A history of auto retailing, or how we got to where we might not want to be.
“Transparency” is a relatively new buzz word in the auto retailing.
Dealers are urged to be transparent with their consumers because that’s what consumers supposedly say they want, as if all of them think the same and all of them mean what they say.
Let’s look at transparency in the context of some auto-retail business history.
First, there are various definitions of transparency. True transparency is when the seller and the consumer have the same information and the equal ability to interpret that information.
I broke into the retail auto business in 1970 at Learner’s Sales and Service, a-brand dealership in Rock Island, IL.
Imperials had a 22.5% markup with a 2% holdback. Plymouth Furys had an 18.5% markup with the 2% holdback. Plymouth Valiants and Dusters had 14.5% and 2%.
There was little “trunk money” or incentives paid to the dealer by the automaker beyond holdback. There might have been some build-out stair-step programs around. But as a rule, gross profit was made above invoice with the holdback retained by the dealer.
Some dealers took holdback quarterly, some yearly. The dealership used washout-method accounting whereby the new-vehicle profit wasn’t shown until all trades on it had been sold. This was considered a good way to defer taxes, but otherwise it wasn’t such a smart program.
All one had to do was lose track of where one was in the trade chain and it was easy to make a mistake. You could get tripped up if you weren’t mindful of the true market value of a piece of inventory vs. what the dealership actually had in it. But I digress. Everyone doesn’t find these things as interesting as I do.
Let’s march on in history from a time when gross profit was largely made above invoice, less holdback.
In 1970, sales began to slow. A recession hit. The 1971 Chrysler vehicles were awful. It was the first year for lowered compression ratios and unleaded gasoline. Not only did we lose most of the high-compression-ratio vehicles in model year ’71, we lost the 5-year/50,000 mile (80,000 km) Chrysler warranty.
Insurance premiums had killed the popular performance cars, the Vietnam War was underway and the country was in the doldrums.
President Richard Nixon imposed a wage-and-price freeze, which later came back to bite President Jimmy Carter and the national economy in the butt.
I worked for a salary plus a commission of $10 per car sale and the dealership covered the gasoline for the demo I drove.
We referred to ourselves as “Moral Motors” because we thought it was smart to charge everyone the same margin. We lost a lot of gross profit by offering up the standard discount to everyone, and walked a lot of buyers when we turned down cheaper deals, eagerly gobbled up by our competitors.
We thought we made it up in volume. The dealership started in the 1920s, and the facilities had long been paid for. We had a large repeat clientele due to excellent customer service on the decidedly crappy quality Chrysler product of the time. We also had a robust leasing operation. Yes, we leased cars in 1970.
Our little Rock Island dealership was the largest Imperial seller in the Chicago zone and five guys would deliver more than 100 models some months. In 1972 Nixon repealed the excise tax on cars and the retail business exploded until the oil crisis of late 1973, when things went back in the tank.
But let’s get back to the transparency issue.
Over time, the markup shrunk and the holdback increased to 3%. The OEMs reduced the markup to allow them to raise their wholesale prices without raising the retail prices.
It was a way to take margin from the dealers and retain the money themselves. They did this under the guise of telling us consumers were suspicious of large markups and over-allowances. They said if we kept the shown numbers closer to the real numbers, consumers would be happier.
Something else happened to transform the retail auto business in 1975. Chrysler invented “Buy a Car, Get a Check.” The cost of the rebates and the eventual interest-rate subventions, an eventual consequence of inflation that followed the Nixon wage-and-price freeze, had to come from somewhere.
OEMs included the rebate cost in the dealer wholesale price while continuing to keep the lid on MSRP and the dealer markup to mitigate consumer sticker shock. This was the first time consumers were taking delivery of a new vehicle for a price less than dealers had to pay off at their floorplan lender.
We have seen dealer gross profit gradually move from above-invoice to below-invoice based on a convoluted combination of various types of trunk money that is earned from stair-step sales incentives and other imaginative programs. There also are purchase incentives as well as customer-satisfaction-index payments and additional vehicle incentives based on OEM facility image programs.
This trunk money system is far less transparent to consumers than the old system.
Consumers have no right to know our true costs, anyway. It’s none of their business, any more than they should know what a grocer paid for a head of lettuce.
The information provided to consumers these days is vast. It is anything but transparent. It’s like drinking from a fire hose for them.
There is so much cost information available, even dealers and their staffs have a difficult time interpreting it. Dealers often don’t know their true cost per vehicle until a particular program ends.
The system has evolved to the point of being like a cable TV or cell phone bill: difficult to fathom while pretending to provide all the information. That’s deceptiveness, not transparency.
Auto retailing never was meant to be transparent.
To be sure, there have been distinct improvements in certain kinds of transparency over the last decades, particularly in Truth in Lending finance disclosures and the Federal Trade Commission’s mandated pre-owned vehicle disclosures.
Legal transparency should be followed in both the letter and the spirit of the law. No one should have a problem there.
But auto retailing is a business of negotiation. For those who don’t have the stomach for it, I suggest they find another career. Some people negotiate more artfully than others. People with polish and technique excel.
It gives consumers the option of buying from the salesperson and dealership that provides them what makes them the most comfortable.
To claim transparency while at the same time working within a system that is unnecessarily complex and confusing is duplicitous. Stop using the word transparency. Consumers ain’t buying it. We don’t buy it ourselves.
Let’s get back to artfully negotiating, selling some cars and making some gross profit without claiming to provide something we’re not.
David Ruggles is an auto consultant and former dealership general manager. He can be reached at Ruggles@msn.com.