By on February 5, 2012


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Another one from the vaults: 2007 to be exact! — JB

I’d like to start this week with a bit of an apology – not for what I’ve done, mind you, but for what I am going to do. Fourteen years ago, I was a flat broke, know-nothing kid starting at the bottom of a small-town Ford dealership’s auto (and light truck!) sales department. The hours weren’t great, and most of the actual minutes were even worse, as Douglas Adams would say. On a monthly “draw” against commission of eight hundred dollars, I didn’t exactly live like a king. Heck, I couldn’t even afford to eat a real lunch. Instead, I’d buy two fifty-nine-cent McD’s cheeseburgers and wander over to the used car department, where “old Frank”, the finance manager for the “used side”, would be telling stories. After forty-plus years in the business, Frank knew all the tales of the car biz, and he wasn’t shy about telling them, no matter how disturbing, slanderous, or just plain obscene they might be. One lifeless Tuesday afternoon, I said to him,

“Hey Frank, you oughta write a book about this stuff.” Frank reacted to this mild suggestion with unconcealed disapproval and what was very possibly contempt, as if I’d suggested that he put a firecracker in the dealership toilet. His lit cigarette – yes, you could still smoke indoors at a car dealership back in 1994 – dangled dangerously out of his stained hand. He “fixed me with his eye”, as the Ancient Mariner did, and replied v-e-r-y s-l-o-w-l-y.

“I could do that,” he said, “but I won’t. I would never write or say anything against this business. I wouldn’t share our secrets, our business, our life, with people on the outside,” and here his glare became quite focused and intense as I shrank back in one of the used car building’s rickety old wire-frame chairs, “and neither… should… you.

As the years went on, I came to appreciate and understand his statement. I arrived at a deep sympathy with, and later a bit of nostalgia for, the business as it once was. Once upon a time, the car business was a real profession, not a dumping ground for low achievers and double-fisted-handshaking douchebags. Those days are gone, and Frank went with them, dying at the end of a short but brutal bout with cancer well before the turn of this century. I’d like to think Frank wouldn’t mind it if I talked about the business now, but just in case, I want to apologize to him, wherever he is. I’m not going to write a book, but I am going to spend some time talking about the business. We’ll cover it all, from the way dealers finance their stock to the tale of the salesman who took a female customer in a Mustang convertible for a “test drive” that ended with the two of them having rather public sexual intercourse on the road adjacent to the service building…. Today we’re going to talk about how a dealership is really organized, and who really makes the decisions.

I feel silly mentioning this at the beginning, but if the discussions on automotive forums are anything to go by, I’d better do it anyway: In the United States, there is an absolute division between manufacturers and dealerships. When you go to a Toyota dealership, you are not dealing with Toyota; you are dealing with an independent business. In many states, it’s not legal for a manufacturer to own a dealership; in others, it’s merely discouraged, but it’s important to understand that the Toyota dealer is not Toyota the manufacturer. This is not the case in most countries, and if the manufacturers had anything to say about it, it wouldn’t be the case here in America either. Independent dealerships are the worst enemy of consumers and manufacturers. They’re outrageously profitable – the number-one profession of self-made millionaires in this country is “auto dealer” – and, as an aggregate group, they are also outrageously crooked, which means that manufacturers simultaneously envy their profit and weep for the damage they do to their brands.

Consider the case of the “Taurus II”. The 1986 Taurus was what they call a “game-changer” for Ford, and it was widely considered to have “saved the company”. Incidentally, that wasn’t true – full-sized trucks “saved the company” in the Eighties – but it was reflective of the esteem in which the Taurus was held by the public. By contrast, the smaller Escort wasn’t all that great of a car, and that’s putting it mildly. When Ford revised the ‘Scort in 1991, changing it from a rather depressing little “Erica”-platform car into a rather decent and sporting vehicle which shared quite a bit with the Mazda Protege, many people were confused as to why Ford had kept the name “Escort”. Why not call it something different, perhaps something which capitalized on the positive reputation of the Taurus? One dealer decided that if Ford wouldn’t do it, he would. He announced the “Taurus II” in 1991 to an extremely positive local response, said local response diminishing in fervor somewhat when the owners of new “Taurus II” automobiles got home and their neighbors said, “Hell, that ain’t nothin’ but one of them Escorts with a Taurus badge. How much didja pay?” As it turns out, the “Taurus II” cost more than an identical “Escort”. Quite a bit more. Thousands of dollars more – for a badge! And here’s the best part – Ford couldn’t stop ‘em! The dealership is free to call its cars whatever it wants! It’s in the law! In the end, the state attorney general clamped down on it as a deception case, to Ford’s massive relief, leading our intrepid if slightly ethics-challenged dealer to move on to his next project, a television ad in which it was strongly implied that he was building brand-new “used cars” at a factory located on dealership property… But that’s another story. The point is that dealers are independent companies and they have very strong protection under the law.

So now we’ve established that dealers are independent of their manufacturers, and fiercely so, the question becomes: Who makes the decisions at most dealers? Well, every dealership has a “dealer principal”. Surprisingly enough in the year 2008, most dealer principals are simply the guy who started the dealership, or that guy’s favorite son. Many dealerships are true mom-and-pop shops, even if they are worth millions of dollars. If you have a problem with a dealership – and “you” could mean you, or it could mean the manufacturer, or even the state attorney general – the buck stops with that fellow. At most dealerships, he has absolute powers. He can sell you a car for any price he wants. He can authorize any repair, or force a warranty repair down the throats of the manufacturer involved. He can call you a son-of-a-bitch, leading you to beat his ass right there in the sales office, as memorably happened to one of “my” dealer principals while I was employed by Ford Credit. There’s no appeal past the dealer principal for dealer-related issues.

Of course, the dealer principal isn’t always some crochety, foul-mouthed old World War II bomber pilot, like mine was when Frank and I sold Fords together. Owning a dealership is so profitable that it leads to owning other dealerships, which leads to eventually forming corporations, which means that sometimes a dealership or group of dealerships has a CEO, who is effectively the dealer principal. These guys are not as interesting as traditional dealer principals, because they usually have no experience either flying bombers or sucking up literal mini-mountains of cocaine, which is another favorite pastime of traditional dealer principals. But they’re still principals as far as we’re concerned. Do not, by the way, confuse dealer princpals with dealer principles. Every dealer has a principal, while very few of them have any principles whatsoever.

Very few dealer principals want to come to the dealership every day. They have condos in Vail, homes in Naples, teenaged prostitutes with lumps of that sweet, sweet coke between their pert young breasts. So they appoint a general manager to do their job for them. The general manager, in turn, supervises the parts manager, service manager, F&I manager, and sales manager. I listed the managers in that order deliberately, because that’s the order of their importance. Selling parts keeps a dealership afloat, servicing cars pays for the dealer principal’s criminal attorney (with special expertise in DUI cases, of course), finance and insurance rakes in the cash, and selling cars… well, that’s a piece of crap. With very few exceptions where markups are insane and customers utterly complacent, drooling morons – I’m thinking Ferrari and Lexus here – selling cars is a money-losing business. Nobody would sell new cars if they didn’t need to. Why do they need to? Because you gotta sell ‘em to finance ‘em, service ‘em, and load ‘em up with parts.

Now, I don’t mean to imply that dealers don’t make money on individual car sales. They do, pretty much every time, no matter what they’re telling you. It’s almost unheard-of for a dealer to lose money on the sale of a particular car. The problem is that once you pay for the big signs, and the television ads, and the DUI convictions of the sales manager, and the DUI convictions of the salesmen (starting to see a theme here?) and the attorney fees, and the settlements with customers and the state attorney general, and the balloons, and the popcorn machine, it just isn’t a money-making business. It was a money-making business back when my friend Frank got started. Back then, cars didn’t have window stickers, women were told to go home and get their husbands’ permission to test-drive a car, and wrecked cars were often sold as new. It was a free-wheeling era that came to a close in the Seventies. In the Fifties, a dealer might expect to hold a 25% markup, the same as the appliance store down the street did, but by 1990, most domestic dealers were selling for between two hundred and fifteen hundred bucks over invoice, a practice which has now been expanded to almost every brand out there, including BMW and Honda. It’s now a very tight business.

The parts, service, and sales managers are engaged in a daily life-and-death struggle to screw each other over and become the next General Manager of the dealership. They’re also constantly embroiled in the little disputes which arise daily between the three departments, usually due to horribly dishonest promises made by the sales manager to new-car customers, or over gross misrepresentations of parts prices by service advisors. “Take the car home today, and if you really rip the bumper off towing that little ol’ Bayliner, take it to the guy in the back and they’ll give you a gold-plated receiver hitch free of charge!” “No, bring that ’73 Fury right on in here! We’ve got plenty of differentials for that old girl, just lyin’ around in parts. Hell, might be fifty bucks, might be free! We might pay you to take ‘em!”

I forgot to mention one fellow – the used car manager. Some dealerships separate the sales of new and used cars. As we’ve established, selling new cars is not profitable – but selling used cars is, and tremendously so. The average markup on a used car is two grand or higher. The customer has no idea what you paid for the car, and as Frank used to say with a smile, “Every used car is different, so there ain’t none of that comparison-style shopping.”

Below all these managers, there are the people who do the actual work, like counter guys, mechanics, admin staff, and humble salespeople such as I was back in 1994. Salespeople don’t make too many decisions, but if they keep their eyes open, they can learn a lot – everything, in fact, from the way manufacturers bully dealers into taking cars they don’t want, all the way to how parts are sold out the back door for big money at your expense. We’ll be covering all that in future weeks – along with the story of that Mustang I talked about before, and the story about how I sold the color-blind guy a wagon with a pink interior, and the day I learned what it means when a female customer has hairy arms. See you next time!

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79 Comments on “Avoidable Contact: Who Really Runs The Dealership?...”


  • avatar
    Vance Torino

    “One dealer decided that if Ford wouldn’t do it, he would. He announced the “Taurus II” in 1991 to an extremely positive local response…”

    If Jack won’t do it, I’ll out said dealer:

    Columbus, Ohio’s own Fred “We’re dealin’!” Ricart.

    A top national auto dealer, this shameless huckster pimped himself out all over TV with a guitar and hokey music beginning with the infamous “dealin’ on the ceilin’” ad in the late ’80s.

    Can’t find that ad online (maybe Lionel Ritchie has something to do with that). But here’s a sample of the pain Central Ohio has endured for DECADES:
    youtube.com / watch?v=v0SYHCtRoH0

    • 0 avatar
      Jack Baruth

      I don’t think Droopy had any bad habits, really. He was probably the only under-50 principal I ever met or heard of who didn’t have some horrible drug issue.

      • 0 avatar
        Vance Torino

        Sorry, reader.
        I deleted an extraneous aside about my suspicion regarding Jack’s Ford dealership before I saw Jack’s comment about “Droopy.”

        I’m pretty sure I’ve met this Droopy, and he’s not a bad guy. Really quiet family man. So no need to identify him online here.

        Droopy, the “principal’s” son, (if it’s the same guy) definitely does not have much of a fighter pilot machismo about him. Also definitely not a coke head.

        (That would be the Infiniti people in upscale Dublin).

        But can you satisfy my curiosity, Jack? Is Droopy’s dad is also “my friend”? [Who has ears to hear, let him hear...]

      • 0 avatar
        DeadWeight

        Jack,

        You’re a credit to journalism, automotive-related or not.

        Thanks for not being just another whore of propaganda and regurgitated press.

        I say this as someone who had a best friend in high school whose father owned a large tri-brand auto dealership (that his grandfather actually started), where we would often hang out on VERY late weekend nights with our network of friends, usually in the service bay area, drinking cheap beer & Mad Dog 20/20 (grape, not orange, damnit),and hear absolutely hilarious stories from my privileged friend regarding his dad’s dealership’s going-ons.

    • 0 avatar
      econobiker

      That Taurus II moniker kind of did make sense given the Bronco II name selling like hotcakes from the mid-80s on (and in an era prior the Mustang II name)…

  • avatar
    Educator(of teachers)Dan

    As my Dad’s old friend Don would say (car salesman of new and used vehicles for many years, he once sold an old lady who came in for a Century a Park Avenue because it had a hood ornament and she needed it to “find the center of the road”… anyway) he loved to tell customers who compalined about price; “The quality remains long after the price is forgotten.”

  • avatar
    Robert Schwartz

    The Taurus II picture above was the work of Ricart Ford, a Central Ohio dealership, although in the opposite corner of the county from Mr. Baruth, and from the clues he has given previously, not the one where he worked.

    The Taurus II scam was outed by Consumer Reports, among others, most of us in central Ohio were delighted that CR had noticed that there were human beings in flyover country.

    Ricart is still there, still claims to be the largest Ford dealer in the [county, state, mid-west, nation, world, or some such], and still has the “Used Car Factory”.

    The John Paul Jones SAAB dealership is on the other side of the interchange from Ricart, and it still has plenty of new SAABs for sale, but its web site has been repossessed.

    Vance beat me.

    P.S. Jack, e-mail me off line, and I will buy you lunch.

    • 0 avatar
      Vance Torino

      I’ll raise you: I will buy him drinks at Happy Hour. Which might be a very costly mistake, although not if V.McB. comes along.

      The Central Ohio Baruth Fan-Club will now come to order…

      • 0 avatar
        Jack Baruth

        I will contact you both.

        The dealership for which I worked was located in Clintonville, OH. Not “my friend”, although I dealt with those folks when I was at Ford Credit and they were good, solid people.

  • avatar
    CJinSD

    Our local Hyundai dealer puts what he calls ‘Bentley badges’ on his Genesis sedans, after prying off the H badges of Hyundai. The ‘Bentley badge’ looks like this: http://media.il.edmunds-media.com/hyundai/genesis/2009/ns/2009_hyundai_genesis_bdg_ns_1_717.jpg
    He told me Hyundai can’t do it because Bentley probably has a trademark on their winged badges. On the Monroney, he charges $500 to do this, but he was quick to throw it in for free if my friend would lease a 5.0R.

    • 0 avatar
      Ltd783

      I don’t think this is quite true. That is the actual Hyundai badge on the Genesis and Equus overseas. Hyundai has been using this badge for years. I don’t think Bentley would have any more standing to sue Hyundai than Aston Martin would to sue them, or Duesenberg, or anyone else who has ever used a winged badge.

      I think the absence of the winged badge on US cars is consistent with Hyundai’s plan to reinforce the image of the Genesis and Equus as Hyundai’s first and foremost, as opposed to creating a luxury line like Lexus or Acura, in the hopes of lifting the prestige of the Sonata, etc.

      It seems though quite a few people who actually buy the Genesis and Equus would rather not shout its a Hyundai, so they swap these badges, or the dealers do too. Our local Hyundai dealer does this for a fee as well.

      • 0 avatar
        Vance Torino

        Last time in NYC, I stopped to get a closer look at a really sharp, black KIA Optima parked in the upper east side. (It’s a great design). The best part was that those horrid black KIA badges were gone, swapped out with an interesting stylized “K.”

        Cool, I thought! KIA finally has enough confidence and balls to go to a logo instead of spelling out the name, the way Toyota did in the ’90s.

        No dice. There is a raging aftermarket for such replacement badges though…
        KIA should pay attention.

        (I once heard that the KIA badge is the same shape as Ford’s blue oval because it made reselling old Festivas easier…)

      • 0 avatar
        Brock

        I can attest to this. When I bought my Genesis sedan the salesman was quick to say they could do the rebadge for a fee. the way he said it made it seem like it was a given I would want them changed. I wasn’t interested and didn’t ask how much but I could see them trying to get $500 for a 20 minute job.

        I have no issue with the H badge on my genesis. I bought the car to deliver myself and my wife from Raleigh NC to Clarksville, TN and back once a month in quiet comfort at 90MPH. If the badge says anything it says “I am not a badge whore, I am a value for money whore”.

        I bought the lowly base model, maybe if I spent 48k on an rspec I would think differently.

  • avatar
    stuntmonkey

    “They’re also constantly embroiled in the little disputes which arise daily between the three departments, usually due to horribly dishonest promises made by the sales manager to new-car customers, or over gross misrepresentations of parts prices by service advisors.”

    LOL. So true to business life in general.

  • avatar
    CJinSD

    I worked for a dealership in 1989, between my first and second years of college. There were stories, but not as colorful. I learned to buy cars for less than pretty much anyone else, and to see where the money is in the finance office, but I never encountered a principal. We were already part of a large multi-franchise, multi-location organization.

  • avatar
    Dynamic88

    This brings back bad memories of working as a car salesman at a GM dealership back in the mid ’80s. The worst part of the job was having to be around other car people.

    • 0 avatar
      CJinSD

      Odd. My own experience in 1989 was that there were no ‘car people’ at the dealerships. There was one guy that road raced motorcycles and appreciated cars that customers would pay for willingly, but to everyone else they were just merchandise.

      • 0 avatar
        Dynamic88

        CJinSD

        I used the wrong term. I didn’t mean car guys in the enthusiast sense, I meant car business guys. IOWs, salesmen, sales managers, F&I guys. The parts guys and mechanics were alright.

    • 0 avatar
      geozinger

      @Dynamic: I had the same experience, twice. Once in the early 80′s at a (of all things) Ford/AMC store and then again in the early 90′s at a Toyota store.

      These guys would be just as happy selling refrigerators or industrial mixing machines instead of cars. They “knew” the product, but could care less about it.

  • avatar
    FJ60LandCruiser

    …so we have just accepted we’re going to be buying cars from career criminals and not the manufacturers in this country, right?

    • 0 avatar
      Dynamic88

      Right. But how does it work in other countries? Doesn’t one still have to deal with salesmen, F/I guys, managers?

    • 0 avatar
      Patrickj

      @FJ60
      Pretty much. I believe it depresses the new car market significantly from what it would be otherwise.

      I started shopping for a new compact or base midsize car this fall. But when someone we knew put their ’03 Corolla on the market, we jumped at it.

    • 0 avatar
      jimbobjoe

      We have though it is changeable. The enormously protective dealership franchise laws are creations of the state legislatures who were lobbied to the point of nauseam by the dealers themselves at some point in history. (Which is of course what those dealer principals did when they weren’t in Vail, they were boozing up our state legislators.) It doesn’t help that some dealer owners, what with their name plastered all over town, take the next step and run for state legislature themselves.

      This is why even the state of Ohio, when it’s buying cars for fleets, *has* to go through a dealer, and can’t buy from the manufacturer.

      Changing this system would require a financial backer willing to invest money in a major campaign to overturn these laws.

    • 0 avatar
      icemilkcoffee

      Is that really true? It seems like Tesla is sold through its own Tesla Stores which are owned by the factory.

  • avatar
    Loser

    Thanks Jack,
    I enjoyed reading this and look forward to more.

  • avatar
    FromaBuick6

    Thanks for reminding me why, when I purchase my next new vehicle later this year, I’m securing my own financing from my bank and hopefully selling my old car to a friend for cheap. I like to minimize the amount of room the dealer has to screw me and I’m not willing to hand over to them a perfectly good old car to them just so they can make another 5 grand ripping someone else off. More and more, I’ve become willing to pay more money to avoid the traditional dealership deceit and douchebaggery.

    Of course, it’s only a matter of time before a car salesman comes in here to tell us how we’re wrong about their profession and how they personally don’t do business that way, or how the customers are also to blame with their unrealistic expectations. If you’re so above-board, why do you immediately jump to the defense of your peers? If it were me, I’d constantly be ratting them out – and probably make a buck taking away their business.

    Speaking of that, Jack, as a Dayton-area resident, I typically also car shop in Cincy and Columbus. I’d love it if you’d rat out some more of the major sleaze balls in Central/Southwest Ohio. I didn’t know Ricart pulled that Escort stunt, but I won’t soon forget it.

    • 0 avatar
      Zackman

      Kings Auto Mall, maybe? Ha ha!

    • 0 avatar
      NulloModo

      I won’t defend blatantly bad behavior like that, but I will defend the industry as it has changed dramatically from the free wheeling days of the 70s, 80s, and even early 90s.

      Are there still some things about the industry that skirt on the side of shady, sure. The local Toyota dealer puts about $2,000 worth of fluff on every window sticker in the form of window etching, paint protection, and other BS, but a lot of that they get forced on them by SE Toyota Distributors who has a lock on the market and puts whatever they want on the cars before the dealers get them. A local Nissan dealership recently got caught double dipping in service – charging customers for repairs then billing that same repair to Nissan as warranty work. There is some corruption in any business, and it’s worthwhile to seek to minimize it, but I don’t share a lot of juicy stories because I just don’t have a lot of juicy stories.

      There was a guy at work with a drug problem, management found out, sent him to get a drug test, and he got fired. A couple people I’ve worked with have gotten DUIs, and they’ve been let go because of it as well. I don’t know anyone who has thrown a customer’s keys on the roof, knowingly sold a car that had been in a wreck (you can even get a free Carfax report on any car in inventory through my dealer’s website), or told a female shopper that she couldn’t take a test drive or buy a car without her husband. None of that is good business anymore (if it ever was) and at the end of the day most people would rather have a fat paycheck than wear gold chains, chomp cigars by the front door, and indulge in rampant misogyny. I’m sure there are still some bad apples out there, but there’s no reason to cast the entire industry in a negative light because of the actions of a few. By and large, most dealers these days aren’t engaging in the antics that the juicy horror stories are made of.

      Will the dealer try to sell their car for as much as they can, and make as much of a profit on your trade as they can, of course, that’s just good business. Most people don’t want to take the time to sell a vehicle themselves. If you want to take less selling it a friend than you would get as a trade, great, you’re a good friend. Trading it in isn’t that different from selling it on Ebay though – in either case the service (the dealer or Ebay) takes some of the profit for facilitating the sale, in Ebay’s case it’s the auction fee, in the dealership case it’s the difference between your trade in value and the eventual selling price. The dealership can make more than Ebay does, but they also assume greater risk – it doesn’t cost Ebay anything if you don’t sell your car. When you trade a vehicle in the dealership has to pay to inspect and service the vehicle, possibly replacing brakes, tires, bulbs and other safety equipment as needed, clean and/or rehabilitate the vehicle if it has damage or needs interior and/or paint/body work, and then pay to advertise it as well as pay someone to sell it. There’s no guarantee the dealer will recoup all of those costs, while some used cars are sold at a healthy profit, others end up sitting on the lot forever and get sent to auction where the dealership is lucky to break even.

      • 0 avatar
        Mark_Miata

        Well said – it can be a hassle to sell a car yourself, especially if you live in a smaller market area or have a car that attracts sketchy buyers. I traded in my Dodge Stealth Twin Turbo rather than list in on Craigslist – the peace of mind from not having to worry about some young kid crashing it on the test drive more than made up for the difference in selling price. The dealer even gave us more than what the online price guides told us it was worth in trade – I don’t begrudge them the profit they made reselling it.

      • 0 avatar
        FromaBuick6

        Somehow I knew you’d respond :)

        The dealer I bought my last vehicle from in Georgia was pretty shady. High-pressure sales tactics, bogus fees and a sleaze ball salesman. Frankly, I’m disappointed in myself for not walking and going elsewhere, but the final deal was decent and I didn’t feel like going through the same crap all over again at another dealer in the next town. I also knew they were crooks before I went in, so that’s my own fault.

        I’d be lying though if I said every buying experience I’ve had was anywhere near that bad. The guy who sold me my old Toyota was great, and I’d buy from the guy who sold my folks their CR-V if the new Civic didn’t suck so hard.

        I actually agree with you on trade ins. Typically, I’d trade the car in, no questions asked. I have zero interest in selling it on Ebay or Craiglist…that’s not worth the hassle to me. And if the trade’s actually worth something, the sales tax credit often negates the difference between wholesale and private party. However, my current car is only worth a couple of grand, and I’d prefer that it goes to someone I know who needs a good cheap car. If there’s no takers, I’ll trade it or dump it at Carmax.

        I understand it is a business, but I’m also still annoyed at the dealer who tried to convince me my Edmunds/KBB/NADA research was bogus and that my practically spotless 10 year old, 90k mile Accord was only worth 2700 bucks, especially after the other dealer that gave me another $1500 for it listed the car for 8 grand. On the other hand, that probably just means the first dealer was a fool.

      • 0 avatar
        NulloModo

        Using your trade as an example, the dealer gave you $4,200 for it. Let’s use round numbers and say that between service and clean-up another $800 gets charged to the car for inspections, fluid changes, replacement of things that look sketchy, and making it look pretty for the lot. Add onto that another $1,000 in pack to cover advertising and overhead, and for the books on the used car side they now have to sell the car for $6,000 to break even.

        So, they list it for $8,000, and likely take somewhere between $6,500 and $7,000 for it after a potential buyer whittles them down, so it’s not exactly a monster deal.

        Yes, a lot of that is just internal stuff, and the dealership is making more money on it than the used car department or salesperson ever sees, but there are plenty of costs to cover between the service guy, the clean up guy, materials to do both of those jobs, advertising costs, commissions for the salesperson and sales manager, pay to the accountants who process the paperwork, etc.

        I would love it if I could take in a car on trade for $10,000, sell it for $15,000, and make commission on a $5,000 gross, unfortunately lots of people dip into that pot before I ever get a chance to.

      • 0 avatar
        FromaBuick6

        I had no problem with the dealer listing my old car for 8 grand. That was above market value at the time, and unless they found a completely clueless buyer, they probably sold it for market value. That car was a cream puff, so maybe the margin was a little fatter, but still fair.

        My whole point was that the dealer that offered $2700 was an idiot. The lowball number was so laughable, I was ready to walk without even making a counteroffer. Instead, for about 15 minutes, I listened to the sales manager’s subsequent ridiculous posturing about why my stack of research paperwork was wrong and how they’d really be taking a bath if they gave me $3200 for it. That ensured that I was fully insulted when I walked and earned the dealer a permanent position on my do not recommend list. I knew the car was worth $4200 and he knew that I knew. Sure he’d have made a killing had I taken the bait and let him bargain me down maybe 500-1000 bucks; instead he blew a sale.

        That car should have been an easy $1000 for the dealership, based on your numbers. Instead they got greedy and shot for $2500, only to end up with zilch. That’s just stupid.

        The dealership I eventually bought from definitely made money off of me (I bought a CPO), but they made a fair offer right up front and were nice to work with. I’d buy there again. I have no problem with a dealer making a profit; I despise getting jerked around.

      • 0 avatar

        So to sale any new cars through a dealer do you think the Franchise must be able to obtain loans from the manufacturer?

    • 0 avatar
      Zackman

      I was teasing about Kings Auto Mall – I’ve bought a few cars there from more than one dealership, and they have always treated us well. It’s a fine facility no matter what brand you are shopping.

      Unfortunately I have known and dealt with a very crooked dealership in the early ’70′s, who later were forced out of business. It’s still a U-Haul facility! I’ve told that story on here and over on Curbside Classic.

      • 0 avatar
        mcarr

        “Let’s use round numbers and say that between service and clean-up another $800 gets charged to the car for inspections, fluid changes, replacement of things that look sketchy, and making it look pretty for the lot. Add onto that another $1,000 in pack to cover advertising and overhead..”

        Or, B.) They just do there “20 point safety inspection” which costs them $0-20, and put it on the lot. And really, are they spending $1k on advertising that one vehicle? I think not.

  • avatar
    Pch101

    “As we’ve established, selling new cars is not profitable”

    That doesn’t make sense. In terms of margin, it’s probably the most profitable side of the house:

    -Dealer “buys” the car, usually with a loan provided by the manufacturer, with virtually no money down

    -Manufacturer then pays the interest on the loan (the “holdback”). If the car is sold quickly enough, then the interest kickback will exceed the actual interest charges.

    -For the slow-moving inventory, the dealer directly and/or indirectly gets extra spiff from the manufacturer in order to move it in the form of incentives

    -And then many of these new car sales will produce additional F&I profit

    That is a recipe for printing money. Once you’ve built the building and incurred the overhead, it costs virtually nothing to park and keep another car on the lot. That unit of inventory that cost little to acquire can then net several hundred or a couple of thousand dollars of net revenue.

    The key to that is to take the fixed costs (real estate, property taxes, insurance, etc.) and to churn as much volume through them as possible.

    On paper, it may not look great, because of the invoice price of the car. But since the entire deal is leveraged, that doesn’t make much of a difference, just so long as the cars that can be sold are sold, and that the manufacturer is willing to pay extra in the back end in order to dump the dogs. When the debt and incentives are considered, the margins are outstanding.

    • 0 avatar
      NulloModo

      New car sales can be profitable, but the margin is a lot lower than used cars. With sites like Edmunds TMV and Truecar, buying services through credit unions, Costco, or USAA, and plenty of freely available information for anyone willing to take the time to Google a bit, plenty of new cars are sold close to invoice, or even below it cutting into the holdback money. The spiffs on slow selling models are often put right on the hood to encourage customers to buy them and move them a bit faster. There can be a little more made on the back end, but almost everyone knows they don’t have to take the dealer financing, and many people already come in with the rate they can get from their bank or credit union. We may be able to match the rate for the customer and still hold a little bit of F&I profit, but as aggressive as many credit unions are being with car loan rates lately, we’re lucky if it’s half a point.

      The fixed costs can also be very high. Insurance, taxes, electricity (those 10,000 square foot showrooms with vaulted ceilings aren’t cheap to keep icy cold when it’s 98 degrees and 90% humidity during the middle of the summer, nor are the halogen lights to keep the lot lit up like daylight after it gets dark), general groundskeeping (an astounding number of license plate screws, razor blades, cigarette butts, bits of plastic, and other unsavory bits of detritus collect daily on car lots), car cleaning (ever noticed how often birds crap on your car or pollen/dirt coat it? Multiply that by hundreds or thousands of cars sitting outside all day), salaried employees (accounting, tag clerks, legal compliance, receptionists, lot porters, maintenance staff, etc), and plenty more add up fast. I’ve heard it mentioned that at my dealership for example we have to clear around $250,000 in profit per month just to cover overhead.

    • 0 avatar
      Pch101

      “New car sales can be profitable, but the margin is a lot lower than used cars.”

      If you ignore the leverage created by floorplan, the holdback and the incentives, then this is true.

      But if you don’t ignore them, then it isn’t. The entire dealership model is driven by leverage. Most people don’t understand leverage and the complete picture of how money moves through a dealership, but if they did, they would understand how dealerships can move inventory at invoice or below and still turn a reasonable profit.

      • 0 avatar
        NulloModo

        Profit is pretty easy to determine – how much more you sell something for vs how much you paid for it. Incentives almost universally go to the customer. Yes, there are occasionally some incentives offered directly to the dealer, but in most cases we’re talking about hundreds per car, not thousands. Holdback exists to help offset interest and other overhead costs, and if you sell something faster, you get to take more as profit, but it isn’t much, and if you’re already dipping under invoice just to get the deal, it gets eaten up quick.

        Moving the metal quickly and in volume helps improve margins, but it doesn’t mean that the margins ever get to be particularly high.

      • 0 avatar
        Pch101

        “Profit is pretty easy to determine – how much more you sell something for vs how much you paid for it.”

        A lot of people don’t understand leverage. You sound like one of those people.

      • 0 avatar
        NulloModo

        If I sell something for a certain price today that will give me $500 in profit, but if I don’t sell it until next month will result in a $500 loss at that same price, I’ve only made $500 by selling it today, not $1,000 against some future loss that may or may not happen.

        The dealer has to pay floorplan interest on each car, so it is in the best interests to sell them quickly, but when the car is sold the manufacturer still needs to get paid in full. Just because we pay $150 per month to keep a car on the lot doesn’t mean that after two months after it’s sold we get to keep the entire $30,000 selling price. If invoice-holdback is $29,500 on that car, and it’s already eaten up $150 in interest charges, selling it at $30,000 only makes $350.

      • 0 avatar
        Pch101

        As noted, some people understand leverage, but you don’t seem to be one of them (or more to the point, you don’t want the readers to understand how your business works.)

        If a dealer had to write a check for invoice and have millions of dollars invested in inventory, then you would be right.

        But they don’t. If I clear $800 on a $25,000 purchase, that isn’t great. But if I pay $200 to borrow all of the money and then clear $800 on my $200 investment, then the situation is completely different.

        Dealerships make money because the money is borrowed. The leveraged returns on the business are substantially higher than the unleveraged returns. The debt makes all the difference.

      • 0 avatar
        NulloModo

        The profit amount is the same regardless of how the car is paid for. In fact, if the dealer bought the car in full and didn’t have to make interest payments, the profit margin would be even better (though there is the cost of whatever the dealer could be doing with that money now tied up in a paid off car).

        We’re still talking about 1%-3% on average profit per new car transaction based on the actual full dealer cost of the car. Sure, if you only had $100,000 to invest you could make more by paying interest only and selling 30 cars than you could by buying 4 $25,000 cars outright, but it doesn’t scale linearly. Just because a dealer can afford to floorplan 2,000 cars doesn’t mean that the market will support that kind of inventory. In fact, paying interest on every vehicle on the lot can easily become a negative when business suddenly slows. If you own the cars outright they don’t become more expensive the longer you sit on them, while if you are floorplanning them they do.

        In your case the $800 profit is $800 profit, no matter which way you slice it. The rest is all games for accountants and book keepers to play, but it doesn’t change the fundamental truth of the situation.

      • 0 avatar
        Pch101

        “The profit amount is the same regardless of how the car is paid for.”

        Are you being disingenuous, or do you genuinely not understand this?

        Let’s put it another way: If Dealership A writes $25,000 checks to put one car on its lot, then it would have one car to sell in order to generate profit on its $25,000 investment.

        In contrast, if Dealership B can use $25,000 to put 100 cars on its lot, then it obviously has 100 cars to sell, instead of just one.

        Now, even you surely must understand which one of those two dealerships is in a better position to generate profit.

        Here’s the clincher: Virtually every dealer acts like Dealership B, and virtually no one acts like Dealership A. There is a reason for that.

      • 0 avatar
        krhodes1

        The leverage model works great as long as sales are steady or increasing. But when the music stops, life gets “interesting”. Like the past several years. That interest just keeps coming, and the highly leveraged business does not have the cashflow to pay off the bank.

        And I disagree about leverage increasing margin – it does not, as the interest paid decreases margin unless the dealership is lucky enough to turn inventory fast enough to make a profit on the holdback – unlikely. But leverage increases the total potential profit, even though margin is lower.

        Note that this is exactly what caused a BUNCH of dealerships to go under in the credit crunch a couple years ago. They could not get floorplan financing, and/or thier outstanding notes were called in , so they were driven into bankruptcy. Things got a lot less friendly once the automakers sold off thier inhouse banks.

      • 0 avatar
        NulloModo

        PCH –

        I see what you are trying to say, I just don’t think it’s relevant to the discussion on margin. Yes, the dealers don’t pay for all of the cars in inventory up front, but they still have to pay the car off in full to the manufacturer when a customer buys it, and they still have to find customers willing to pay $30K or more on average for the product. $500 is $500 profit whether you own the vehicle outright or you are making monthly interest only payments on it.

      • 0 avatar
        Pch101

        “That interest just keeps coming, and the highly leveraged business does not have the cashflow to pay off the bank.”

        That is not particularly true in the case of new car sales, as the manufacturers use incentives paid to the dealer and/or consumer to move the slow inventory, plus the manufacturer pays holdback to the dealer that is sufficient to cover several weeks’ worth of interest expense.

        “And I disagree about leverage increasing margin”

        In strict accounting terms, that is correct. But in real world practice, a car dealer will generally clear net revenue that is several times greater than the cash that the dealer initially laid out to acquire the car.

        The business works fine, just so long as the manufacturers are willing to keep lending the money and pay incentives to move the dogs. It became a problem in 2009 for some, when GM and Chrysler ran out of money to lend and decided to thin its herd of borrowers (the number of dealers that it would carry.)

      • 0 avatar
        Rob Finfrock

        “Are you being disingenuous, or do you genuinely not understand this?”

        “A lot of people don’t understand leverage. You sound like one of those people.”

        So nice to see Pch101 laptop quarterbacking against someone who is actually in the car business (and who, you know, might actually know a thing or two about the subject at hand.) And he’s doing so with his usual level of respect for dissenting opinion.

        Lest we forget, Pch Knows All.

      • 0 avatar
        Pch101

        “So nice to see Pch101 laptop quarterbacking against someone who is actually in the car business”

        Right. Car salesmen are just famous for their honesty, and for candidly explaining how their business operates in ways that can save you money.

        You can either learn from this, or else you can act like a spoiled child and overpay. If there is anyone here who deserves to subsidize dealer profits, it’s someone such as yourself, so feel free to ignore it.

      • 0 avatar
        Rob Finfrock

        Nullo has proven himself over hundreds of posts here at TTAC to be pretty damn upfront to the ins and outs of his chosen business.

        I may deserve your smug contempt, Pch, but Nullo doesn’t.

      • 0 avatar
        Pch101

        Nice case of Stockholm Syndrome, Mr. Finfrock.

        In any case, believe whoever you want. Again, if there is anyone who deserves to remain ignorant and to overpay, it’s you. It’s always pleasantly ironic when it’s the chest-thumping social Darwinists who get suckered.

      • 0 avatar
        Rob Finfrock

        Wow… you must be absolutely surrounded by people in the Real World who just don’t understand your obvious brilliance, to feel you must lash out at anyone who doesn’t agree with you here.

        Bzzzzzt.

      • 0 avatar
        smokingclutch

        Here’s the thing – Nullo isn’t concerned about leverage through floor plan financing. He isn’t being somehow “not above board,” it is irrelevant to him because that’s not how salesman are paid. They’re paid off the margin, which you admit doesn’t change as a result of financing.

        You are right about leverage, but that makes the money for the dealership. That’s why it is a great business to start, if you can get a franchise. There isn’t as much need for capital up front because of it.

        That doesn’t mean you aren’t portraying yourself as a complete jerk.

      • 0 avatar
        ihatetrees

        @krhodes
        “But when the music stops, life gets “interesting”. Like the past several years.”

        +1 referencing J Irons in ‘Margin Call’.
        If that wasn’t your intent, see the best flick of the year.

        Props to PCH for getting the above mostly right…

  • avatar
    GS650G

    I actually saw the ad promoting the Taurus II before. It was quite a ballsy scandal to push Escorts as nearly Taurus cars.

    “all the way to how parts are sold out the back door for big money at your expense.”

    I knew a parts counter person at a dealership who was robbing the place blind selling their parts for cash into his pocket. He made thousands before they caught him and disposed of him. They didn’t press charges because he knew of the crooked stuff they were doing in the back offic.

  • avatar
    readallover

    This reminds me of the major Chevy dealer I worked for, briefly, in 1983. The store bore the owners name and he was there every day. A deeply religious man, I figured it would be a good place to worl. In my defense, I was just out of school, inexperienced in the ways of the world and stupid.
    I learned many things:
    Religion is religion and business is business.
    ALWAYS check out a car before taking a customer on a test drive since the parts and service departments would cannibalize anyhting on the lot if they needed a part.
    They won`t know the car was totalled until their title comes in the mail a month later, and even then most will be too dumb to know what it means.
    Nobody walks off the lot without talking to at least two people.
    People are idiots.
    People are the enemy.

    When I returned a year later to pick up a part, there were only 3 salesmen ( out of the 40 plus that were there when I was) still employed.

    The most successful salesmen were the most miserable human beings I have ever met.

  • avatar
    Zackman

    There’s nothing I will pay extra for on a vehicle if a dealer adds it on. However…IF I buy another Impala and IF it is an LTZ, and IF he wants to add additional tail lights to the required three on a side (two red, middle back-up), and IF he wants to add crossed-flags emblems to the sides and rear AND proper Impala script to the sides as well, we may have a deal!

  • avatar
    Rob Finfrock

    I just discovered “Avoidable Contact” a few weeks ago on Speed:Sport:Life, and thought at the time that the series deserved a shot at the (larger?) TTAC audience. Glad to see I wasn’t alone there!

    For the most part, the dealer can do whatever he or she wants to sell a car. If someone is so dense as to be fooled by a “Taurus II” deal, then so be it. Caveat emptor.

    I may not wish to shop at a dealer caught stooping to such levels, but I don’t begrudge them for trying. There are a lot of suckers out there, and stupidity should be painful.

    I can just imagine the moments of reckoning for those poor Escort buyers… if not in front of their neighbors, then when receiving their registration cards with “ESCORT” displayed prominently as the model. I wonder if any tried to argue with the DMV?

  • avatar
    capdeblu

    This just about says it all about the typical American business. At least its not a ponzi scam like the real estate/mortgage/bank bailouts.

  • avatar

    Jack, your story telling would make Steinbeck proud, and though it’s similarly perhaps Pulitzer Prize prose, it’s just about as pertinent to today’s reality.

  • avatar
    BobinPgh

    When it comes time for me to buy a car I will just buy the new car and nothing else from the dealership. Like everyone else I work hard for my money and why should I pay for someone’s cocaine habit and alcoholism? Thus, I do not want to pay much for the dealer when I want the product. In fact, there are some businesses I will not use because I know they have a lot of overhead that I do not need to pay for. Example: JCPenney. I worked there and found that at the time they had A LOT of managers and all they would do is gather around the store manager and tell him how wonderful he was. Meanwhile, a senior would be going “Is anyone here?”. There often was not a sale clerk in sight. So why should I pay for someone’s career path?

    Also why is auto sales called a profession? A Profession is a form of work that requires long, intensive study at a university. As in Doctor, lawyer, or engineer. You don’t need any beyond high school to be a car salesperson.

  • avatar
    Vmaximus

    I worked for a while as a wholesale buyer. The lowest of the low on the car chart. I bought cars that Used Car Managers were afraid of and sold them to exporters. I did not do very well but I learned that Toyota was the brand to export. I could pay 2x for a Toyota over a Honda or a Nissan Lexus beat Acura and Infinity by 2x.

  • avatar
    Dynamic88

    PCH

    Thanks for your comments. I’m not too proud to admit I really didn’t understand leverage. Now, after reading what you wrote, I think I do.

    If it costs 200 to put a car on the floor, and a few months later I get 800, I’ve quadrupled my investment.

    But it’s really more than quadrupled because if I borrowed the 200 my only real investment is the interest.

    Even with other costs if I make say 400 net on my 800 gross, I’m still making excellent ROI.

    This helps explain why the dealers who constantly claim not to make any money on new cars cried in their beer when their franchises were abolished during the great “culling” a few years ago. I always knew there was something not right about claiming not to make money on new cars and continuing to sell new cars. Now I think I can put my finger on it.

    Like most everything coming out of a car dealers mouth it was a lie -er, let’s say deception.

    • 0 avatar
      Dynamic88

      I goofed up the details a bit – $200 was the cost of borrowing the money to put the car on the floor, not the amount borrowed.

      Still, I think I’ve got the jest of it. Invest $200 to make $800. That’s a lot of leverage. I doubt if most used cars sell for 4 times cost.

    • 0 avatar
      Pch101

      “But it’s really more than quadrupled because if I borrowed the 200 my only real investment is the interest.”

      In practice, it’s even a bit better than that, because if the car is sold quickly enough, the interest is effectively paid by the manufacturer via the holdback.

      Net net, a dealer that can sell cars quickly enough is paying nothing out of pocket for its inventory. The full invoice is borrowed, and the interest on that debt is paid by the manufacturer via the holdback, so the cost of acquiring inventory is nominal.

      Think of a dealership as a sort of parking lot. For a metro market dealer that can move volume, the key to profitability is to get that parking space to be as productive as possible. That means moving the metal quickly enough so that a given space holds many units that generate revenue during a given period, rather than just one.

      If cars can be moved quickly enough, then the holdback itself becomes a profit center, and that piece of real estate (fixed overhead) becomes more productive because of the amount of inventory that it is moving. If inventory turn is poor because the vehicles are undesirable, then the next best option for the dealer is to have an automaker that will pour on the incentives in order to sell those cars and compensate for the slow turn.

      • 0 avatar
        NulloModo

        The holdback will cover some of the interest on the vehicle, unless the vehicle is sold for a price like you see on TrueCar in which case the dealer is already dipping into the holdback and using that as up front discount.

        For most of the cars on the lot (and I can’t speak for what all manufacturers do) the incentives go to the customer. Yes, there are sometimes incentives that aren’t disclosed and go to the dealer, but often these are unit count based (e.g. if you sell 100 Focuses during this three month period you will get a check back for $250 per car). For typical rebates they are listed separately on the contract from the selling price, are fully disclosed, and available to see on Ford.com, so most of the time the customer knows what they are entitled to before they even step into the dealership. They help move the metal and encourage customers to buy, but I can’t take the $2,500 on an Escape, hold it back from the customer, and count it as profit.

        Your analogy of a metro parking complex isn’t far off – the faster you turn the cars the less interest you pay and the more money you make. However, most bigger dealers, including the big chains like Autonation and Sonic, have tens or hundreds of millions of dollars in cash available, so buying cars outright isn’t a problem. All things being equal taking the same amount of time to make $2,000 on the sale of a $20,000 used car is a better margin than making $800 on the sale of a $20,000 new car, regardless of how it was paid for.

        The floorplan model is better for cars that sell quickly, but those are typically cars with higher demand and thus ones less likely to be discounted as much, so the dealer would be making more on those anyway. While there aren’t significant floorplan costs in something like a CTS Wagon that has an average of 2 days in inventory, those charges can add up quick for something like a G37 Convertible that has an average of 262 days in inventory.

        It’s like the people who were flipping houses during the height of the real estate boom and buying multiple properties with interest only loans. If they bought a $100,000 house on an interest only loan and sold it for $150,000 a couple of months later, the total profit wasn’t $150,000, it was $50,000 minus whatever the interest charges and various closing costs were. Not bad money to be sure, but those were the same people whose world came crashing down when the market collapsed and they suddenly had interest only loans on multiple properties that they couldn’t sell for what they paid for them, and they were still having to pay monthly costs for paper ownership of those properties.

        Maybe we are just splitting hairs at this point, but I’d consider ROI to be different from profit margin. If it costs me $200 in floorplan to sell a $20,000 car for an $800 profit my ROI may be 4x, but my profit margin is still just 4%. Home audio speakers have markups around 50% (or at least they did ten years ago when I sold them). Selling a $2,000 set of speakers and pocketing $1,000 is doing a lot better on margin than making $1,000 on a $30,000 car. Especially when you consider that those speakers just sit in a nice tidy box in a warehouse not eating up additional costs while that car is eating up cleaning costs, fuel for test drives, insurance, reconditioning costs for the myriad ways they can get dinged up on the lot, etc.

      • 0 avatar
        Jack Baruth

        I’m sorry to have missed this whole “leverage” discussion: Sunday afternoons are reserved in my house for my son’s Kodaly class followed by a feeble attempt to exercise.

        My opinion: You are both right, and you are both wrong.

        Pch101 is right in the sense that using nearly free money to sell cars is profitable, although if we look at the actual numbers, the cost of floorplanning a $35,000 vehicle for the four months that it is likely to remain in inventory is usually quite a bit more than $200. In practice, holdback usually covers floorplanning expenses and then some… but holdback isn’t paid right away and that can create a cashflow issue.

        But let’s say that we are looking at a large dealer, selling 1,000 cars a year, making an easy $1,000 on each after floorplan expenses and the salesman’s commission are taken out. OMFG THATS A MILLION DOLLARS. What do you have to do with that million dollars? You have to:

        * Pay the mortgage on a $2 million (or more) facility;
        * Cover the salaries of five front office people;
        * Pay the sales manager, who expects to earn $150K/year or more if he is doing that kind of volume;
        * Pay your insurance bill, which is considerable because hey, you are letting people off the street drive (and CRASH) brand-new cars;
        * Pay your attorney, because you are being sued by multiple people at this very moment and you will have to settle with some of them;
        * Pay for every stupid campaign or architectural change your OEM demands;
        * Pay your regional advertising fees;

        You get the idea. Selling cars may be a completely leveraged path to free cash, but the cost of your inventory isn’t the issue.

        So, why would anyone get in the business? Like I said above, parts and service. By selling new Fords, you get to participate in the oddest scheme known to man, just about:

        * A new Ford breaks.
        * Ford sells you the part at a heavy discount.
        * Then buys it back at full retail.
        * And pays you to install it.

        You also get to F&I the vehicles, which is profitable. You get to be a “factory authorized body shop” which means insurance companies will pay you to put Chinese fenders on six-month-old Bentleys.

        Owning a dealership is profitable, but for mainline non-luxury brands in this country, the new car department is often a break-even or money-losing enterprise.

      • 0 avatar
        Dynamic88

        I have a hard time believing that people remain in business while loosing money.

        I also have a hard time believing that much money is made on parts. Our ’04 CR-V has needed exactly two new parts replaced. Two suspension bushings. Assuming that my experience with Honda is fairly typical, it’s hard to see how they’ve made money on parts. We financed through our credit union so all the F/I gal did was say hello. I gotta believe there is money in new cars, otherwise it’s jut not making sense.

        One more thing – all businesses have overhead. All businesses have salaries to pay. etc. etc. etc. You price the product with some sense of what your costs are, so that they are covered.

      • 0 avatar
        Pch101

        “The holdback will cover some of the interest on the vehicle”

        The holdback should pay all of the interest. If your dealership isn’t consistently doing that, then it’s a mismanaged dealership or it is attached to the wrong brand.

        “What do you have to do with that million dollars?”

        You’re attempting to attribute the entire overhead cost of the business to new car sales. You make these statements as if used cars sales, parts and service and F&I don’t generate any costs.

        And fixating on the gross misses the point. A dealer will tie up more working capital into used cars than new cars, and then will generally not get any manufacturer’s support for the used cars that don’t sell. The floorplan for new cars is generally more favorable, and it is floorplan that makes it possible for virtually every dealership in the US to stay in business.

      • 0 avatar
        Jack Baruth

        “You’re attempting to attribute the entire overhead cost of the business to new car sales. You make these statements as if used cars sales, parts and service and F&I don’t generate any costs.”

        Not at all. I didn’t say a word about costs incurred by the back half, from waste disposal to $75,000 manufacturer-specific diagnostic tools.

        A significant percentage of dealerships physicially separate new and used cars.

        I’m not trying to display a lack of respect for your theories, which are developed from some sound prinicples, but please understand that I worked on the floorplan, consumer credit, and dealership sides of this business. I’ve seen dealership balance sheets, I’ve seen how specific floorplans are written, and I have observed cash flow through all parts of a dealership. I’m not trying to explain the way things should be; I’m explaining how they frequently are.

        As far as holdback exceeding finance costs, that happens the majority of the time, but in the final analysis we are only talking about 2% or 3% of MSRP. On a base Camry that’s $450. Incidentally, that Camry was delivered with about a gallon of fuel and the customer expects to test-drive it and get it with a full tank, so right there you can drop $65 off the holdback.

        The car requires a dealer prep. This costs you an hour of the service department’s time, plus a detail job by the guys in the back. You’re now down to $300 net.

        If the car has been scratched or smudged in any way, you need to pay for that. This happens more often than we would like to admit, particularly in the snowbelt.

        You’re going to sell the Camry at invoice because that’s how the vast majority of transactions are taking place now. Your salesman receives $100 for taking the order.

        You now have $200 to advertise the vehicle, pay your people, pay the floorplan, and insure the test drives.

        This isn’t representative of every dealership — there are Lexus shops out there moving 70 ES and RX vehicles every month and clocking $3000 net on each — but it happens.

      • 0 avatar
        Pch101

        “I’m not trying to display a lack of respect for your theories”

        I didn’t offer a “theory”, I explained the math.

        “As far as holdback exceeding finance costs, that happens the majority of the time”

        So you agree with me. Nullo tries to suggest that it isn’t.

        This goes back to my basic point — the net marginal cost of a dealership acquiring an additional unit of inventory is about zero. The dealer will probably lever 98% or so of the new car inventory cost (including the advertising) through the floorplan, then get an additional payment that covers its financing costs over the holding period. The fixed and semi-fixed costs that you reference will decrease on a per-unit basis if the dealership is managed well enough and carries brands that are strong enough to support high rates of inventory turn.

        As a consumer, this is useful information. But most dealers will blow smoke and never explain the implications of how this affects the average person’s car purchases. For someone who understands the circle of floorplan and incentives, it becomes quite easy to see how a dealer will willingly sell a car for relatively low prices. For most vehicles, the price that the consumer pays will not be dictated by textbook notions of supply and demand, but by the negotiation skills of the buyer.

  • avatar
    nrd515

    I cracked up when the “Taurus II” was mentioned in the article! I had forgotten all about it, but I remember it from one of my many trips to Columbus and seeing it, wondering who would be stupid enough to fall for it. I’ve bought my last 3 vehicles from the same dealer, and I see no real reason to go elsewhere, they haven’t done a single thing to irritate me, unless sticking me in a couple of sad loaners Mitsubishi Galant and a Dakota 4×4 with the awful 3.7L “hacked 318″ V6. I actually laughed when they pulled the Dak up to the service writing area. The dealers in Las Vegas were the scumbags of scumbags, the stuff the pulled and tried to pull on me was amazing, both in the way they did it (They did warranty work (badly)without telling me, then denied they did it!), and how they reacted when they got caught (A scam where they “forgot” to charge me sales tax, and had a major temper tantrum) was priceless. The experiences with my present dealer are much less stressful, and at this point in life, less stress is best.

  • avatar
    AMC_CJ

    I was a technician for a major family-owned RV dealer for a little over a year. Right out of college, took the first job I could get.

    RV dealers work a little different, but at the core, much of what you said was fairly true. I’d like to think we were a bit better then some, but I’ve heard the stories from the “ol-days” of sales guys doing lines of coke in the Winnebagos.

    Naturally, the owner was the son of the man who started it, and yes, we was never there. I spoke three words to the guy the whole time I was there; avoided him like the plague all others. His son made his way to parts-manager during my time there. About the same age as me, also with a business degree. He wasn’t a terrible guy, but he would of never had cut it on his own if daddy didn’t own the business.

    Ah, the stories, they could go on and on. I spent just over a year there; overall, I just had too much going for myself to settle for such a crappy job. Because of my time there, now I have about as little respect for a “sales guy” as one possibly could, and I’ve since avoided working for family-owned businesses.

  • avatar

    I sold Hondas out of a trailer on a dirt lot beginning in 1977.When sales took off, the principal built us a new store next to his Ford store. I had a lot of fun, met some great people and a lot of shady types that were on their way down to rock bottom.

    The principal’s philosophy was that he was in the used car business. He just bought most of his used car inventory with new Fords.

  • avatar
    icemilkcoffee

    With cars getting, on the whole, more and more reliable, I wonder how this model of using the service/repair shop as aa profit center will play out in the future.

    • 0 avatar
      supersleuth

      That depends on whether the rubes ever start bothering to read the recommended service intervals in their owner’s manuals, figure out what an obscene ripoff all those dealer service “packages” are, and learn the location of a good independent mechanic.


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