TedH

Markup In The Automobile Business

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Hello from America's Dairyland.  I'm exploring writing a story about how the automobile business operates.  No, I don't believe dealers pay anything near what is listed on the "dealer invoice"; second, I've never seen a convincing story with information from insiders on how the business truly works; third, I'm not looking to make things harder for anyone.  Goal is truth.  I've had some experience in retail, and the typical markup is 100%—buy for $10, sell for $20.  Sometimes, rather confusingly, this is referred to as a 50% markup, meaning 50% of the selling price is markup.  My goal is to find individuals with long, industry experience, interview them, and write a report.   Please send an e-mail to deneb77@icloud.com if you're interested in helping and wish to remain anonymous or have opinions or ideas and wish to remain anonymous.  

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Ted, I was a dealer for over 30 years and worked for GM as well. If you do not believe a dealer invoice then I do not know what to say to you as you are wrong as can be.  There is only one true factory invoice. It has a net cost to the dealer and usually includes a hold back of a very low percentage that the dealer gets back later. It also may include marketing fees as well which the dealer does not get. Also shipping is usually listed separate.  I can't speak for all manufacturers but I had a domestic and a foreign franchise.  At times, there are incentives that come back to the dealer in the form of "bogeys" that they have to hit, contests or consumer incentives.  There is a ton of data and books already on this subject.   

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You may have trouble getting people to want to help you out if you start with the premise that we are outright lying. If you'd like my full seminar feel free to look up post of my username "Frantz" on "Ford-Trucks.com", you'll find a wealth of information, at least from the Ford perspective. I am a commercial account manager, basically a glorified salesman who writes my own deals from top to bottom for local businesses. Or feel free to list questions which I'll be happy to provide public answers for.

Invoice is what we pay. We do get "holdback", which can be profitable, but it also is used to cover overhead, I don't pay too much attention, but we bill each car about $300 to cover overhead rather than having it fully itemized per unit. The more expensive the vehicle, the more holdback there is. On a $70k truck its around $2k, on a Fiesta, it's maybe $200 (the nice Fiestas are a ltitle better, but the base ones like what I own are loser deals for dealerships). Additionally we can receive per unit bonus money for meeting sales goals (you know, get paid for doing well, it's a capitalist thing). We also make money by arranging deals with banks. Frankly I tell anyone that asks, find out what your bank will offer you and let me beat it. This way I'm making money, but doing so by saving you money. It's a fair way to handle the system IMO. Of course any other product has a much higher profit margin, such as warranties, protection plans, and maintenance. That being said, they can still add value for many and I buy some of them myself, others I don't have use for.

If you really want to do a story for consumer protection and understanding, the biggest fraud is in the variety of state laws. Google "Edmunds document fees" and they have a chart that just begins to go into differences between states. From there you can explore how some states allow dealerships to advertise without including the destination fee in the price on new cars, and other states are more up front and require its inclusion. Further, internet marketing where you can add a $300 pinstripe, and then show an extra $250 discount, which might be okay, but not if you're going to call your starting price "MSRP". Many people patronize the wrong dealer, thinking they are getting a price better by thousands, and never know the deal down the street was identical, without the smoke and mirrors. Dealers have to play by their state laws in order to be competitive, but it's confusing to the consumer who now can look at prices around the country, but doesn't have enough information to make an honest comparison to discounts.

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Those are impressive credentials, Steve, and I appreciate your taking the time to respond.  Will be back with some questions but not today; leaving soon for a meeting. 

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The situation in Switzerland is not exactly the same as the one in the US, but probably not that different...I did work for 32 years at GM Switzerland; during that period, I was for 3 years a Vauxhall district sales manager (it was a real joke), so I did know what the dealers paid if by accident they ordered a new car at GM.

To be short: usually the margin for dealers was 19%, less for a cheaper model. However, have you ever see somebody buying a car at advertised price? As an employee, I could buy a car (1 per year) for the same price as what the dealer paid. I still have the invoice for my 1980 Oldsmobile if you want to have a look at it...

Your 50% margin does exist, but not in the automotive industry. It may apply to watches and jewellery. My wife was working for a watch company in Switzerland; she had a 40% discount on a new watch...

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I have a son in law who works at a Chrysler dealership, I can only report what he tells me.  At the end of one calendar month recently, the dealership was frantic to sell X number of cars the last day, to make a certain quota based on a sales incentive.  If they reached the magic number in sales, the dealership received an "award" worth many ten's of thousands of dollars.  One car short, and the dealership received nothing.  There were also levels above that number, at which points dollars were added to the award.

 

He told me that the last car that was sold, which was the one that met the quota number, they discounted by thousands under invoice price, just to make it happen.

 

In the mid 1970's, I was living in New Orleans, and had a good friend who collected very low mileage antique cars.  He was never into new cars, but one day, there was a brand new, top of the line, Buick sitting in his garage.  I commented on it, and he said it was a deal he couldn't pass up.  A friend of his owned a Buick dealership, and Buick had a promotion going with dealers, order four cars for your inventory, get the fifth one free.  He said the car he had was the "free" one to his dealer friend, and he had bought it at exactly half sticker price...........

 

You don't keep dealerships going making $200 a car, there are all sorts of deals going on all the time....as mentioned, though, this is not "new" news....

 

As for other retail items, some things might be heavily marked up, I was in the electronics business in the 1980's, TV's, VCR's, cameras, sold RCA and Sony, and I can tell you that we rarely, if ever, got a 50% markup, 15-25% was more common, you had to make your money in volume....

Edited by trimacar (see edit history)
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Most dealers lose money on every car, just ask the sales person, they have to make it up in volume. ;)..................Bob

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Ted, I think you might find as well intentioned as it is, your story is a bit dated.

 

FWIW (and no, I did not own a dealership but I was in the business for a few years) I believe the evolution of the industry in the past 25 - 30 years has had a dramatic change on dealership profits.

 

1) We are now in the information age where comparative retail pricing on new and used cars is available at one's fingertips.  "no negotiation" pricing is seeing much more consumer acceptance and seems to be market driven, not dealer driven.

 

2) When I was involved, the most profitable section in the dealership was the finance office (financing, warranty, and other add ons such as life insurance on the loan or rust/paint packages) - some of these dealings were a little questionable, and to a large degree, improved basic warranties and factory extended warranties have changed that quite a bit.  I believe service and parts led new car sales in most franchises, but again this is older info.  

 

4) Yeah, costs have risen dramatically but Just how much does it cost to make a car these days?  They are literally packed with technology.  Most dealers I spoke with would lament the fact that a furniture markup could be well over 100% while they were looking at margins in the 5 - 10% range, sometimes less.  I am in a business today with margins that look more like that vs. 100 or even 50% (granted service oriented) but my point is "retail pricing markup are usually 100%" is quite a generalization.

 

Anyway, good luck with your project, but I think you might be disappointed at what your research shows.

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bob I totally agree but doubt these guys are making the kind of margin people might think, we saw a lot of dealerships fail in 2008 - 2011 here in CT due to bumps in the economy a business with the kind of margin or mark up Ted suggests would have ridden out with no problem at all.  Competition, at least in dense states like CT, helps keep things tight as well - good for us consumers though!

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3 hours ago, Frantz said:

I am a commercial account manager, basically a glorified salesman who writes my own deals from top to bottom for local businesses. Or feel free to list questions which I'll be happy to provide public answers for.

Invoice is what we pay. We do get "holdback", which can be profitable, but it also is used to cover overhead, I don't pay too much attention, but we bill each car about $300 to cover overhead rather than having it fully itemized per unit. The more expensive the vehicle, the more holdback there is. On a $70k truck its around $2k, on a Fiesta, it's maybe $200 (the nice Fiestas are a ltitle better, but the base ones like what I own are loser deals for dealerships). Additionally we can receive per unit bonus money for meeting sales goals (you know, get paid for doing well, it's a capitalist thing). We also make money by arranging deals with banks. Frankly I tell anyone that asks, find out what your bank will offer you and let me beat it. This way I'm making money, but doing so by saving you money. It's a fair way to handle the system IMO. Of course any other product has a much higher profit margin, such as warranties, protection plans, and maintenance. That being said, they can still add value for many and I buy some of them myself, others I don't have use for.

 

I agree with everything Frantz says above, I am also a commercial/fleet manager at a Ford & Chrysler dealer group and previously worked for a Chevy/Olds/Nissan dealer.  The holdback he mentions is usually 3% from Ford/GM/Chrysler paid monthly or quarterly into an account by the automaker.  And Steve Mack is correct that the internet means more dealers have more similar pricing on cars than ever since it is so easy to compare.  The 50-100% markups may indeed still be the starting point in furniture or jewelry but car dealers are more like grocery stores--maintaining large facilities and staff hoping to make 3-5% if people buy a few extras. 

 

In fact I often joke that now new cars are like grocery store bananas for 39 cents a pound.  You know the store can't be making money at that price but they use that 39 cent banana special to get you in the door and hope you buy more stuff, Todd C

 

 

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The new cars are about a wash. Profits come from selling finance, service, and used cars. They are the by products of the new car sale.

 

What are the by products from America's dairyland?

 

Bernie

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Roger, the days of 19% mark up have long been gone in the US.  When I closed my Olds store many models were less than 10%.  It is a business with high overhead and yes some dealers are ultra successful.  It is one though not for the faint of heart as weather, economy, the offerings from your manufacturer and loads of stuff that you cannot control can bite you big time. 

 

Bob, I knew a few dealers that tried that philosophy and are not in business anymore!  A little history, when I got in the business the new car department was the biggest profit center, then it later went to the used car department, then it went to the finance department and today many dealers are doing well in the back end (service, parts and body shop).  So actually in some cases the salesman may be telling the truth especially if it is very slow moving franchise.  Others get close to the MSRP or more and do very, very well.  I experienced both as a dealer, hot products brought high margins and slow stuff I would sell at my net cost if I had to just to get rid of them and not pay floor plan.

 

Try being a dealer in the days of 22% floor plan rate with 400 cars in stock!  It was no fun....come to think of it, not much fun today either for me. :) 

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100 percent markup was what we put on parts at a Marina I worked at.  This was before the internet.  I believe car dealers often had high markups on parts.  Especially when they ran specials where the dealer could buy in bulk and sell them individually.  I remember seeing the specials weekly that were sent to the marina.  X number of bottles of 2 cycle oil, bilge pumps, fuel primer bulbs etc.  Sometimes you could buy 10.00 parts for 2.00 a piece.  

  I've heard from friends in the business that the used cars are where the money is to be made.  Especially when the dealer can get that overpriced car financed.  Where the average Joe on the street wouldn't get that for the used junker because the guy looking at it has no money. 

  Seems alot of people only look at the monthly.   I look at total cost of all angles before I decide which would be the best way to go. 

  We recently bought a new Tacoma Quad cab pickup and the guy selling a similar one at a different dealership kept telling us the lease was the way to go and buy it out at the end.  I said print it out and let me see the numbers.  Well that proved false.

 When the dealer couldn't find her the exact truck she wanted, I took to the net and bought the exact truck she wanted (had to be a stick) from another dealer that was within the search radius they said none existed in.  It had been on the lot for 3 months or close based on the production date.  He never talked about a better deal on the truck on his lot, but the one she bought had just been discounted $3,000 anyways so we did better.  I actually just hired a local shipper and had it shipped rather than pick it up as it was about 4 hours away and I didn't have the time or spare body to go get it.   (The shippers works in the Northeast and is great to work with if anyone needs any cars moved he has good equipment open and enclosed and is based in VT)  I had him move another car for me as well and I was equally pleased. 

  I guess they didn't really want to sell her a truck. 

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My understanding of "floor plan" is the factory owns the cars on the floor until they are sold but the dealer has to pay interest on them until they are sold much like they were an actual loan. Correct?...............Bob

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Part of our family was in the high end furniture biz from 1906-1996. In the pre internet days their usual markup was 115%. When they had a sale it was 100%. Those were the good old days.

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Usually a floor plan is run by a third party, not the factory/manufacturer.  It could be through a bank, or it could be through any number of financial institutions.  That was my experience in the retail electronic business, anyway, and I'd bet the car business is no different, although conceivably a manufacturer could have a division that handled the financial side.

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You don't keep dealerships going making $200 a car

You really don't have to. There are many different models of how to structure a dealership, but generally you're making more than that per car, though you have to pay the salesman, manager, finance manger directly out of that, so business profit isn't that huge. I'm like most of my peers and 100% commission, I make a good living, but again, I'm driving a Fiesta S model (crank windows, manual trans). Though if not for the old car hobby I could probably upgrade to a halfway decent truck. Dealerships make a good chunk of their profit from service, and much of that is warranty work, so it's back from the manufacturers or warranty companies. I have always pointed out that there are publicly traded dealerships (PAG), so if there was major funny business going on, you could easily see it in their books. In reality, the auto industry is probably the most transparent retail company you deal with, yet we're also the least trusted. I don't come close to having a clue how much any other purchase I make actually cost the company, and while I bought my Fiesta at Fords dealer employee price, I'm still flipped by double, which I knew would happen going into it.

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25 minutes ago, Steve Moskowitz said:

Roger, the days of 19% mark up have long been gone in the US.  When I closed my Olds store many models were less than 10%. 

 

 

It was in the eighties! I'm retires since 15 years and, at what I heard, even in my country the car business is no more what it was!

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I think, to the manufacturer's credit, they got wise to some things and put pressure on dealers to stop it - specifically I mean in the Finance and Insurance offices.  The firm I worked for in the 80s provided consulting services (staff, training) and "wholesale" insurance, extended warranties and rust stuff to around 150 - 200 dealerships in southern New England.

 

Typically would sell a mechanical warranty for a couple hundred bucks, retail was in the $600 - 800 range, more if you could get it.  F&I manager gets $100 - 200 commission, rest went to dealer - rust, paint, upholstery was similar.  Financing and life insurance on the loan was a nice add on as well.

 

"Check with your bank and I will beat it"  is fair enough but truthfully most people do not take that extra step.  The consumer owns that one. It is really about "when can I get it, and will you throw in the floor mats?  Win!!"

 

But these finance guys were sharks back in the day..

 

You wanted to zero in on the "safety concsious" spouse whenever possible.

 

"Oh look Mrs Smith, your totally covered with the comprehensive protection package.  God forbid, if anything happens to Mr. Smith, your policy here will pay off the loan.  And between our mechanical and cosmetic coverage, this large investment is covered for years to come.  $1,500 is a small price to pay when you amortize it over the life of your loan, don't you think"

 

And of course, subtly challenge one's manhood, another popular technique, 

 

"Mr. Smith, surely you have adequate income to pay for this extra protection, heck it is only the cost of a pizza or two out each month, and your protecting the investment in your new car."

 

It did not take me too long to see that was an aspect of the business I wanted to move away from.  I did meet a lot of interesting people though - dealers and people in the business.  Some were great car people - some you could just tell wanted to be gangsters but just couldn't handle the violence part, the dishonesty part though, was not an issue for them.   I wish I kept notes because that might have made an interesting book.

 

These guys literally had contests to see who could get the biggest home run in a month, and to Todd's point, this was often a used car buyer with spotty credit or a limited budget.  Financing "captives" (customers who needed to overpay for the car due to credit issues and dealer's ability to get them financed) with high rates and lots of add on warranties - sometimes to "protect the bank" was another way to make a lot on the used car and the finance related options as well.  

 

Everyone has a right to make a fair profit in business, but it was a bit over the top in those days and I think, largely corrected today.  

 

Lastly, what about service & body shop?  I know what I pay an electrician, my veterinarian, etc. and can honestly say service rates seem ok to me  - we all wish it was cheaper but is it unreasonable?  Let's be honest, garages get a bad rap but I think generally it is fair in today's market.

Edited by Steve_Mack_CT
clarity (see edit history)
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33 minutes ago, Bhigdog said:

My understanding of "floor plan" is the factory owns the cars on the floor until they are sold but the dealer has to pay interest on them until they are sold much like they were an actual loan. Correct?...............Bob

 

The factory does not own the cars under "floor plan" 

 

Typically the vehicle is invoiced to the dealer at the time the vehicle goes out the factory door or in the case of an import maybe the time it leaves the port.  The vehicle is to be paid for at that time.  There may be a "grace" period of the dealer paying interest while the vehicle is in transit.  That might be a couple of weeks. 

 

After that time the dealer must pay the bank or finance company that paid for the vehicle for the money borrowed by the dealer to buy that vehicle.  This interest is "floor plan".   The dealer must keep paying the interest / floor plan every month for the money borrowed from the bank or finance company until the car is sold. 

 

When the vehicle is sold the dealer then "pays off" the loan for that vehicle so the consumer can get a clean title to the car.

 

The hold back talked about which could be say 3% can also be made smaller because of different types of associations a dealer may belong to for improving car sales.  Example:  This advertisement is brought to you by your 25 metro fill in brand here car dealers.  The dealers that belong to that advertising association may be paying in $200.00 per car sold by that dealer for that group advertising.

 

I have been out of that end of the business for a while, but I think the typical mark up today is in the 10-12% depending on the manufacturer and model.  I agree with what Steve M says above.

Edited by Larry Schramm (see edit history)

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"Check with your bank and I will beat it"  is fair enough but truthfully most people do not take that extra step.  The consumer owns that one. It is really about "when can I get it, and will you throw in the floor mats?  Win!!"

You're correct, most folks don't bother, but again, you can go on your smart phone and show me the advertised rates. So long as someone has decent credit it's easy enough to do and make sure it meets the banks fine print. If you don't do it, you really can't blame the dealer for looking out for their own interest.

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Generally does the dealer pay the finance co interest secured by individual cars or is it more a general line of credit. I'm guessing there is much variation in the financing but the bottom line is the maker is paid at time of delivery. Do any makers operate a finance division to carry their dealers?................Bob

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Ford covers their dealers, though it's not required. Ford does give some incentives for using them, but banks try to compete with that. We were with the banks, then switched back to Ford. I like being with Ford because on dealer trades I don't have the mess with checks to the other dealer, I can just switch the financial responsibility from one dealer to the other with Fords system. I do lots of dealer trades to get folks the trucks they want. Some dealers even own their entire inventory. They have to figure where the time value of money is, but if they've been doing that for years and it works, more power to them.

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I agree on financing Frantz, onus is 100% on the customer.  given the current state of interest rates, I can easily see where a fraction of one point on say $15K for three years might not even be worth the effort of chasing around town.  I have no issue with that, my only thought was that most new/used purchases are handled by the dealer which helps position them with the other add ons.   

 

I have actually purchased vehicles in the not too distant past where all the finance manager did was process the paperwork - I was shocked to the point of asking when they were going to sell the magic rust dust and such.

 

FWIW I think the stand up people in the industry must be happier to see a lot of this nonsense in the history books - I think Ted's proposed project would have been a lot more interesting a few years back.

 

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I have worked 40 years in the retail dealership environment. For the last 30 years, I have been a Controller or General Manager for the same manufacturer. This is a high line European franchise.

 

Contrary to the belief of the OP, there is only one factory invoice. The amount shown on the invoice is what we pay for the vehicle. Our manufacture gives us 8.0 percent markup from invoice to MSRP. We do not have holdback, like some manufactures do. We do have the ability to earn extra from the manufacturer for Customer Satisfaction in service, Satisfaction in sales, facilities improvements etc. Each category pays us an additional percent, if we achieve the factory goals. If we do not meet the manufacturer goals, we do not earn the extra percentages.

 

Floor plan is paid on each unit individually. It is calculated at a fixed interest rate and is payable monthly. When we sell a floored unit, we have 3 days to pay off the bank for that unit.

 

With the internet age, customers have the ability to see our cost for the vehicles. There are various sites that provide this info. Since all dealers pay the same for an identical unit, customer service and reputations are all that separate one dealer from another, if comparing same models. Some manufacturers pay the dealer a unit bonus per month, based on units sold verse sales goals, but ours does not.

 

This industry has changed immensely in the years I have worked in it. I've got to say the internet has been the biggest influence to come along. Now, most customers know exactly what they want before they come into the showroom and many are very educated on the product, sometimes knowing more than a salesperson.

 

Years ago, some manufacturers had 15 - 20 percent markup. Those days are long over for all manufacturers.

 

In many dealerships, the service departments provide the most gross profit, but the expenses are staggering. Equipment and training are very expensive. Each of our technicians have to attend approximately 100 hours of training per year, off site, to maintain their ratings with the manufacturer. There is also a requirement for extensive electronic testing equipment.

 

Hope this sheds some light on our industry.

 

 

Kevin

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