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Friday, May 1, 2015

Elephants in the Room! Startling New Studies Revealed!

ruggles/Wards

Two important automotive conferences were held in New York City recently in conjunction with the New York International Auto Show. The first conference was the J. D. Power Automotive Forum, followed the next day by the Driving Sales President's Club Event. The conferences had at least one thing in common. They both were launching points for two new surveys regarding what consumers supposedly want in their retail shopping experience, based on consumers answering questions to survey questions. AutoTrader released its new survey at the Power conference while Driving Sales revealed its own survey the next day at their own conference. The presentations of these survey results were rife with anecdotes. Both "studies" "proved" what some people have been trying to prove for decades, that consumers prefer not to negotiate and don't like the sales process.

...the continuation of attempts to predict auto buying behavior by asking survey questions instead of observing actions...

I was reminded of the infamous J. D. Power survey released at the NADA convention in 1993, where they showed that consumers didn't like to negotiate, which "proved" that the Saturn way of doing business was going to take over auto retail. Interestingly, J.D. Power was also selling consulting and training services to teach dealers how to implement the "new sales strategy." At the time, Saturn dealers were doing really well while GM was losing about $1500 per vehicle. Unfortunately for J. D. Power, no one taught the OEMs that for the "Saturn Method" to work over production can't be part of the equation and true "success" includes OEM profit. [The Prof adds: in the pre-internet days Saturn dealerships were also few in number and widely dispersed, which was important in limiting the ability of consumers to play dealerships off against one another]

At the same 1993 NADA convention new research was published by an Arizona research and marketing company that showed the exact opposite of what the Power survey had said. The different results were achieved by merely changing the wording of survey questions. At the time it seems that consumers really do want to negotiate, they just want to be guaranteed a win. They want to play poker with you. They just want to see your cards first before placing bets.

The marketplace ultimately proved who was right and who was wrong. Saturn proved many things. It proved that fresh product enthusiastically received by the consuming public is essential. And we know GM subsequently starved Saturn for product. After all, why give a division product unless they have proven they can move the metal? Saturn proved that some consumers prefer their business model. They also proved there aren't enough of them to make for a viable division. Saturn introduced a stellar vehicle in the Aura. Yet, consumers voted with their feet. Instead of buying the very competitive Aura and its consumer friendly sales model, they went in hordes to Toyota and Honda to get abused by the so called traditional sales model. Go figure.

Later in the decade Ford attempted to show the industry how to do auto retail based on how consumers respond to survey questions. The Ford Collection lost hundreds of millions of dollars and was one element of the underlying dissatisfaction that cost Ford CEO Jacque Nassar his job. [The Prof adds: the Explorer-Firestone rollover issue was a factor, too]

Both of this year's surveys ignored some "elephants in the room." While demonizing the "old methods," as if there is such a single thing, they failed to tell us exactly how to do what consumers want us to do while still making money. After all, new cars aren't sold for profit these days anyway. Dealers typically pay off more at their floor plan lender than the customer just paid for their new vehicle. And after paying each new vehicle's share of the overhead, our industry is selling new vehicles for about break even. And to add insult to injury, consumers still aren't happy.

I'm living proof that there is no such thing as the "old method" of selling new vehicles. I started in the business in 1970, selling in a One Price store, although it wasn't called that back in the day. We called ourselves "Moral Motors." The anecdotes related by those who try to demonize "the old ways" might describe some stores, but they certainly don't describe them all. There has never been a single way for dealers to run their sales operations. Auto retail has ALWAYS been about relationships and satisfying customers. This has never changed. As a consultant/ trainer over 20 years ago, we taught sales people to open dialogue with prospects by saying, “Before you leave, we want to make sure we provide all the information you need to make a practical purchase decision, including some numbers to think about.” Today that's called "transparency."

Even though the consumer today has ready access to all sorts of information, they "know" less today than they ever did because of the complexity that exists today. Much of that complexity was created by OEMs when they curtailed dealer markup and hid gross profit behind invoice, something I seriously doubt consumers would call “increased transparency.” The vast amount of information available today is like drinking from a fire hose for consumers. Auto buying consumers have more information, yet know less. Over the last few years I have visited hundreds of dealerships. I have seen a consistent pattern of sales people attempting to deal with consumers who think they know a lot more than they do. It is an art to correct your potential buyer on their misconceptions while still maintaining a relationship to allow them to do business with you afterward. Many of our sales people fail miserably at this. [The Prof adds: with sales staff turnover, don't be too sure consumers aren't the more informed party! But remember too brand proliferation: can you name all 600 makes on sale in the US market??]

I am able to do my own research. Since it is informal I don't try to calculate a "margin of error" or use lofty terms to describe my methodology. I am regularly in front of groups of college students. My own personal study group is my 22 Gen Y nieces and nephews. Further, I am regularly in front of a large group of retired millionaires at a retiree forum in my home town. This gives me the opportunity to conduct show of hands type surveys. Example: "How many of you think an auto dealer is entitled to a return of 10% on the sale of a new vehicle?" EVERYONE in the room raises their hand. A little later I'll ask, "How many of you, after you get home after buying a new car, would be upset if you find out you paid the dealer a $3K profit." EVERYONE in the room again raises their hand!!

For those who think the Ford Collection, Saturn, and Priceline outcomes happened ages ago and are no longer valid, a Dallas company specializing in lease comparison software, Cybercalc.com, recently did extensive surveying which “proved” consumers prefer to get their deal structured and “locked in” before revealing who their identity. The initiative was called AutoBids Online and a small fortune was invested to create a software platform to enable consumers to anonymously enter a marketplace where dealers would bid for their business, thereby locking in an offer before the consumer’s identity was revealed. This would seem to prove that the AutoTrader survey results on this issue are valid, right? In talking to CyberCalc CEO Jeff Cook about his expensive lesson as it regards auto buying consumers, he says, “I have some GREAT software for sale if anyone thinks the market is now ready for this. When we did this a few years ago, it clearly wasn’t, despite our extensive surveying.” Perhaps it was the $29 consumers had to pay top enter the marketplace? One would think that would be a small price to pay for avoiding the “old method grind,” right?

This is not to say that the Internet hasn’t forever changed some things about our business. Dale Pollak and others have definitively proven that if a dealer prices his/her vehicles wrong, their inventory will never be seen by consumers doing routine searches. But this has been proven by actual consumer behavior, not by surveys.

So what are the "elephants in the room" ignored by these recent surveys? In our bid to thrill consumers shouldn't we ask them about how we answer the phone? After all, a HIGHLY valued relic from the past, Jackie B. Cooper, used to point out that the dealership telephone operator talks to more potential gross profit than any employee in the dealership. "And who gets paid the least?" Jackie would ask. These days the telephones are answered by an IVR system (Interactive Voice Response). en Y calls them "bots." AND they are universally reviled. Why are no studies focused on how our customers like the way we answer the phone?

Another elephant? Even the best sales process can turn counterproductive when executed crudely. The least polished of our sales people make up the VAST majority these days. Why? Because WE have run off most of the good talent. Our industry has cut the upfront markup, increased the holdback, increased the pack, taken away demos, cut fringe benefits, instituted full retail markup internal charges, etc., etc., and we wonder why we are left with the unpolished and unpracticed sales people? When you turn over employees it is because you either did a bad job of hiring, or a bad job of managing. Why ignore this while focusing on peripheral issues?

Perhaps the most outlandish claim "proven" by the Driving Sales survey is that our industry is losing up to 5 million new vehicles sales each year because consumers don't like our processes. This is referred to as lost "headroom." This assumes that consumers who don't like the first dealer they encounter, exit the market instead of exiting that dealership and visiting another. I have run this claim by a number of industry economists. I first started asking about "lost SAAR" when I heard TrueCar's Scott Painter claim that new vehicle retail could be doing 20 million SAAR if we eliminated the "friction" in the sales process. The unanimous responses from these numerous industry economists and other experts uses terminology reminiscent of Norman Schwartkop's reference to "bovine scatology."

At least we all got to listen to Warren Buffet and Larry van Tuyl at the J. D. Power conference and Maryann Keller at Driving Sales. Maybe it’s just that I take comfort in listening to common sense from people closer to my age bracket, or maybe I just like listening to common sense from whomever it comes from.

Some high points, or low points of the conferences, depending on one’s perspective follow. According to the AutoTrader study:

Consumers want a change in the car buying process, but they failed to define either “old process” or “new process.”

There is no such thing as “the old process.” Dealers used to compete with other dealers to provide an experience acceptable enough to consumers to gain their fair share of sales and gross profit. It seems like any new process would work the same way. If there is a single universally acceptable new process that would accommodate the 30% of buyers who are in the Buy Here/Pay Here or subprime credit category, as well as the near prime tiers, and would take negative trade equity into consideration, as well as “fast track” credit buyers, AND allow for dealer Return on Investment, we’d all like to hear about it.

Consumers want to test drive new vehicles at a central location without sales people present.

What they failed to ask is how much more consumers would be willing to pay for this.

Consumers dislike the process as it is today...

...yet that process sells 14 million plus new retail units per year. Perhaps consumers would prefer if the FTC would allow dealers to fix prices so everyone could pay the same price? Why not ask consumers how they would like that?

Consumers prefer to remain anonymous until they lock in a deal.

Of course they do. So what?

Dealers have always been free to adapt to whatever they believe consumers really want.

A lot of money has been invested in attempts to do business based on what consumers say they want in surveys with Saturn and The Ford Collection being the best examples. Maryann Keller mentioned the Priceline experiment, which didn’t work. She should know. She ran it and is completely upfront about the experience. Who better to tell us about the difference between what consumers say and how they actually behave than the world’s leading auto analyst who also spearheaded a well financed attempt to appeal to consumers based on their stated preferences? What has changed since those expensive experiments failed? Why are people still continuing to try to prove that consumers behave the way they say they would on surveys?

From Driving Sales: Rachel Richards, listed as Vice President and Chief Marketing Officer from Sonic Automotive, the country’s fourth largest automotive retailer, gave a presentation on their new retail initiatives called “One Sonic - One Experience.”

One would think that Richard’s previous career experience with Ford Motor Company might have provided some insight on the difference between what consumers say on surveys and how they actually behave in the real world. As I understand it, the new program is still in pilot stage and has not been rolled out across their system. My understanding is that they have 15 sales people at one pilot store who also do their own F&I. When I asked if they would all be AFIP (Association of Finance and Insurance Professionals) certified, she told me she didn’t know what that is, and that a different department was responsible for the F&I element. I can only imagine the regulatory vulnerability associated with having 15 sales people all trying to do their own F&I. I’m sure time will tell, as it did with the Ford Collection.

What seems to be inevitable is the continuation of attempts by some to predict consumer auto buying behavior by asking them survey questions instead of merely observing their actions. After all, we have many talented and experienced experts who are in the trenches on a daily basis. Why not just ask them?