Car dealership system needs overhaul
General Motors and Chrysler are reducing dealerships to cut costs as they restructure their ailing businesses. Commentator David Frum says the cuts have been a long time coming.
David Frum (David Frum)
More on Commentaries, Auto Industry
TEXT OF STORY
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.
Comments
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From NY, 06/14/2009
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.
From IL, 06/14/2009
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.
From HI, 06/14/2009
Why does new plastic smell new? You are smelling the monomer that leaks from the polymer. It is a dangerous chemical. I always buy a used car from friend who does not smoke but couple of months before in goes off warrantée. I get good price. When the lemon sours my brother the lawyer sues the factory. I quickly settle out of court, sell the car, then buy from other friend. But now our friendly legislators are marking up the price of my previously owned clunkers using supply-demand-curve and legislation to take usable cars off the market for $4000 a pop. I am going to vote against each incumbent on the ticket then pray to the devil to invent new torture for dead congress crooks.
Have a very smiley day.
: - )
From NY, 06/12/2009
"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.
From Great Falls, VA, 06/11/2009
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.
From New York, NY, 06/11/2009
"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.
From New York, NY, 06/11/2009
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?
From S. Glastonbury, CT, 06/11/2009
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.
From Claremont, CA, 06/11/2009
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.
From at the beach, NJ, 06/11/2009
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!
From Maricopa, AZ, 06/11/2009
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.
From Phoenix, AZ, 06/11/2009
No matter how dismal the car-buying experience is at dealerships, that's not stopping people from buying cars. Dealerships that sell cars from other than the Detroit Three offer similar experience and disincentives. The cars sell -- or don't sell -- themselves. The experience at the showroom has a minimal impact because people don't buy cars every day. Well, most people.
From CA, 06/10/2009
It is unbelievable to me that NPR would run such a dishonest story about car dealerships as this one. The Edmonds hatchet job is one that Jeremy Anwyl should be ashamed of; yet as a marketer of advice on how to deal with car dealers, he has left that story on his website for years. It makes Edmonds seem more useful. But just as the quoted part of the story indicates, it is all about a dishonest writer fantasizing about what other people might be thinking, so long as that fantasy fits with the "be afraid" theme of the story. It took that guy many attempts to find a dealership with standards low enough to accept him as an employee.
But to the main article, Frum makes up almost everything in it from whole cloth. The only "fact" was the 43,000 dealerships in the country which is more than twice the actual number. There are less than 20,000 franchised new vehicle dealers in the U.S. and as of yesterday about 1000 less than that. A vast majority of dealership customers are very happy with their experiences at new car and truck dealership, as reflected by every recent survey I have seen on the subject. Frum reaches back to the '80's for the bad experiences with cars (which has nothing to do with the dealers anyway) and has to go back almost as far for any of the rough practices he cites. The worst practices of car dealerships in the last decade are angelic if compared to regular practices by many other industries, with credit card, phone and airline companies having standard business practices that would put car dealers in jail. It's time for the press to open their eyes and recognize that the highly-regulated and extremely community and customer service oriented dealership community has long ago moved past the old stereotypes people like Frum want so much to keep alive.
From Bayside, NY, 06/10/2009
I just about threw up up listening to this " so called, SELF appointed expert " rail against the profession that I have painstakingly dedicated myself to for the last 48 years. I RESENT to the very marrow of my bone someone who speaks of what he knows NOT what he speaks about ( NOT to mention-on the radio station I have LOVED & SUPPORTED for as far back as I can remember ). That Marketplace can feature the likes of a story like this-makes me want to demand back my pledge from last week and reprogram my stations on my car. How dare you allow this misguided weasel vent his incorrect,inexperienced and insecure projections with such a broad stroked brush? That the DEALERS are the PROBLEM ? ?? Who were they put there by ?
How about some equality in your programing, or has THAT diminished along with the dealers AND your judgement? I could go on, but you want brevity...
insecure slant
From Olalla, WA, 06/10/2009
Regarding car dealerships need an overhaul, RIGHT ON! I HATE to buy a new car and so I do it ONLY when absolutely necessary. The cars I buy perform poorly and the dealership can't fix them. The manufacturer, Ford in my case, ignore complaints. I want a 50 mpg car and my only choice is Toyota. The Chevy volt is a cynical joke. Cancel all the dealerships and send us a catalog. The US car makers got what they deserved and it hasn't gone far enough yet.
From Richmond, TX, 06/10/2009
Frankly, I believe these David Frum spots ... are a spoof... a joke on the part of Marketplace played upon its loyal listeners...... just see if we are ... REALLY ... listening...
Like the time David said we should ALL RENT... rather than own... I still own... and will continue to....
The "dealerships".... lets see.... somehow, putting a few thousand small business men "OUT OF BUSINESS" is a good thing... .according to Frum.... That's right... dealerships are NOT part of the big three.... they are independent businesses... These dealerships .... buy the cars upon receipt at their lots.... they pay for the shipping... they pay for all the flyers and advertisments.... the advertising ... etc... they pay to use the big three's accounting system, dealer locator service, etc. etc.... etc.. Dealerships cost the big three.... NOTHING!.....
By the way... the dealerships that are geing closed are not the dealerships that scare people..... the ones that you have to take a course in Taikwandow to get a fair deal... these dealerships move more than 100 cars a month and will continue to be in business... The ones they are closing are the Mom and Pop dealerships... the ones that employee local towns people.... the ones who support the local little league and soccer teams.... the high school senior class play .... and so on...
When in front of Congress last week neither C or GM gave any realistic explanation to the Senators as to how the dealerships to be closed were selected.... in the fact the dealerships who appeared as withnesses in fact met the criteria (so called) to remain open... and none of the criteria for closure....
The Senators who took the time to read the C and GM written statements quickly pointed out that the cost savings (so called) that the closings will provide... are in fact.... not dealership costs at all... but costs associated with being a corporation.... so go figure...
If one closes dealerships that sell less than a certain number of cars a month, then the ones that get closed are the ones in small towns... many being many miles from the nearest town... so what is Mrs MacGalister from small town america suppose to do the next time her car needs service.... Why tow it to big city america at a cost of several hunder $...... this makes sense...... NOT!
Frum as usual.... has his head up is complimentary oriface...
My only question is.. why does NPR waste valuable air time on this nut case... Usually David presents an alternative view to ponder which at the very least makes us appreciate the current situation...
This time he just editorialized on a subject HE KNOWS NOTHING ABOUT....
Hurrumph!
and...
I own a Saturn! In fact, three of them...
From Fort Lauderdale, FL, 06/10/2009
I was actually excited to hear David Frum's commentary on car dealerships. I have suffered from buyer's remorse too many times in the past. Though I've never gotten a bad car, I certainly have gotten some less than pleasant financial deals. I would be interested to explore a hub and spoke system, with the "hubs" selling and the "spokes" servicing.
From detroit, MI, 06/10/2009
The US has gone bonkers. Helping companies worth one billion with 80 billion, paying people to get rid of a clunker and sign up for debt on a new one, bankrupt GM buying other bankrupt company, neither on has any money, is nutts. Giving a car company along with our tax money to FIAT,(they are gonna cream the good parts and dump the rest back on taxpayers) Alot of STUPID things going on. Please someone wakeup, we are gonna loose alot of money and be in big trouble. PLEASE!!! Stop this idiot bailout mess now.
From CA, 06/10/2009
Loved the story but agree that Saturn was missed. About 6 years ago I bought, without shopping around, a Saturn. I always hated shopping for a car and the pressure and confusion. I didn't want to deal with all that so walked into a Saturn dealership and bought a car for the posted price. That was that. Not sure what I will do the next time I decide to buy a car.
From wichita, KS, 06/10/2009
There is a lot of interest in promoting consumer protectionism these days to the point that it makes us wonder if our capitolist system is derailing. I say it's not. The problem is the easy credit market spoiled us into not caring to negotiate pricing on just about anything, including houses. Case in point. Regarding buying a car. Contrary to David Frum's assesment, buying a car can be a positive experience if you do some research on car prices first, then go car shopping. Make an offer, if they balk, then you walk. I guarentee you the salesman will call you the next day wanting to hear your offer again. I would much rather use my negotiating skills than go with the everybody pays the same price scenario. If you want to learn how to negotiate prices, step outside of the USA to buy anything. You'll get an eye opener.
From Reston, VA, 06/10/2009
David Frum's comments about auto dealerships are on-the-mark. But he missed something, namely the early success of Saturn, built on changing that dealership experience. We bought a Saturn in 1995 under their no-haggle pricing policy. We replaced that with a Volvo through their European Delivery program, another -fixed price- purchase. (In both cases, there was some negotiation on trade-in value, but nothing like the high pressure sales tactics and gamesmanship associated with a vehicle purchase.) Here's to hoping Penske Automotive 'gets it' and retains the core "treat the customer with respect" approach of Saturn dealerships. Our Volvo's getting "long in the tooth;" one of the reasons we haven't replaced it is the fear of having to navigate the abomination that is the current auto dealership experience.
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