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Monday, December 28, 2009

CASH FOR CLUNKERS COVER UP?

“Cash for Clunkers” aka CARS, the government stimulus program for the auto manufactures and dealers last August was generally regarded as one of the more effective stimulus programs of the Obama administration. It cost us taxpayers $3 Billion but it sold almost one million new cars. There are arguments on how many extra new cars it sold and how many of those that were sold would have been sold eventually anyway. But, overall, it is generally considered a far more effective stimulus than TARP and certainly a lot less expensive.

What puzzles me is why there is so little media coverage of the fact that most customers who bought new cars under this program did not receive a fair trade-in for their clunker. There was a class action lawsuit filed in New York against one of the largest dealer groups in the country on this point and the Oregon Attorney General has ruled that all car dealers must pay their clunker customers what they received from the salvage yards to which they sold the clunker. Both of these incidences received virtually no national or local media coverage.

In my judgment, the clear intent of the Cash for Clunkers program was that the buyer should receive a trade-in allowance commensurate with the value of her clunker, just like a normal sale with a trade-in would. Unfortunately, the government did not make this abundantly clear and therefore most car dealers took advantage of this “loophole”. Most car dealers allowed hundreds of dollars less than they actually sold the clunkers to salvage yards for. Some dealers gave their clunker customers absolutely nothing for their trades.

I read in the auto manufacturer/dealer trade publication, Automotive News, that the average trade-in allowance estimate for clunkers was $75. Since the government did allow the dealer to keep $50 for administrative costs, this meant that the average clunker customer netted $25. I sold 286 new Toytota in the clunker program and my average sale to the salvage yards was for $445. If this average applied nationally to the one million clunkers, this would mean that car buyers under the clunker program were underpaid on their trade-ins by about $400 million.

One has to ask, why the media is ignoring this at least ethical violation which has cost American car buyers hundreds of millions of dollars. I can think of only one reason and that is the fact that car dealers and manufacturers are among the largest advertisers. Asking the same question of why the NHTSA doesn’t take action I can think of only one reason too. That is that the National Automobile Dealers Association, NADA, is a very powerful lobbying group. They are so powerful that they were able to at least temporarily halt the cancellation of GM and Chrysler dealers by GM and Ford which was mandated under the government bailout program.

The amount that a clunker was sold to a salvage yard for is a matter of public information and should be available from NHTSA under the Freedom of Information Act. If you bought a car under this program, you might be interested to know how much you should have received as a trade-in vs. how much you actually received. I’m working on accessing this information and I will advise all of my readers when I’m successful.

Monday, December 21, 2009

The Six Deadly Sins of Car Salesmen

The internationally renowned research and polling company, J.D. Power, LLC conducts an annual survey of U.S. car buyers to learn what motivates them to buy from one particular car dealer rather than another. Their latest survey of 48,000 recent car buyers discovered that there were six reasons that people chose not to buy from a car dealer.

Surprisingly 49% of people who buy cars, buy from the first dealership they visit. This is a shocking statistic to me because it means that a lot of car buyers are not getting competitive prices from several dealers. This means that they overpaid for their vehicles. Of the 51% of those 48,000 car buyers who shopped more than one car dealership before buying, 21% bought the same make car from another dealer than the first one they visited for six reasons. I’ve labeled these “The Six Deadly Sins of Car Salesmen”.

(1) Thou shalt not be rude to thy customer. In schools for sales people, no matter what you’re selling, you’d think this would be full explained. How could a salesman expect to make a sale after insulting the prospective customer? But, apparently it happens often. One of the most common offenses is male chauvinist car salesmen referring to female customers as “honey” or “sweetie pie” and even telling them to go home and come back with their husbands.
(2) Thou shalt not be dishonest with thy customer. Of course this applies only to the salesmen who are “caught’ being dishonest.
(3) Thou shalt be knowledgeable about thy product. Today’s automobile is a highly complex, very sophisticated computerized machine. Buyers look to the sales person for answers to their questions. A buyer rightfully assumes that, if the salesman can’t even show me how the navigation system works or tell me what the city gas mileage is, why she should believe he’s right about anything else he has been telling her.
(4) Thou shalt not pressure thy customer. Can you believe that car salesmen still haven’t figured this one out yet? Who likes to be pressured? I often drive by car dealerships and see a half dozen or more sales people gathered together in a “pack”, often smoking cigarettes waiting for their prey to drive onto the lot. I wonder how many prospective car buyers just keep on driving after drinking in that fearful scene.
(5) Thou shalt not ignore thy customer. My first reaction to this one is how a salesman, especially in such dire economic times, could afford to ignore anybody that might be thinking about buying a car. The unfortunate answer is that a lot of car salesmen think they can tell just buy a person’s appearance if they can afford to buy a car. Boy is that stupid! I know many wealthy people who dress down because they like the comfort or because they don’t want to be seen as having a lot of money. That guy who walks into a car showroom wearing a Tee shirt, flip flops, and jeans may well be able to buy the whole dealership.
(6) Thou shalt quote thy customer a firm price. You may find this hard to believe, but this is true of 95+% of car sales people. In fact, a lot of car dealerships have a firm rule never to give a prospective customer a firm price unless that customer will buy now. A salesman can be fired for giving a customer a firm price and letting that customer leave the dealership. This is “old school” but still common and it’s very insulting to the customer. When I ask other car dealers why they continue this practice, they ask me “why should I give the customer a firm price so that he can go to my competitor and let him beat it by $100?” What these car dealers don’t understand that this is what the free marketplace is all about…shopping and comparing products and prices so that you can make the best buying decision. If you deny your customer this inherent right, he will not buy from you. If you do give the customer a firm price, you show your trust and often times that customer will return to give you a 2nd chance to meet a better price.

I wish all of my readers a Merry Christmas or I hope you already enjoyed a happy Hanukah and I wish everyone a happy New Year.

Thursday, December 17, 2009

Shame on Florida and Federal Politicians and Regulators

On December 11th [my birthday] the U.S. House of Representatives passed a bill which provides a sweeping overhaul for oversight of financial institutions by a new Consumer Financial Protection Agency. This was in response to an effort by our federal government to improve regulation of our lending institutions and avoid another financial meltdown which came close to bringing us into a 2nd depression.

Before the bill could be passed, an amendment to subject car dealer-assisted financing to some Consumer Financial Protection Agency oversight was withdrawn. This was the result of strong lobbying efforts by the National Automobile Dealers Association. Consumer advocates argued that dealers are the biggest target of consumer complaints to state agencies and have been the subject of a number of lawsuits over financing for consumers.

“The House exempting auto dealers from fiscal oversight is just not right”, said a Consumer Federation of America spokesman Jack Gillis. “Each year millions of Americans finance their second biggest purchase through car dealers, and these consumers deserve the same protection as those working directly with financial institutions.”

We see the same dereliction of duty by Florida politicians, regulators and the Florida counterpart to the NADA, the FADA Florida Automobile Dealers Association. The Florida legislature is lobbied heavily by the FADA not to pass good laws to protect Florida car buyers and the Attorney General will not enforce the ones we already have.

I know exactly what car dealers and political conservatives [I’m both] will say when they learn about this…”We don’t need more government regulations and laws”. However, I have to reluctantly differ on this. It’s easy enough to say that we don’t need more laws and regulations but what we do need is enforcement of the laws and regulations we already have. That’s true, but what happens when you do not enforce the current laws and regulations? We do not enforce them and that’s what got us into this recession. When you see more laws added to the books, it’s because the current ones are being ignored. It may be faulty logic, but making new laws is at least doing something.

If Bill McCollum reads this or politicians like Dave Aronberg who are running for Bill’s current position of Florida Attorney General, I’m talking to you. I’ll describe advertisements by just one car dealer in the PB Post auto classified section. You can see for yourself if you can locate a copy of last Saturday’s paper. If you can’t don’t worry because the same ads run almost every day. You can see similar ads in newspapers [and TV and radio] all over Florida. I gave you an easy one to find because this dealer spends more on advertising in the PB Post than any other. You can’t miss his ads…or maybe you can because you have allowed him to run rampant for years.

Monday, December 07, 2009

Should I lease or buy my next car?

Unfortunately, as with most things, there is no simple answer to this question. However, it is important that you evaluate both options because one or the other usually will have a significant cost advantage.

The most important factor in deciding between a lease and a purchase is the vehicle you choose. If you are buying a used vehicle, you can pretty much rule out a lease as a viable alternative. The reason for this is that banks and other leasing institutions do not offer favorable money factors or residuals on used cars. This translates into you paying more for the lease. Ironically, residuals should be relatively higher for used cars. The residual is the percentage of the depreciated value of the car remaining at the end of the lease. A used car experiences the largest portion of its depreciation when it is driven off the showroom floor. But banks and leasing institutions are leery of used cars because they have to rely too heavily on the dealer for their true condition and most used cars have no new car warranty remaining.

If you are buying a new car, the most attractive leases will usually be with makes and models having the highest resale values. You can check this by comparing the cost of the new car with the wholesale value of a 2, 3, or 4 year old model. A good Web site for this is www.kbb.com, the Web site for Kelly Bluebook. This is how the banks and other leasing companies calculate their residuals. The makes with the higher residuals and resale values are your more popular makes, those that don’t employ excessive rebates and incentives, and those that don’t sell large numbers of cars to rental and leasing companies. Generally speaking, these are mostly your Japanese makes, some European, and even some domestic cars that are in high-demand and low supply like the Chevrolet Corvette or Pontiac Solstice.

If you decide to purchase a new car that has a high resale value which makes it makes it a good candidate for leasing, be sure that you get lease quotes from several banks and/or leasing companies. The money factor (equivalent of the interest rate in a purchase) and residuals will vary. You should shop your financing if you are buying and shop your lease rates/residuals if you are leasing.

Many people think there is a “tax advantage” to leasing. This is not true. You can deduct only that portion of the usage of a car that is for business whether you lease or buy. For a lease that represents part of the lease payment and for a purchase that represents part of the depreciation.

Here are some things to be careful of if you lease: (1) Your insurance cost will be considerably higher. (2) Do not opt for a lease term beyond the time you want to drive the car. You may be tempted by lower payments on lease terms from 60 to 72 months, but don’t do this! You are obligated to pay the leasing company for many more months than you want to keep the car and you will have to pay a very large sum of money to get out of the lease early. (3) Never allow a dealer to switch you from a purchase to a lease at the last minute simply because they offer you a lower payment. This is common tactic to raise the profit on the transaction. Remember, at the end of the lease you own nothing, but after the last payment of a purchase, you own the car so naturally, your lease payment will be lower than a purchase payment. (4) Be sure you understand how many miles per year you will be allowed in your lease without a charge per mile. Most leases are for 12,000 miles per year. If you drive more miles per year, you could be confronted with a very large surprise charge at your lease termination. (5) When you sign your lease, there will be a “fee” commonly labeled a “lease acquisition fee”. Part of this fee goes to the leasing company but part may go to the dealer and is negotiable. Ask him to waive his portion of the lease acquisition fee because it is part his profit on the lease.

The cost of a car is total cost of the car during the time you drove it. If you lease, that is the sum of the payments. If you buy it, it is the total cost of the depreciation plus interest. Of course you have extraneous costs like maintenance, insurance, repairs, and fuel, but (except for insurance), these are the same for a lease and purchase. Too many people look only at the purchase price of the car. A higher priced car with a higher resale or residual value can actually cost you less than the lower priced car.

Wednesday, December 02, 2009

10 New Years Resolutions for Car Dealers in 2010

2009, with the exception for August [Cash for Clunkers] will go down as a 2nd bad year in a row for our economy and especially for car dealers. I’ve been a dealer for over 40 years. I say that because I don’t want those dealers who read this to think I’m “kicking them while they’re down” by preaching redemption. I’m suggesting these resolutions because they can help these dealers survive these bad times and prosper even more when business returns to normal.

(1) Eliminate your dealer fee. We’ve seen some progress in dealers eliminating their dealer fees in Palm Beach County. Palm Beach Toyota and Royal Palm Toyota dropped their dealer fee in June and Royal Palm Nissan dropped theirs in November. This was due, not to a “moral revelation” by the dealer or legislative action but economic pressure. Palm Beach Toyota and Royal Palm Toyota are my two nearest competitors. Six years ago, when I eliminated my dealer fee, Royal Palm Toyota did not exist and Palm Beach Toyota was outselling my dealership by a wide margin. Now I outsell both dealerships combined. Hopefully other dealers can learn from this economics 101 course, Ethical Business Practices Equal Increased Business. Quote your customers the full, out-the-door price. The only additional costs passed to your customer should be federal, state, or local taxes and/or fees like Florida sales tax. This is the generally accepted practice in retailing all other products and services. A price is quoted to your customer when you communicate a price in any fashion including advertising a price in the newspaper, radio or TV, painting a price on a windshield or sign, saying a price over the phone or in person, or giving a price over the Internet. Your “dealer fee” is profit for you. It is not a “fee” and it should be included in your price.

(2) The buck stops with you. You are responsible for the actions of your employees. Your salesmen, service technicians and service advisors are virtually all paid on commission. If you do not police your people and hire ethical people your customers will be taken advantage of. If you are an absentee owner, as most owners of car dealerships are in South Florida are, you have to have someone running your store that knows and cares about what is happening to your customers. Your ignorance of the mistreatment of your customers is no more an excuse than being ignorant of a law when you break it. You may think you know how your employees are treating your customers, but I promise you that you don’t unless you communicate directly with some of them. You cannot rely exclusively on reports from your managers to tell you the truth.

(3) Don’t advertise a car at a price that you don’t want to sell it for. If you advertise a car for a specific price, you should be willing and able to sell that car to as many customers as respond to the ad. If you run out of stock, give the customer a rain check. Also, pay your salesmen a commission on the ad cars. Now most of you don’t pay a salesman a commission if he sells the ad car. What do you think that salesman is going to tell the customer who comes in on the ad? If you run out of that model, you should give your customers a rain check. When you don’t do that, it’s called “bait and switch”.

(4) Don’t insist or encourage your customers to buy and take delivery of their car on the same day. This is called a “spot delivery” in the trade. There are lots of thing bad about this. A car is the 2nd largest purchase a person makes. The customer should be allowed time to reflect and think about this decision. Cars are often spot delivered when the credit has not been approved, especially nights and weekends when the banks are closed. Customer often have to be called back to sign another contract at higher payments, higher interest, and/or higher down payments. This is sometimes done deliberately because customers are often too embarrassed to tell their friends that they really haven’t bought that shiny new car they were showing off. Attorneys in other states have filed class action suits against car dealers and attorneys in this state are working on doing the same.

(5) Give customers who are” just looking” a price when they ask for it. It’s insulting to today’s sophisticated buyers to be told when they ask for the price that they can buy the car for, that they have to make an offer in writing with a deposit first. It’s also insulting when you tell the customer that you won’t give her a price until she’s “ready to buy”. Can you imagine being told this by a salesman at Best Buy when you asked the price of 50” Plasma TV? Your salesmen won’t give prices to your customers because they are afraid the customer will compare his price with the competition. This is what the free market place is all about! Customer should shop and compare. If you treat your customers with respect, integrity, and courtesy, they will return to you an offer you the right to meet or beat a lower price.

(6) Don’t advertise discounts from “dealer list” price. When you mark up the manufacturer’s list price by thousands of dollars and then advertise a discount, you are misleading you customers. The federal government has a law that every new car displays a “Monroney label” [named after the U.S. senator who sponsored this bill] on the window when it is sold. The reason for this law is to give car buyers a fair, even basis for comparing prices between different dealers. By confusing your customers between “dealer’s list” and “manufacturer’s list” you are circumventing the law.

(7) Don’t advertise lease payments that require large down payments hidden in the fine print. Most people lease cars to minimize their monthly payment. When your customer comes in on the ad finds out she has to pay $4,000 cash down to get the lease payment you advertised, it’s just plain wrong. There are some dealers who actually advertise prices with a qualification that the customer pays an additional sum first to get the advertised price.

(8) Do not advertise that you can get anybody financed no matter how bad their credit. This is not true and just plain cruel, especially during these terrible economic times with very tight credit.

(9) Don’t guarantee the lowest price with qualifications that cannot be met. Your qualifications are usually that you “reserve the right to buy the other car from the other dealer who beat your price” and that the customer must have a signed buyer’s order from the other dealership. You know that the other dealer will never agree to sell you that car and you also know that the chances of the customer getting out of the dealership with a signed buyer’s order without taking delivery are slim and none. Dealers reading this, I dare you to show me evidence that you have honored your guarantee with jus one customer. I’ll make you a bet that you have never honored that guarantee.

(10) Don’t offer a minimum $10,000 [or some other high number] for every trade-in. Sometimes these ads, say “if you can push, pull, or drag your old car in we will give you at least $10,000 toward the purchase of a new car. You then mark up the new car so high, you are not really offering the customer anything more than the wholesale value, if that.