Already a Bloomberg.com user?
Sign in with the same account.
Heavy discounting and added costs by U.S. automakers are bleeding its dealer bodies
Most auto industry observers think they know what is wrong with Detroit. As General Motors weighs a possible alliance with Renault and Nissan, and Ford hands out the pink slips and slashes its dividends, the Greek chorus of critics has its favorite targets of what to fix first: expensive labor contracts, poor understanding of the market, mediocre designs and quality, resistance to hybrid technology and an ossified bureaucracy that is out of touch with reality.
Yet, the sharp-eyed will have noticed that progress is being made in all these areas. Labor contracts are being renegotiated, Ford (F), General Motors (GM) and DaimlerChrysler's (DCX) Chrysler division are coming out with some of their best cars ever, hybrids and alternate fuel vehicles are being fast-tracked, and management is being shook up.
But there is one fundamental problem that is largely ignored—and unaddressed: Detroit's manufacturers are slowly killing their dealer bodies.
It's ominously like the way they managed to bankrupt so many of their automotive parts suppliers. Why is this so important? Well, if your parts supplier goes out of business, there are always others who want your business, usually from cheaper overseas manufacturers. But when you bleed the financial life out of your dealers, who's going to sell your automobiles?
MANAGEMENT 101: "YOU'RE NOT SALES."
Detroit's demise will stem from one faulty premise: That auto makers know anything about how to actually sell a car. Not one senior executive is a former successful salesman; yet they consistently ignore their dealers, preferring to base their business model on consumer surveys.
One of the car business' greatest contradictions is that on surveys people demand non-negotiable pricing, but in real life usually negotiate like their lives depend on it. As further proof, during last year's Employee Discounts for Everyone at GM dealerships—which frequently included additional cash rebates—hundreds of individuals e-mailed me asking how much they could get off those Employee Prices. That's right, the biggest "gift horsepower" Detroit has ever given retail consumers, and some buyers looked it right in the mouth and wanted to negotiate.
The very fact that incentives, dealer rebates, and subvented interest rates are now the norm in the industry suggests that Detroit has built its house on sand. For, in the fervent belief that consumers truly hate negotiating, the industry has adopted the practice of cutting the markup on their products. So small are profit margins today that, even if a salesperson discounts a vehicle to the invoice amount, neither the customer nor the dealer is satisfied with the proposed offer.
For example, today a Mercury Grand Marquis with a list price of $25,680 carries only a $910 markup to the dealer—assuming the car sells for the sticker price. (This does not include the holdback.) Chrysler's big summer clearance of Employee Discounting means that a 300C sedan with a window sticker price of $26,088 can be purchased for $23,746.
Even the importers are starting to strip away dealers' ability to negotiate the deals that their very real customers demand. For example, the new Volkswagen Rabbit base edition carries just $261 markup (for dealers in major metropolitan areas with advertising associations). That guarantees that even if every Rabbit sells at list price, it still won't cover the dealer's cost of doing business.
And that's not the only way Detroit is taking dealers for a ride.
CONVERTING THE DEALER'S PROFITS INTO DETROIT'S.
Reimbursements for things like preparing a new car for delivery to its owner have been slashed by up to 50% at Chrysler over the past few years. Further, I wonder how many new Chrysler owners realize that they paid $25 for the "thank you" letter they got from the corporation; it's listed on the invoice as "DaimlerChrysler Owner Loyalty Mail." Thus, the perfect question to ask Daimler Chairman Dieter Zetsche at his www.askdrz.com Web site would be, "Why do I have to pay Chrysler to thank me for my business?"
Chrysler also lists on the invoice a charge for the eight gallons of gasoline to be put in the customer's new car—and then strongly suggests that the balance of the fill-up come out of the dealer's pocket, whether the dealer made money selling the car or not.
There are many other examples as well. Today many new car dealers are paying interest rates as high as 9% for floor-planning their new car inventory. That means Lincoln dealers are paying a great deal of money to carry something like a loaded Town Car. Yet consider today's retail incentives for the Town Car: $7,000 cash back, a $1,000 gas card, $2,000 in owner loyalty cash, and another $1,500 paid directly to dealers for each sale.
Additionally, Ford demanded that Lincoln Mercury dealers build new standalone facilities over the past few years, and then gave them almost nothing new and exciting to sell. Consequently, many larger Lincoln Mercury dealers who, as recently as the late '90s, sold 90 to 120 new vehicles a month, found themselves paying mortgages on $8 million properties while watching their volumes fall as low as 30 to 40 sales a month.
Ask any Chrysler or Dodge dealer how angry they were about the sales bank operations of the corporation, in which vehicles were built that no dealer had ordered, and then local zone personnel spent their entire week browbeating dealers into accepting the surplus. Rumor says that the last Texas Chrysler dealer meeting turned into a seriously heated event over this issue alone. Twenty-six years ago Lee Iacocca promised that Chrysler would never again build cars that dealers had not actually ordered; but, as the saying goes, "Never say 'never again.'" (Chrysler has once again told dealers that this system of forcing them to take unordered vehicles is history.)
PLANNING YOUR FUTURE ONE DAY AT A TIME.
Today, there is so little markup in most vehicles that dealers can no longer handle retail sales by themselves. They can't plan advertising for even the shortest period in the future because their lack of markup means they have nothing to offer customers in the way of special sales. Instead, they must rely on the next series of incentives to move the market.
Nor, most of the time, do dealers know what the incentives will be in a month. How can a dealer order the correct vehicles if he doesn't know which ones will be affected by the next round of manufacturer discounts? And what about the vehicles a dealer orders that never do get the huge rebates—which dealers now need, to offset both their new inability to negotiate sales and to cover the climbing costs of doing business?
On the other hand, Detroit has often ruined what little trust existed between the dealers and the retail consumers by telling dealers about incentives in advance. Chrysler informed its dealers 10 days beforehand that they would be able to offer Employee Discounts during the month of July. And so for 10 days, when a customer asked the salesperson that most pointed of questions—"Is this your best deal?" —the choice was either to lie to the customer or to refuse to sell the vehicle until the first of the month.
General Motors put its dealers in the same no-win situation with its employee discounts a year ago—and then repeated the error this year. The word was out a week early that Zero Percent Financing for 72 months was about to happen. I wonder how buyers felt who drove their new Chevy HHR home three days before they could have gotten the loan interest-free from GMAC? Do you think they will ever buy from GM again? If I'd been taken for that much money, I wouldn't.
A WASTELAND, UPSIDE DOWN.
One other situation needs attention drawn to it. Although most dealers have not complained about this practice, in recent years manufacturers have from time to time paid additional factory-to-dealer incentives based on retail volumes, or their accepting vehicles they do not need, or on some combination of the two. This gives the highest-volume dealers a lower cost per car—a big edge over some of their most prudent competitors, who are simply trying to run a tight ship. However, unless I'm misreading the 1956 Dealer Day in Court Act, it is against federal law to base the wholesale price of an automobile on the dealer's sales volume.
In some cases I've studied, certain dealers actually sold their vehicles and intentionally lost money to close the sale, believing that they would receive the additional dealer rebates from the factory; but they missed their sales target and therefore lost all the money. This is a practice that needs to end simply because it violates the intent of that federal law.
Let me remind you that American car dealers over the past 30 years have survived two major energy crises (not including the current one), five recessions, a 21% prime interest rate, and some fairly disappointing products. But they had an overpowering will to survive, and so they did, with nothing more than their personal belief that they could move the market and earn their customer's business. Today, Detroit's executives think they know retail better than their dealers do. So they have starved them of their profit centers and reduced them to mere delivery outlets. The manufacturers' rebates mean it's Detroit, not the dealer, that determines how much cars should be discounted and therefore how many will be sold each month.
This is why, contrary to widespread belief, GM has the best shot at survival. Of the Big Three, the General still treats its dealers best. But, if I were William Clay Ford Jr., Ford's chairman and chief executive, I'd quit discussing pipe dreams like ethanol and start figuring out how to get my dealers profitable again, or face the possibility that soon there won't be enough dealers left to sustain the corporation. There are exceptional domestic dealers who still outperform their local markets, true; but if the majority of dealers abandon the idea of high volume sales and start cutting their way to a profit, even the best will suffer as more and more dealers give up on Detroit.
I spent many successful years inside the automobile industry. I don't recognize what Detroit has done to the business today.