Love, Hate & Incentives

Car dealer Lee Kemp recalls feeling bemused and slightly amused when a customer told him she'd hold off buying a vehicle because she wanted to see if something better than 0% financing would surface. I kidded her, Lady, it's 0%. It won't get better than that. What do you think we're going to do, pay you to buy the car? She didn't crack a smile. Instead, she said, I'll wait for something better. That's

Steve Finlay, Senior Editor

August 1, 2003

5 Min Read
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Car dealer Lee Kemp recalls feeling bemused and slightly amused when a customer told him she'd hold off buying a vehicle because she wanted to see if something better than 0% financing would surface.

“I kidded her, ‘Lady, it's 0%. It won't get better than that. What do you think we're going to do, pay you to buy the car?’

“She didn't crack a smile. Instead, she said, ‘I'll wait for something better.’”

That's one of the downsides of the auto industry's generous incentives, notes Kemp of Forest Lake Ford in Forest Lake, MN.

Incentives lure shoppers into the showrooms. But sometimes the prospect of impending bigger and better incentives puts customers on hold. In between sales surges, dealers feel like they're warehousing vehicles.

“Customers are willing to wait to see how low can we go,” says Kemp, who sells about 40 new and 65 used vehicles a month outside the Twin Cities.

“It's getting to the point where we're just warehousing vehicles for the next big incentive drive. We're becoming order takers in the front, and trying to make money in the back and with used-vehicle sales,” says Kemp.

Yet used-car prices are down, largely because incentives lure many would-be used-car buyers into new cars. Nor do back-end profits always come easy, says Kemp.

“It's hard to sell finance and insurance products like extended warranties when newspapers, in which car dealers are major advertisers, run articles telling readers not to buy them,” says Kemp.

Incentives move metal, but gross margins are eroding. Kemp says the average gross in his region of Ford Motor Co. dealers is $1,200 for trucks, $962 for cars, with a big chunk of such profits diverted to floor-plan costs. Those can run as high as 25% before credits for orders.

Expressing mixed opinions on incentives, dealers see them as bitter medicine with possible side effects. Most agree customers are addicted to them, and there's no rehab program out there. It's reaching a point where some dealers are getting hooked on them, and can't sell without them.

“Absolutely, customers are addicted to them,” says Rich Douglas, general sales manager of DeFouw Chevrolet BMW in Lafayette, IN. “I don't know how auto makers are going to change that. I guarantee you if they took off incentive programs, business would stop.

“You get customers every day who say, ‘Maybe if I wait another two weeks I'll get something better yet.’ And normally they do.

“But overall, incentives have been tremendous. Have they worn out their effectiveness a bit from when 0% came out in October of 2001 and sold everything? Sure. But from a dealer standpoint, I don't see how General Motors Corp. can do much more.

“If you were to tell me before that they'd have 0% for 60 months, I'd have said you were nuts. Well, now you can get rebates and 0%. You don't know where it will end. It will be hard to end. It used to be you sold cars, now you sell programs.”

One of the assets of incentives, says Douglas, is that “they allow you to get people with negative equity in to trade, whereas before you couldn't get them in.”

He says rebates have become so large lately that “in many cases we're not using 0%, we're using the $4,000.”

He's speaking of the Chevrolet part of his dualed dealership. DeFouw maintains separate facilities and staff for the BMW sales operation where the word “incentive” is foreign. BMW does well without incentives because “the luxury line pretty much sells itself,” says Douglas. (Although BMW's current days' supply is 35 compared with 15 last year; still, days' supply in the 60s is considered healthy.)

Michael Baker, vice president-operations of the 9-franchise Bob Baker Auto Group based in San Diego, says, “Customers in the initial shopping experience expect almost all domestic and non-high-line import products to have some sort of incentive.”

He adds, “The larger the rebates, the greater the consumers' perceptions of greater discounts available.”

That's chipped into dealers' net profits-to-sales. It's an average of 2% this year vs. more than 2.5% last year, Baker says.

He notes incentives in one form or another have been around for 15 years. Although he balks at saying consumers are “addicted” to incentives, “they expect them after 15 years of pathetic conditioning.”

Says Bill Stasek of Bill Stasek Chevrolet in Wheeling, “We'd be in trouble without incentives.

“But I certainly don't think we're more profitable because of them. It's just factored into the whole equation. When you're negotiating with the customer, that incentive is front and center. They don't add to our bottom line though.”

He says GM effectively leverages incentives to stay competitive. “I'm glad I'm a GM dealer because they've done a good job getting people into dealerships.”

But the bitter byproduct is that incentives tempt dealership sales personnel to sell price more than product, says Stasek. That can hurt brand image and dilute vehicle value, which is a shame because as an auto division Chevy's vehicle lineup is second to none, he says.

Stasek adds, “Dealers can theorize as to how it can be done better. But I don't know if collectively as a group dealers are prepared for what probably ought to be done, which is eliminate rebates, rollback prices and put the products at reasonable prices.

“It sounds good. A part of me believes it, but I'm not sure I'd have the guts to do it in this environment, either.

“It's a tough decision. People are so used to incentives that they are like the cost of entry. Manufacturers and dealers together created the monster that got consumers hooked on incentives. But the goal is to sell as many vehicles as you can and educate the consumer as to what the cost is.”

Baker suspects most car shoppers perceive that vehicle prices have increased over the years to fund the incentives, making it all the harder to take them away.

He worries that incentives are making most vehicles mere commodities and hurting brand images.

“They're overwhelming the brand image with a distressed-merchandise image,” Baker says.

Incentives along with advertising and dealership sales efforts have kept new-car sales strong, says Paul Taylor, chief economist for the National Automobile Dealers Assn.

He predicts auto makers will cut back on incentives only if the nation's gross domestic product experiences strong growth.

“But manufacturers can't reduce incentives too much,” says Taylor. “Today's consumer shops carefully.”

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