Hi Bendetto,
Thanks so much for your response. I should have refrained from the word ‘fleece’ as that would be making assumptions. Generally speaking, your F&I manager is one of the best, if not the best, salesperson in the house. You can tack on some good positive cash flow on the services and bumps in rate that happen in that room.
It is challenging to find an analogy to car sales with any other static product on the market. This is because, and let’s take the TV as an example, or any other item, the standard is to double cost, which equals wholesale and then the retailer will double that cost to make it retail. Now there is certainly a +/- variance to that, and I would set a baseline of +/- 10% that can exceed on either end.
However the car industry apparently does not work that way. The car maker purchases its parts, builds their vehicles, and ships them to their ‘retailers’ for (on average) 92% of MSRP. So in a traditional scenario, if cars were like, I don’t know, soap lets say, where if soap costs 1.50 to make and you sell it wholesale to the retailer for $3.00, then the retailer will MSRP it at $6.00, then they would build a MSRP $50,000 car at $16,600 cost, sell to the dealer for around $33k, who would sell it to the customer for around $50k. But that’s not how it works. Instead, let’s take the Buick Cascada with a difference of 2% between ‘cost’ and MSRP. A lower end car perhaps? OK, then let’s go with the Alfa Romeo 4C @ 4%.
With my business, I take a very traditional approach. I make my product at cost x, i then sell it to retailers for double of x. Then the retailer sets msrp of the doubled x.
Now say I was thinking of starting an auto dealership. For arguments sake, I want to purchase a Mercedes Dealership. Now first, I need to have about 10 million liquid. I go and meet with Mercedes Representatives and tell them I would like to sell their cars in my store. They go sure thing Onyx, however your profit margin is only on average 7%. But then, wait, no one actually pays 7% over cost, so let’s say on average about 3%. Now not everyone who is 10 mil liquid is brilliant, but I have to guess that most of them are fairly smart to get to that much money. Then the rep goes, oh, but you can make money other ways as well, but really, we can’t give you definitive numbers on that. You will probably get about x amount of oil changes annually, and depending upon how well built our vehicles are, you can expect to maybe make around x. I go, ok, let me get this straight. I have to pay 93% of the vehicle’s actual price to get it on my lot, I probably won’t make any money after you factor in keeping the lights on, admins, utilities, etc, we have no definitives on the amount of used cars and service we will do. This is a GREAT business model. Where do I sign!!??
No, I would be running to the nearest McDonald’s Franchiser, going to Burger U and making at least double my money every year guaranteed. In the end, the business model that the industry is selling to the public sucks, and I would have to believe if investors and or dealer owners heard this, they would think the same.
Let’s think about this for a moment. I open up a brand new Mercedes dealership, I have to purchase say 100 cars at 93% of the total price. I have zero people coming into my dealership for oil changes or to purchase used cars (because I don’t have any) and then i have to sell most of these cars at cost? Do you know how absolutely insane that sounds? Now to top that off, 20 years ago, these same cars had an average margin between cost and MSRP of around 18% and that number has dropped more than 50% and you want me to buy into this? I’m literally laughing out loud as I type that.
OK, so I will bring up a recent deal that happened in February. HN108 I believe it is, who is one of the more experienced ‘leasehackers’ on this forum, began talking about and then teaching others, how to get around 25% off of MSRP on an Infiniti Q50 3.0t. Now there were some Factory to Customer incentive, not much. What HN108 kept saying however was that he knew there was at around 9k of cash out there that could be used towards the vehicle. Where did he get this number? It surely was not the 1% of MSRP from NVDR or SFPAP. One would think that it was just an anomaly, that was until we began to see other get very close to his numbers in different parts of the country. There is no way that could have happened without some factory to dealer ‘trunk money’ involved.
To close, please know that I am not attacking anything you are saying, and on the contrary, I welcome intelligent debate with you. However I feel as though the story is incomplete. The numbers do not add up for me, and the business model, the way it is presented.
One final thing that has always and will always confound me. No other manufacturer provides the ‘cost’ of their item so readily and openly to the public as the auto industry does. I would surely not want the actual ‘cost’ of my items to be known to the public who purchase them at MSRP or close to it. What this indicates to me is the auto industry intentionally wants us to know these numbers whether real or not, because it benefits them financially. Otherwise you would have shareholders and Dealers losing their minds about the level of transparency. It would be like me going on TV and saying…Hey, I know my product sells for $45.00 MSRP, but I actually make this stuff for only $5.00. So unless I was actually making the item for $1.00 and telling them it was $5, why in the world would I do it?
