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Monday, January 30, 2012

Car Dealers’ Bogus Lowest Price Guarantee


On my weekly radio show, I introduce myself as “the recovering car dealer”.  I say this because many years ago I employed many of the same unethical and deceptive advertising and sales practices as a lot of dealers do today. For a lot of reasons I won’t go into now, I finally “got it right” and in many ways, like a recovering addict, I’m preaching integrity like an addict preaches sobriety. At an AA meeting what lends credibility and authenticity to the message is that it’s coming from those who have “been there and done that”. Unless you've hit the bottom and struggled back to sobriety, you can’t really assure another addict that it can be done. An ex drunk or drug addict also knows all of the “tricks of the trade”. He knows how he deluded himself into believing he was not addicted. He knows how he rationalized his behavior as being acceptable and how he blamed his family and friends for not understanding him.

Years ago, I advertised a $500 lowest price guarantee. I did this for several years but I only paid the $500 out once. It wasn’t because nobody ever beat my price. It’s impossible for any retailer to always have the lowest price. I began to feel nervous because I never did pay out the guarantee. I was the first car dealer that I know of to come up with this idea. I wasn’t sure how the regulators would look upon a guarantee that was never paid out. The regulators know that car dealers are competitive and that no one dealer always sells his cars for less than his competition. If that were true, there would be only one car dealer of each make in a market. I instructed my sales managers to be sure and pay the $500 to anyone who bought a car from another car dealer because he beat our price. It was only after practically threatening my managers that we finally paid just one $500 guarantee.

What I learned from this experience is that it’s against “the nature of the beast” for a car salesman, manager, or dealer to admit that they lost a sale to a competitor. They will rationalize, ignore, or even lie to avoid confessing that they lost the sale. My lowest price guarantee was actually fair by today’s standards. We had a printed guarantee form that showed our price and left a blank for the other dealer’s price. We kept a copy and gave a copy to the prospective customer. Our conditions were that the customer return with a signed buyer’s order from the competitor and allow us the right of first refusal. This is what makes paying this guarantee virtually impossible. No competitor is going to give a prospective customer a final price knowing that the customer will take it back to the other dealer for a chance to beat his price.

Today, these dealers with the lowest price guarantees have raised the ante to as much as $3,000 or, if you can beat their price, will give you the car free! And they’ve added another condition which makes it totally impossible for you to ever earn their guarantee. In the fine print, this condition is “dealer reserves the right to purchase the exact vehicle the competitive dealer offers to sell for a lower price from that dealer”. What this means is that unless the dealer’s competitor agrees to help the customer “steal” the business from him by selling that same car to him, the dealer offering the guarantee is under no obligation to honor that guarantee. Take it from a guy who has been a car dealer for 44 year. If a competitor called me and said, “Earl, I’ve got Mr. and Mrs. Jones in my showroom. They’re the folks that you gave a price of $19,766 on this VIN number Camry. I can’t beat that price, so please sell me that same car for the same price so that I can sell it to Mr. and Mrs. Jones. If you don’t, they’ll buy the car from you and I’ll have to pay Mr. Jones my $3,000 lowest price guarantee. And I know you wouldn’t want that to happen to me, your competitor. What do you say, Earl?

The real reason for the lowest price guarantee is to catch car shoppers off guard. They assume that the prices they are being quoted are the lowest in the market. Or else, how would that dealer dare to offer $3,000 if they beat his price or even pay for the car? By assuming that they are getting a good price they are less likely to shop and compare it. Repeat after me: “I SWEAR NEVER TO BUY A NEW CAR WITHOUT SHOPPING AND COMPARING THE PRICE WITH AT LEAST THREE CAR DEALERS”.

Do you agree with my premise that it’s impossible for any retailer to always have the lowest price? Then it would logically follow that dealers offering this guarantee will have paid out a few. I have a guarantee for those dealers. Mr. Dealer, prove that you’ve paid your cash guarantee to a customer who beat your price on a new car sale and bought the car from your competitor, and I’ll donate $500 to your favorite legitimate charity. To prove this, all of the paperwork will be submitted to an arbitration board of three CPA’s, one chosen by you, one by the customer, and one by me. To avoid you “setting me up” this offer is restricted to sales from the date of this column, 1-30-12,  back one year.

Monday, January 23, 2012

Ways Dealers and Manufacturers Deliberately Distort Selling Prices


Before 1958, there was no such thing as a manufacturer’s suggested price (MSRP) on cars. We can thank the late Senator Mike Monroney for changing this with what has become known as the Monroney Label. Congress passed this into law on July 7, 1958 with severe penalties for violating the law. A dealer or manufacturer found guilty of removal or alteration of the label can be fined up to $1,000 and/or imprisoned for up to one year. It may be removed only by the purchaser for the vehicle.

The purpose of the Monroney label was to give consumers the ability to compare prices between different dealerships on the same make, model and equipped car. If you were shopping for a new Chevy Impala with power steering, power brakes, AC and other specified options, you could compare “apples and apples” at several different Chevrolet dealerships and make your buying decision on which gave you the biggest discount from MSRP.

Unfortunately, like so many well intended consumer laws, this law is no longer enforced. I do a weekly mystery shopping investigation of competing car dealers in South Florida and I know of at least one dealer that removes his Monroney labels and replaces then with his own retail price. The regulators don’t know about this and they don’t seem to care. Virtually all of the dealers add their own label next to the Monroney label to artificially increase the suggested retail price by thousands of dollars. The dealer label is disguised to resemble the Monroney label and, being adjacent, many customers assume it’s the official MSRP. More often than not, customers never look at the Monroney label on the car they buy. This means that you probably can’t shop and compare the car you want by discounts from the retail asking price which is what the U.S. Congress intended with the Monroney label. 

But what about comparing the dealers’ profits by measuring his markup above cost? You can find out what the invoice is on the car you want to buy very easily. This information is available on the web and, strangely enough, many car dealers will gladly show you their car’s invoice. The reason the dealer will willingly show you his invoice is because it does not reflect his true cost. In fact, it reflects thousands of dollars in profit on the average. This is where the manufacturers join the conspiracy. The manufacturers add thousands of dollars to their dealers’ invoices which they subsequently “kick back” to the dealers monthly. You probably have heard the term “holdback” which was the original 1%, 2% or 3% that is added. There are many other additions now including advertising fees, dealer prep fees, interest fees, and extra holdbacks on port installed accessories. The biggest item that dealers get back monthly is “dealer cash” which is a secret rebate on different models that the consumer doesn’t know about. I’ve seen dealer cash rebates as high as $10,000. In fact, there’s a dealer cash rebate known as the “stair step incentive” which can pays the dealer as much as hundreds of thousands of dollars every month. He gets paid an amount per car retroactively on every car he sells in one month if he hits his sales objective. Theoretically, a dealer can sell one car, at or below his invoice, and make an effective profit of tens of thousands of dollars…even hundreds of thousands!

As if all of the above isn’t enough, I haven’t even mentioned dealer fees or dealer “packs”. If you read this column or know me you know that my war against the dealer fee has been going on for 14 years. The dealer fee is just more profit to the dealer that he surprises you with when you sign your paperwork to take delivery of the car. It varies from a low of around $500 to high of $2,500, but there is no legal cap in many states.

I normally wouldn’t mention the dealers “pack” because it’s not something that affects the MSRP or is kicked back from the manufacturer to the dealer. A caller to my radio show last Saturday brought this up and I’m covering it in an abundance of caution just in case others would like to understand it. However, it possibly could affect the price you pay for the car, but not in the same way distorting the sticker price and the invoice does. A “pack” is an amount the dealer subtracts from the profit a salesman makes on a car he sells. A typical pack would be $700. A salesman sells you a car on which the dealer makes a profit of $1,700 but before he pays his salesman the typical 25% commission, the dealer subtracts the pack. The salesman is paid 25% of $1,000, not $1,700 saving the dealer $175 in sales commission expense.  Years ago packs were used by dealers to trick their sales people into thinking they were earning a higher percent commission than they really were. Since then, federal wage laws have been passed that require full disclosure of packs so that sales people do know exactly what their percentage is. However, I’m sure that there are some dealers still ignoring the law and tricking their sales people just like their customers. But, packs continue to exist even though there is no good reason for them. One could argue that the salesman will sell the car for more with a pack than without one, but the dealer and the sales managers generally set the price, not the salesman.

What does all this mean for you when you buy your next new car? Nothing more than what I’ve already warned you about in previous columns. Pay no attention to dealer advertised prices, window sticker prices, or dealer invoices. Never make a buying decision on the size of a discount from “retail” or markup over “invoice”. Make your buying decision by picking the lowest selling price from at least three different dealers on the exact same make, year, model, and accessorized vehicle. Separate your trade-in valuation and financing from the purchase transaction and get at least three bids on both of these too. 

Monday, January 16, 2012

Don’t Pay for Nitrogen In Your Tires


It’s bad enough that gas stations now make you pay to inflate your own tires with air. But at least you are getting what you paid for…air which does what it’s supposed to do and that is to keep your tires inflated.

Many car dealers are now charging customers to fill their tires with “pure” nitrogen. They tell you that nitrogen does not leak from your tires as quickly as air and this means that your tires will stay properly inflated longer before you have to add more nitrogen (and pay the dealer for this). What the dealers don’t tell you is that the air that is already in your tires is mostly nitrogen anyway. In fact, 78% of the air you breathe is nitrogen. Oxygen represents only 12% of the air. The rest of air includes carbon dioxide and other inert gases. I’m not sure what the purity of the nitrogen is that they pump into your tires for $199 (this is not a typo…one hundred and ninety-nine dollars for filling four tires full of mainly air). But, you can be assured that the purity of the nitrogen is not 100% and is probably closer to the 78% that regular air consists of.

Even knowing all of the above, I have to admit that I was curious about whether or not nitrogen could prolong tire live and improve fuel economy because I knew that NASCAR drivers used nitrogen filled tires and I heard that Volvo’s came from the factory with nitrogen in their tires.  I have a BS in Physics from the University of Florida and a Master of Science from Purdue and these kinds of things interest me. So, to find out for myself, my dealership conducted an experiment. We have a fleet of rental cars and we filled two tires of each car with pure nitrogen and 2 tires with regular air. Over the course of many weeks, we measured the pounds of inflation in the nitrogen and air filled tires. There was no difference in the inflations of the nitrogen v. s. the air filled tires. If there is no difference in the inflation, there can be no benefit from nitrogen of better gas mileage or fuel economy.

You may have read my column last week, “Beware the Phony Monroney”. In that column I warned you about car dealers that add a window sticker designed to look exactly like the federally mandated Monroney sticker. This is where you should look for dealer installed accessories and additional dealer markups over MSRP. Often these accessories have a high price but a very low cost. In the case of nitrogen in four tires selling for $199, this is exactly the case. Since air is already 78% nitrogen, it costs virtually nothing to extract nitrogen from the air. To be generous, let’s say the dealer’s cost is $10 including labor. That is a 2000% markup when he charges $199.

Just when I thought I’d seen it all, I actually saw window stickers on a car today from another dealer who had actually modified the Monroney label to show nitrogen filled tires. To do this, the dealer actually had to remove the real Monroney label, make the modification showing the nitrogen tires, and re-paste the Monroney label to the window. Federal law requires that a Monroney label not be removed until the vehicle is delivered to the customer. It also requires that it not be modified. This new vehicle was one we had traded for from another dealer and still had the counterfeit Monroney and the modified real Monroney attached to the window. The modified Monroney looked so authentic, that one of my technicians and my service manager inquired of Toyota about the necessity of our carrying nitrogen tanks so that we could refill these tires with Nitrogen. If this could fool a Toyota dealer’s technicians and service manager, it might fool you too.

This particular dealer also had another charge added to the counterfeit Monroney sticker, a $4,995.00 “Market Value Adjustment”. Most prospective customers think that this is part of the manufacturer’s recommended retail price. They either end up paying too much money for the vehicle or think they are getting more for their trade-in or a bigger discount than they really are. It’s easy to allow someone an extra $5,000 on their trade-in when you have already marked the car up an extra $5,000 over sticker price. 

Monday, January 09, 2012

Will TrueCar.com Change the Way You Buy a Car in the 21st Century?


There’s a new company, TrueCar.com, that was started a little over a year ago by a bright, young entrepreneur named Scott Painter. Scott reminds me a little of Steve Jobs and Bill Gates because he’s extremely bright, ambitious and successful and he’s a “college dropout”. He studied political science and systems engineering at West Point for three years where he was elected class president. Then he won a scholarship to the University of California, Berkeley, where he studied economics for two years. Before he entered West Point, he joined the army and served as a “Spanish Interrogator” for the 82nd Airborne. TrueCar.com is the last of 35 companies that Steve Painter has started. He started his first business when he was just 14 years old, “Scott’s Auto Detailing Service”.

I signed up with TrueCar.com less than a year ago. Their concept is unique and frankly kind of frightening. I had to think about it for a while before I agreed to become a TrueCar dealer. For starters, TrueCar charges the dealers $299 for every new car and $399 for every used car they sell under their program. All other lead generators for dealerships like AutoByTel, Cars.com, and AutoTrader charge a much smaller amount for each lead they give you and/or charge a monthly fee. TrueCar also requires access to your dealership’s computer accounting system because they must verify if you sold a car under their program and the price for which you sold it. This way, they know they will get paid by the dealer and that the dealer charged the TrueCar customer the agreed upon price. Finally, TrueCar pits dealers in all of their marketplaces against each other by posting their agreed upon prices on TrueCar’s website and allowing customers to choose the lowest price. This has the effect of forcing any dealer who wishes to participate to post a price that is lower than their competitors’ or the lowest price they can post.

TrueCar’s sales are soaring. Last year their dealers sold about a quarter million cars. Last month they sold about 30,000 compared to 18,096 in June. With car dealers the relationship with TrueCar is a “love-hate”. They love TrueCar because, if they post a price lower than the other dealers in their market, they sell a lot of cars. They hate TrueCar because, if you don’t post the lowest price, your competitor sells all the cars. Many dealers simply drop their TrueCar affiliation because they don’t want to or cannot sell their cars for such a small profit.

TrueCar not only has a very smart CEO in Scott Painter, but private investors who put up $35.5 million in 2010. You won’t find too many people who will invest that kind of money in a company that doesn’t have a good chance of succeeding. In fact, Scott Painter has raised almost $1.25 Billion dollars including all 35 startups. The investors in TrueCar must have liked his track record of success in the previous 34. As a car dealer, I’m afraid of TrueCar but as an investor, I love them. In fact, I tried to invest in TrueCar but was unable to find an avenue. I contacted Merrill Lynch and was told that there were no investment options available to the public.

Another reason that I’m reasonably certain that TrueCar will succeed is the hysterically negative reactions from car dealers, car manufacturers, state legislatures, state attorney generals, and TrueCar competitors. If you don’t already know it, car dealers have a lot of money and invest heavily in PAC’s and their dealer associations to get politicians elected. The National Auto Dealers Association, NADA, is very powerful, well financed and has great influence in Washington D.C. State dealer associations are also very powerful. Colorado has already banned TrueCar from doing business and Washington is considering it. Car manufacturers are concerned because they fear for the profitability of their dealers. On the one hand, they like dealers to sell cars at low prices because they sell more cars that way. On the other hand, they worry if they sell cars too cheaply because it might cause dealers to go out of business. Honda has instructed dealers that posting prices on TrueCar is a violation of their contractual agreement with Honda. Honda has a provision that prohibits a Honda dealer from advertising a new car below dealer invoice. The states and the attorney generals are attacking TrueCar on flimsy technicalities. One technicality is that they are violating state dealer license laws. This is patently absurd since many companies are providing car dealers with leads and charging for it but they just don’t do it as well as TrueCar. Another technicality is that some states ban third parties from getting commission for referring a buyer to a car dealer. Very few states have this law and this is simply a bad law and could be easily overturned as being unconstitutional. Competitors to TrueCar are also bad-mouthing TrueCar to their dealers. I won’t name any names, but one very large lead provider has been very vocal in providing its dealers with all of the negative hoopla surrounding TrueCar. I don’t blame them because TrueCar is threat to them just like it is to us dealers. Isn’t it amazing that the one entity that not considered by the dealers, manufacturers, state legislatures or an attorney general is the car buyer? No one is has asked what is best for the consumer. I guess that’s because consumers don’t have powerful paid lobbyists.

The only group that is truly thrilled about TrueCar is the consumer, the car buyer. If you haven’t heard of them before now, just click on their website, www.TrueCar.com and pretend to be buying a car. In just a few minutes, you’ll fully understand why car buying will never be the same again. The last huge impact on buying of cars was the advent of the Internet. Dealers and manufacturers reacted the same way they’re reacting to TrueCar. In fact, even today some dealers will refuse to quote you a price over the Internet. Most dealers now understand that the Internet is the wave of the future. About one-third of all cars sold are sold over the Internet today and this percentage will approach 100 within the next 10 years, especially with the advent of TrueCar.

TrueCar has essentially “perfected” the Internet purchase for the car buyer. Before TrueCar, dealers could still “play games” with the Internet buyer by adding dealer and doc fees, switching the buyer to another car at a higher profit, and various other tricks of the trade. TrueCar knows the exact car their customers buy and the exact profit the dealer makes. Why? This is because they have access to the dealer’s financial records through his data management system (DMS). This access is a condition of being a certified TrueCar dealer. If a car dealer charges the customer a higher profit than he agreed to, TrueCar knows it. If the dealer sells the customer a different car, TrueCar know it. TrueCar will drop the dealer from their certified dealer list in their market if they don’t play by the rules. There are two reasons for dropping the dealer. First they are cheating TrueCar’s customer and secondly they are cheating TrueCar who doesn’t get paid their $299 on a new car or $399 on a used.

Some car dealers will simply not be a part of TrueCar, but you can be sure that if another dealer of the same make is a certified member, his prices are lower. I strongly suspect that some dealers will actually collude with their competitors and “fix prices” artificially high. Of course this is a serious violation of a Federal law, the Sherman Anti Trust Act.

Now, I’m not saying that TrueCar is the only way you should ever buy a car. I even have an “ax to grind” with TrueCar. I don’t like the way they allow their dealers to not include dealer fees and doc fees in their quoted prices. They do require the dealer to disclose them separately, but you have to look in the fine print at the bottom of the quotation to find this. I don’t charge a dealer fee but a competing Toyota dealer can show a TrueCar price that is lower than mine which is actually higher than mine when you add back his dealer fee. If the car shopper doesn’t notice the fine print, he could end up going to the dealership with the higher price. In fact, TrueCar ranks the prices on their website without including the dealer fee. This is very wrong of TrueCar and I intend to call them on this. I also think that you should always get at least two other bids besides the TrueCar bid and give the other dealers a chance to beat the TrueCar price. Finally, you should always get three bids on your trade-in and financing. TrueCar can only guarantee that you get the lowest price on your new or used car. It can’t help you if you allow the dealer to undervalue your trade-in or overcharge you for financing.