The Alpha Dawg weighs in on FCA's plans to squeeze dealers' profits, Millennial marketing madness and Sen. Elizabeth Warren's auto finance revolution.

The Alpha Dawg weighs in on FCA's plans to squeeze dealers' profits, Millennial marketing madness and Sen. Elizabeth Warren's auto finance revolution. 

There’s a running joke in my family that I am our only Yankee, having been born in Philadelphia. But my parents moved to Florida when I was two years old and I have lived in the South ever since. So it truly offends me when people from other parts of the country make fun of Southerners and our way of life. We’re not all Duck Dynasty refugees or Honey Boo-Boo genetic throwbacks. Those people are actors who are deliberately perpetuating a stereotype, and they may be laughing at you even harder than you’re laughing at them.

It goes both ways. I never believed for a second that all you Northerners are cold, rude, indifferent gangsters. I am always treated with warmth and respect when I travel to New York, New Jersey and Boston. I have even added a few of your sayings to my lexicon. “Get outta here!” and “Forget about it!” are my personal favorites.

In return, I invite you to try a Southern expression and see if it sticks: Down here, when someone does something unbelievably illogical and stupid, we ask them, “Did you bump your head?” Unfortunately, recent events in the retail automotive business have me asking that very question of the factory executives, marketing “experts” and regulatory firebrands who seem to be hell-bent on destroying all the gains in profits and consumer trust dealers have made in recent years.

The Squeeze Is On

The headlines in the trade publications and Detroit media outlets varied in verbiage, but they all told the same story: To boost their profits, Fiat Chrysler is increasing vehicle invoice prices without raising MSRP. That’s right: FCA is now, in effect, charging dealers an additional $300 per Chrysler, Dodge, Jeep and Ram vehicle.

Sound familiar? It should. This is the same dirty trick that virtually every manufacturer has been playing on their dealers repeatedly for several decades.

No wonder so many consumers still distrust us. It was only 20 years ago that vehicles were marked up 25% from invoice to MSRP. The dealer had room to negotiate and absorb negative equity into the deal structure. Now, with most manufacturers allowing 4% to 6% markup in new cars and trucks, car buyers are starting to believe the dealers must be cheating them. If only they knew.

So Chrysler, Dodge, Jeep and Ram dealers are left to sell $20,000 vehicles with less than $300 total gross margin to work with. These terms are unconscionable and they will hurt sales. The dealers reportedly got the message in a conference call to the dealer council from Reid Bigland, national sales director for FCA. I wouldn’t want to deliver that news in person either. FCA dealers are already working with half the markup their General Motors counterparts get and a fraction of what Ford dealers enjoy — and those are disgraceful enough.

So why would FCA put the squeeze on dealers when they are selling at record multiples and fueling the company’s phenomenal growth?

I see this as a desperate move on the part of Sergio Marchionne. Rumors abound that FCA’s Italy-based head honcho has been knocking on every other manufacturer’s door, looking to sell the company or secure some sort of financially beneficial partnership. Why? Because the high-flying Chrysler brands are saddled with Fiat and have to absorb European economic liabilities.

I predict this latest move to further compress margins is going to herald another wave of aggressive stair-step incentive programs in the near future. That will have dealers climbing all over themselves to slash each other’s throats to get the factory objective-based incentives. The margins and the holdback profits will cost them deals if that is all they have to work with. Dealers will have to take losses on the units in hopes of hitting their quotas — which the manufacturer will continue to ratchet up even higher.

Don’t forget, third-party retailers are telling consumers they can get guaranteed savings of $2,500 to $3,500 off MSRP. The less room dealers have to move, the more your reputations will suffer. This takes total gross profit in deal to less than $1,000, including margin and holdback, if you don’t take a loss in order to hit your objective.

Finally, despite their good looks, gadgetry and fuel economy, the latest FCA products are taking a major hit in the initial-quality reports. In other words, they’re selling well right now, but the reckoning is bound to happen.

I wish I was wrong about this one, but I don’t think I am. There’s a “For Sale” sign in Chrysler’s front yard, and the seller is doing his best to inflate the asking price.

Fiat Chrysler Automobiles’ Reid Bigland was reportedly tasked with delivering the news that FCA would increase vehicle invoice prices for Chrysler, Dodge, Jeep and Ram vehicles — without raising MSRPs.

Fiat Chrysler Automobiles’ Reid Bigland was reportedly tasked with delivering the news that FCA would increase vehicle invoice prices for Chrysler, Dodge, Jeep and Ram vehicles — without raising MSRPs. 

The Continuing Assault on Profit Centers

Watching TV this past weekend, I caught the first commercial for Cars.com’s new “Service and Repair” referral system. Fixed ops is simply too good a target for the vendors to pass up. We all knew it was coming; we just didn’t know who would be first.

The good money was on TrueCar. In the initial public offering documents the company’s executives submitted to the SEC, they mentioned TrueTrade, TrueLease and TrueLoan among a list of future projects. They are already experimenting with financing and trade values but they really haven’t crossed over into a full-scale marketing effort in those arenas … yet. It was inevitable that online services would expand into other profit centers in the dealerships, and service and F&I are two leading revenue generators.

But Cars.com beat them to it, announcing in an April 21 press release that stated, in part, “With this game-changing online feature, Cars.com aims to remove the stress and fear of the unknown associated with maintaining, servicing and repairing a vehicle. Through innovative, confidence-building features that help save consumers time and demystify the entire service process, car owners can approach any service or repair situation with less apprehension.”

I especially love the parts about demystifying the process and reducing apprehension, which of course implies that service facilities might be crooked. Thank God somebody has sent a savior to the consumers to protect them from us.

So I went to Cars.com’s Service & Repair page, entered my ZIP code and selected “brake job” for a 2010 Buick Enclave. The service recommended a dealership 40 miles and seven Buick dealers away from my home. The price? Somewhere between $440 and $666.

I continued to click around and soon realized that many of the facilities Cars.com listed are members of “RepairPal”-certified shops and service facilities. Further investigation revealed a rogues gallery of gas stations and oil change shops, some with only two service bays. Now, it says RepairPal members are required to employ ASE-certified mechanics, but I did hours of research, and I couldn’t shake the impression that I would be sent to either a reputable dealer with factory-trained techs and OEM-approved parts or Joe’s Gas and a mechanic named Bowser.

Once again, I could be wrong, but I doubt it. How do you feel about subsidizing this program?

Cars.com’s new Service & Repair platform could herald a wave of third-party sites promising a reduced-stress approach to vehicle maintenance.

Cars.com’s new Service & Repair platform could herald a wave of third-party sites promising a reduced-stress approach to vehicle maintenance. 

Those Lovable Millennials … Again

News flash! Stop the presses! Our latest, revised, up-to-date research now shows that everything we previously thought about Millennials is absolutely untrue. So if you believed everything we previously published about young people’s buying habits, please disregard all of it because we have some new stuff for the manufacturers to waste money on and shove down dealers’ throats!

OK, give me a minute. I’m laughing so hard it hurts my sides.

Folks, haven’t I always said, in article after article, blog after blog and speech after speech, that all that Millennial crap they were feeding us was just that? Believe it. By the time Millennials become a viable economic force, they will transform into traditional consumers. It happens to every generation. Even the hippies suited up and joined the executive workforce eventually.

Despite that incontrovertible and indisputable fact, a veritable cottage industry of Millennial marketing acumen has sprung up nationwide, led by sanctimonious, new-age Millennial gurus. What’s even more absurd is that the manufacturers are taking every word of it as the gospel truth and throwing billions of dollars away in exchange for the promise of a competitive edge and future returns.

Be honest. Don’t you just throw up in your mouth a little bit every time some fool starts telling you what Millennials like and what they don’t like, and how we need to adapt to Millennial culture and start being Millennial-centric at our dealerships? Where did they find these idiots?

I know what you’re going to say: The research backs them up. But it wasn’t that long ago — and by that I mean last year — that the latest research showed that those city-dwelling, bike-riding, car-sharing Millennials didn’t even want to own their own vehicles. Then, just last month, Bloomberg Business and J.D. Power and Associates reported that Millennials bought nearly 30% of all new vehicles sold in 2014. Oops! I guess that means they just outdistanced Generation X to take second position in the buying-power pecking order, right behind the Baby Boomers, i.e. old people, like me.

How could this be? Easy, say the authors. The Millennials are getting jobs and having kids and moving to the suburbs, thus increasing their dependency on cars. I guess the gurus didn’t see that one coming. Nor did the factories, which continue to produce Millennial advertising for Millennial vehicles on Millennial media. Did they bump their heads?

If the manufacturers really wanted to know what they had to do to capture sales in the midst of a demographic shift, all they had to do was ask their dealers. Actually, on second thought, all they had to do was ask their salespeople and their managers. … You know, the people who are actually dealing with real customers, in real showrooms, in real time. They would have quickly discovered Millennials are blending in with everyone else.

You say they shop differently? That’s true. They use smartphones and tablets. Then again, so do their grandparents.

You say they don’t like to negotiate? Right again — until you give them a price. The fact that they try to drive it down via text message doesn’t change the fact that they’re negotiating.

You say they don’t like a long, drawn-out sales process? Who does?

The mere existence of technology-driven car buyers is not justification to throw everything we know about selling vehicles out the window. Any factory executive who thinks otherwise should be assigned to work in a dealership, on your pay plans, with their margins, for a year. I guarantee their decisionmaking prowess would increase exponentially.

Be Afraid. Be Very Afraid.

Ziegler fears the advancement of reforms proposed by Sen. Elizabeth Warren (D-Mass.) which would all but eliminate dealer-arranged financing at the expense of car buyers.

Ziegler fears the advancement of reforms proposed by Sen. Elizabeth Warren (D-Mass.) which would all but eliminate dealer-arranged financing at the expense of car buyers. 

In recent press appearances, Sen. Elizabeth Warren (D-Mass.) was at it again, demonstrating her ignorance and lack of comprehension for the complexity of the impact the revolutionary automotive finance regulations she’s advocating would have on consumers.

What scares me most is, despite announcing she will not run for president in 2016, she could possibly be a serious contender for the White House if the Hillary campaign unravels.

Warren is calling for total elimination of dealer markup on indirect loans and even outlawing dealer-arranged financing altogether. She believes the Consumer Financial Protection Bureau should have iron-fisted control and regulation of the indirect lending sales and processes in car dealerships. She cites predatory and discriminatory lending practices and loose standards, blaming it on Congress exempting dealers from CFPB regulation in the 2011 Dodd-Frank financial overhaul legislation. 

In the State of New York, there is another move underway to completely outlaw dealer-arranged financing for consumers.

Folks, all these attacks on dealer-arranged financing miss several points. First and foremost, a significant portion of the car-buying public could never get an auto loan if it were not for the dealer leveraging the buying power of their relationship with their banks and finance companies to get them to stretch. Very few credit-challenged buyers have any clout to work the lenders the way we do. F&I and special finance managers are experts at creating second chances for people who need dependable vehicles to live and work, often with little equity or stability.

Of course, all of these liberal politicians keep beating the drum that we actively discriminate against minority car buyers, largely based on a ludicrous theory that is about to be fatally undermined by our nation’s highest courts.

I swear to you, after working, training and consulting in this business for 39 years, I have never discriminated against anyone, and I don’t know anyone who has. What a stupid argument that we somehow select what type of person we’re going to make more profit on and which other people we’re going to give a profit break to. What good would that do?

I believe we make as much profit as is legally and ethically available on every customer without any discrimination whatsoever. Loan rate markup is capped by the lenders and we have no leeway to go above it. Varying rates are the result of varying credit scores and varying credit histories. We have no control over whether or not the customer sitting in front of us paid their credit card bills on time,  lost their home in the mortgage crisis or had a vehicle repossessed. We have limited reasonable markup, usually one or two percentage points of profit, and it’s uniform. There is no room for discrimination in a productive, compliant F&I process.

The real argument here is anti-business in general. We have a right to make a legal, ethical, reasonable profit on what we do and the services we offer. I have personally always been an advocate of reasonable profitability. That is what I believe is under attack here.

I understand Sen. Warren was born and raised in Oklahoma — not the South, but close. I wouldn’t mind meeting her one day. I would shake her hand, smile and ask, politely, “Senator, did you bump your head?”

Class Reunion

Debbie and I just got back from my 50th high school reunion in Meridian, Miss., where I completed my senior year after my dad, a military man, was reassigned. My friends from Forrest High School in Jacksonville, Fla., are having their reunion later this year, and I plan to attend that one as well.

I was amazed at how many of my friends made it to the reunion. I joked that a bunch of old people had snuck in and stolen our name badges. The next day, I took Debbie on a trip down memory lane. I showed her the house we lived in, the lake we swam in and the shell of a bakery where I worked one summer. We saw my old school and ate at Weidmann’s Restaurant, a historic landmark. Folks, if you haven’t touched the green, green grass of home in a long while, I highly recommend it.

Before you leave, be sure to weigh in on this article. I always look forward to hearing your thoughts and comments, even if you think I bumped my own head. Please find me on Facebook, YouTube and Twitter, and keep those emails, calls and text messages coming. 

Author

Jim Ziegler
Jim Ziegler

Jim Ziegler

Jim Ziegler ranks among the industry's most recognized and honored trainers, consultants, authors, speakers, and forecasters.

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Jim Ziegler ranks among the industry's most recognized and honored trainers, consultants, authors, speakers, and forecasters.

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