This week’s Automotive News brings word that while dealers may be selling more new vehicles, they are making less money on the cars they retail.

The front page article’s headline deftly summarizes the dynamic: “As Dealership Sales Climb, Margins Slide.”

But I was most struck by what the article, which quotes executives from public dealer groups that reported front-end margin declines in new vehicles during the second quarter, does not address. You won’t find much mention that margin compression has, and will remain, a fact of life for dealers.

On some level, I can understand that the dealer group executives might shy away from public stating what seems pretty obvious—making money in this business is no longer as simple as selling more new cars. To their credit, however, the executives do relay their confidence that a “total gross” strategy, where you may concede front-end margin to build volume and F&I, service and parts revenues, will result in shareholder-friendly balance sheets.

This story follows other profit-unfriendly news—the recent consent order from the Consumer Financial Protection Bureau (CFPB) that requires American Honda Finance Corporation to limit dealer mark-ups on loan interest rates to 1.25 percent or less.

Much of the industry coverage focused on reaction from dealer associations, which decried the agreement as bad for consumers and dealers. Some observers dug deeper, questioning whether CFPB used faulty data to justify the order.

But I didn’t see much discussion of how the ever-growing effort to restrict reserve income in the F&I office is yet another troubling fact of life for automotive retail.

Taken together, these news stories highlight trends that should serve as a wake-up call for dealers. This wake-up call is especially relevant for dealers who have opted to make up for lost front-end margin by pulling two levers that have traditionally worked—increasing sales volumes and leaning more on their F&I managers to increase production/profitability.

Let’s remember that dealers are, by design, blessed with five profit centers—new vehicles, used vehicles, F&I, service and parts. Looking ahead, the most successful dealers will be those who maximize efficiency, production and profitability across all departments, not just those where it’s typically been easiest to move the needle.

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I’ve been talking new cars with dealers lately, helping them create and navigate strategies for proper pricing in today’s market.

Naturally, customer incentives and rebates are a key part rebates 300x221 A Call For Reality In New Vehicle Incentives/Rebates and Pricingof the discussion—particularly as some manufacturers rely on them more than ever to drive market share and sales.

From these conversations, I think it’s fair to group dealers in three buckets:

Bucket 1: These dealers resist applying any incentives or rebates as they price new vehicles. The chief reason: The dealers prefer to limit incentive/rebate discussion to the showroom floor, where they can be absolutely certain they’ve matched specific customers with the correct price discounts.

Bucket 2: These dealers believe it’s appropriate to include incentives/rebates in their new vehicle pricing, provided a) most buyers would qualify for them, and b) each vehicle listing properly discloses the conditional nature of the rebates/incentives, and shows how a dealer uses them to calculate each asking price. The dealers have adopted this practice to meet buyer desires for a greater level of pricing transparency.

Bucket 3: These dealers include nearly all available incentives/rebates in their new vehicle pricing, even those that may only apply to a small percentage of potential buyers. The dealers rationalize this “kitchen sink” approach by noting that they provide the proper disclosures, and they hear few complaints from customers who might feel misled.

I can understand why dealers in Bucket 1 are where they are. It’s only been of late that dealers have the technology and tools to accurately apply/stack incentives and rebates in their pricing strategies.

I typically applaud dealers in Bucket 2. They’re keeping it real and realistic as they include incentives/rebates and offer more transparent asking prices.

With Bucket 3 dealers, I offer a word of caution. Just as you get more proficient at applying incentives/rebates as they price new vehicles, customers and industry regulators get better evaluating them. The “kitchen sink” approach may be working for now, but I have to question the strategy’s risks and viability moving forward.

It wasn’t all that long ago that every dealer was essentially a Bucket 1 dealer. Incentives/rebates were too complex, and online pricing technology too limited, to confidently and efficiently include them in a new vehicle pricing strategy.

Times are different now, of course. The technology is now available and, more importantly, dealers recognize that it’s increasingly important to provide consumers incentive/rebate information right away, while they shop new vehicles online.

Looking ahead, I believe incentive/rebate-based new vehicle pricing will become the norm, and we’ll see the vast majority of dealers in Bucket 2.

As this transition continues, dealers would be wise to remember what our customers will be thinking when they evaluate new car prices—“if it seems too good to be true, it probably is.”

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It’s time for a little truth-telling.

KC427 3 Ways To Drive Dealers To Discover Profitability Through EfficiencyLet’s start with TrueCar. As a matter of principle, dealers don’t like the company. And who’d blame them? TrueCar essentially tells customers, “we’ll set you straight on a vehicle price before you contact the dealer.” Yet, if you take the company’s customer base at face value, roughly half of all franchise dealers have signed on.

What gives? The answer is TrueCar’s relevance to today’s consumers. Their “never overpay” message taps into a chief car-buying emotion for consumers—fear of paying too much. At the same time, TrueCar’s promise of a faster, less frustrating purchase experience addresses another consumer concern—the last time they bought a car it took forever, and who’s got that kind of time?

I know some dealers wish that TrueCar would just go away. A handful of dealer-driven lawsuits this spring suggest this sentiment is alive and well.

But here’s the reality: TrueCar, and other companies that aim to erode or take away the traditional role of dealers in the car-buying process, will remain unless and until dealers credibly capture the mantle of relevance these third-party players have claimed for themselves.

At its most fundamental level, this challenge will require that dealers embrace a higher level of efficiency and transparency than they’re accustomed to providing.

This resistance owes to three factors.

First, dealers’ businesses have seen great success in spite of minimal efficiency and transparency. Like many business owners, past precedent sets practice for dealers. This makes it difficult for dealers to change even if their business practices are less effective than they used to be.

Second, the pain of inefficiency and a lack of transparency isn’t readily apparent to most dealers. Indeed, we’ve all been blessed by ever-better good times the past few years, with rising new/used vehicle sales volumes. But as dealers view their top-line numbers with satisfaction, many miss that the return on their investment in cars, facilities and people is lower than it used to be. Stats from the National Automobile Dealers Association show a steady decline in margins for new/used vehicles (31 percent and 20 percent, respectively) over the past five years

Third, the traditional dealership model’s inherent inefficiency and lack of transparency is a matter of great pride among dealers. The thinking goes like this: Car deals are complicated, and it takes the expertise of a dealer to ensure buyers find the right car and right price. In addition, it’s as American as apple pie for consumers to expect that they will negotiate the vehicle price, trade-in values, loan rates and, to some degree, F&I product purchases.

Unfortunately, all three of these factors have combined to create the current predicament, where industry outsiders, like TrueCar, are capturing consumer attention and carving out a part of the car business for themselves.

But some dealers aren’t taking these circumstances sitting down. They’ve made greater levels of efficiency and transparency operational imperatives for their businesses. Their efforts to transform the way they retail new/used vehicles provide a roadmap for other dealers to become more relevant for car buyers today and tomorrow. Their efforts often focus on three key areas:

  1. Adoption of new technologies. These technologies help dealers identify the new/used vehicles that hold the greatest appeal to potential buyers and to price every unit to meet the current market. The end goal is two-fold: to stock the vehicles that will garner the most consumer attention and to create a clear and transparent value proposition that stands up to competition. As they price new vehicles, dealers account for the transaction price ranges advertised by TrueCar and others and, in fact, use them to enhance credibility with potential buyers.
  2. Faster transaction times. Large dealer groups like AutoNation and Sonic Automotive have made a “one hour or less” transaction time an operational goal. To achieve the benchmark, they’ve reduced, if not eliminated, the traditional back-and-forth negotiation with customers in the showroom. In some cases, negotiations over vehicle prices and trade-in values occur online, with the help of tools that allow buyers to self-direct their deal. In other cases, the dealers stand behind the asking prices they’ve posted online, telling buyers “what you see is what you pay.”
  3. Increased productivity. With the right cars and right prices, and a faster sales process, efficiency- and transparency-focused dealers correctly conclude that sales associates can and should be more productive. It’s not uncommon for these dealers to set 15 deals a month as a minimum performance standard. By creating an environment where increased productivity is the norm, dealers are able to reduce personnel costs, which benefits their bottom lines.

In summary, dealers should at least be aware that our industry is in the midst of a transition to a different way of capturing the hearts and minds of car buyers. Perhaps the key lesson is that in times of transition, tradition is often the biggest impediment to success.

 

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Cox Automotive’s Can-Do, Caring Spirit Really Shines

07.09.2015

I couldn’t believe what I’d heard. I asked my assistant to read the e-mail again. 82,195 pounds of food. $100,000. 468,496 meals. It took me a moment to process these impressive tallies from Cox Automotive’s just-completed Drive Away Hunger campaign. I thought about how just one of those meals would keep a child from going [...]

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3 Reasons Efficiency Will Ultimately Drive New Car Profitability

06.24.2015

It’s probably not the best time to talk about problems in the new car business. After all, dealers have been enjoying what may go down in history as unprecedented success in new vehicles. Sales have been on steady uphill climb since 2008, and everyone expects the current year to end on the same, if not [...]

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When Should You Increase Your Inventory?

06.16.2015

  Following is an email from a friend and customer about increasing his inventory as we enter the summer slowdown. Good afternoon Dale. Hope all is well with you. Last month was a down month for my used car department. Sold 62 at $1200 per copy. I had around 15% of my used inventory as [...]

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3 Ways To Turn Your Average Inventory Cost Into Advantage

06.10.2015

It’s becoming more critical for dealers to pay close attention to the average cost of their used vehicle inventory. I say this for three reasons: First, today’s market can lead dealers to believe that managing your average used vehicle cost isn’t important. After all, cars are more expensive and, if you want to play in [...]

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A Case Of One Step Forward, Two Steps Back

05.29.2015

Mistakes happen in used vehicles. Simply put, there are too many things that could go wrong, for everything to always go right. That’s what makes the following story from a used vehicle manager so troubling. Last December, the manager made a decision to stock up on inventory. He had no choice but to acquire the [...]

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3 Ways To Boost Used Vehicle Profitability While Selling More Cars

05.28.2015

  In its 2014 report on dealership financial performance, the National Automobile Dealers Association (NADA) highlights a disturbing trend in used vehicles. The NADA report notes that franchise dealers enjoyed a 6 percent increase in used vehicle sales compared to 2013—an increase similar to what dealers saw in 2013, compared to 2012. Yet, net profits [...]

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A Quick Look At Closing Ratios And “Closers”

05.22.2015

I’ve been asked recently for benchmarks on closing ratios for dealers. The frequency of the question, I suspect, follows the fundamental change in the way today’s new/used vehicle shoppers zero in on a potential purchase. As most dealers are aware, shoppers do the bulk of their homework and research online. On average, they visit fewer [...]

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