Elephants in the Room! Startling New Studies Revealed!

ruggles/Wards

Two important automotive conferences were held in New York City recently in conjunction with the New York International Auto Show. The first conference was the J. D. Power Automotive Forum, followed the next day by the Driving Sales President's Club Event. The conferences had at least one thing in common. They both were launching points for two new surveys regarding what consumers supposedly want in their retail shopping experience, based on consumers answering questions to survey questions. AutoTrader released its new survey at the Power conference while Driving Sales revealed its own survey the next day at their own conference. The presentations of these survey results were rife with anecdotes. Both "studies" "proved" what some people have been trying to prove for decades, that consumers prefer not to negotiate and don't like the sales process.

...the continuation of attempts to predict auto buying behavior by asking survey questions instead of observing actions...

I was reminded of the infamous J. D. Power survey released at the NADA convention in 1993, where they showed that consumers didn't like to negotiate, which "proved" that the Saturn way of doing business was going to take over auto retail. Interestingly, J.D. Power was also selling consulting and training services to teach dealers how to implement the "new sales strategy." At the time, Saturn dealers were doing really well while GM was losing about $1500 per vehicle. Unfortunately for J. D. Power, no one taught the OEMs that for the "Saturn Method" to work over production can't be part of the equation and true "success" includes OEM profit. [The Prof adds: in the pre-internet days Saturn dealerships were also few in number and widely dispersed, which was important in limiting the ability of consumers to play dealerships off against one another]

At the same 1993 NADA convention new research was published by an Arizona research and marketing company that showed the exact opposite of what the Power survey had said. The different results were achieved by merely changing the wording of survey questions. At the time it seems that consumers really do want to negotiate, they just want to be guaranteed a win. They want to play poker with you. They just want to see your cards first before placing bets.

The marketplace ultimately proved who was right and who was wrong. Saturn proved many things. It proved that fresh product enthusiastically received by the consuming public is essential. And we know GM subsequently starved Saturn for product. After all, why give a division product unless they have proven they can move the metal? Saturn proved that some consumers prefer their business model. They also proved there aren't enough of them to make for a viable division. Saturn introduced a stellar vehicle in the Aura. Yet, consumers voted with their feet. Instead of buying the very competitive Aura and its consumer friendly sales model, they went in hordes to Toyota and Honda to get abused by the so called traditional sales model. Go figure.

Later in the decade Ford attempted to show the industry how to do auto retail based on how consumers respond to survey questions. The Ford Collection lost hundreds of millions of dollars and was one element of the underlying dissatisfaction that cost Ford CEO Jacque Nassar his job. [The Prof adds: the Explorer-Firestone rollover issue was a factor, too]

Both of this year's surveys ignored some "elephants in the room." While demonizing the "old methods," as if there is such a single thing, they failed to tell us exactly how to do what consumers want us to do while still making money. After all, new cars aren't sold for profit these days anyway. Dealers typically pay off more at their floor plan lender than the customer just paid for their new vehicle. And after paying each new vehicle's share of the overhead, our industry is selling new vehicles for about break even. And to add insult to injury, consumers still aren't happy.

I'm living proof that there is no such thing as the "old method" of selling new vehicles. I started in the business in 1970, selling in a One Price store, although it wasn't called that back in the day. We called ourselves "Moral Motors." The anecdotes related by those who try to demonize "the old ways" might describe some stores, but they certainly don't describe them all. There has never been a single way for dealers to run their sales operations. Auto retail has ALWAYS been about relationships and satisfying customers. This has never changed. As a consultant/ trainer over 20 years ago, we taught sales people to open dialogue with prospects by saying, “Before you leave, we want to make sure we provide all the information you need to make a practical purchase decision, including some numbers to think about.” Today that's called "transparency."

Even though the consumer today has ready access to all sorts of information, they "know" less today than they ever did because of the complexity that exists today. Much of that complexity was created by OEMs when they curtailed dealer markup and hid gross profit behind invoice, something I seriously doubt consumers would call “increased transparency.” The vast amount of information available today is like drinking from a fire hose for consumers. Auto buying consumers have more information, yet know less. Over the last few years I have visited hundreds of dealerships. I have seen a consistent pattern of sales people attempting to deal with consumers who think they know a lot more than they do. It is an art to correct your potential buyer on their misconceptions while still maintaining a relationship to allow them to do business with you afterward. Many of our sales people fail miserably at this. [The Prof adds: with sales staff turnover, don't be too sure consumers aren't the more informed party! But remember too brand proliferation: can you name all 600 makes on sale in the US market??]

I am able to do my own research. Since it is informal I don't try to calculate a "margin of error" or use lofty terms to describe my methodology. I am regularly in front of groups of college students. My own personal study group is my 22 Gen Y nieces and nephews. Further, I am regularly in front of a large group of retired millionaires at a retiree forum in my home town. This gives me the opportunity to conduct show of hands type surveys. Example: "How many of you think an auto dealer is entitled to a return of 10% on the sale of a new vehicle?" EVERYONE in the room raises their hand. A little later I'll ask, "How many of you, after you get home after buying a new car, would be upset if you find out you paid the dealer a $3K profit." EVERYONE in the room again raises their hand!!

For those who think the Ford Collection, Saturn, and Priceline outcomes happened ages ago and are no longer valid, a Dallas company specializing in lease comparison software, Cybercalc.com, recently did extensive surveying which “proved” consumers prefer to get their deal structured and “locked in” before revealing who their identity. The initiative was called AutoBids Online and a small fortune was invested to create a software platform to enable consumers to anonymously enter a marketplace where dealers would bid for their business, thereby locking in an offer before the consumer’s identity was revealed. This would seem to prove that the AutoTrader survey results on this issue are valid, right? In talking to CyberCalc CEO Jeff Cook about his expensive lesson as it regards auto buying consumers, he says, “I have some GREAT software for sale if anyone thinks the market is now ready for this. When we did this a few years ago, it clearly wasn’t, despite our extensive surveying.” Perhaps it was the $29 consumers had to pay top enter the marketplace? One would think that would be a small price to pay for avoiding the “old method grind,” right?

This is not to say that the Internet hasn’t forever changed some things about our business. Dale Pollak and others have definitively proven that if a dealer prices his/her vehicles wrong, their inventory will never be seen by consumers doing routine searches. But this has been proven by actual consumer behavior, not by surveys.

So what are the "elephants in the room" ignored by these recent surveys? In our bid to thrill consumers shouldn't we ask them about how we answer the phone? After all, a HIGHLY valued relic from the past, Jackie B. Cooper, used to point out that the dealership telephone operator talks to more potential gross profit than any employee in the dealership. "And who gets paid the least?" Jackie would ask. These days the telephones are answered by an IVR system (Interactive Voice Response). en Y calls them "bots." AND they are universally reviled. Why are no studies focused on how our customers like the way we answer the phone?

Another elephant? Even the best sales process can turn counterproductive when executed crudely. The least polished of our sales people make up the VAST majority these days. Why? Because WE have run off most of the good talent. Our industry has cut the upfront markup, increased the holdback, increased the pack, taken away demos, cut fringe benefits, instituted full retail markup internal charges, etc., etc., and we wonder why we are left with the unpolished and unpracticed sales people? When you turn over employees it is because you either did a bad job of hiring, or a bad job of managing. Why ignore this while focusing on peripheral issues?

Perhaps the most outlandish claim "proven" by the Driving Sales survey is that our industry is losing up to 5 million new vehicles sales each year because consumers don't like our processes. This is referred to as lost "headroom." This assumes that consumers who don't like the first dealer they encounter, exit the market instead of exiting that dealership and visiting another. I have run this claim by a number of industry economists. I first started asking about "lost SAAR" when I heard TrueCar's Scott Painter claim that new vehicle retail could be doing 20 million SAAR if we eliminated the "friction" in the sales process. The unanimous responses from these numerous industry economists and other experts uses terminology reminiscent of Norman Schwartkop's reference to "bovine scatology."

At least we all got to listen to Warren Buffet and Larry van Tuyl at the J. D. Power conference and Maryann Keller at Driving Sales. Maybe it’s just that I take comfort in listening to common sense from people closer to my age bracket, or maybe I just like listening to common sense from whomever it comes from.

Some high points, or low points of the conferences, depending on one’s perspective follow. According to the AutoTrader study:

Consumers want a change in the car buying process, but they failed to define either “old process” or “new process.”

There is no such thing as “the old process.” Dealers used to compete with other dealers to provide an experience acceptable enough to consumers to gain their fair share of sales and gross profit. It seems like any new process would work the same way. If there is a single universally acceptable new process that would accommodate the 30% of buyers who are in the Buy Here/Pay Here or subprime credit category, as well as the near prime tiers, and would take negative trade equity into consideration, as well as “fast track” credit buyers, AND allow for dealer Return on Investment, we’d all like to hear about it.

Consumers want to test drive new vehicles at a central location without sales people present.

What they failed to ask is how much more consumers would be willing to pay for this.

Consumers dislike the process as it is today...

...yet that process sells 14 million plus new retail units per year. Perhaps consumers would prefer if the FTC would allow dealers to fix prices so everyone could pay the same price? Why not ask consumers how they would like that?

Consumers prefer to remain anonymous until they lock in a deal.

Of course they do. So what?

Dealers have always been free to adapt to whatever they believe consumers really want.

A lot of money has been invested in attempts to do business based on what consumers say they want in surveys with Saturn and The Ford Collection being the best examples. Maryann Keller mentioned the Priceline experiment, which didn’t work. She should know. She ran it and is completely upfront about the experience. Who better to tell us about the difference between what consumers say and how they actually behave than the world’s leading auto analyst who also spearheaded a well financed attempt to appeal to consumers based on their stated preferences? What has changed since those expensive experiments failed? Why are people still continuing to try to prove that consumers behave the way they say they would on surveys?

From Driving Sales: Rachel Richards, listed as Vice President and Chief Marketing Officer from Sonic Automotive, the country’s fourth largest automotive retailer, gave a presentation on their new retail initiatives called “One Sonic - One Experience.”

One would think that Richard’s previous career experience with Ford Motor Company might have provided some insight on the difference between what consumers say on surveys and how they actually behave in the real world. As I understand it, the new program is still in pilot stage and has not been rolled out across their system. My understanding is that they have 15 sales people at one pilot store who also do their own F&I. When I asked if they would all be AFIP (Association of Finance and Insurance Professionals) certified, she told me she didn’t know what that is, and that a different department was responsible for the F&I element. I can only imagine the regulatory vulnerability associated with having 15 sales people all trying to do their own F&I. I’m sure time will tell, as it did with the Ford Collection.

What seems to be inevitable is the continuation of attempts by some to predict consumer auto buying behavior by asking them survey questions instead of merely observing their actions. After all, we have many talented and experienced experts who are in the trenches on a daily basis. Why not just ask them?

Maryann Keller Speech to the NADA/JD Power Conference, NYC, MArch 2013

For the over four decades I’ve been involved with the auto industry, first as an investment analyst and now as a consultant and director serving on the boards of both automotive companies and auto dealers. Over those four decades, I’ve heard many arguments made against the franchise dealer system…which dealers never fail to disprove time and time again.

One myth promulgated in the 1990s - and now resurfaced by Tesla - is that factory stores save money by reducing distribution expenses wrongly estimated at 30% of total expense. Let’s put aside for the moment that the percentage itself is nonsense, Ford’s ill-fated Auto Collection experiment proved conclusively (as told to me by a former Ford executive last week) that corporate guys are not risk takers and lack the entrepreneurial spirit to manage dealerships. Big corporations control from the top but selling cars requires street smarts and adapting to local market and competition. Ford ended its experiment after a couple of years of market share losses amid mounting evidence that factory stores do not deliver a better customer experience nor reduce costs, in fact they proved to be bad at both. GM, perhaps after watching Ford’s travails, and despite repeating the same nonsense about reduced costs through factory ownership, canceled its plans to buy 10% of its dealers, plus the Saturn stores, and operate them in through what it called GM Retail Holdings. Ford’s failed experiment demonstrated that, franchise laws notwithstanding, dealers are essential partners in the long process of a car’s journey from the factory to a customer’s garage. Franchise laws protect dealers from arbitrary actions by automakers and given the financial commitments they continue to make in response to factory demands in image programs, equipment, training and even vendor selection, the laws are entirely reasonable. Given the intense competition in auto retailing, it’s hard to understand how anyone could suggest that franchise laws hurt consumers.

Franchise dealers’ cumulative investment in land, equipment and facilities easily exceeds $100 billion. Dealers fund 60 days of inventory and another month of inventory in transit that would otherwise fall to the car maker. The inventory buffer allows automakers to adjust future production levels. For a company like Ford US inventory funding equals about $15 billion at any point in time.

Tesla may be the first start up to launch a car and change the retail process as well but it is definitely not the only company that saw dealerships as a costly impediment to customer bliss. A few years ago I was involved with one such company funded by venture capitalists, and led by a non-automotive executive, that invested in a small car promising to build to order sold though mall-based stores. The car never made it to production and the company folded after consuming the investors’ capital. . Despite evidence to the contrary and lacking any real world understanding to the business, a journalist writing on Yahoo Autos last year stated “Instead of building cars and selling them to dealers who hawk them to shoppers, Tesla wants to build only cars to customers orders, eliminating part of the auto industry’s massive overhead costs in inventory. By selling cars directly Tesla’s executives believe they can make their customer happy, and eventually sell more cars for less money.” Well we will see if it is fact is more economical for the factory to pay the rent, salaries, delivery and service or have someone else do it using his or her own capital. And build to order works only as long as there is an order bank…what happens when the orders dry up…do you send the assembly workers home, tell your suppliers to send to stop producing until you call?…..unfortunately auto assembly really doesn’t lend itself to build to order. It is capital and labor intensive even when work is farmed out to suppliers.

Every dealer knows that the vast majority of customers want their car that day not a date convenient to a manufacturer. The dealer has always been the buffer with the automaker facilitating inventory management through various incentives and production adjustments. It is the dealer who finds the market-clearing price for a vehicle even at the sacrifice of his or her profits. Others have tried experiments in selling away from the traditional retail dealer location on the notion that a big box retailer or mall would mitigate advertising expenses by placing cars where the customers are.

Early in the 2000s, Asbury struck a deal with Walmart to sell used cars in the parking lots of Walmart stores. Asbury would take the cars to where the retail customers were at America’s busiest retailer. A few dealers have experimented (as Tesla is now doing) renting inline space in large shopping malls as storefronts to sell cars. So far, the history of non-dealership settings to sell cars – with perhaps the exception of the infrequent offsite tent sale – hasn’t worked. The Asbury/Walmart experiment ended in less than two years when both parties discovered there were too few car buyers among the static population of regular customers who shopped for food and other necessities at their local Walmart each week.

I suspect that once the novelty associated with Tesla wears off, it too will also discover that mall locations aren’t ideal places to market or sell cars. The enclosed shopping mall typically has several large anchor stores – Nordstrom, Macy’s, Neiman Marcus, etc. – and perhaps eighty to one hundred or so “in line” shops like GAP, the Limited, Zale’s, Sunglass Hut, Apple, etc. A large successful mall might have more than a million or more visitors a year – and that’s about 3,000 folks per day. Those big numbers can dazzle but they aren't what they seem. Much of this traffic represents repeat visitors, as it did at Walmart, coming each week or so to see the changing merchandise at her favorite stores – new fashion and seasonal clothing, makeup, shoes or the latest Apple gadget. Everything can be purchased on a credit card. I used the pronoun “her” deliberately because the vast majority of mall stores are dedicated to women and children not the men who would be the targets for an expensive, high tech performance car.

Furthermore, new car models are only really new only every four to six years. The merchandise doesn’t change very often – so on the second or third visit to the mall, the car store looks exactly as it did last month or even the month before. What was fresh once is now stale with the passage of time…so visitors to the mall just skip past that new car display.

What the uninformed forget – or figure out after an attempt or three – is that automotive retailing is very different from traditional retailing. The product car dealers sell is expensive, generally requires financing, and often involves a trade. It often includes helping shoppers match their budget to a car that might not be their first choice but rather one they can afford. The process is slowed by required disclosures and regulations resulting in a pile of documents that have to be signed even for the most straightforward transaction.

A car weighs 4,000 pounds and takes up 50 square feet of space. It can’t be delivered overnight to one’s front door by FedEx. And most folks don’t have a big enough credit limit on their Visa card to pay for it. And what do they do with their trade? Or get it serviced?

While we are talking about myths, how about the still repeated one that people hate dealers so, if given the chance, they will buy a car online. I almost don't know where to start in taking this one apart…..In the early days of the Internet, Silicon Valley funded and lost hundreds of millions, maybe even a billion dollars, on ill-fated ventures that promised to do just that. CarOrder.com, Greenlight.com, and CarsDirect.com (in its original configuration), among others, all promised to avoid the dealership experience. A few actually did that by buying cars from dealers and then reselling them at lower prices to customers until they blew through their capital. Build to Order.com proposed that you would place your order for a fully customized car while lounging in a company-owned showroom entertainment center. Again here the premise was to build these cars using an automaker’s parts and technology but avoiding high labor costs and dealerships and give the customer the exact car they wanted. Build-to-order.com never built anything for anyone. In 1999 and 2000, I ran PriceLine.com’s experiment with selling cars online, which like most others of the era no longer exists. The essential elements of the PriceLine model were replicated by TrueCar.com and of course they too ran afoul of franchise laws for the same reasons as PriceLine. What I learned then – and this is still true today – we could connect buyers with dealers and that the price of a vehicle was the easiest part of a deal. The other elements are harder to control and often the cause of frustration for the customer and the dealer. People don’t like to hear that their trade isn’t worth the value they saw online or that their poor credit doesn’t qualify them for the no down payment, zero percent loan. There are few people who would think about buying a house online from a few photos taken make rooms seem larger than they are or the neighbors Beware of dog sign. Buying a car is comparable to buying a house, why should we think it should be as easy as buying a pair of shoes from Zappos with a return receipt in the box in case they don’t fit.

Although many automotive websites claim to have “sold” millions cars, even today twelve years after PriceLine decided to concentrate exclusively on travel, automotive websites link a buyer to a dealer who actually sells the car. The Internet has mostly replaced the newspaper as a source of information about cars and dealers but it has not reduced advertising expense per vehicle or made buying a car as easy as buying a book.

Add up all the monthly traffic to all automotive sites, including automakers, dealers and independent sites – and you’d get more than 100 million possibly close to 200 million unique visitors using the web to get information about buying or selling a new or used car. Except there’s one problem if this traffic is somehow suppose to represent potential sales…the total number of new and used cars sold by dealers at retail and excluding fleet each month is only about two million units, and that is probably generous given that not all retail customers go online..some might just release the same brand of the leased car they are returning to the dealer. So the real shoppers – however you want to define that number – are only a small fraction of the total visitors. So just like newspaper, radio, or TV advertising, dealer spend on the internet is likely no better targeted – once again dispelling the notion that the internet would solve the age-old problem of knowing which 50% of a dealer’s advertising works.

And what was once promised as to the beauty of the Internet for used cars…listings of available cars with pictures, even videos, and stated pricing would make it easy for shoppers to find the best car at the best price. But what has happened is that for any given vehicle, within a similar bandwidth of age, mileage, trim, the price range for specific models is usually within a few hundred dollars, not enough to make price the deciding purchase factor. The Internet hasn’t created a pricing advantage for any seller and customers simply have confirmation that similar cars within a market are priced the same. With the exception of hard to find cars, the differentiating factors are having the car the customer wants, proximity of the dealership and the dealer’s reputation in providing a good customer experience.

In summary, technology is a wonderful thing…and dealers have adopted it nearly full tilt. Sophisticated software to manage every aspect of the business is now de riguer…BDC’s to support internet sales…and eDocuments will eventually become the norm. But the point is that the system of franchised dealers – using their own risk capital to fund their businesses and guarantee millions of dollars of inventory, promote their own brand and that of their OEM, provide the expensive tools needed in their service departments, and manage the endless headache of a workforce – will not be superseded by technology or factory owned mall stores. Factories have learned that they cannot do a better job than independent businessmen at the retail level. And new start ups – many of whom will come and go – with new systems of selling and servicing retail automobiles will all reach the same conclusion: the dealer network is the best way. Thank you for listening today.

Detroit's Biggest Mistakes

Detroit’s Worst Mistake EverNov. 7, 2012 by Drew Winter in Ward's Automotive Final Inspection

Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices.

History of Automotive Boondoggles

• Most Over-Hyped Automotive Trends of Past 25 Years
• Ward's 10 Best Engines: Chrysler 3.6L DOHC Pentastar V-6

I recently blogged about some of the auto industry’s biggest boondoggles of the last 25 years and asked readers to contribute their thoughts.

My email bulged with suggestions, especially related to the Detroit Three.

Many mentioned General Motors’ misguided attempt to reinvent itself with Saturn and ill-advised investments inFiat and Saab. Plus, there were vehicles such as the infamous Pontiac Aztek and the entire Hummer brand. Others mentioned questionable adventures at Ford, such as its purchase of Jaguar and Volvo, and numerous bad cars going back to the 1970s including the Pinto subcompact and Mustang II.

Readers also pointed to head scratchers at Chrysler such as the TC by Maserati, a gussied up K-car with a Maserati badge; the odd-looking Plymouth Prowler; and the disastrous “partnership” with Daimler that ended in divorce.

But to ferret out the absolute worst mistakes Detroit has made in recent history, I look to professional automotive observer and author Maryann Keller. She has been enormously influential since the early 1980s. After a 28-year career as one of Wall Street’s top auto analysts she now runs her own company, Maryann Keller & Associates. She is as tough and insightful as ever.

During a recent speech to the Society of Auto Analysts, Keller unleashes her own list of auto industry blunders, and her choices make most of the items above look like minor glitches.

Detroit auto makers wasted at least $50 billion during the past two decades in failed efforts to impress Wall Street and raise their stock prices, she says.

That incredible figure includes stock buybacks, excessive dividends and diversification efforts, all of which could have been spent making better products. GM alone doled out $20 billion from 1986 to 2000 on stock buybacks and actually borrowed money it did not have to pay dividends from 2005 to 2008.

Ford kissed off half the cash it had on hand in 2000 creating a special dividend of $10 per share, Keller says. GM and Ford also wasted billions buying rental-car companies that hid excess production capacity and threw away billions more for e-commerce efforts that looked sexy during the Internet bubble economy but ultimately yielded zip in revenue and profits. Also on her list are the names of financial-services companies, vehicle retailers, recyclers, junkyards and mortgage companies. All were purchased in an effort to add glamour and growth to auto maker bottom lines, but they did neither.

Of course, these strategies did not look quite so boneheaded at the time. In the late 1990s, auto companies were considered old-fashioned. No matter how many vehicles they sold and how much cash they raked in, their stock prices looked weak compared with the soaring value of technology and Internet stocks.

So auto makers tried to redefine themselves as something other than companies that built and sold cars and trucks.

And this was the Detroit Three’s biggest mistake ever: They tried to be something other than vehicle manufacturing companies. When they focused on being banks and mortgage lenders and impressing Wall Street, they took their eye off the ball of their core business. Design faltered, quality slipped and market share skidded. Disaster ensued.

Ford was first to see the error of its ways and avoided bankruptcy. GM and Chrysler were not so lucky.

But as Keller points out, “Wall Street didn’t make these decisions; the CEOs did.”

I currently am testing vehicles for Ward’s 10 Best Engines and as a judge for the North American Car and Truck of the Year awards. Detroit’s new products such as the Cadillac ATS, Ford Fusion and Dodge Dart are terrific. Detroit auto makers clearly have their eye back on the ball. It shows in vehicle sales numbers, on their bottom line and their stock price. Let’s hope they never again try to be something they are not.

dwinter@wardsauto.com

Maryann Keller - Recent Speech at a JD Power Conference

For the over four decades I’ve been involved with the auto industry, first as an investment analyst and now as a consultant and director serving on the boards of both automotive companies and auto dealers. Over those four decades, I’ve heard many arguments made against the franchise dealer system…which dealers never fail to disprove time and time again.

One myth promulgated in the 1990s - and now resurfaced by Tesla - is that factory stores save money by reducing distribution expenses wrongly estimated at 30% of total expense. Let’s put aside for the moment that the percentage itself is nonsense, Ford’s ill-fated Auto Collection experiment proved conclusively (as told to me by a former Ford executive last week) that corporate guys are not risk takers and lack the entrepreneurial spirit to manage dealerships. Big corporations control from the top but selling cars requires street smarts and adapting to local market and competition. Ford ended its experiment after a couple of years of market share losses amid mounting evidence that factory stores do not deliver a better customer experience nor reduce costs, in fact they proved to be bad at both. GM, perhaps after watching Ford’s travails, and despite repeating the same nonsense about reduced costs through factory ownership, canceled its plans to buy 10% of its dealers, plus the Saturn stores, and operate them in through what it called GM Retail Holdings.

Ford’s failed experiment demonstrated that, franchise laws notwithstanding, dealers are essential partners in the long process of a car’s journey from the factory to a customer’s garage. Franchise laws protect dealers from arbitrary actions by automakers and given the financial commitments they continue to make in response to factory demands in image programs, equipment, training and even vendor selection, the laws are entirely reasonable. Given the intense competition in auto retailing, it’s hard to understand how anyone could suggest that franchise laws hurt consumers.

Franchise dealers’ cumulative investment in land, equipment and facilities easily exceeds $100 billion. Dealers fund 60 days of inventory and another month of inventory in transit that would otherwise fall to the carmaker. The inventory buffer allows automakers to adjust future production levels. For a company like Ford US inventory funding equals about $15 billion at any point in time.

Tesla may be the first start up to launch a car and change the retail process as well but it is definitely not the only company that saw dealerships as a costly impediment to customer bliss. A few years ago I was involved with one such company funded by venture capitalists, and led by a non-automotive executive, that invested in a small car promising to build to order sold though mall-based stores. The car never made it to production and the company folded after consuming the investors’ capital. .

Despite evidence to the contrary and lacking any real world understanding to the business, a journalist writing on Yahoo Autos last year stated “Instead of building cars and selling them to dealers who hawk them to shoppers, Tesla wants to build only cars to customers orders, eliminating part of the auto industry’s massive overhead costs in inventory. By selling cars directly Tesla’s executives believe they can make their customer happy, and eventually sell more cars for less money.” Well we will see if it is fact is more economical for the factory to pay the rent, salaries, delivery and service or have someone else do it using his or her own capital. And build to order works only as long as there is an order bank…what happens when the orders dry up…do you send the assembly workers home, tell your suppliers to send to stop producing until you call?…..unfortunately auto assembly really doesn’t lend itself to build to order. It is capital and labor intensive even when work is farmed out to suppliers.

Every dealer knows that the vast majority of customers want their car that day not a date convenient to a manufacturer. The dealer has always been the buffer with the automaker facilitating inventory management through various incentives and production adjustments. It is the dealer who finds the market-clearing price for a vehicle even at the sacrifice of his or her profits.

Others have tried experiments in selling away from the traditional retail dealer location on the notion that a big box retailer or mall would mitigate advertising expenses by placing cars where the customers are.

Early in the 2000s, Asbury struck a deal with Walmart to sell used cars in the parking lots of Walmart stores. Asbury would take the cars to where the retail customers were at America’s busiest retailer. A few dealers have experimented (as Tesla is now doing) renting inline space in large shopping malls as storefronts to sell cars. So far, the history of non-dealership settings to sell cars – with perhaps the exception of the infrequent offsite tent sale – hasn’t worked. The Asbury/Walmart experiment ended in less than two years when both parties discovered there were too few car buyers among the static population of regular customers who shopped for food and other necessities at their local Walmart each week.

I suspect that once the novelty associated with Tesla wears off, it too will also discover that mall locations aren’t ideal places to market or sell cars. The enclosed shopping mall typically has several large anchor stores – Nordstrom, Macy’s, Neiman Marcus, etc. – and perhaps eighty to one hundred or so “in line” shops like GAP, the Limited, Zale’s, Sunglass Hut, Apple, etc. A large successful mall might have more than a million or more visitors a year – and that’s about 3,000 folks per day. Those big numbers can dazzle but they aren't what they seem. Much of this traffic represents repeat visitors, as it did at Walmart, coming each week or so to see the changing merchandise at her favorite stores – new fashion and seasonal clothing, makeup, shoes or the latest Apple gadget. Everything can be purchased on a credit card. I used the pronoun “her” deliberately because the vast majority of mall stores are dedicated to women and children not the men who would be the targets for an expensive, high tech performance car.

Furthermore, new car models are only really new only every four to six years. The merchandise doesn’t change very often – so on the second or third visit to the mall, the car store looks exactly as it did last month or even the month before. What was fresh once is now stale with the passage of time…so visitors to the mall just skip past that new car display.

What the uninformed forget – or figure out after an attempt or three – is that automotive retailing is very different from traditional retailing. The product car dealers sell is expensive, generally requires financing, and often involves a trade. It often includes helping shoppers match their budget to a car that might not be their first choice but rather one they can afford. The process is slowed by required disclosures and regulations resulting in a pile of documents that have to be signed even for the most straightforward transaction.

A car weighs 4,000 pounds and takes up 50 square feet of space. It can’t be delivered overnight to one’s front door by Fedex. And most folks don’t have a big enough credit limit on their Visa card to pay for it. And what do they do with their trade? Or get it serviced?

While we are talking about myths, how about the still repeated one that people hate dealers so, if given the chance, they will buy a car online. I almost don't know where to start in taking this one apart…..In the early days of the Internet, Silicon Valley funded and lost hundreds of millions, maybe even a billion dollars, on ill-fated ventures that promised to do just that. CarOrder.com, Greenlight.com, and CarsDirect.com (in its original configuration), among others, all promised to avoid the dealership experience. A few actually did that by buying cars from dealers and then reselling them at lower prices to customers until they blew through their capital. Build to Order.com proposed that you would place your order for a fully customized car while lounging in a company-owned showroom entertainment center. Again here the premise was to build these cars using an automaker’s parts and technology but avoiding high labor costs and dealerships and give the customer the exact car they wanted. Build-to-order.com never built anything for anyone.

In 1999 and 2000, I ran priceline.com’s experiment with selling cars online, which like most others of the era no longer exists. The essential elements of the priceline model were replicated by TrueCar.com and of course they too ran afoul of franchise laws for the same reasons as priceline. What I learned then – and this is still true today – we could connect buyers with dealers and that the price of a vehicle was the easiest part of a deal. The other elements are harder to control and often the cause of frustration for the customer and the dealer. People don’t like to hear that their trade isn’t worth the value they saw online or that their poor credit doesn’t qualify them for the no down payment, zero percent loan. There are few people who would think about buying a house online from a few photos taken make rooms seem larger than they are or the neighbors Beware of dog sign. Buying a car is comparable to buying a house, why should we think it should be as easy as buying a pair of shoes from Zappos with a return receipt in the box in case they don’t fit.

Although many automotive websites claim to have “sold” millions cars, even today twelve years after priceline decided to concentrate exclusively on travel, automotive websites link a buyer to a dealer who actually sells the car. The Internet has mostly replaced the newspaper as a source of information about cars and dealers but it has not reduced advertising expense per vehicle or made buying a car as easy as buying a book.

Add up all the monthly traffic to all automotive sites, including automakers, dealers and independent sites – and you’d get more than 100 million possibly close to 200 million unique visitors using the web to get information about buying or selling a new or used car. Except there’s one problem if this traffic is somehow suppose to represent potential sales…the total number of new and used cars sold by dealers at retail and excluding fleet each month is only about two million units, and that is probably generous given that not all retail customers go online..some might just release the same brand of the leased car they are returning to the dealer. So the real shoppers – however you want to define that number – are only a small fraction of the total visitors. So just like newspaper, radio, or TV advertising, dealer spend on the internet is likely no better targeted – once again dispelling the notion that the internet would solve the age-old problem of knowing which 50% of a dealer’s advertising works.

And what was once promised as to the beauty of the Internet for used cars…listings of available cars with pictures, even videos, and stated pricing would make it easy for shoppers to find the best car at the best price. But what has happened is that for any given vehicle, within a similar bandwidth of age, mileage, trim, the price range for specific models is usually within a few hundred dollars, not enough to make price the deciding purchase factor. The Internet hasn’t created a pricing advantage for any seller and customers simply have confirmation that similar cars within a market are priced the same. With the exception of hard to find cars, the differentiating factors are having the car the customer wants, proximity of the dealership and the dealer’s reputation in providing a good customer experience.

In summary, technology is a wonderful thing…and dealers have adopted it nearly full tilt. Sophisticated software to manage every aspect of the business is now de riguer…BDC’s to support internet sales…and eDocuments will eventually become the norm. But the point is that the system of franchised dealers – using their own risk capital to fund their businesses and guarantee millions of dollars of inventory, promote their own brand and that of their OEM, provide the expensive tools needed in their service departments, and manage the endless headache of a workforce – will not be superseded by technology or factory owned mall stores. Factories have learned that they cannot do a better job than independent businessmen at the retail level. And new start ups – many of whom will come and go – with new systems of selling and servicing retail automobiles will all reach the same conclusion: the dealer network is the best way. Thank you for listening today.

Maryann Keller Testimonay RE: Tesla versus the state of Texas

Considerations for the State of Texas

Consumer Benefits of the Independent versus Factory-owned New Car Retailer

April 9, 2013

My name is Maryann Keller. I am the Managing Partner of Maryann Keller & Associates LLC, a management consulting firm specializing in the automotive industry. I have served in this position for more than twelve years. My firm is and has been engaged on a wide variety of consulting projects for clients including automotive OEMs, lenders, private equity firms, government agencies, and retailers. Several law firms and one US government agency have engaged me to provide expert witness testimony in support of litigation. I have never served as an expert witness in any litigation involving or related to auto retailing or auto dealers.

I currently serve as a Director on the Boards of two companies. The first is a privately-owned franchise new car dealership group in the State of Maine, and the second is for Drivetime Automotive, a privately-held multi-state automotive retailer specializing in providing subprime credit customers with affordable transportation. At various times in the last twelve years, I have served on the Boards of several public companies including Sonic Automotive and Lithia Motors, both multi-state franchised dealership operators, and for Dollar Thrifty Automotive Group, a rental car agency. Prior to starting my own firm, I was President of priceline.com’s automotive services division during 1999-2000. That start up operation was essentially a sophisticated lead generation process that matched online shoppers of new cars to franchised dealers.

Before my employment at priceline.com, I worked as an automotive industry analyst on Wall Street for 28 years. I served as Chairman of the Society of Automotive Analysts from 1994-1999. During my Wall Street tenure, I was ranked as an All-Star Analyst 12 times by Institutional Investor magazine. I have authored two books on the industry. My first bookRude Awakening: The Rise, Fall and Struggle to Recover at General Motors, was published in 1989 and received the prestigious George S. Eccles prize for Excellence in Economic Writing from Columbia University. My second book, published in 1993, is entitled Collision: GM, Toyota, and Volkswagen and the Race to Own the Twenty-first Century.
The Texas Auto Dealers Association asked me to submit my comments for your consideration as to the benefits of the franchised dealer system for consumers. I can unequivocally state that the consumer is best served by the franchise dealership system for the reasons elaborated herein. My opinions are based upon my four decades of involvement with the automotive industry, particularly within the United States, during which time I have witnessed challenges to the franchised dealer model, including a somewhat recent experiment by Ford that proved both the value and superiority of the franchise dealership over a factory–owned store.
All too often the debate about what is the better retail solution of the car buyer is couched in vague goals: lower distribution costs, more control over the ownership experience, consistent experience in every store, etc. But this ignores the actual car purchase and ownership experience for the vast majority of new car buyers who acquire a new car every four to six years and in doing so links him or herself to the dealer expecting that dealer to resolve all repair issues, manage recalls and warranty claims, and be their advocate in resolving issues with the manufacturer.
Buying a car is not akin to shopping at Target, Wal-Mart, or Tiffany where the transaction is paid by credit card and requires no further relationship with the seller. Buying a new car is a thoughtful process often involving months of online research and visits to multiple dealerships to test drive vehicles under consideration. Even with the enormous amount of easily accessible information on the characteristics and features of every make and model, retail and invoice pricing, projected residual values, quality ratings etc., the process is different. With a new vehicle, most customers are making significant emotional and investment decisions which require assistance in obtaining new financing and disposal of an existing vehicle often including extinguishment of associated debt. The new car purchase experience is far removed from any other retail purchase as to the unique needs of every shopper and the regulatory and disclosure requirements for each sale.
Further, the customer relationship with any new vehicle (and some used vehicles which offer extended manufacturer warranties) and the selling entity – a new car dealer – extends well beyond the initial acquisition. There are elements of warranty repair, manufacturer recalls (from time to time), and even silent recalls which are addressed at service visits. Warranty periods are generally at least three years in length (subject to mileage limits) or longer with some components, such as powertrain, emissions and occupant safety systems, having manufacturer warranty coverage over an even longer period. Warranty and recalls are exclusively handled only by dealers authorized to represent the manufacturer. And for lease customers, one end-of-lease option includes returning the vehicle to manufacturer’s captive fiancé company or other lender through its dealer network. It is also interesting to note that while General Motors, Ford and others have abandoned some brands in recent years, the remaining franchised dealers were designated to perform the above required functions for the owners of Oldsmobiles, Saturns, Hummers, Pontiacs and Mercurys.
There is a strong consumer interest in having independently-owned dealerships acting on behalf of the manufacturers. The primary reasons result from the following:

1. Desire by the independent dealer to find a solution that best meets the transportation requirements for all customers regardless of income, creditworthiness, available cash, or trade value;
2. Competition among dealers drives product and service pricing to a true market level and offers the consumer a choice among vendors; and
3. Value preservation for both the manufacturer’s brand and dealer’s brand drives behavior to seek customer satisfaction with the dealer acting as in intermediary between the manufacturer and the consumer.

It should be understood that the franchised dealership, an entity owned and operated by a business separate and distinct from the vehicle manufacturer, is nonetheless a franchisee. As such, the franchisee is granted specific rights to utilize certain marks of the manufacturer, sell and service the manufacturer’s products, and engage in a limited number of other ancillary activities such as used car sales, car rental, and other related automotive services. However, the franchisee is not given an unlimited license and must conform to the standards and practices set forth by the manufacturer in order to retain the franchise rights. This can include investing in store image programs, adding service bays, personnel and service hours to accommodate local needs, purchasing specialized tools, investing in continuous training levels of sales and service personnel, meeting specific levels of customer satisfaction based upon manufacturer surveys of every buyer and service customer, and acting in a manner appropriate to maintain the general goodwill of the manufacturer and the brands represented.
As such, the dealer – as the franchisee – must conform to the standards expected by the franchisee. Yet, unlike other franchise systems such as McDonalds or 7-11, the automotive dealer also has his own local, regional, or even nationwide brand to support and maintain. In this manner, the dealer acts as both a “system operator” selling and servicing an automotive brand for a manufacturer but also on his own behalf to support his or her own brand. Think of the local car dealers in your districts. You likely do not think of them as just the “Ford” or “Nissan” store but that of “John Doe Ford” or “Jane Doe Nissan” owned and operated by businesses distinct from their manufacturers. They and their employees are members of the community where they continue to represent the automaker’s brand as well as their own.
This is a singularly different element of the franchised automotive dealer system as opposed to most other franchise businesses. No one goes to a McDonalds or a Fairfield Inn and cares who the actual owner might be – the reputation is solely that of the franchisor. The nature of their products and services are such that there is little variance, if any, among franchisees, the product or service is rapidly consumed (and at relatively low cost), and there is no long term on-going relationship of daily use.
Any new car though is expensive, has a long duration ownership cycle, and warranty claims can only be satisfied at a franchised dealer. The relationship with a new car dealer extends well beyond the initial purchase, and maintaining customer satisfaction with the vehicle becomes not only the responsibility of the manufacturer but that of the local dealership as well, even if different from that where the vehicle was purchased. Hence, new car dealers are different from other franchise operators in that there is usually a name attached to the franchise brand that is promoted, advertised, and carries its own reputation separate and distinct from the vehicle brand. Hence, the new car dealer actually serves two masters – that of his manufacturer and that of his or her own creation.
This distinction is extremely important for one reason: the dealer’s desire to maintain his or her own reputation serves as the buffer between the customer and the manufacturer. It is in the dealer’s interest to ensure the complete satisfaction of the customer during the duration of vehicle ownership – and this may involve satisfaction of warranty claims, policy work as goodwill from time to time (for vehicles out of warranty), and expeditious handling of recalls and technical service bulletins as they arise. The franchised dealer often can be the advocate for the consumer with regard to issues that may be a result of action (or inaction) by the manufacturer to provide redress.
Second, the franchised dealer network – among any given brand – provides choices for the customer as to both sales and service. While different brands compete for customers, within a given brand, a consumer can pick and choose among different dealers offering the exact same products and services. So price competition exists between not only different vehicle companies (e.g., Chevrolet versus Toyota) but between dealers within the same brand as well. The vast majority of new car purchases are done in major metropolitan regions. Here, shoppers generally have access to several dealers of the same brand within a 25 mile radius who compete with each other and while providing convenient access to service without forcing the owner to drive long distances for repairs.
Competition permits true price discovery by consumers for the best deal among different brands. But such competition also exists among the dealers of any specific brand to promote their best deals. Thus, dealers provide a service to all shoppers that may see such promotions – and hence force competing dealers to respond. Here again, the consumer is served by independently-owned franchisees competing for business from consumers in a local market. Likewise with service, dealers compete for such business and drive prices to a market level as consumers have a choice.
I note that while all new vehicles are required by federal law to display a Manufacturer Suggested Retail Price, the reality is that most new vehicles are sold at prices somewhat below the suggested price. Further, the actual market pricing for a given vehicle can vary among markets for a number of different reasons – changes in local demand associated with local economies, regional manufacturer incentives, equipment match (or mismatch) with regional needs and desires, excess or insufficient inventory stock, or simply response to new models from competing brands at the local level. With so many variables in the dynamic automobile marketplace no company or dealer can fix a price over long periods of time. The presence of competing dealerships allows this market-based pricing to occur among brands, models and among dealers.
Third, the franchised dealer system has generally served customers very well. Everyone who wants to buy a vehicle – a necessity for many – is generally accommodated in some fashion. For new and used car buyers, the franchised dealer provides the inventory and financing to provide transportation for many even if means offering an alternative to a new car purchase for some. But as independent businesses, the franchised dealer owns his inventory of new and used cars. There are often hundreds of vehicles available sale – which gives customers same day access to transportation. Because such inventory is owned by the dealer – there is a strong incentive for the dealer to make sure that each and every customer can be satisfied. Once again, the consumer benefits from broad selection, immediate availability, and the on-site services the dealer provides to take trades and arrange financing for the customer.
Furthermore there is no evidence that the vast majority of car buyers are willing to wait weeks or months for a build to order vehicle. The purchase of a new car is often prompted by a life changing event: a new job, relocation to the another city, a move to a new home, the birth of a child, marriage, divorce, a death in the family, or an accident rendering the car a total loss or resulting in high repair costs. We know that the shopping process can begin months before the actual purchase, but once the decision has been made the customer wants the car as soon as possible. The franchised dealer, with his inventory, is generally able to accommodate every customer’s needs and pocketbook. Even if a dealer doesn’t have the exact car in stock, the dealer is generally able to find and deliver that exact car the customer desires within a couple of days. This past October, my sister, having just moved to CT from AZ, decided prior to her move to purchase a specific make and model. I accompanied her and my brother in law to the dealer where they settled on the trim level and color they wanted which this dealer didn’t have in stock. My sister needed a car quickly and couldn’t wait for the next factory shipment. However, within ten minutes, the dealer located the exact vehicle 60 miles away in New Jersey and arranged with the NJ dealer to flat bed the car to CT the next day. Within 48 hours of entering the CT dealership for the first time, she and her husband drove out of the store with their desired vehicle.
One of the arguments made by vehicle manufacturers seeking to control both distribution and service can generally be described as follows:

We can offer a compelling customer experience while achieving operating efficiencies and capturing sales and service revenues incumbent automobile manufacturers do not enjoy in the traditional franchised distribution and service model. Our customers deal directly with our own factory-employed sales and service staff, creating what we believe is a superior buying experience from the buying experience consumers have with franchised automobile dealers and service centers. We believe we will also be able to better control costs of inventory, manage warranty service and pricing, maintain and strengthen our brand, and obtain rapid customer feedback. Further, we believe that by owning our sales network we will avoid the conflict of interest in the traditional dealership structure inherent to most incumbent automobile manufacturers where the sale of warranty parts and repairs by a dealer are a key source of revenue and profit for the dealer but often are an expense for the vehicle manufacturer.

The fundamental problem with this argument is that the consumer has no choice but to deal with the factory itself for both sales and service. There is no opportunity for price discovery by consumers for a new car or for service as there is no competition among stores and service centers all are owned by the factory. All new cars are priced as set by the factory – and not determined by the marketplace among competing sellers. Second, the factory also determines service rates, parts costs, and makes its own determination as to whether a claim is valid for warranty coverage. There is no independent arbitrator that can act on behalf of the consumer as in the case of the independent franchised dealer system. And last, the factory owned store has little impetus to accommodate customers that cannot afford their new vehicles – in contrast to the franchised dealer which has a strong motivation to satisfy each and every customer with a transportation solution.
There is yet another problem with the factory-owned model of distribution and service. Since the factory controls both the parts supply as well as the technical training for the mechanics, there is little impetus for the factory to provide such to independent third party agencies. In effect, the factory service locations and its own mechanics (whether based at a service center or delivered through mobile repair trucks) forces all customers to utilize its labor and needed parts at prices it solely determines. The customer is effectively trapped within the network solely controlled by the vehicle manufacturer.
This is in contrast to the franchised dealer system where a customer can access parts and labor among competing independently owned service centers – at prices that are determined by the market. Further, franchised dealers also sell factory original parts to vehicle owners, independent mechanics, and even to other dealers. Some franchised dealers have large wholesale parts inventories and supply factory parts to various professional buyers, thus supplementing the manufacturer’s own parts distribution system. In contrast, the factory-owned store system, as a sole source, has no incentive to do so in order to maximize its own revenues and eliminate potential competitors from servicing its vehicles. Again, not only are customers deprived of the right to shop for the best service price (and experience) but other third parties – such as independent mechanics or other dealers – are deprived of the right to service and support vehicles sold and serviced only by the factory.
Last, there is no inherent conflict between the factory and the franchised dealer with regard to warranty and service. It is true that warranty work can generate a profit for the dealer – and the desire to provide warranty service is a motivator, not detraction for such independent dealers as it is a solution which optimizes customer satisfaction. In the factory-centric model, as a single source provider of service, such motivation to supply and support warranty service becomes diminished as it is only a cost to the factory, not a revenue stream.
There is a notion that factory stores eliminate costs in the factory-owned distribution system that can be passed on to consumers. It is easy to find essays written by uninformed professors on the topic that have helped to perpetuate this notion. One has to ask exactly where those savings might arise. It is also merely hypothetical to assume that the automaker would be altruistic and pass any “realized” savings on the consumer.
There are certainly no savings in fixed assets such as the dealerships land, buildings, or equipment. Nor would there be a reduction in employees. Variable costs such as advertising would remain unchanged. So the question is whether there would be savings in inventory. The “build to order” model remains a theoretical ideal. Currently auto companies are paid immediately for their output by their dealers. Each dealer is then obligated to find the market clearing price for vehicles in high demand as well as models that might be at the end of the production cycle facing intense competition and requiring heavy discounting.
Auto assembly is capital intensive which requires large facilities and skilled workforces. It is called auto assembly because vehicles are assembled from parts and components produced by suppliers that fabricate them in equally capital and labor intensive production plants. Parts producers bid contracts based upon annual production volume targets. They make investments to support projected volumes. Neither the supplier community nor the automakers themselves can rely upon a fixed price retail model based on “build to order” as a way to manage or reduce costs. For both assembler and parts suppliers steady output above breakeven optimizes profits. Stop start production raises unit costs because of the high fixed costs associated these factories. Every product has a life cycle whether an Apple iPhone or Chevrolet Silverado. Demand for individual products varies not only because of macro economic factors but also competition. So to assume that there are savings from a perpetual order bank is simply not credible or supported over the long term even by models like Dell Computer. Dell Computer’s build to order model worked as long as there was no iPAd.
Both GM and Ford experimented with factory ownership of retail stores during the late 1990s. Ford’s ill-fated Auto Collection experiment proved conclusively that factory ownership did not work well. Ford ended its experiment after a couple of years of market share losses amid mounting evidence that its factory stores did not deliver a better customer experience nor reduce costs. GM, perhaps after watching Ford’s travails, and despite repeating the same nonsense about reduced costs through factory ownership, canceled its own planned takeover of 10% of its franchised dealers.
In summary, the independent franchised dealer system does provide the best solution for consumers for the reasons elaborated above. Of course, I recognize that the franchised system is not perfect – and there are and will always be a few dealers which do not provide high levels of customer satisfaction. Yet the franchise system has survived for over 100 years and best serves customer needs.