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I saw an article recently saying that dealerships and car makers want to keep inventories low because they like the post-covid margins they're experiencing. Whe

I saw an article recently saying that dealerships and car makers want to keep inventories low because they like the post-covid margins they're experiencing. When I paid 5k over msrp a few months ago the salesperson claimed they wanted more inventory because salespeople were unable to hit the volume goals they have. Not sure who to believe but I'm sure the truth lies somewhere in between.

AmVess 4y ago
I'm sure they will all return to the way they did things prior to covid. All it will take is GM or Ford to start stacking new vehicles on car lots, and all of them will have to follow along.
- etempleton 4y ago
  Ford leadership seems to really want to move to the Tesla preorder model, but changing this will be extremely difficult. This entrenched way of doing business may start seriously hurting their bottom line if Tesla and others can scale the direct to consumer model.
  - ryanSrich 4y ago
    Car dealerships and the experience of being in one is truly like stepping into a different world/time. The only other industry that’s close is real estate. These types of businesses function as if the internet doesn’t exist. As if I can’t pull up the factory MSRP on my phone for a car, or find a house I want better than my realtor can on Redfin. I think the sooner all car makers move DTC the better.
  - rootusrootus 4y ago
    The preorder model only works with artificial scarcity. When the product is plentiful, people want it today. Nobody waits for their Tesla just because they can do it all online. They'll put up with the dealer hassle if it means getting the car today. Now, if you can get the online order model to work with really short lead times, this might gain more traction than usual. E.g. bring me a car to test drive, and very soon -- today ideally. Then I order the car, and you deliver it to my house on a trailer within a week. But months? No way, this is how you tell customers to go somewhere else.
  - randomdata 4y ago
    > Ford leadership seems to really want to move to the Tesla preorder model It may not be so much that they want to, but it is apparent that Ford is struggling to figure out how the dealership fits in an EV world, where your customers aren't constantly funnelling in for oil changes. The ICE model allows the dealership to make a sizeable portion of their income from the attached repair shop, but much of that shop work goes away with EVs. This will bring higher commission expectations and Ford could quickly find their cars priced out of the market from that when competitors aren't establishing dealer networks.
    - rjsw 4y ago
      This may vary by country. A large proportion, maybe even all, of the Ford dealers in the UK are owned by Ford itself. The only Ford dealers that I have had contact with in France are still separate companies.
    - bluGill 4y ago
      Oil changes are a good source of income, but there is a lot of other service. Oil changes are nice to get people into the dealer, but many people go elsewhere for them. My last new car was recalled a few times, for things unrelated to the engine. An EV still has a suspension system, tires, steering, brakes, and thousands of other components that can have recalls, break, or otherwise need work. There is a bit less maintenance without an ICE, but not much.
    - bluedino 4y ago
      They can still sell warranties, paint protection packages, dealer installed accessories, tire and wheel protection, etc
      - randomdata 4y ago
        They can, but they already do, so it does not provide a new revenue stream to offset what is lost.
  - mattbrewsbytes 4y ago
    Tesla only sells luxury cars, even the Model 3 is considered luxury ($48k). Supposedly Tesla was going to sell in the luxury segment then ramp up production for other market segments. When exactly is Tesla going to offer an economy car? With their margins they could make the Model 3 priced like that to win market share before other automobile companies catch up. I don't follow them or their product releases but haven't seen anything in the press about that direction of the company.
    - itsoktocry 4y ago
      >With their margins they could make the Model 3 priced like that to win market share before other automobile companies catch up. You've answered your own question: their high gross margins have more to do with accounting differences with OEMS than actual finances. Making cars is expensive.
WXLCKNO 4y ago
Really glad that dealers in Canada can't charge over MSRP for new vehicles.
- geoduck14 4y ago
  I tried to buy a new car yesterday. The price was exactly MSRP, but there were plenty of ad-ons. That I couldn't remove "if I wanted to buy that car". In the end, there were about $11k in "extras" and they low balled me on my trade-in vehicle. I ended up walking away.
  - mrfusion 4y ago
    I found this in the US too. They were close to MSRP but each dealer had a different mandatory package of junk adding at least 6k. I looked at my itemized bill and I had actually paid $200 for a phone cable. Oh and one dealer had mandatory financing.
  - jcampbell1 4y ago
    Know the 4 boxes where they make profit. Price, trade in, add ons, and financing. You just found out that a law that forces MSRP doesn’t do much except help politicians break their arm patting themselves on the back.
    - syrrim 4y ago
      You could sell the car yourself, and get financing from a bank. Then its only price (fixed), and addons.
      - kube-system 4y ago
        I've found (in the US at least) that automaker financing on new vehicles is usually better than any other banks. I'm now wishing I put zero down on my last car, because it's looking like my loan is way cheaper than inflation is going to be over the life of the loan.
csours 4y ago
Disclosure: I work for GM. Anything expressed here is solely my own opinion and experience. I think each statement is true. Context: for ages, OEMs (the factory) have had a belief that Americans will not wait to buy a car. There's also a bit of a prisoner's dilemma: if any automaker wanted to trim inventories, the customer could go to a competing automaker's lot and buy today. Since customers will not wait to buy a car, a dealership must have some quantity of vehicles that are acceptable to buy today. Now customers are used to waiting and nothing really catastrophic happened to the dealer or the OEM. In fact profits went up substantially. If OEMs or dealers had worked together to limit inventory, that would be illegal market manipulation. (I'm sure someone may build a conspiracy theory out of this, but I do not believe any intentional market manipulation took place). Dealerships hate carrying extra inventory because it costs money to finance the vehicles until they sell them. However, there are also salesperson and dealership bonuses based on volume, so that individual salesperson is feeling the pinch. Kind of similar to how crazy home prices are right now (in many large cities) - the homebuyer is hurting, but the real estate agents aren't making a commensurate amount of extra money because the market is relatively inelastic. In future American OEMs may move to a more European model where vehicles are built to specific customer order. This takes on the order of two months at the moment for many legacy reasons, but there is no need for it to actually take this long.
- BenoitEssiambre 4y ago
  >Dealerships hate carrying extra inventory because it costs money to finance the vehicles until they sell them. Note that with interest rates having been really low, even negative in real term, an inventory was almost a good investment with relatively good returns (if you could get your hands on it). Now with rising interest rates and falling inflation, the cost of financing might become a burden again.
  - cokelee 4y ago
    Further, if a manufacturer were to stop paying for a portion of the floorplan interest when the vehicle is sold, then the effective interest rate may go up even more dramatically for lots with inventory over N days old. Since Ford’s plan to prioritize direct sales has made news recently, it seems plausible they will seek some means to limit existing dealer inventory. GM went through a dealer culling after the government bailout to strengthen the remaining stores. The Covid shock, it appears, may permanently cull inventory levels across the board and (optimistically) have the same end.
pacerwpg 4y ago
You can believe both. The salesperson and dealer don't necessarily have the same desires.
BurningFrog 4y ago
Not sure who to believe either, but by default I'd put car salespeople the last on that list.
- pnutjam 4y ago
  Truer words may never have been spoken. 8D
maxerickson 4y ago
Of course they want margins to be as high as possible. There are enough things that factor into it that they can't just turn a knob (especially buyers and competitors).
ryanSrich 4y ago
Idk where you live, but paying over MSRP is unnecessary where I live (tier 2 US city) unless you’re looking at a very high end car ($80k+). Most dealerships near me that priced gouged had to change course pretty quick. I bought 2 vehicles during the pandemic, both at the same dealership, both at MSRP. I think most people who pay over either don’t know other dealerships will negotiate to MSRP, or they just really want a specific color, etc.
- lettergram 4y ago
  I have yet to pay MSRP for a new car. Twice, Ive gone in on Christmas Eve or New Years and make the guy wait around until he offers an employee discount. I’ve also gotten a discount (5% under MSRP) for being associated with a university which purchases in bulk from the given dealership. In one case I made the guy go into their system and show me I was buying it at cost to the dealership. People just don’t know how to negotiate. I’d be sad to see dealerships go, I’ve saved probably ten thousand of haggling.
  - exitb 4y ago
    As usual with this type of advice, it wouldn’t work that way if everyone approached dealerships like that.
    - Broken_Hippo 4y ago
      And it shouldn't work like that. Haggling the price of a car simply shouldn't be something that is done. Every vehicle for sale should have the price listed on it. No dealer should expect more and folks that think it is too much should simply not buy.
      - itsoktocry 4y ago
        >Every vehicle for sale should have the price listed on it. They do. It's called MSRP. You can walk into any dealer in Canada (and presumably the US) and pay it. The price is on the website or the car window. Why do you care if other people are able to haggle for a better deal?
rootusrootus 4y ago
This sentiment is common across any industry that did well during the pandemic due to supply side issues. But I think it would be a little disingenuous to believe that manufacturers previously had the market all wrong and have just now realized that they could have had higher margins with artificial scarcity. In an actual free market, now is the anomaly, not the way things were in the past.
hef19898 4y ago
Not sure how car dealerships in the US work, but that is the general inventory management problem: sales what all of everything, finance wants nothing of everything, productions wants to keep utilization at 100% and Supply Chain needs to balance that. From experience, this works best when sales has no direct influence on inventory levels and forecast accuracy goals on top their other ones. That way you can let Supply Chain, through sales and ops planning, figure out how to meet both availability and inventory targets.
voidmain0001 4y ago
I work in retail automotive in Ontario, Canada. It sucks to read that you paid over MSRP. The province of Ontario has a governing body called OMVIC that doesn't allow sales of new vehicles for > MSRP/sticker price. That said, not all OMVIC registered dealerships abide by that policy, but I do know the one I work for adheres to it. All told, dealerships are making the same amount of gross now as they did prior to the pandemic, if not more thanks to full margin sales despite lack of volume.

AmVess 4y ago

I'm sure they will all return to the way they did things prior to covid. All it will take is GM or Ford to start stacking new vehicles on car lots, and all of them will have to follow along.

etempleton 4y ago
Ford leadership seems to really want to move to the Tesla preorder model, but changing this will be extremely difficult. This entrenched way of doing business may start seriously hurting their bottom line if Tesla and others can scale the direct to consumer model.
- ryanSrich 4y ago
  Car dealerships and the experience of being in one is truly like stepping into a different world/time. The only other industry that’s close is real estate. These types of businesses function as if the internet doesn’t exist. As if I can’t pull up the factory MSRP on my phone for a car, or find a house I want better than my realtor can on Redfin. I think the sooner all car makers move DTC the better.
- rootusrootus 4y ago
  The preorder model only works with artificial scarcity. When the product is plentiful, people want it today. Nobody waits for their Tesla just because they can do it all online. They'll put up with the dealer hassle if it means getting the car today. Now, if you can get the online order model to work with really short lead times, this might gain more traction than usual. E.g. bring me a car to test drive, and very soon -- today ideally. Then I order the car, and you deliver it to my house on a trailer within a week. But months? No way, this is how you tell customers to go somewhere else.
- randomdata 4y ago
  > Ford leadership seems to really want to move to the Tesla preorder model It may not be so much that they want to, but it is apparent that Ford is struggling to figure out how the dealership fits in an EV world, where your customers aren't constantly funnelling in for oil changes. The ICE model allows the dealership to make a sizeable portion of their income from the attached repair shop, but much of that shop work goes away with EVs. This will bring higher commission expectations and Ford could quickly find their cars priced out of the market from that when competitors aren't establishing dealer networks.
  - rjsw 4y ago
    This may vary by country. A large proportion, maybe even all, of the Ford dealers in the UK are owned by Ford itself. The only Ford dealers that I have had contact with in France are still separate companies.
  - bluGill 4y ago
    Oil changes are a good source of income, but there is a lot of other service. Oil changes are nice to get people into the dealer, but many people go elsewhere for them. My last new car was recalled a few times, for things unrelated to the engine. An EV still has a suspension system, tires, steering, brakes, and thousands of other components that can have recalls, break, or otherwise need work. There is a bit less maintenance without an ICE, but not much.
  - bluedino 4y ago
    They can still sell warranties, paint protection packages, dealer installed accessories, tire and wheel protection, etc
    - randomdata 4y ago
      They can, but they already do, so it does not provide a new revenue stream to offset what is lost.
- mattbrewsbytes 4y ago
  Tesla only sells luxury cars, even the Model 3 is considered luxury ($48k). Supposedly Tesla was going to sell in the luxury segment then ramp up production for other market segments. When exactly is Tesla going to offer an economy car? With their margins they could make the Model 3 priced like that to win market share before other automobile companies catch up. I don't follow them or their product releases but haven't seen anything in the press about that direction of the company.
  - itsoktocry 4y ago
    >With their margins they could make the Model 3 priced like that to win market share before other automobile companies catch up. You've answered your own question: their high gross margins have more to do with accounting differences with OEMS than actual finances. Making cars is expensive.

WXLCKNO 4y ago

Really glad that dealers in Canada can't charge over MSRP for new vehicles.

geoduck14 4y ago
I tried to buy a new car yesterday. The price was exactly MSRP, but there were plenty of ad-ons. That I couldn't remove "if I wanted to buy that car". In the end, there were about $11k in "extras" and they low balled me on my trade-in vehicle. I ended up walking away.
- mrfusion 4y ago
  I found this in the US too. They were close to MSRP but each dealer had a different mandatory package of junk adding at least 6k. I looked at my itemized bill and I had actually paid $200 for a phone cable. Oh and one dealer had mandatory financing.
- jcampbell1 4y ago
  Know the 4 boxes where they make profit. Price, trade in, add ons, and financing. You just found out that a law that forces MSRP doesn’t do much except help politicians break their arm patting themselves on the back.
  - syrrim 4y ago
    You could sell the car yourself, and get financing from a bank. Then its only price (fixed), and addons.
    - kube-system 4y ago
      I've found (in the US at least) that automaker financing on new vehicles is usually better than any other banks. I'm now wishing I put zero down on my last car, because it's looking like my loan is way cheaper than inflation is going to be over the life of the loan.

csours 4y ago

Disclosure: I work for GM. Anything expressed here is solely my own opinion and experience. I think each statement is true. Context: for ages, OEMs (the factory) have had a belief that Americans will not wait to buy a car. There's also a bit of a prisoner's dilemma: if any automaker wanted to trim inventories, the customer could go to a competing automaker's lot and buy today. Since customers will not wait to buy a car, a dealership must have some quantity of vehicles that are acceptable to buy today. Now customers are used to waiting and nothing really catastrophic happened to the dealer or the OEM. In fact profits went up substantially. If OEMs or dealers had worked together to limit inventory, that would be illegal market manipulation. (I'm sure someone may build a conspiracy theory out of this, but I do not believe any intentional market manipulation took place). Dealerships hate carrying extra inventory because it costs money to finance the vehicles until they sell them. However, there are also salesperson and dealership bonuses based on volume, so that individual salesperson is feeling the pinch. Kind of similar to how crazy home prices are right now (in many large cities) - the homebuyer is hurting, but the real estate agents aren't making a commensurate amount of extra money because the market is relatively inelastic. In future American OEMs may move to a more European model where vehicles are built to specific customer order. This takes on the order of two months at the moment for many legacy reasons, but there is no need for it to actually take this long.

BenoitEssiambre 4y ago
>Dealerships hate carrying extra inventory because it costs money to finance the vehicles until they sell them. Note that with interest rates having been really low, even negative in real term, an inventory was almost a good investment with relatively good returns (if you could get your hands on it). Now with rising interest rates and falling inflation, the cost of financing might become a burden again.
- cokelee 4y ago
  Further, if a manufacturer were to stop paying for a portion of the floorplan interest when the vehicle is sold, then the effective interest rate may go up even more dramatically for lots with inventory over N days old. Since Ford’s plan to prioritize direct sales has made news recently, it seems plausible they will seek some means to limit existing dealer inventory. GM went through a dealer culling after the government bailout to strengthen the remaining stores. The Covid shock, it appears, may permanently cull inventory levels across the board and (optimistically) have the same end.

pacerwpg 4y ago

You can believe both. The salesperson and dealer don't necessarily have the same desires.

BurningFrog 4y ago

Not sure who to believe either, but by default I'd put car salespeople the last on that list.

pnutjam 4y ago
Truer words may never have been spoken. 8D

maxerickson 4y ago

Of course they want margins to be as high as possible. There are enough things that factor into it that they can't just turn a knob (especially buyers and competitors).

ryanSrich 4y ago

Idk where you live, but paying over MSRP is unnecessary where I live (tier 2 US city) unless you’re looking at a very high end car ($80k+). Most dealerships near me that priced gouged had to change course pretty quick. I bought 2 vehicles during the pandemic, both at the same dealership, both at MSRP. I think most people who pay over either don’t know other dealerships will negotiate to MSRP, or they just really want a specific color, etc.

lettergram 4y ago
I have yet to pay MSRP for a new car. Twice, Ive gone in on Christmas Eve or New Years and make the guy wait around until he offers an employee discount. I’ve also gotten a discount (5% under MSRP) for being associated with a university which purchases in bulk from the given dealership. In one case I made the guy go into their system and show me I was buying it at cost to the dealership. People just don’t know how to negotiate. I’d be sad to see dealerships go, I’ve saved probably ten thousand of haggling.
- exitb 4y ago
  As usual with this type of advice, it wouldn’t work that way if everyone approached dealerships like that.
  - Broken_Hippo 4y ago
    And it shouldn't work like that. Haggling the price of a car simply shouldn't be something that is done. Every vehicle for sale should have the price listed on it. No dealer should expect more and folks that think it is too much should simply not buy.
    - itsoktocry 4y ago
      >Every vehicle for sale should have the price listed on it. They do. It's called MSRP. You can walk into any dealer in Canada (and presumably the US) and pay it. The price is on the website or the car window. Why do you care if other people are able to haggle for a better deal?

rootusrootus 4y ago

This sentiment is common across any industry that did well during the pandemic due to supply side issues. But I think it would be a little disingenuous to believe that manufacturers previously had the market all wrong and have just now realized that they could have had higher margins with artificial scarcity. In an actual free market, now is the anomaly, not the way things were in the past.

hef19898 4y ago

Not sure how car dealerships in the US work, but that is the general inventory management problem: sales what all of everything, finance wants nothing of everything, productions wants to keep utilization at 100% and Supply Chain needs to balance that. From experience, this works best when sales has no direct influence on inventory levels and forecast accuracy goals on top their other ones. That way you can let Supply Chain, through sales and ops planning, figure out how to meet both availability and inventory targets.

voidmain0001 4y ago

I work in retail automotive in Ontario, Canada. It sucks to read that you paid over MSRP. The province of Ontario has a governing body called OMVIC that doesn't allow sales of new vehicles for > MSRP/sticker price. That said, not all OMVIC registered dealerships abide by that policy, but I do know the one I work for adheres to it. All told, dealerships are making the same amount of gross now as they did prior to the pandemic, if not more thanks to full margin sales despite lack of volume.