purchasing dealer penetrate his/her current market?  Any dealer who has ever tried to get factory approval for a buy/sell knows how important market share is to an auto manufacturer.  Despite this fact of life in the auto industry, we weren’t able to get any specific comment from any of the OEMs we contacted, other than in very general terms.

Consumer advocacy groups would like us to think that the “Moral Motors” dealer carries higher CSI. but they are unable to cite more than anecdotes.  There are MANY “Traditional Dealers” who maintain more than satisfactory CSI scores.  Without satisfactory market share, the “Moral Motors” dealers will be found wanting, all other things being equal, and will not likely be approved for expansion even if the other two critical items are without issue.

“Moral Motors” can make money if his or her overhead is controllable, especially if his/her dealership is in a market with other less aggressive dealers.  But it also means the dealer has to take a strong stand with his OEM regarding “factory image programs,” where the dealer is expected to increase overhead to bring the dealership facilities in line with OEM standards.  This is not a good way to gain favor with an OEM one might be asking for factory approval to add another dealership.

Our industry is either blessed or cursed, depending on your outlook, with a variety of companies who are quite willing to collect dealer money to help the industry sell more cars and keep customers happy.  They tend to cite surveys done by others, or conduct their own in justifying their approach.  Some of these vendors have actual front line dealership experience and are much more than theorists.  Others? Not so much.  Vendors who would tell dealers to charge everyone the same have probably never worked in or owned a car dealership.  We now have “experts” telling us that our industry should provide a buyer experience like Disney, Apple, or Amazon.  When they have to start negotiating price, taking trade ins with negative equity, and dealing with complicated financing issues, they might have credibility.  Until then, now so much.

Frankly, many of us thought the issue was settled when the factory owned “Ford Collection” vanished from the face of the earth, but this really bad idea of “everyone pays the same” lingers on.  We had this great debate 20 years ago when Saturn was launched, and many opportunists cited the so called “success of Saturn” to “prove” the theory was sound.  Saturn lost money from the start, and never made money, which explains why it is currently extinct.  Saturns were sold for a loss from the start.  Not by the dealer, but the factory lost at least $1500. a car from 1991.  Most wouldn’t call that “success” even if their customers were happy.

I experienced a similar situation in Japan with Toyota about 12 years ago.  A client there asked me how I thought it would work out.  My answer was, “As long as demand and supply are properly balanced, and dealers stay disciplined, it will work great.”  I also mentioned the chances of that happening are “slim and none.”  In Japan, franchises are awarded by region, similar to the old Saturn model.   If the idea of charging everyone the same was ever going to work, it was going to work in Japan.  Imagine a single dealer owning every sales outlet in a particular region or state for a brand.  Toyota even created a new sales channel for the great experiment, combining Auto and Vista into a new one called Netz.  In Japan, Toyota calls their various divisions “channels” and they have 5.  Toyota cut back the markup on Netz vehicles to the point that there was nothing left to give away.  As a consequence, the degree of discounting was minimal from the start.  But sure enough, once demand waned compared to the factory’s need to build cars, along came the “trunk money.”  And dealers took advantage of it to discount, even though the same dealer owned all competitive dealerships.

If this isn’t a commentary on the human nature that drives a new car buyer, I don’t know what is.  Consumers tell surveyors they hate negotiation.  But the first thing they try to do when buying a car is negotiate.  It would seem that what consumers say and what they mean are two different things.