On-the-Point

Staying Power

Erosion can affect every aspect of your dealership, from staff and processes to the very foundations of your business. The Alpha Dawg wants you to keep fighting.

April 1, 2014

In every training situation I have ever conducted, I have repeated the same words to every audience: “In the car business, we don’t have a ‘knowing’ problem, we have a ‘doing’ problem.” It’s amazing how many times dealers, managers and experienced sales professionals will sit in my seminars and say, “I knew that.”

Of course they did. Regardless of what they’re saying, nobody is actually reinventing the car business. I spend more time reminding my students about things they should already be doing than teaching things they don’t know. There is still a basic, proven road-to-the-sale process. There are things customers say and things we say in response.

Through the years, the process has evolved and modernized to become more customer-friendly and transparent. New technology has made more information available and the manufacturers have compressed the profit per unit to unconscionably low levels. Just because our sales departments know how to sell cars, there is no guarantee they’re doing what they know they should.

As members of our local LA Fitness, Debbie and I hit the gym twice a week. We also work out in our home gym between visits. Two years ago, I was still bench-pressing 300 pounds; since my surgeries, it has been a struggle trying to get back to that weight. Still, we’re there every week, lifting and sweating, keeping up the routine. (“Why don’t more people lift weights?” goes the old joke. “Because they’re heavy.”)

January was a miserable month at our gym. From open to close, there wasn’t a single machine or bench you could use without waiting in line. Two months later, all the New Year’s resolutionists have gone and things are back to normal. The January crowd just didn’t have the conviction to see it through. A lack of staying power is endemic to most dealerships. It’s the reason I’ll always be in business.

When I visit a dealership and refresh the training and processes, the increases in profit and unit sales are immediate and measurable. Without exception, the numbers always go up. And they tend to stay high for a predictable amount of time. We are hoping that new digital, on-demand training platforms will help extend those good results for our dealers. Still, in most stores, staffers come and go and processes suffer “erosion” as they gradually get modified until they are no longer effective. In my experience, staffers modify programs, procedures and processes to make things easier for themselves. Rarely is their goal to improve results.

In recent years, our industry has entered into a period of incredible prosperity. Dealers are experiencing record sales and profits and industry analysts are predicting year-over-year increases for the next five years. Statistics from The Detroit News say 2013 went into the record books with the most average new-car sales — 875 units per dealership in the U.S. In comparison, 2009 saw an average of 565 new sales per store. If 2014 meets analysts’ expectations, we could see more than 900 new units averaged over the nearly 18,000 dealerships and their 31,440 franchises.

Wars and Rumors of War
I have been writing commentary in industry magazines, blogs, speeches and interviews since 1988. In the very beginning, when I was a salesman, and later, as a manager, I was a student of the business. When I transitioned into the role of consultant, trainer and futurist, I became I student of the industry.

One thing you can count on — every time, without exception — is that when things get this good, some alleged genius at one of the manufacturers will inevitably do something incredibly stupid and screw everything up. They just can’t help themselves. I think it might be genetic.
I just read the announcement that General Motors has launched an “unprecedented promotional assault” (their words) on the car-buying public. They’re offering increased discounts, incentives and “supplier pricing” on almost every model in the Chevrolet lineup, including Silverado pickups. The sale officially ends at the end of March. History tells us it will be extended and drag on into infinity. In fact, the new program is really an extension of a sale that started in January.

We’ve just experienced some of the worst winter storms in decades across most of the country, including here in the Deep South. There’s no doubt January and February sales took a big hit because of the bad weather. As I write this, they’re predicting new storms will threaten the Northeast and Midwest in March.

You’ve got to admire any manufacturer that’s willing to take the initiative to move some additional units with inventory piling up for reasons beyond anyone’s control. But here’s the blatant stupidity of it: We don’t need these incentives. The vehicles that didn’t sell during the storms will be moved by pent-up demand. The people who stayed home are still in the market.

What I really hate is the language in the “Chevy Truck Month” promotions. The factory-produced tagline is “Supplier Price or Less.” They want to be sure the public knows there might be a couple more dollars they can squeeze out of their dealer, who is already at a disadvantage thanks to the absurdity of this asinine promotion. And the public will know, because they’re backing the promotion with heavy advertising, large-scale direct mail with additional incentives for existing owners and conquest owners, and TV spots throughout the NCAA men’s basketball tournament. “March Madness” indeed.

Will you sell more cars and many more trucks with this promotion? The answer is “Yes” and then “No.” The factory rationale says the promotion will help your dealership pick up additional service business and added F&I revenue. But the word “assault” should tip you off: This is the first volley in a war between the pickup manufacturers.

Do you honestly believe Ford and Ram are not going to fire back? And when they do, Toyota, Nissan and Honda will have to join the fight. … Okay, Honda doesn’t actually have a truck, unless you want to count the Ridgeline, which might be a little more trucklike after its 2015 redesign. Honda will probably have to stack some money on the hood or prop up some leases to stay in the game. If the new Ridgeline gains ground, Hyundai and Kia will be right on Honda’s tailgate.

It’s not inconceivable that even the highline luxury segment could get sucked into the Incentive Wars. First comes the cash on the hood, then the secret money, then the not-so-secret money. (The manufacturer always leaks out information about the secret money.) Then we get the rebates and the subsidized, no-profit leases. GM was already incentivizing truck sales at $3,600 a copy before the current promotion. Since the Silverado redesign was introduced, transaction prices have been up $4,000 to $5,000 a unit over the previous model, which was seven years stale. Yup, dealers are finally making some reasonable profit on truck sales. So, what are we waiting for? Let’s screw it up.

Production tends to spike after training sessions, where managers and staff are reminded of the crucial steps on the path to the sale. Unfortunately for dealers, time and turnover can cause proven processes to slowly erode.
Production tends to spike after training sessions, where managers and staff are reminded of the crucial steps on the path to the sale. Unfortunately for dealers, time and turnover can cause proven processes to slowly erode.
God Bless the NADA
I have always been, and always will be, a supporter and advocate of the National Automobile Dealers Association. They have faced some hard criticism in recent years from some dealers who believe the association was weak on defending their position on some key issues. Well, no one can claim they aren’t putting up a world-class fight in resisting The Consumer Financial Protection Bureau’s move to completely eliminate dealer reserve.

The NADA has drafted guidelines for dealers to standardize — and, probably, limit and reduce — interest rate markups. Their goal is to eliminate any appearance of racial discrimination, or discrimination of any kind, for that matter.

It should come as no surprise that the CFPB finds this solution unacceptable. Rather than endorse the NADA’s guidance, they are pressing on to sanction, penalize and bring down the practice of interest rate markup in dealer-originated loans on behalf of financial institutions. I have been writing about this for years. I saw the loss of rate coming more than 15 years ago, when the first “60 Minutes” reports aired. The writing was already on the wall. I’m surprised it didn’t happen sooner.

Truthfully, I am not convinced that we wouldn’t be better off without reserve profits — if the financial institutions would offer a reasonable flat-fee payment to the dealers who originate and contract the loans. Banks and finance companies would compete to outpay each other to get the business. Flat fees could allow us to make money on people we never made money on before; specifically, people with excellent credit. If we do go to flat fees and it turns out I was wrong, I’ll be surprised. Remember, when I worked in retail, I worked in F&I, and I still teach F&I schools today.

The author believes that supplier pricing and other promotions for models such as the redesigned Chevrolet Silverado are unnecessary. Winter storms created pent-up demand in the market, and Ziegler worries that escalating incentives could trigger a race to the bottom among pickup manufacturers.
The author believes that supplier pricing and other promotions for models such as the redesigned Chevrolet Silverado are unnecessary. Winter storms created pent-up demand in the market, and Ziegler worries that escalating incentives could trigger a race to the bottom among pickup manufacturers.
Whether or not there is a benefit to dealers, the push for flat fees can only be described as a bureaucratic witch hunt, and it’s unfair. Car dealers are easy to vilify, but I have been in the box at thousands of dealerships, and I have never heard a single word that would indicate my dealers have any interest in their customers’ race. We’re trying to make a reasonable profit on every loan. It doesn’t matter who the customer is.

The banks have tier levels set based on consumer credit scores, and they are already heavily policed by the government. A consumer’s credit score is based on their past credit performance and no other factor. People get the rates they qualify for based on risk. We know this because the government requires us to disclose and explain the situation on every transaction at delivery before the contract is signed.

All of that being said, debated and discussed, I will repeat what I have already said in past columns: We’re going to lose this one, and not because we’re doing anything wrong or immoral or illegal. We’re going to be stuck with flat fees because there is a government agenda playing out in the background. It’s purely political.

So God bless the NADA. You might not like the outcome, but you can’t say they didn’t put up their best fight on this one.

Follow the Money
Where do they get these people? I just read the highlights of a recent report from McKinsey & Co., an extremely prestigious consulting firm with headquarters in New York, offices around the world and numerous accolades and awards on their shelves. I know because I spent the better part of an hour investigating them online. I had to be sure it wasn’t some sort of practical joke perpetrated on the more naïve industry press by a bunch of drunken college kids. … Nope! McKinsey is the real deal. P.T. Barnum supposedly said there’s a sucker born every minute. Evidently, the analysts at McKinsey & Co. have found all of them.

The report purports to describe the magic formula that will significantly increase dealers’ profit margins. Well, you got my attention there, Bubba, tell me more! (Okay, the report’s author isn’t named Bubba; it’s Hans-Werner Kaas, senior partner at McKinsey’s Detroit office. Of course, Hans-Werner could be German for “Bubba.” I really don’t know.) He said the average U.S. dealership is showing a 2.2% net return, and if the dealers would implement a few operational changes, they would realize a 4% to 5% net return. Well, now you really got my attention, Hans-Werner. What do you have in mind?

His first solution is “Some of you have got to go.” That’s the Ziegler translation, but the sentiment is clear: There isn’t room for everyone in the lifeboat. Kaas talks about the slow evolution of paring down the dealer body. He doesn’t say clearly whether you’ll have to walk the plank at swordpoint or jump overboard voluntarily. … Now, wait a minute, isn’t this exactly what the manufacturers tried to do a few years ago? Something doesn’t smell right to me here. Who commissioned this report, anyway?

He goes on to point out that our employees and service consultants are ill-trained (read: incompetent), which ignores the fact that we would all have to offer the kind of pay plans and profit margins that convince quality employees to stick around. The dealerships are making record profits, but the individuals working for those dealerships aren’t making it.

Kaas then explains that we need business models that are more in tune with today’s consumer. Apparently, dealers are completely unaware of mobile technology and online shopping. He’s also suggesting online stores and home visits by dealers. Where is this guy leading us?
Here it comes. Hans-Werner also said we need to look at adopting formats that are used in Europe; unfortunately, he says, state franchise laws would prohibit this. Aha! I knew it. Those pesky franchise laws are keeping U.S. dealers from becoming super-successful like their European counterparts. If Hans-Werner is right, we had better just tear up the laws protecting dealers from unfair competition and other mistreatment. If, like me, you have an IQ higher than that of a goldfish, you might suspect that this report was written with a clear, preconceived agenda in mind.

Let’s start with the call to reduce the number of dealers. I agree that fewer dealers would make more individual profit, but who is Kaas or anyone else to decide who stays and who goes? It’s the same question we asked of the manufacturers. Something really stinks here. Here’s another expression: Figures lie and liars figure. Our business is beset by alleged research that is little more than the thinly disguised advancement of some crackpot agenda.

Secondly, hot coffee spewed out my nose when I read the part about state franchise laws preventing the stateside adoption of the incredibly successful European dealership model. The most tangible result would be factory ownership and operation directly competing with their own dealers. That might work for Tesla, which is starting with no dealers and no commitments, agreements, family investment or risk legacy. Most franchises are built on the sweat and investments and agreements made between the dealers and the manufacturers.

Franchised dealers are invested in the manufacturers’ business as true partners. Unfortunately, they are rarely treated as equals. That only happens every couple of years, when the manufacturers get themselves in a jam and come crawling back to their dealers to bail them out. Dealers have always rescued the OEMs when the chips were down. Tesla may never have that kind of safety net.

Like I said, I wonder who commissioned this alleged research. To me, it smells like a setup. Of course, that’s just my opinion. I might be wrong.

Last year, the Honda Accord beat out its old rival, the Toyota Camry, to become America’s best-selling car among individual buyers. The Camry still has the Accord beat when fleet sales are added to the retail totals.
Last year, the Honda Accord beat out its old rival, the Toyota Camry, to become America’s best-selling car among individual buyers. The Camry still has the Accord beat when fleet sales are added to the retail totals.
The Accord Takes the Trophy
You know, we sometimes get lost in the numbers and lose sight of what’s most important. Did you know the Honda Accord took the title as the best-selling car among individual buyers last year? It’s true. I bet you thought the Toyota Camry was America’s best-selling car. It is — if you count fleet sales. According to Polk, U.S. dealers sold 23,000 more new Accords than new Camrys. Add back the fleet numbers and the Camry beat the Accord by 42,000 units.

Can you say, “future certified pre-owned”?

I’m sitting here in my half-darkened office. As usual, I sat down at the keyboard before noon and now it’s 11:30 at night. An empty snifter sits by the keyboard. Two glasses of Remy Martin Louis XIII Cognac went into the production of this article.

Tomorrow, Debbie and I are flying to Tampa to attend the National Speakers Association’s Winter Conference. I am a Certified Speaking Professional, which is the highest earned designation in the organization. Meanwhile, I’ve been working day and night to put together the Sales Management Super Conference we plan to host in Dallas in May. With 20 expert automotive speakers over three days, it should be a blockbuster.

I love to hear from you. Please keep those emails and private messages coming. Follow @JimZiegler on Twitter and find me on Facebook. I appreciate your continued support and friendship.

Comments

  1. 1. David [ April 05, 2014 @ 06:42AM ]

    Great article Jim, truck wars has been on, and will continue to heat up! I'm the first to claim, "bullsh*&", on the excuse of weather being a factor for the impact on Jan, Feb auto sales. Apparently Ram has been doing business in a top secret warm part of the US that neither Ford or GM know about. Their truck sales have increased 25% each of the first three months this year! The Ram outsold the Silverado last month, and is less than 10k units behind the Silverado for YTD. I don't buy into the argument of, well if you combine GMC and Silverado numbers. The Silverado is their flagship product in the truck segment, and the fact that the guy in third is close to overtaking you, GM should be very concerned. Yes, Ram had higher incentives on their trucks, however GM announced a price increase for their trucks in November. The purpose was to offset their anticipated future rebate/incentive offers. That move, IMO smacks in the face of the consumer, and shows a clear manipulation/deception on their part. As you are well aware, rebates/incentives don't sell vehicles, people sell vehicles. "Mr customer, the reason why you should buy our RAM is because we have higher rebates/incentives than GM or Ford!" Hey, screw the millions/billions that the manufacture has put into R&D designing and engineering this product, it's all about the rebates/incentives? Weak excuse on why your loosing market share. Again, as you already know Jim, people will pay more if the perceived value of the product exceeds the price. "Mr Customer, here's the differentiating things that our product has, and why our product has them."

  2. 2. Jim Ziegler [ April 05, 2014 @ 07:29AM ]

    Thanks David, we are on the same songsheet here. I completely agree. Since I wrote that article the ignition switch scandal has sort of knocked this story off of the proverbial front page. Still I suspect they will increase stoopid incentives even more Nowwwww. JIM

  3. 3. David Crader [ October 03, 2014 @ 02:24PM ]

    Fantastic article as usual Dawg. Great job. Head. Nail. Hit.

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