Monday, June 21, 2010

Car Dealer Economics

Recently I purchased a car and came face to face again with the befuddling economics of car dealerships.  My brother, who is an expert car negotiator, helped me out a lot doing research and negotiating with them in the crazy, we-aren't-ever-going-to-see-each-other-again style necessary not to get ripped off at the dealer.

The car dealership that we were working with had masses of cars on his lot.  A co-worker of mine said his buying power was increased because while he was haggling a big rig came onto the lot full of cars to unload and it was so packed that there literally was nowhere to put the newly arrived autos.

While every other industry in the world seems to be moving to a just-in-time model or some sort of centralized distribution warehouse (Amazon), the car dealer industry uses the sad, old-fashioned methods of packing their lots with autos and then cutting each others' throats to get an incremental sale.  Rather than having the exact car you want by having you order it and wait for its arrival (BMW still does this, at least according to a friend of mine who recently bought one, and Scion does this, too) - my dealer just tried to sell me the closest one to what I wanted on the lot.

My brother, being a crazed car buyer, actually uses the technique of 1) determining the car you want 2) asking for a different, similar car to what you want that you KNOW the dealer doesn't have on the lot 3) threatening to walk away because they don't have the car that you knew they didn't have in the first place and instead having to "settle" by having them offer you to take the car you wanted in the first place, for a discount.

One major problem with this methodology is that the car buyer (me) leaves this experience with a terrible feel for the brand rather than a positive view, based upon interaction with the dealer.  This sort of marketing is suicide given that a repeat customer is critical to the long-term success of a car brand.  The second major problem is that having all this inventory on the lot causes all the dealers to drive down prices since they need to move these cars quickly which isn't the most profitable outcome.

In today's Wall Street Journal there is an article about car dealers and the tough times that they face today called "Driven To Despair".  The article discusses how dealers are trying to stay afloat when sales are down and it is more difficult to finance all the inventory sitting on their lot.  Then they interviewed a Chrysler dealer named Mr. Bragg:

Mr. Bragg then did what many dealers have been forced to do: "I took my own money out of the bank and bought cars with it," he says, "I was out of options".
You can see that easy financing at low rates was prompting much of this economically insane behavior.  Many other businesses would not see it as a "last resort" to finance inventory out of their own cash flow; only in the car industry was it viewed in this manner, because distorted economics shielded dealers from the obviously depreciating assets gathering dust on their lot.  Maybe if dealers had to finance the inventory they'd only keep a few demonstration vehicles on hand, and then customers would need to order to obtain what they'd need, or just keep popular models in popular configurations immediately available and special order the rest.

Cross posted at Chicago Boyz


Dan from Madison said...

I always feel like I am entering a third world country when I step onto a car lot. What a stupid way to sell something, and everyone always feels bitter and used afterward.

Jonathan said...

What was wrong with your Altima? It was just getting broken in.

Carl from Chicago said...

Ha ha. The 1998 Altima seemed like it was leaving on a high note. My brother wanted it for his kid and they were super excited to get it.

I bought a 2010 Altima :)