NADA White Paper on Incentives

I found the NADA White Paper on Used Vehicle Depreciation (pdf) interesting. Key sections are:

• Why we’ve seen so much volatility in depreciation in the past
• What to expect in terms of depreciation through 2014
  
• How external factors influence depreciation trends
  
• Which vehicle segments face a greater upturn in depreciation

Ruggles

“Buy a Car, Get a Check” and the recent NADA White Paper on Incentives

ruggles: the following is a collection of notes and has not a published column.

NADA recently published a long awaited white paper on incentives. While it is chock full of salient data and information, there are some things missing. I will try to fill in some blanks based on my own experience and perception. Before getting into the discussion, it is important to understand that the conclusion of the report, that incentives degrade residual values and therefore brand equity, is unassailable. My purpose is to add to the discussion.

I began my auto business career in 1970 in a Chrysler Plymouth dealership. Markup on full sized vehicles was 22.5% with a 2% holdback. At GM and Ford, I believe the holdback was 2.5%. There was an annual carry over allowance of 5% that Chrysler dealers counted on to move end-of-model-year inventory. At the low end, the markup was 14.5% on a Valiant or Duster.

No one was too worried about Toyota and Datsun in those days, but Volkswagen was certainly a factor. I have no idea what incentives and marketing strategies those auto makers used in those days.

My first recollection of “stair step” incentives was in the middle 1970s, perhaps as early as 1974. I recall a stair step incentive based on an assigned objective on Plymouth Valiant models. I recall a Guaranteed Value Program (GVP) on Chrysler Imperial leases that provided a $900 payment on leased Imperials to even out their resale value with a Cadillac Sedan de Ville. Those leases were privately capitalized lease company transactions. “Showroom Leasing” as we know it today hadn’t yet been invented.

To add additional perspective, a “long term” finance contract was 36 months in those days, with some 24 and 30 month terms occasionally used by borrowers. Borrowed down payments were fairly common, with a buyer trip to the “mouse house for a dip” being common in the vernacular of the day. An average interest rate was 6% ADD ON, which was about 12% APR. The Federal Truth in Lending Act had been passed in 1968 and even though the payment books of the day were based on an “Add On” interest calculation, the actual APR had to expressed on the bank contract along with the finance charge and the total of payments.

The first consumer rebate came about as a consequence of the recession triggered by the 1973 Middle East war and the OPEC oil embargo. Ex major league baseball player Joe Garagiola was everywhere with Chrysler/Plymouth advertising in 1975 with, “Buy a Car, Get a Check.” Chrysler led the auto industry in pulling the U.S. economy out of recession. There was considerable pent up demand and the new purchase activity quickly cleared dealer inventory, prompting them to order more. Soon the auto plants were humming again.

An ongoing problem in the economy was “stagflation” and the resulting MSRP price increases spawned the advent of 48 month term auto loans. In the run up to the 1979 Iran hostage crisis, and another spike in fuel prices, Chrysler was near death. They continued to build cars on speculation, as they had done for years, but the dramatic slowdown in sales stopped dealers from ordering inventory. That didn’t stop Chrysler from continuing to build. They stacked the unsold vehicles in every parking lot they could find. They booked the vehicles as assets, but they were running out of cash. It was common to see weeds growing up through the gap between the fenders and hood of these vehicles waiting for a dealer to order them. Thermostats rusted shut, resulting in engine damage when the vehicles heated up when they were loaded and unloaded for transport. These vehicles were largely odd ball color and equipment combinations as they were built with whatever parts Chrysler had available at the time. To move this inventory and produce sorely needed cash, Chrysler paid its dealers big money per vehicle up front, as well as offering a large consumer rebate. Chrysler drafted the dealers’ floor plan accounts immediately before shipping the vehicles, while paying the dealer for the purchase incentives and consumer rebates months later.

Of course, all of this crushed the company’s already weak resale values. I recall paying $4250 for a 1979 Dodge St. Regis in 1980. I bought the car for my parents. The vehicle had an original MSRP of about $10,400 and had 6,000 miles on it. As a percentage of original MSRP, these incentives must have set “all time” records. So did warranty claims. The best values were the low mile pre-owned vehicles that were everywhere.

While I don’t have “first hand” knowledge, I have reason to believe that similar measures were in place at the other domestic OEMs.

The industry saw another period of extreme production pushed via incentives when the domestic OEMs, in particular, short-cycled rental vehicles, producing large volumes of off-rental units at really cheap prices in the late 1990s. This situation created an opportunity for some of the most compelling pre-owned lease payments the world has ever seen. Lenders failed to account for the drop in residual value precipitated by the flood of rental returns to the market. So did the common residual guides. It wasn’t uncommon to see a lender guarantee the value of a vehicle 36 months out at a higher value than it could be purchased from auction a year old. The industry saw reverse amortization leases.

Astonishingly, the lenders, who took great pride in their “risk mitigation” departments, failed to pick up on this. The result was predictable. Many banks refrain from pre-owned leasing today because they think pre-owned leasing is risky. If they think they can guarantee the value of a vehicle 36 months from now at a higher value than it can be purchased for today, it might be a little risky. This same anomaly happened again in 2008 when fuel prices killed the current market on pre-owned "heavies."

...invoice hasn’t been “Invoice” for over 30 years

Against this historical backdrop lies my major point: Through all of this, banks still used “Invoice” as their “advance” or “amount financed” lending guideline. They still use it today. Invoice hasn’t been “Invoice” for over 30 years, as is well-observed in the NADA report.

Since the late 1970s, dealer transactional gross profit has moved from above invoice to below invoice. The average consumer pays less for a new vehicle than the dealer pays the factory when the OEM drafts on the dealer’s floor plan account. Gross profit has moved from “over invoice” to “trunk money.” The amount financed is MUCH higher as a percentage of dealer NET vehicle cost than it ever has been, while at the same time, loan terms have increased from 48 to 60 and now 72 months and higher. Now we see 84 and 96 month terms becoming common. Negative equity on a trade in is much more common than not, despite the recent strengthening of used vehicle values. That will be temporary, as it reflects a pre-owned inventory shortage resulting from slow new-car sales during the Great Recession amplified by Cash for Clunkers.

Bottom Line: Rebates go with extended term financing like peanut butter goes with jelly. Certainly, the approach imports have taken is preferable to that taken by OEMs who use customer cash. But as long as extended term is what is used to provide low monthly payments, consumer rebates and trunk money will remain with us, for better or worse.

But there’s more to this story! As mentioned in the NADA White Paper, there was a point where the OEMs began to reduce dealer markup over invoice. This has certainly contributed to dealership sales staff turnover as well as reduced new vehicle margin as a percent of sales. We used to make $1300 gross profit on a new vehicle when the MSRP was $10K - $12K. Reduced margin over invoice also helped fuel the move to gross profit as “trunk money” instead of gross profit over “Invoice.” Hell, some dealers START their deals from “Invoice” these days. Most consumers have been trained to feel they have the “right” to know the dealer’s invoice, and the industry has a plethora of vendors eager to give it to them. That genie isn’t going back in the bottle. But I find it interesting that so many dealers actually fund the same vendors who demonize them to the consumer one minute, while providing the dealer’s proprietary information the next.

The point is that our industry, on purpose or inadvertently, has made it a highly complex task to determine the actual net cost of a new vehicle. Dealership staff themselves have a difficult time figuring it out, as evidenced by the regular charge backs that occur as a result of factory incentive audits. The world seems to be clamoring for even more transparency while dealers know that if their own staff know their true net cost, they couldn't wait to give that away too. And there are always vendors to help that process along.

With the “stair step incentives,” Customer Satisfaction Index kickbacks, and purchase cash money on top of “First Time Buyer,” “Plumber,” "Realtor,” “Glass Company,” “Loyalty,” “Conquest,” “College Grad,” "Friends and Family" and “Military” incentives, who can figure it all out? To a consumer, it’s like drinking through a fire hose. A skeptic might think this is by design. I think it’s the only way our industry holds on to the embarrassingly low gross profits it maintains today.

While the NADA White Paper on incentives is salient, I’d like to add these points to mix for consideration.

Smitka adds that the transaction pricing variance – still there in the earlier days of larger differentials in bargaining skills – makes econometric studies of vehicle demand a challenge. Indeed, AutoFacts (now part of PwC?) began as an effort by a former GM economist William Pochiluk to build a database of prices that corrected as best as possible for invoice versus list and rebates by marketing region and date. Yet I've read papers published in top economics journals that use list price, though it's well-known that there are systematic and non-trivial price differences across the model year. Some is laziness in searching for better data, some may be the lack of budget to buy the cooperation of AutoFacts. Take statistical studies of auto demand with a large grain of salt!

People LOVE Their Car Dealer, But Hate Yours

Steve Finlay - WARDS June 2013

People carry on a love-hate relationship with car dealers.

They typically love their dealer, as evidenced by rating websites where grateful customers say things like:

• “He cares about his clients and is extremely helpful with any questions or issues.”
• “I have always been extremely pleased with the service and professionalism.”
• “It was honestly the BEST customer service I’ve received in my whole life.”

But many consumers dump on dealers in general. Disliking from afar is a human flaw. Disdaining faceless groups is a building block of bias.

So when the National Automobile Dealers Assn. said the traditional franchised-dealer system actually protects consumers, angry Internet users began pounding their keyboards.

“Yes, everyone I know leaves a dealership thinking, gee, that dealership is really interested in protecting me and my interests rather than their own interests,” one sarcastic wag wrote in the reader comment section of an online story mentioning NADA’s claim.

“Very disappointed to see that NADA thinks we’re a bunch of morons who will buy this line,” someone else commented. “I could respect them more if they would just come out and say they were trying to squash a competing business model.”

Another person proclaimed: “The arrogance of trying to tell us they are just watching out for our best interests is stunning.”

All this bluster is tied to electric-vehicle maker Tesla deciding to short-circuit the conventional dealer system by selling its vehicles directly to customers.

Tesla has opened small showrooms here and there where shoppers can check out the single-product Model S, then order one online from the manufacturer.

Some consumers think that’s the way to go. They see dealers as needless middlemen who hike up vehicle prices, even though one could argue prices would rise if dealers weren’t competing against each other, and a customer instead had to buy a particular vehicle from only one source: an auto maker.    

Many foes of the franchise system seem woefully uninformed about how it works. Yet, they praise Tesla founder Elon Musk for trying to “revolutionize” how cars are sold. But auto companies, not dealers, came up with the franchise system.

Auto makers did that because they deemed it better for someone else to sell and service products, especially if that someone covers the facility costs. Accordingly, dealers collectively have invested billions in their stores.

Auto makers realize their core competency is in making vehicles, not selling them. Every now and then, an auto maker will give auto retailing a shot. In the late 1990s, Ford unsuccessfully tried in certain markets, such as Tulsa, OK, and Salt Lake City, UT. It took years for the smoke to clear from that bomb.

A newspaper columnist decries the fact that if you want a Ford, you can’t march down to your local general car store to get one. No, you must buy it from a Ford dealer.

That’s because auto makers want it that way. They don’t want big-box auto stores selling different brands, side by side, under one roof. You’d find plenty of dealers willing to do that, but good luck finding a manufacturer.

Dealer associations and Tesla are battling legally and legislatively over the EV maker’s desire to sell cars directly to consumers. Meanwhile, Tesla stock looks like a bubble ready to burst.

“Elon Musk has done an amazing job of driving up Tesla’s stock price,” Bill Wolters, president of the Texas Automobile Dealers Assn., tells me. “He’s a master of P.R. What puzzles me is that he has never tried the franchise system, yet he insists it won’t work for him.”

Throughout automotive history, start-up companies selling limited-appeal products in unconventional ways have suffered high fatality rates.

I’m not saying the dealership franchise system is perfect or that it will last forever. But I bet it outlives Tesla Motors.

Auto Dealers Take CFPB Issues to Washington DC

Excerpts from NADA Front Page; comments by Ruggles follow

More than 400 fran­chised auto deal­ers weighed in with Wash­ing­ton law­mak­ers ear­lier this week on the Con­sumer Finan­cial Pro­tec­tion Bureau’s (CFPB) effort to end the dis­counts that cus­tomers can nego­ti­ate when financ­ing a car or truck through a deal­er­ship. The vis­its to Capi­tol Hill were orga­nized as a part of the National Auto­mo­bile Deal­ers Association’s Wash­ing­ton Conference.

Deal­ers asked their sen­a­tors to sign the let­ter authored by Sens. Rob Port­man, R-Ohio, and Jeanne Sha­heen, D-N.H., request­ing that the bureau explain how elim­i­nat­ing a dealer’s abil­ity to “meet or beat” a competitor’s rate is good for consumers.

A key ally in the deal­ers’ fight, Rep. Gary Peters, D-Mich., told the deal­ers in a speech on Thurs­day that he’s “very con­cerned” about the CFPB’s recent effort to alter the $800 bil­lion auto finance mar­ket­place with­out a hear­ing or offer­ing analy­sis for pub­lic scrutiny.

“I believe it’s absolutely essen­tial that we have a very com­pet­i­tive mar­ket­place so that folks can get the low­est rate they can for their loans, and cer­tainly dealer-assisted financ­ing is about that,” said Peters, who along with 12 Democ­rats on the House Finan­cial Ser­vices Com­mit­tee sent a let­ter to the CFPB demand­ing greater transparency.

“The CFPB has not pro­vided any infor­ma­tion about its study or how they com­pare the numer­ous fac­tors that can affect auto inter­est rates,” said NADA Chair­man Dave West­cott, a new-car dealer in Burling­ton, N.C. “Even more shock­ingly, the bureau failed to exam­ine how this change could impact the cost of credit for con­sumers. In-dealership financ­ing has been enor­mously suc­cess­ful in both increas­ing access to credit, and reduc­ing the cost for mil­lions of Americans.”

Ivette Rivera, NADA vice pres­i­dent of leg­isla­tive affairs, said that sen­a­tors were recep­tive to the dealer’s request to sign on to the Portman-Shaheen Auto Finance letter.

“Early reports from our Hill meet­ings indi­cate that mem­bers of Con­gress on both sides of the aisle think that greater trans­parency from the CFPB is needed,” Rivera added.

Ruggles writes:  The issue is over dealer "rate participation."  Dealers "buy" money from lenders at "wholesale, and distribute it at "retail."  The CFPB alleges that all consumers aren't treated equally.  They have set out to regulate dealer rate participation via a proxy strategy.  Using laws against discrimination and an obtuse theory called "disparate impact," the CFPB seems to want to abolish rate participation and replace it with some kind of a flat fee arrangement.

WIKI on the subject:

"In United States employment law, the doctrine of disparate impact holds that employment practices may be considered discriminatory and illegal if they have a disproportionate "adverse impact" on members of a minority group. Under the doctrine, a violation of Title VII of the 1964 Civil Rights Act may be proven by showing that an employment practice or policy has a disproportionately adverse effect on members of the protected class as compared with non-members of the protected class.

The doctrine prohibits employers "from using a facially neutral employment practice that has an unjustified adverse impact on members of a protected class. A facially neutral employment practice is one that does not appear to be discriminatory on its face; rather it is one that is discriminatory in its application or effect." Where a disparate impact is shown, the plaintiff can prevail without the necessity of showing intentional discrimination unless the defendant employer demonstrates that the practice or policy in question has a demonstrable relationship to the requirements of the job in question. This is the so-called "business necessity" defense.

Disparate impact contrasts with disparate treatment. A disparate impact is unintentional, whereas a disparate treatment is an intentional decision to treat people differently based on their race or other protected characteristics."

Ruggles again: Even though disparate impact pertains to employment law, the CFPB, along with the FTC and the DOJ, have chosen the theory to try to bully the auto financing industry. What is especially interesting is how the CFPB proposes to determine how one is a member of a "protected class."   They propose to use zip codes and surnames, along with other data they are less than transparent about. 

A recent decision in California was settled where a Mitsubishi dealership was alleged to have provided better interest rates to Asians, than to the general population.

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.

Sparks from Orlando

David Ruggles - Ward's Dealer Business

One of the more interesting occurrences taking place in Orlando during NADA convention week actually happened at the American Financial Services Association (AFSA) conference held at the Peabody Hotel earlier in the week. The conference preceded the J.D. Power conference and the NADA convention. One of the most anticipated presentations was to be given by industry forward thinker and innovator, Dale Pollak. Many of the attendees were curious to see what Dale would have to say to a room full of bankers.

Pollak made the case that technology could better determine retail values by sampling actual prices posted on dealer pre-owned inventory in each market. It then followed, based on Pollak’s reasoning, that wholesale and loan values could then be established by calculating backwards from the market driven retail price. He then asked the room full of bankers, “Wouldn’t it make more sense to lend based on actual market numbers rather than the theoretical numbers provided by the “guide books?”

Of course, this new concept assailed the current and historical practice of lenders and dealers using the guidebook numbers provided by Kelly Blue Book, Black Book, and NADA, which use much different methods from what Pollak proposed to establish their values. Adding to the intrigue is the fact that Pollak’s company, vAuto, is under the same Cox Enterprises/AutoTrader corporate ownership as Kelly Blue Book and Manheim Auctions. Manheim Market Report (MMR) has become a commonly used appraisal tool for dealers these days.

Mike Stanton, VP and COO of NADA Used Car Guide took the microphone when the floor was opened up for Q&A. Clearly irritated at having his business assailed in a public place by a partner of NADA University, Stanton made the assertion that Pollak had misrepresented the methodology used on the sixth floor of NADA headquarters, where the NADA guide book staff crunches the numbers for the iconic values guide. There was an uncomfortable hush in the room as the discussion unfolded.

In a later conversation, Stanton itemized a number of potential problems with Pollak’s new concept, including the fact that all possible vehicles are not necessarily available for sale in a given market at any single point in time to provide consistent retail pricing. In other words, single markets do not always provide enough units of each example to be statistically relevant. Then there is the issue of price sampling inventory with inconsistent mileage. In addition, lenders need a certain “smoothing” in the values they depend on to make lending decisions as value volatility can be unnerving to lenders. To be sure, NADA in particular, has improved its methodology in recent years after dealer margins were pinched when the relationship between actual wholesale values and retail values were not accurately reflected when the used vehicle shortage caused auction prices to skyrocket in 2009.

With retrospect, it is easy to imagine that the participants in the discussion would have preferred that it had unfolded in a different forum. But the genie is now out of the bottle. It will be interesting to see if this discussion has legs. There is a lot at stake.