It's a New World Out There

Consumers have always wanted the deck stacked in their favor, and the Internet gives them a compelling tool to dictate negotiation. General Motors' Saturn business model allowed dealers in their own territories to set prices. Now the only business model that protects dealer profitability is going away. Before the Internet, it was difficult to make money on new vehicles unless the demand exceeded supply.

Consumers have always wanted the deck stacked in their favor, and the Internet gives them a compelling tool to dictate negotiation.

General Motors' Saturn business model allowed dealers in their own territories to set prices. Now the only business model that protects dealer profitability is going away.

Before the Internet, it was difficult to make money on new vehicles unless the demand exceeded supply. The Internet has triggered a free for all on readily available vehicles.

But the profit on the new vehicle is only the beginning of the dealer's opportunity. Most dealers know the most important thing is to get the deal, without over-appraising the trade to get it. Finance and insurance is the real profit center. And the new-car franchise adds tremendous credibility to a used-vehicle operation.

Keep in mind credit issues. Three years ago, about 37% of consumers had a car buying credit score over 700.

Now, the good-credit threshold seems to have moved up to 720, while the number of consumers in this category has fallen due to the economic stress of recent times.

Many dealers advertise to credit-challenged consumers who are glad to pay whatever if the dealer can get them “bought.”

Don't assume every buyer is “Internet armed” and “fast-lane” credit qualified. But it's difficult to determine which customer is a traditional walk in, which is Internet armed and which is credit challenged.

Used vehicles are becoming more and more a commodity, because of the Web. To maximize turn rate, it is essential for dealers to price competitively. The old cost-plus model has been largely discredited, although some dealers still cling to the old ways.

Read Dale Pollak's excellent book “Velocity” for his take on how the pre-owned business has evolved. His company, vAuto, is predicated on these theories. And it is a thriving concern.

I wish I could predict where all this is going to lead, but we are truly on new ground. It seems clear that dealers will be forced to engage on the consumer's terms or be left out. How to make money on the consumer's terms is the new challenge.

A dealer whose costs are too high on a per-vehicle basis just can't compete. Chrysler and General Motors think that cutting dealers will make the remaining ones profitable so they can build ever larger and more expensive monuments to the factories.

But today's reality is that the monitor on the consumer's PC is the new showroom. The big fancy dealership with acres of inventory is a losing proposition. Yet, the OEMs just can't let go. Of course, it's not their money.

It becomes apparent to me that cutting dealerships was largely mandated by the government task force that was trying to make over GM and Chrysler, based on their nebulous understanding of the Toyota model of high through-put per dealership.

When Mark LaNeve was GM's sales chief until recently, he voiced concern about losing so many rural dealers. The idea that consumers will drive long distances because of brand loyalty flies in the face of the new realities. Toyota has acknowledged that the lackluster sales of its fine Tundra pickup truck is largely due to the distances consumers must travel from rural areas to buy them.

Now LaNeve has left GM to pursue non-automotive interests. One of these days, LaNeve, Jim Press or another insider familiar with the dealer terminations is going to write a tell-all book and we'll know the truth.

The idea that auto makers would save appreciable money by closing dealerships is a farce. The idea that fewer dealers will enable them to build bigger and pricier facilities will go nowhere.

Future success will depend on wringing all possible costs out of each transaction, as there will be loads of downward- pricing pressure on transactional gross profits.

The auto business, from the standpoint of dealers and others, is in the process of being reinvented.

Former auto dealer David Ruggles is active with CyberCalc Arbitrage and Advanced Concepts & Techniques. He is at [email protected].

Questions or comments about this column? Send us an e-mail at [email protected].

TAGS: Dealers Retail
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