Tuesday, August 11, 2015

Why Hondas Cost More Than Other Cars

When you buy a Nissan, Toyota, Ford, Dodge or any other low to medium priced car the dealer’s markup is much less than the markup when you buy a Honda. Yes, Hondas are better than many other makes. They score above average in quality, reliability, and low maintenance, but there are quite a few makes that are as good and maybe even better. Honda dealers sell you their cars at a higher price and profit margin than any other low-to-medium price make dealer because of something called the Honda Dealer Advertising Covenant.

This document is a contract that all Honda dealers must agree to and sign or experience huge financial penalties which would put them out of business. As a consequence, I’m aware of no Honda dealer in the USA that does not abide by the Honda Dealer Advertising Covenant. The key language is “ADVERTISED PRICING CANNOT BE BELOW DEALER INVOICE.”

You may be thinking, why should a rule stating Honda dealers cannot advertise below their cost be such a bad thing? After all, why would any car dealer want to advertise and sell cars below his cost? The answer is that Honda dealers’ (and all make car dealers’) factory invoice IS NOT HIS COST. All auto manufacturers “pack” profit into the factory invoice when they bill the dealer for their cars. This hidden profit comes in many forms such as “holdbacks” which are 2% to 3% of the MSRP and is standard for all manufacturers. A new Honda with an MSRP of $20,110 has an invoice of $18,753.68. Holdback is $385.80 and this amount is “kicked back” to the Honda dealer every 30 days. At this time this Honda has $1,200 in “dealer cash” packed in which is a secret rebatethat customers don’t know about. There is also something called the “Honda Transfer Balance” which is essentially another holdback profit kicked back to the Honda dealer. The sum of this hidden profit contained within the “invoice” is $1,875. The true cost of this Honda to the dealer is $16,878.53.

The average car has an MSRP of over $35,000 and holdbacks and other kickbacks on higher priced cars are even greater. Depending on the time of the year, the model, and the MSRP kickbacks to dealers can easily amount to well over $4,000. This means that all Honda dealers are required by the manufacturer to advertise their cars with a minimum built in profit of between $1,500 and $4,000 and even much higher.

It’s no surprise that Honda dealers love this advertising covenant. All of their advertising has a good profit built into the price. No other car manufacturer has this requirement although Toyota is thinking about changing their advertising covenant to copy Honda’s. At this time, all other make dealers are highly competitive in their advertising. This is good for you, the car buyer, because competition between car dealers keeps the price down.

The average profit on a new car is much less than many people think. Of course it varies by make, supply and demand of each model, and the time of year. The average profit on a new car, after all variable expenses, is around $1,500, but that is an average. Profits on each car sold by a dealer vary widely from zero (or below) to $10,000 and higher! Almost all cars are still sold by negotiation (haggle/hassle) and the shrewd negotiator gets the low price and others pay much higher.

What this means for Honda dealers, is that they have a huge “leg up” over all other make cars being sold. The best price that anybody can get on a Honda is the invoice which already has a higher than average profit “baked into it”. No matter how badly a Honda dealer wants to sell a particular car, he is prohibited from advertising it below a pretty good profit margin. This is not to say that a Honda dealer cannot sell the car below invoice, but it’s highly unlikely that he would. The main reference that buyers have for determining a low price is advertising and the floor on all advertised Hondas is fixed by Honda, the manufacturer. Only buyers who know about the Honda Dealer Ad Covenant and also know that the factory invoice has lots of profit hidden within it are likely to even ask for a discount from the advertised price, and certainly not when the dealer can show you his “invoice”.

I know very little about anti-trust law and I’m not even an attorney. But as a car dealer for many years, I’ve always marveled at why Honda was able to “get away” with this. I copied and pasted this excerpt from the website for the Federal Trade Commission: Price Fixing

Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.

Honda dealers compete with each other much more so than they compete with other make dealers. I’m a Toyota dealer and other Toyota dealers in my market are my most intense competitors. Most car buyers make up their mind which make car they want to buy and then compare prices among dealers of that make for the lowest price. I don’t understand why the Federal Trade Commission does not consider Honda’s Advertising Covenant PRICE FIXING. I understand that it is the Honda manufacturer that “forces” their dealers to advertise artificially high prices but the net negative effect on the Honda buyers is the same as if it were collusion only among the Honda dealers. Isn’t it the consumer that the FTC is supposed to be protecting? If I had to guess, I would say that the Honda dealers strongly influenced Honda to adopt this clause in their advertising covenant. It benefits the dealers and does not benefit Honda at all. In fact, one could argue that it harms Honda because selling Hondas at artificially high prices should reduce the total number sold. I wrote above that Toyota is considering copying Honda and Toyota dealers are strongly encouraging Toyota to adopt fixing the minimum advertising price at dealer invoice. Can you imagine the negative effect on car-buyers if all manufacturers followed suit!

You may have seen in the news last week that Lexus will begin a pilot program this January with their dealers posting their lowest selling price on every car they sell. Eliminating the haggle/hassle negotiation process has been on the minds of a lot of manufacturers and dealers. Old habits are hard to break, but most everybody agrees that the current way cars are sold is a “dinosaur” that must be replaced. A few car dealers around the country have made this move, including me. I changed to posting my lowest price on all of my cars 3 years ago and it’s made my dealership very successful and my customer very happy. I outsell all single point car dealers between Orlando, FL and Ft. Lauderdale, FL…about 300 miles. I’m the only one-price dealer in this area and I attribute a lot of my success to this fact.

Why do I bring this up when the subject of this article is “price fixing and the Honda dealer advertising covenant”? If I were a Honda dealer, or if Toyota copied Honda’s advertising covenant (as is being considered), I could no longer tell my customers what my low selling prices are! I would be forced to raise my prices on most of my cars because my lowest prices I now post are mostly below invoice. Currently I post all of my prices on all of my new and used cars online. If I had to abide by the advertising covenant most of these prices would be a violation of the advertising covenant.

Hopefully sane heads will prevail and Toyota will not adopt Honda’s ad covenant and hopefully the Federal Trade Commission will take another look at Honda’s advertising covenant to reconsider if this is a bad thing for the consumer

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