Going, Going, Gone?

By now you've heard enough rants about how dealers are mercenary, how manufacturers are secretly (and not so secretly) plotting to sell direct to the public and how suppliers are scheming behind the backs of each of them as if the other were evil. Stories of suppliers selling out their dealer customers in exchange for a manufacturer's endorsement are as abundant as those about dealers selling out

By now you've heard enough rants about how dealers are mercenary, how manufacturers are secretly (and not so secretly) plotting to sell direct to the public and how suppliers are scheming behind the backs of each of them as if the other were evil.

Stories of suppliers selling out their dealer customers in exchange for a manufacturer's endorsement are as abundant as those about dealers selling out their manufacturers to grab a little extra profit. As much fun as it is to chronicle the push and pull of the franchise system and the idiosyncrasies of manufacturers and dealers, there's rarely anything newsworthy in the near ancient tug-of-war over profitability.

But something has changed that is drawing attention these days. It started with General Motors' dramatic slide.

I'm inundated with calls from Wall Street analysts and anxious dealer groups trying to hedge their bets regarding domestic vehicle concentrations in their stable of franchises, and moreover, in their new-car inventories. The calling dealers always seem to be in a panic.

My overriding advice is “never count the General out,” but, I am keeping a keen eye on its resale values. As their residual and wholesale values slide, so go the retail opportunity for new-car dealers.

Another set of figures that I keep close at hand is the profitability of selling programs (i.e., fleet) cars vs. selling new inventory. This is not limited to GM's product sales. I am equally cautious regarding all brands and recommend that all second-tier dealers, import and domestic alike, would profit by a similar vigilance.

Every first generation new-car dealer starts with a fantasy that they will push a few buttons and a shiny new vehicle will show up only to be sold a few days later for a fat profit by a clean-shaven collegiate kid all smiles and enthusiastic about this year's cup holders. But the bloom comes off that rose pretty quickly.

Sometimes the manufacturers pour a little margin a dealer's way, sometimes they take it back. Unfortunately, over the past several decades, the manufacturers needed all of the margin most of the time, and then some.

There's nothing new in that, but I am beginning to see an unprecedented shift to used cars and the dramatic incentives that are being used to lure the market back to new. Dealers with strong used-car skills are dominating. We see it in the rise of “special finance,” while some of it is seen in the heretofore unheard of three used sales to one new that many of the best dealers are showing in their mix.

It seems that the free market of car auctions offers far more flexibility and certainty than the free-for-all of stocking new cars. Viewed at ground level, the auctions are influenced only by a buyer's potential for resale profit. Buyer profit potential is the dominant market driver that other factors rarely can push around.

An auction has no tiered pricing, nor does it care who your floor plan source is. It is unimpressed if you hit your objective last month. The auction has no Wall Street fears to drive it into desperate strategies. Buy a car at auction and you can bet that the guy bidding against you is counting it down pretty much the way you are and that, ultimately, the seller will have to yield to those same dynamics. Everyone is in it for the pure profit potential of the metal in front of them. The used-car market is a dealer's domain and those who understand it are the dealers who can create profits in every kind of market with or without great franchises.

New-car business requires greater faith. Manufacturer retail programs and pricing initiatives reflect the difficulty of juggling the rigors of manufacturing against the uncertainty of the marketplace. Add the complexities and costs of dealering, and the simplicity of the used-car equation becomes alluring to many.

If GM and Ford are going to reverse their current slide, they would do well to consider that used cars, in many instances, conquest many more real potential new-car customers than all the Asian brands put together. After all, customers of used cars in domestic franchised dealerships were literally theirs for the losing.

Peter Brandow is a veteran auto dealer in Pennsylvania and New Jersey.

TAGS: Dealers Retail
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