Car prices and sales models

IS-SV

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How can you say that manufactures don’t incur cost savings with a direct sales model? The manufacturer doesn’t have to sell the car to a dealer at a lower price (wholesale) and then miss out on the benefit of selling to the consumer at MSRP. This margin the dealer makes, not the manufacturer. If you do direct sales you sell at MSRP and keep the full margin from cost to make the car to sales price, not cost to make the car to invoice price, the price you sell the car to the dealer for which is less than MSRP.
Direct sales model does allow higher margins on sales, since they are not wholesaling the car to dealerships like you said.
But Tesla still has had to build/lease/staff showrooms and Tesla has to pay, not the dealers.

You missed the facts that the franchised dealership owner has to pay to finance his inventory (carrying costs/interest expense), pay for the lease or mortgage on the property/buildings, make the lease-hold improvements to the properties and pay the employees. None of that is free. The manufacturer avoids incurring those costs/overhead in the case of traditional dealerships.

According to NADA, these are costs of retailing cars and the cost will be incurred by whoever is doing the retailing, whether it’s the manufacturer or a dealership.
By outsourcing the sales part of the process to a dealer, and the local dealers compete with one another, there are incentives to minimize those costs. And in a normal market, heavy discounting contributes to higher depreciation rates and degrades the brand sometimes.

So that's how I can say what I did above. And I doubt anybody here can quantify any small net cost savings when taking into account costs incurred to build/lease/equip/staff showrooms nationwide.

But by now you may have guessed where the real monetary benefit to the automaker of direct sales happens, and it's not from cost savings incurred....
 
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MichaelL

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Direct sales model does allow higher margins on sales, since they are not wholesaling the car to dealerships like you said.
But Tesla still has had to build/lease/staff showrooms and Tesla has to pay, not the dealers.

You missed the facts that the franchised dealership owner has to pay to finance his inventory (carrying costs/interest expense), pay for the lease or mortgage on the property/buildings, make the lease-hold improvements to the properties and pay the employees. None of that is free. The manufacturer avoids incurring those costs/overhead in the case of traditional dealerships.

According to NADA, these are costs of retailing cars and the cost will be incurred by whoever is doing the retailing, whether it’s the manufacturer or a dealership.
By outsourcing the sales part of the process to a dealer, and the local dealers compete with one another, there are incentives to minimize those costs. And in a normal market, heavy discounting contributes to higher depreciation rates and degrades the brand sometimes.

So that's how I can say what I did above. And I doubt anybody here can quantify any small net cost savings when taking into account costs incurred to build/lease/equip/staff showrooms nationwide.

But by now you may have guessed where the real monetary benefit to the automaker of direct sales happens, and it's not from cost savings incurred....
Thanks for the very detailed reply. Very good information, but I still believe the manufacturer can save money by selling directly to the consumer. I didn’t miss the other costs and factors in play when I thought about it, but I didn’t express them in my basic example. Tesla as an example with their cheap “ showrooms “ in malls, is a far less costly place to do business than an actual dealership, they can likely get cheaper financing, employees, etc than a dealership can get. But, big picture it isn’t that savings as much as if they can can keep the repair and servicing in house, that would be a solid moneymaker.
 

IS-SV

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Thanks for the very detailed reply. Very good information, but I still believe the manufacturer can save money by selling directly to the consumer. I didn’t miss the other costs and factors in play when I thought about it, but I didn’t express them in my basic example. Tesla as an example with their cheap “ showrooms “ in malls, is a far less costly place to do business than an actual dealership, they can likely get cheaper financing, employees, etc than a dealership can get. But, big picture it isn’t that savings as much as if they can can keep the repair and servicing in house, that would be a solid moneymaker.
Tesla has both mall stores AND Sales/Service locations with Sales and Service combined. In fact they have taken over many dealership sites that shut down and those locations have big showrooms/big service centers and acreage. Both Tesla and traditional dealerships perform service and repairs. (btw-EV's are not service-intensive vehicles and the US mechanics know that and are concerned as expected because their livelihood will be impacted.)


And those "cheap showrooms" in malls are not cheap as you assume, because they are often in high-end Rodeo Drive Beverly Hills-like malls. Examples of Tesla mall stores in high end locations are Santana Row San Jose and Walnut Creek, both in northern California. The rents are crazy expensive in those exclusive locations that specialize in high end luxury retail. in fact rents are often more than traditional locations on "auto row".

Not true, Tesla doesn't get cheaper financing, they don't even have their own finance arm like GM, Ford, BMW, Mercedes for example. Tesla offers financing via bank partners, nothing in house.

Not true, Tesla can't get people cheaper, it pays people market rate just like any other business in a a competitive economic environment. Good people are hard to hire today.

Yes, like I said earlier big picture, direct sales isn't about cost savings.
The monetary benefit is on the revenue side, control of selling price which is predictable = MSRP.
 
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mikeavelli

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Thanks for the very detailed reply. Very good information, but I still believe the manufacturer can save money by selling directly to the consumer. I didn’t miss the other costs and factors in play when I thought about it, but I didn’t express them in my basic example. Tesla as an example with their cheap “ showrooms “ in malls, is a far less costly place to do business than an actual dealership, they can likely get cheaper financing, employees, etc than a dealership can get. But, big picture it isn’t that savings as much as if they can can keep the repair and servicing in house, that would be a solid moneymaker.

I agree. I have clients that sell direct and retail and the margins direct are much higher.
 

MichaelL

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Tesla has both mall stores AND Sales/Service locations with Sales and Service combined. In fact they have taken over many dealership sites that shut down and those locations have big showrooms/big service centers and acreage. Both Tesla and traditional dealerships perform service and repairs. (btw-EV's are not service-intensive vehicles and the US mechanics know that and are concerned as expected because their livelihood will be impacted.)


And those "cheap showrooms" in malls are not cheap as you assume, because they are often in high-end Rodeo Drive Beverly Hills-like malls. Examples of Tesla mall stores in high end locations are Santana Row San Jose and Walnut Creek, both in northern California. The rents are crazy expensive in those exclusive locations that specialize in high end luxury retail. in fact rents are often more than traditional locations on "auto row".

Not true, Tesla doesn't get cheaper financing, they don't even have their own finance arm like GM, Ford, BMW, Mercedes for example. Tesla offers financing via bank partners, nothing in house.

Not true, Tesla can't get people cheaper, it pays people market rate just like any other business in a a competitive economic environment. Good people are hard to hire today.

Yes, like I said earlier big picture, direct sales isn't about cost savings.
The monetary benefit is on the revenue side, control of selling price which is predictable = MSRP.
Those “cheap showrooms” are cheaper than a real dealership with so much space for inventory and service bays etc… I don’t care how expensive the mall is, I live in San Francisco, can’t tell me Stanford shopping center is more expensive than, say, Peter Pan BMW’s location…. Or MB at 101 and Ralston. Those are massive spaces in an extremely expensive part of the country. The acreage alone tilts the cost scale to those legacy locations.

Tesla gets cheaper financing than dealers, that was the comparison, not other manufacturers, I was referring to the direct sales vs. dealerships comparisons and one of the reasons direct sales was more profitable.

Tesla should get “ dealership “ people cheaper, when you sell everything at MSRP, why do you need veteran, seasoned sales people and sales managers? There is no negotiation, don’t need the same experience, and skills, it is like selling a phone, you see who staffs the cell phone stores. I have only been in a couple Tesla stores and I didn’t see veteran, industry professionals working in them. I saw young, newbies to the industry.
 

IS-SV

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Those “cheap showrooms” are cheaper than a real dealership with so much space for inventory and service bays etc… I don’t care how expensive the mall is, I live in San Francisco, can’t tell me Stanford shopping center is more expensive than, say, Peter Pan BMW’s location…. Or MB at 101 and Ralston. Those are massive spaces in an extremely expensive part of the country. The acreage alone tilts the cost scale to those legacy locations.

Tesla gets cheaper financing than dealers, that was the comparison, not other manufacturers, I was referring to the direct sales vs. dealerships comparisons and one of the reasons direct sales was more profitable.

Tesla should get “ dealership “ people cheaper, when you sell everything at MSRP, why do you need veteran, seasoned sales people and sales managers? There is no negotiation, don’t need the same experience, and skills, it is like selling a phone, you see who staffs the cell phone stores. I have only been in a couple Tesla stores and I didn’t see veteran, industry professionals working in them. I saw young, newbies to the industry.
And Tesla also has those large acreage sales/service locations too, they too are expensive. Speaking of SF, do you think the Tesla Sales/Service location on Van Ness is cheap to operate? And the franchised dealerships incur those high costs, not the manufacturer. I've been to SF BMW and saw how they double stack cars, amazing and costly They pay it with their margins. But as I said earlier, EV’s are less Service-intensive, therefore fewer costly Service centers than ICE businesses. To your point, EV infrastructure can be cheaper than ICE in either business model.

You are right, veteran seasoned, old school traditional industry professionals do cost more. And that's why traditional dealerships continue to phase them out in the high turnover/high pressure environment that wastes so much customer time. Therefore the staffing in traditional is largely something other than seasoned professionals too. As pay plans continue to deteriorate in traditional to the point where it's not a great career path for those with educations and choices. ( And now some of those veteran seasoned old school traditional types actually work in direct today btw.)

But I understand some are proponents of the franchised dealership model, it can be lucrative for some involved. It's not to say that one business model is better than the other. Let's just say the customer experience is different between the two models sometimes.

On the topic here "used cars", direct sales models have some similarities too. And today used car prices are still at all time high no matter what the business model.
 
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ssun30

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China adopted the US model of franchising and because capital investment in dealerships is extremely high, competition also tends to be very fierce. I like this model because it allows the salesperson to form a long-term relationship with their customers. Loyal customers get unwritten benefits like referral bonus, skipping waitlists on high demand models and 'motor show prices' (very heavy discounts). Lexus dealers tend to do best in these aspects even though their cars are not cheap to own at all. That's how I got the ES300h without waiting for 8 months or paying a $8k markup. I don't know if these kinds of 'perks' are available in US.

On the other hand I also know you get even better customer experience with the direct-sales model in Japan (dealers are owned and operated by manufacturers). Direct-sales dealers in Japan offer unrivalled hospitality in the entire world. I think it's mostly due to culture.
 

Will1991

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I’ve changed this thread title to “Car prices and sales models” to better suit what we’re talking here.
Nice discussions with good and different view points in my opinion.
 
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Cadillac, Kia and Land Rover command the highest average transaction prices above MSRP as consumer demand runs high
SANTA MONICA, CA — February 15, 2022 — More car shoppers than ever are paying above sticker price amid inventory shortages and elevated consumer demand. According to the car shopping experts at Edmunds, buyers paid above MSRP in a record 82.2% of all new vehicle purchases, compared to 2.8% in January 2021 and 0.3% in January 2020. Edmunds data reveals that the average transaction price for a new vehicle climbed to $728 above MSRP in January 2022, compared to $2,152 below MSRP in January 2021 and $2,648 below MSRP in January 2020.

"The fact that an overwhelming majority of consumers are paying above sticker price would have been unthinkable even just a year ago," said Jessica Caldwell, Edmunds' executive director of insights. "This is in part driven by affluent consumers being willing to shell out more cash to get the vehicles that they want, but there's also a vast population of individuals who are being forced to do so simply because they need transportation and have no other choice."

Edmunds analysts took a look at the difference in new vehicle average transaction prices and compared them to the average MSRP across automakers to identify the brands commanding the largest amounts above sticker price and the brands yielding the greatest discounts. Cadillac topped the list of brands that commanded above-sticker price, with an average markup of $4,048 in January, followed by Land Rover, with an average markup of $2,565, and Kia, with an average markup of $2,289. Alfa Romeo topped the list of brands that brought below-sticker price, with an average discount of $3,421 in January, followed by Volvo with an average discount of $869 and Lincoln with an average discount of $510. The table below is the full list of brands.

"All eyes have been on Ford and GM since they both publicly called for their dealers to stop charging over MSRP for vehicles. Of all automakers, they might be in the most precarious position since they have very high-profile launches in the near future that appeal to a new type of customer. But looking at the numbers, there are clearly some other automakers who might want to follow suit," said Caldwell. "Savvy dealers, though, are conducting business during this wave of inflation in a way that's mindful of the possible adverse reaction of their customers."

Edmunds' experts say that holding off on a new car purchase would be the most pragmatic move for consumers in this market, but they also note that this course of action might be unrealistic for some individuals given that prices aren't expected to normalize for quite some time.

"Consumers might be waiting up to a year or longer if they want to hold off until the market resembles anything close to the pre-pandemic normal, but some buyers simply cannot wait," said Ivan Drury, Edmunds' senior manager of insights. "If you know you need a new vehicle soon — or if you have a vehicle coming off lease and its term can't be extended — doing extra research is critical to get an advantage, and using the list set forth below is a decent starting point if you're looking out for price discrepancies among different brandse."
Surprising, Lexus ATPs aren't much more than MSRP
 

mikeavelli

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March 28 (Reuters) - U.S. new vehicle sales could fall to the lowest first-quarter volume in the past decade as chip shortages and the Ukraine crisis squeeze inventories and rising prices push less affluent buyers out of the market, research firm Cox Automotive said Monday.

U.S. car and light truck sales are expected to fall more than 24% to about 1.22 million units in March and decline more than 16% in the first quarter.

"Make no mistake, this market is stuck in low gear," said Charlie Chesbrough, senior economist at Cox Automotive, adding that sales will remain at current levels until supply improves.

Cox forecasters said the U.S. economy should not experience a recession. But Cox cut its forecast for U.S. car and light truck sales in all of 2022 to 15.3 million vehicles, down 700,000 vehicles from its January outlook. And even hitting the new target will require significant improvement in supply chain disruptions, Cox said.

Fresh lockdowns in China as well as Russia's invasion of Ukraine have reignited supply bottlenecks that were easing over recent months. Tight supplies have pushed new vehicle prices to record high levels. read more

Detroit's mainstream brands and Nissan are getting hurt as less affluent consumers leave the new vehicle market, Cox analysts said during a call.

Households with less than $75,000 in annual income now account for nearly two percentage points less of the U.S. light vehicle market than a year ago, Chesbrough said. The average income of a new vehicle buyer is now $124,000.

Detroit mainstream brands such as Chevrolet are losing market share, while Cox predicted Japan's Toyota could be the top selling automaker in the U.S. market for the first quarter.

"Long-term, you are shrinking the pool of people who are likely to buy" a new vehicle, said Cox Chief Economist Jonathan Smoke.
Affluent buyers still buying cars, more than those that aren't. Toyota might stand to gain!
 

IS-SV

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^ Yes, with the average purchase price of over $40K on new cars sold in US (with EV's, mainly Teslas being considerably more expensive). Recession not coming per Cox forecasters, hard to guess?
 

bogglo

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With the state of the market right now, is it better to buy a GSF now or just wait till next year. I currently own a 14 GS 350 f sport so this a WANT not a NEED. Is it better to wait or smart to make the move now?
 

Levi

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With the state of the market right now, is it better to buy a GSF now or just wait till next year. I currently own a 14 GS 350 f sport so this a WANT not a NEED. Is it better to wait or smart to make the move now?
Tough question. In Europe last week, there was only one GSF for sale. It all depends on the state of the world. If you can (also with regards to future finances) probably go for it. Who knows if and when prices will go down? While not felt buy occidental other than in inflation/price increase/shortages, we are in Cold or should I say Lukewarm war. Don't know how that will turn out..