by Jeremy Cato

Retired school teacher Bill Jenney, 55, of Kitchener, Ontario, is living proof that if a car manufacturer builds a car he wants, he’ll go and buy it — and he won’t need to be lured in by extraordinarily generous cash giveaways, cut-rate financing deals, free gas for a year or any of the many other buyer incentives now so commonplace in the marketplace.

It’s the same story for Marjorie O’Krafka. Both are now driving cars they were excited to buy and willing to pay for at a fair price. And both say they remain thrilled with the deal they made and the vehicle they drove off the dealer lot. That’s sweet music to the ears of dealers and manufacturers who increasingly are being forced to offer fire-sale prices to move slow-selling models off the lot.

“We love the car and it was a fair price to us,” says O’Krafka, who recently took delivery of a luxurious 2005 Toyota Avalon sedan for $40,459, a price that did not include any factory or dealer sales sweeteners, yet still came in about $3,000 below the list price, including the freight charge.

Adds Jenney of his 2005 Mazda3 GT five-door hatchback: “I like the car very much and I did the deal over the phone in less than a week. I never even went into the dealership at all.” Yet in Jenney’s case he says he paid slightly more than $22,000 or just about $600 over what he believes to be the dealer invoice price. “The only incentives were financing, and for me I got zero per cent over two years,” says Jenney.

Right now, manufacturers and their dealers regularly offer rebates and allowances of up to $10,000 or more just to get consumers to buy. No one collects and publishes comprehensive and detailed incentive information in Canada, although information about individual offers is available through such services as CarCostCanada and the Automobile Protection Association.

Still, the Canadian market substantially mirrors the United States and there, according to Merrill Lynch, in April the average incentive per vehicle came to US$2,844. That’s just the average. Some manufacturers offered more, led by General Motors averaging US$3,910, DaimlerChrysler’s Chrysler Group at US$3,788 and Ford Motor Company at US$3,467. At the low end of the scale were Porsche (US$264), Toyota (US$1,048) and Honda (US$1,126).

And overall the trend is to bigger handouts, not smaller ones. For instance, while the traditional Big Three pulled back slightly on incentives in April, Toyota and Nissan jumped in more aggressively, with incentives jumping 18.8 per cent and 19.8 per cent respectively. Nonetheless, the Big 3 accounted for US$2.81 billion of the US$3.65 billion the industry spent on incentives for American consumers in April. Japanese manufacturers spent US$528 million, European manufacturers spent US$178 million, and Korean manufacturers spent US$128 million.

How the car dealer makes a profit
By Jeremy Cato

The new and used vehicle market is a brutal place to earn a buck these days. The average car dealer is not raking in the kinds of profits common even a decade ago.

As a general rule it is safe to assume a typical dealer has just $1,000-$1,500 in profit on the sale of the average new vehicle to cover sales commissions (25-50 per cent of the gross profit on a new vehicle) and fixed overhead costs. However, dealers do have other sources of revenue beyond car sales: service and parts departments, body shops and finance and insurance centres can be among the most profitable.

Factory-to-dealer incentives and various factory holdbacks are also significant to dealer profitability. The latter and the former help explain why dealers can quite honestly advertise a sale at “dealer invoice,” yet remain profitable.

The factory-to-dealer incentive is simple enough to understand. It is an amount paid by the manufacturer to the dealer based on sales. The holdback side of the business is more complicated and not all manufacturers engage in holdback activity.

In a nutshell, the holdback has to do with the practice of manufacturers building a percentage of a vehicle’s price into the invoice and holding it back for a period of time. Later, the holdback amount is credited to the dealer’s account when the vehicles are sold. Think of the holdback as a discount to the dealer which reduces vehicle cost below the invoice price.

Dealers also aim to profit by providing various add-ons and services to customers. They include rust-proofing, extended warranty protection, life and disability insurance, fabric protection and others.

Finally, dealers also try to profit on used car sales and trade-ins. Obviously, if you have a trade-in the dealer wants to pay a price low enough to result in a profit when that car is later sold off the lot.

When negotiating the purchase of a new vehicle, the smart buyer should take all these factors into consideration. The dealer certainly is.

In Canada, the main Japanese automakers remain more cautious with incentives compared to their domestic counterparts, but that doesn’t mean they aren’t playing the game. For instance, according to Paul Timoteo, president of Armada Data Corporation which operates, Honda Canada sweetened deals on its Accord sedan and Pilot SUV (sport-utility vehicle) in early May by offering $1,350 and $2,200 in free gas with a purchase.

Based in Mississauga, CarCostCanada sells dealer invoice pricing and incentive information to consumers at a charge of $39.95 for up to five vehicles. The APA offers a similar service for $25 per vehicle, although APA members are entitled to two free quotes, with two additional quotes costing $10 each.

Jenney and O’Krafka both used dealer invoice pricing and incentive reports to help them negotiate their deals. Jenney says being armed with that information smoothed out the whole buying process.

“I just found–I’ve done this before and you just end up going back and forth,” says Jenney, who bought his new car several weeks ago. I found it so much quicker. I told him (the salesman) I had the CCC (CarCostCanada) price and he said he’d like to make $600 over dealer invoice and did I think that was fair. I said yes and that was it. My main concern was I didn’t want someone to come in two days later and get it much cheaper than me. And I don’t have that concern.”

Jenney, of course, was out to buy the third-best selling car in Canada, a hot little compact that has won numerous awards for its ride, handling, design and now even quality. The car is strong enough to be sold on its true merits, without discounting in any substantial way.

“I talked to three dealers over the phone and that’s what the first one told me,” says Jenney. “He said, ‘I don’t have to discount the car; they’re moving.”

For O’Krafka, it’s a similar story. Like Jenney, whose previous car was Mazda Protegé hatchback, the predecessor to the Mazda3, O’Krafka had happily driven a 1996 Toyota Avalon without incident.

“That car gave no trouble at all for years and years,” says husband Bob O’Krafka. “It was just the best vehicle.”

So when the O’Krafkas heard Toyota had completely reinvented the Avalon for the current model year, giving it more power, new styling and a bigger interior, they were prepared to replace the old car with a new one. “There were no deals, no zero financing or anything like that,” says Bob O’Krafka. “I think overall we paid about $500 over cost.”

In both instances, each party did extensive research before beginning to negotiate an agreement.

“You have to have the information, because the deals are being thrown at people, so they need to know,” says Timoteo. “The price is not just the price. If you don’t get your calculator out and do the math, you’re going to get into trouble.”

Most dealers, of course, feel it is unfair to reveal their costs to consumers, although the practice has been commonplace in the United States for many years. In fact, Jenney began his research using U.S. sources, only to find none of them provided useful pricing information for Canadian consumers.

But Jenney and most other buyers are more than smart enough to realize that pricing and incentive information is a valuable tool. Not surprisingly, Timoteo, who has a background as a car salesman himself, says many Canadian dealers thoroughly resent his service.

“But the smart ones don’t. They realize that nine out of 10 people who walk into a dealership are not going to buy. But the CCC person has done his or her research and is ready to buy. The smart dealer realizes he’s got a sale. So he says, ‘I may not make as much on the deal, but it’s a sale and I can make it up somewhere else.'”

For Jenney and O’Krafka, being armed with the invoice price meant they found themselves negotiating up from that figure, rather than down from the commonly available manufacturer’s suggested retail price (MSRP). In Jenney’s case he was more than happy to make sure the price he settled on contained a reasonable profit for the dealer. According to Timoteo, most Canadian buyers are extremely reasonable negotiators.

Salesperson’s tactics to beware of

By Jeremy Cato

The buddy system: The salesperson, working on commission, is not your buddy, even if he or she seems to be working to convince management to get you a low price. Call a halt to the actions of any salesperson who leaves negotiations more than once to talk to the manager about the deal.

The silent treatment: As with above, if the salesperson needs to leave to discuss matters with a sales or business manager, call a halt to that, too. Your time is too valuable to have you left waiting around for an answer.

The bump-and-grind: if after talking to the sales manager, the salesperson needs a small “bump” to the monthly payment you’ve already negotiated, say no. A deal’s a deal.

Being held hostage to your deposit: Only agree to a deposit when the whole deal is completely done. Otherwise you’re hostage to that early payment.

The limited-time offer: If the salesperson can’t hold the offer for 24 hours just so you can consider the big decision properly, you should walk away. Another deal will come along.

“Every customer is willing to pay more than the dealer is willing to sell for. The customer might be willing to settle for a 10 per cent profit, where the dealer is happy to get 4.5 per cent,” says Timoteo. “What buyers say is, “I know the dealer has to make money. I just don’t want to be the guy who raises his average profit.”

Naturally, the vehicle itself also has a significant bearing on how much buyers are willing to pay and what dealers are willing to sell for. Jenney and O’Krafka are perfect examples of that. Their previous ownership experience and new research convinced them it would be wise to purchase vehicles not heavily discounted yet still very, very desirable.

The wealth of incentives available, however, suggests that it’s not easy to come up the kind of winning formula exemplified by the Mazda3 and the Avalon. In fact, it is extremely difficult. And then there are the buyers who feel absolutely no emotional or intellectual connection to their vehicle at all. They merely want an affordable transportation appliance.

As automotive analyst Dennis DesRosiers of DesRosiers Automotive Consultants puts it, a combination of “product and price still control the market; always has and always will.”

On the product side, he points out in a recent note to clients there is “a smorgasbord of new high end niche product entering the Canadian market this year and sure enough sales are strong for many of these new products thus the segment grows. There is very little ‘new’ in subcompact thus sales are down.”

On the price side of the equation, the Chevrolet Blazer is the poster child for the power of discounting. As DesRosiers notes, the aged Blazer was introduced in 1983 and has since been given only cosmetic changes – aside from a power train change a decade ago. In some parts of Canada it is being advertised for as little as $18,000 – that for a vehicle with a base MSRP of $26,045.

“This has proven an effective way of moving them out of the dealers’ lots and accounts for most of GM’s market share increase this year,” notes DesRosiers. “With this aggressiveness, sales of Blazers have crept into the top ten light trucks selling 3,450 this year compared to only 444 last year�This speaks volumes about the Canadian consumer. Paste $8K on the windshield of a vehicle and even Canadians will buy them.”

By contrast, DesRosiers points to the Honda Civic and Toyota Corolla. Canadians put durability and dependability at the top of their list of top reasons for buying. The Corolla and Civic are among the most reliable vehicles available and not surprisingly they are also the two best-selling cars in Canada.

“Such a simple solution to success,” says DesRosiers. “Find out what the consumer wants and build it. Why don’t others understand this?”

For Jenney and O’Krafka, Mazda and Toyota proved they understand the formula and how to use it to make desirable products. And that’s why Jenney and “‘O’Krafka were willing to become buyers even when there were no big handouts and giveaways on offer.

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