I used to think that the business of business was making money. Lately, with employee pricing and all the hoopla over profitless volume, I'm beginning to wonder.
Is there something more powerful than profit before which dealers bow in awe? Clearly auto makers and national dealers' councils think so It is called volume.
In July, record numbers of dealers sold more units than they had in a long, long time. Their stores looked like the circus had come to town. There were tents, balloons, prizes and hot dogs. Customers were all over the place. Cars were coming and going in every direction.
Everywhere you looked there were smiling faces: dads happily peering under hoods, moms joyously wiping ice cream from babies' faces and teenagers checking out car sound systems on the showroom floor.
Sounds great, doesn't it? Yes if you're the bank, the hot dog vendor, the classified ad salesman and the company that sells aftermarket anything. It's especially great if you're an auto maker getting almost full pop for every taillight crossing the dealership curb.
But woe to the dealer who's watching the bottom line and woe to the comptroller managing cash and flooring lines. After all those deliveries, thousands of dollars of dealer cash leaked out the back door.
Let me explain.
You sell something to someone who pays part of it with a trade-in and part with factory incentives, but less of it with cash than enough to cover the full cost of the thing sold.
Say you stock a vehicle for $30,000 and sell it for $35,000. You might think you've made a fat profit. But suppose the customer paid that $35,000 with a $10,000 trade, $5,000 down payment, a $2,500 factory incentive and financed the balance.
As that car crossed the curb you've got a pile of paper, a depreciating $10,000 trade, $5,000 in cash and a floor-plan debt of $30,000 due tomorrow. Short take, you need to pony up $25,000 of your cash to carry the deal until the finance contract is funded, the trade liquidated and the factory incentives earned and paid.
Do that 50-100 times a month, and soon you'll see your capital quickly becoming an interest-free loan for your factory. Add the percentage of today's deals that involve special finance (taking a few weeks to fund), and the image quickly turns from fun to funeral.
I love volume as much as the next guy. But lately my factory has lost touch with how I make money.
Auto makers' latest round of incentives is so devoid of compensation for sales people and dealerships that I'm convinced that those who care to think about it are convinced that we make money in spite of new car sales not because of them.
I am now asked to order a 5-month supply of new inventory to come close to hitting the incentive levels that put me in the game.
What's more, my factory partners are pushing the line that I've got a “fair-share obligation” to order vehicles above my allocation to help them to stay ahead of their goals. Suffice to say, most of the extra vehicles are not the ones that are in demand.
I'm now fighting to get the leftover, hard to move, “fair share” inventory shipped from the back of storage yards around the country to my store where I can sell them. A day after I take my “fair share” they are drafted onto my floor-plan account. So, the manufacturer's problem becomes my problem.
Sure I'll eventually get the extra “in transit days of interest” paid back. Meantime, I've used up flooring line and in the case of transition from 2005 to 2006, you can bet those back-of-the-yard cars are not the newest of them.
I usually celebrate the differences between retailers and manufacturers and boo those dealers who want to look and sound like bankers and factory guys.
But there is a line of difference. I am a dealer and do the tough work of moving, managing and marketing cars. But when my manufacturer demands addicted, frenzied, “cuckoo-for-coco-puffs” dealer attitudes about volume, the line has been crossed.
Peter Brandow is a veteran auto dealer with stores in Pennsylvania and New Jersey.
