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Friday, May 23, 2014

Transparency, and Some Retail Auto Industry History

Ruggles

“Transparency” is one of the new buzz words in the retail auto industry these days. Dealers are urged to be transparent with their consumers because vendors tell us that’s what consumers want. These vendors tell us being “transparent” is the best way to win them over, as if all consumers think the same and all consumers mean what they say. Let’s take a look at transparency in the context of some retail auto business history.

First, there are a variety of definitions of “transparency.” True transparency is when the seller and the consumer have the same information as well as the equal ability to interpret that information.

I broke into the retail auto business in 1970 in a Chrysler dealership in Rock Island Illinois, Learner’s Sales and Service. Chryslers and Imperials had a 22.5% markup with a 2% “holdback.” Furys had an 18.5% markup with the 2% holdback while Valiants and Dusters had 14.5% with 2% HB. There was very little “trunk money” or incentive money paid to the dealer by the OEM back of “hold back.” There might have been some “stair step” programs around “build out” but as a general rule, gross profit was made ABOVE invoice with the “hold back” retained by the dealer. Some dealers took “hold back quarterly, some took it yearly. Our dealership had a $125. “pack” on new vehicles and none on preowned. The dealership used “washout method” accounting, where the new vehicle profit wasn’t shown until all trades on it had been sold. This was considered to be a good method of tax deferment, but was otherwise not such a smart program. All one had to do was lose track of where one was in the trade chain and it was easy to make a mistake if one wasn’t mindful of the true market value of a piece of inventory versus what the dealership actually had in it. But I digress. Everyone doesn’t find these things as interesting as I do.

From this point in in 1970, where gross profit was largely made ABOVE invoice less holdback, lets move forward in history. In 1970, sales were slow. The economy entered recession. The 1971 vehicles were awful. It was the first year for lowered compression ratios and unleaded gasoline. Not only did we lose most of the high compression ratio vehicles in model year 1971, we lost the 5 year 50K Chrysler warranty. Insurance companies had killed the popular performance cars, the Viet Nam war was underway, and the country was in the doldrums. Richard Nixon imposed a wage and price “freeze” which later came back to bite Jimmie Carter and the national economy in the ass. I worked for a salary and a commission of $10. per car sale. The gas for my demo was paid for by the dealership. We referred to ourselves as “Moral Motors” as we thought it was smart to charge everyone the same margin. We lost a lot of gross profit by offering up the standard discount to everyone, and “walked” a lot of deals when we turned down cheaper deals, eagerly gobbled up by our competitors. We thought we made it up in volume. The dealership had been in existence since the 1920s, and had long been paid for. And we had a large repeat clientele due to excellent customer service on the decidedly crappy quality Chrysler product as well as a robust leasing operation. Yes, we leased cars in 1970. In fact, the little Rock Island dealership was the largest Imperial dealership in the Chicago Zone and 5 guys would deliver over 100 vehicles some months. In 1972 Nixon repealed the “Excise Tax” on cars and the retail business exploded until the Oil Crisis of late 1973, when things went back in the tank. But let’s get back to the “transparency” issue.

Over time, the markup shrunk and the “hold back” grew to 3%. The OEMs shrunk the markup to allow them to raise their wholesale price without raising the retail price, figuring to take margin from the dealer and retain it for themselves. They did this under the guise of telling us real retail guys that consumers were suspicious of large markups and over allowances and that if we kept the shown numbers closer to the real numbers, consumers would be happier. Something else happened to transform the retail auto business in 1975. Joe Garagiola and Chrysler invented “Buy a Car, Get a Check.” The cost of the rebates and the eventual interest rate subventions, an eventual consequence of inflation that followed the Nixon Wage and Price Freeze, had to come from somewhere. OEMs included the cost in the dealer wholesale price while continuing to keep the lid on MSRP and the dealer markup to mitigate “sticker shock” to consumers. This was the first time consumers were taking delivery of a new vehicle for a price LESS than the dealer had to pay off at his floor plan bank.

Over the course of time we have seen dealer gross profit move from above invoice to below invoice based on a convoluted combination of “trunk money” that is earned from “stair step” sales incentives to purchase incentives as well as CSI payments and additional vehicle incentives based on OEM image programs. This “trunk money” system is FAR less transparent to consumers than the old system. Don’t get me wrong. I do NOT believe consumers have any right to know our true costs, even though vendors like TrueCar CEO Scott Painter say that hiding that true dealer cost information from consumers is costing the industry 4 million new vehicle sales per year because it creates “friction” in the selling process. Dealers often don’t know their true cost per vehicle until a particular program ends, and that is what grates Painter and others.

The “new” gross profit system is also designed to hide salient cost information from dealership staff who get paid based on a percentage of real gross profit. A cynical person might say that dealers aren’t likely to be “transparent” with consumers until they are first “transparent” with their own employees.

The information provided to auto retail consumers these days is vast. For them it is like drinking from a fire hose. There is so much “cost information” available even dealers and their staff have a difficult time interpreting it. It is anything but “transparent” to consumers. Its none of their business anyway any more than it is our business as consumers to know what our grocer paid for a head of lettuce. The system has evolved to the point it is designed like your cable TV or cell phone bill to be difficult to fathom while pretending to provide ALL the information. This is deceptive. It is FAR from “transparent.” In fact, it was NEVER meant to be “transparent.”

To be sure there has been distinct improvement in certain kinds of “transparency” over the last decades, in particular, in the area of Truth in Lending finance disclosure and with the FTC mandated pre-owned disclosure. Legal transparency should be followed to both the letter and the spirit of the law. No one should have a problem with either of these and other similar requirements.

Auto retail is the business of negotiation. For those who don’t have the stomach for it, I suggest they find another career path. There has always been artful negotiation and those who aren’t so artful. This allows those with polish and good technique to excel. It gives consumers the option of buying from the salesperson/dealership that provides them what makes them the most comfortable. To claim “transparency” while at the same time working within a system that is unnecessarily complex and designed to confuse to the advantage of the seller is duplicitous at best. I’d suggest we stop embarrassing ourselves by using the word. Consumers ain’t buying it. We don’t even buy it ourselves. Let’s get back to artful negotiation, sell some cars, and make some gross profit without claiming to provide something we’re not.