Car dealership system needs overhaul

David Frum


Kai Ryssdal: After a 24-hour delay courtesy of the U.S. Supreme Court, Chrysler and Fiat didn't waste any time this morning closing their deal. Forty-two days after it entered Chapter 11 bankruptcy protection, the new Chrysler came out this morning lighter by billions of dollars in debt and free of 789 under-performing dealerships. Both Chrysler and General Motors say they want to dramatically reduce the number of dealers to cut costs and become more competitive. Commentator David Frum says it's about time.

DAVID FRUM: Americans don't like the auto bailouts. That dislike does credit to the people's understanding of a market economy. It also represents payback time for decades of unhappy motoring experiences with the Detroit Three.

Too many Americans have bought too many bad cars. But it's not just the product that is the problem. It is the car buying process.

Some years ago, the car-rating service Edmunds.com sent a writer to work undercover in a car dealership. Here's his first meeting with potential customers:

"I gave them a cheerful, 'Good afternoon!' They turned and, in an instant, I saw the fear on their faces. What were they afraid of? They were afraid they would be cheated, ripped-off, pressured, hoodwinked, swindled, jacked around, suckered or fleeced."

American business excels at retail: low, predictable, clearly marked prices in low-pressure environments. Except autos, a shopping experience more like medieval Damascus than like modern Wal-Mart or Home Depot.

The source of the evil is the dealership system. The big idea in American retailing since Montgomery met Ward was to accept lower margins in return for higher volume. Cars and trucks however are sold through a vast network of dealerships, 43,000 of them at last count. Even at the top of the home refinancing bull market, that translated into one dealer for every 500 vehicles sold. Too many dealers are trying to squeeze too much profit out of too few customers.

We need a revolution in auto selling to match the revolution that Toyota has brought to auto manufacture. Fewer dealers. Lower margins. More predictable prices. No more after-market ripoffs. A clearer separation of the cost of purchase from the cost of financing. Car selling awaits its Sam Walton. Somebody who can figure out that when consumers cease to dread the showroom, they might buy more of the cars shown.

RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.

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Mr. Reich,
Like all bargain hunters you've lost sight of the fact that serious competition for the bargain hunter's business will bring out the worst participants in the process. An honest car dealer, and there are many more than the other kinds, will simply show you the door when you refuse the discount that has been offered. The others will use every trick that they can come up with to accept a losing offer and turn it into a profitable deal. Most bargain hunters seem to believe the biggest lies they've been told, if only to repeat those lies to the next dealer they visit in their search for the bottom price. If you've been offered 8%-10% off the MSRP is that not enough? If you look for more than that you will likely find less than you bargained for.

When WalMart lowers the price of a $1,200 refrigerator do you insist that the sales staff lower the price even more so to "win" your business? When was the last time you asked any retailer, other than a car dealer, to lower the price for you below that which the last buyer paid? There in lies the conflict in retail auto sales. The buyers don't accept that there is a bottom below which another dealer will not go, and so expect every dealer to price in the same manner. A low fixed price would suit you? Not likely if you've gotten used to the idea of a yet lower price than the dealer is offering.

I am stunned. This is the first time I've agreed with anything David Frumm has said on Marketplace. In fact, I've considered complaining to Marketplace about why so much airtime is given to Mr. Frumm and The American Enterprise Institute.

However, this time, I completely concur with him. To equate the arcane car sales "system" to that of other consumer products, as some earlier posters have said, must be an indication of someone who has never bought a car in the US. The game-playing, misdirection, and outright lying routinely employed by car dealerships for decades is, as Frummm suggests, the biggest impediment to buying cars. The sooner this business model changes, the better.

"paying a price that's not going to change at the last minute the consumer and industry will benefit."

Like any other product at the retail point of sale there wil be fluctuations that occur in pricing due to the discounting of that product at varying times. Given that such discounting from suggested list price is market driven there is no way to predict the lowest possible price for that product in advance. You know the price when you sign the deal. It is little different from any other retail sale. An IPod was $399 a month ago and it seems to be going to $99 soon enough if not already. Is housing any different? I'm glad that I didn't buy during the past several years. Those same houses are now significantly less expensive to buy. It is rarely the case that the car buyer is financially devastated by the reductionj in value of the car that he/she only recently purchased. That can happen in real estate sales.

When too many buyers are looking for the lowest price for a product and there is too much of that product on the market the sellers are going to get creative. Buyers feed into that creativity by wanting to believe the biggest lies. Such markets may be looked at as a turbulent sea within which only the sharks survive.

I was delighted to hear this piece air. I have dreaded each of my 5 car purchases and know I'm not alone. The current system does not serve the interest of the consumer and will therefor fail (too bad it's taking so long). When I can order the model and features I want on my schedule, paying a price that's not going to change at the last minute the consumer and industry will benefit.

"Each and every time i felt that the dealer salesrep had his hand in my pocket. Consumer Reports said make sure they account for the holdback money from the mfr;" D. Goldstein

Mr. Goldstein now that you've tried to bargain the price down to the dealer hold back the question arises as to how much profit had you intended to allow the dealership to earn through the sale to you? Assume that the hold back and the full gross add up to 13%-15% potential gross margin, why is it that you want to pay less and you see the dealer's hand in your pocket? There's the conundrum. You want to pay less than suggested retail and less than the dealer's first offered discount, but you see his hand in your pocket. What level of profitability do you recommend
that will cover the dealer's costs and investment? What is the appropriate bottom line? How much of a loss do you deem to be reasonable? But still you see the dealer's hand in your pocket. Maybe the dealer feels your out to steal his livelihood.

You ppoint out that Frum is connected to the AEI. You fail to ppoint out that Frum was a key member of the Bush administration's lie machinery. WMDs, al Quida loves Iraq, Saddam and bin Laden are buddies, etc. The presence of David Frum on APM's Market Place lends only doubt to the qualilty of the report.

Frum demonstrates his ignorance of the automotive sales business. It is the exsistence of too many dealerships that has resulted in the low gross margins that have required dealers to search out other profit centers. Aftrer sale, finance reserve and service depts all make up for the initial low gross on each sale. A reduction in the number of auto dealers for any specific brand will most likely lead to in increased profit margin for the remaining dealers. The analogy with WalMart that Frum uses is questionable. Does he want lower priced autos from China that fall apart shortly after purchase? What would that save the buyer?

The auto industry isn't serious about reform; it appears to me they’re just a tired old bunch of folks reorganizing the proverbial deck chairs before the sinking.

Right size from start to finish....
They need to change the whole model from beginning design & manufacturing right down to the dealer ship model. Why isn't there a MAJOR national crisis in the appliance industry, the lawn mower industry, and the tv-video industry as well as all the other “essential commodity goods” we buy?
Because these industries have right-sized their entire business model and most importantly have retail distribution across a variety sales points i.e.: online, Home Depot, Lowes, Mom and Pop appliance stores, High End specialty stores, Retail Big Boxers-Walmart, Best Buy etc.

This distribution model is driven by the consumers buying habits, where the consumer determines how much extra fluff in the form of service & security they want to pay for based on their buying habits. (Think about the shear numbers of both premium and generic riding lawn mowers that are sold off the sidewalk in front of big-boxers.)

Look behind the curtain… It’s a commodity just like everything else we buy......
Detroit’s tricked some of us and all of themselves with the perception of what they are selling is special and we need to go to this very inefficient store called a car dealership to get this special thing.
When is the last time you heard someone say after a car buying experience:
· Man I had a blast at the dealer
· I need to run MY business like that, they’re efficient
· Two college kids: “I have a great idea for a start up company, the sales and distribution of our new product will be a snap, we’ll use the auto industries model!

I’d just as soon buy a work van, my kid’s first new car, or even a loaded premium vehicle from a big box type store or a mom and pop as long it has the correct value proposition for my needs at that time.

Don’t you hate when you have a friend that has a problem that is so clear but they just don’t and cant realize it and in turn cannot be helped.
Please look at the ever-changing world around you Detroit.

Gee...another person that knows nothing about the car business and wants to write about it. During this auto industry crises there just seems to be too many "experts" that haven't a clue as to what they are talking about, and Mr. Frum is at the top of the list. 43,000 dealerships??? Where did this number come from. Lower margins?? Has he seen a dealer statement with an expense sheet?? Maybe Mr. Frum can get a job at a McDonalds and report on the way the fries are unevenly distributed into the customers container. I think there are 43,000 fries in a large order.

Finally, a story that expresses my feelings to a T. I bought my first new car in 1976 and have only bought new since, every few years. Each and every time i felt that the dealer salesrep had his hand in my pocket. Consumer Reports said make sure they account for the holdback money from the mfr; dealer said they don't negotiate with that. And what about the admin fees, extended warranties and Life Insurance (yes, life insurance) they tried tacking on when the negotiation was assumedly over????? i feel no pity for them and still avoid them like the plague. i could go on!

Much as I dread the dealership experience, it doesn't deter me from buying cars. The experience at a Kia dealership or a VW dealership is not different from the experience at a Detroit Three dealership. Although I wouldn't cry if dealerships made their sales approach less dreadful, please tell Mr. Frum that it's the cars that make the difference in sales and viability of the auto companies.


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