Ed Wallace

Using Bias For Fun and Profit

You may not remember, because it’s been decades ago, but when Saturn arrived on the scene it sold itself as “A Different Kind of Car Company.” Of course it wasn’t at all; it wasn’t even a car company per se, but a division of General Motors. Its biggest ad pitch to the public was No Negotiating, and that was based on GM’s surveys that claimed people hate to negotiate for automobiles. In reality, we’re internally wired to negotiate for anything in life, including homes, raises at work, and even with our spouses — except, apparently, in surveys when they ask about buying a car.

People used to come into our luxury car store and say, why can’t every dealer be like a Saturn car dealer? We would say, we are. Then we let them find the car, show them its features and benefits, and when it came time to buy it, we’d write it up at list price. Worried, they would ask what you were doing. And you’d reply, “You said you wanted all dealers to be like Saturn dealers, and they don’t negotiate.” At that point nobody wanted you to behave like a Saturn dealer anymore, but wanted fair and honest negotiations.

It is true people say they didn’t want to negotiate. But most car salespeople will tell you when you give a consumer a price, it is never quite as low as they were hoping for. Fair enough; that’s when the negotiations began. In spite of that, in almost 40 years of J.D. Power Customer Satisfaction surveys, right at 85 percent of customers rated the way their car purchase was handled as either satisfactory or very satisfactory.

Saturn worked for a time by the power of its admittedly exceptional advertising, which of course was not based on the real world of car buying. As stated in this column many, many times, in the end business fundamentals will always win out. At list price, Saturn never made money for GM and as the years went by, it wasn’t profitable for most dealers either. So it died.

Similar things are happening today in the used car market, which is under pressure in multiple ways.

Post-owned Cars

First, with new car margins being slashed over the past 30 years, many franchised dealers are operating their new car departments in the red. It’s gotten so bad that numerous manufacturers actually pay local salespeople directly in addition to their minimum commissions. However, one of the key ways to improve a dealership’s overall profitability is to increase the volume of used cars it sells. And to show how serious it is, we don’t even call them “used cars” anymore. They are now “pre-owned vehicles” — which is paradoxical, because a “pre-owned” car is new; used cars are in fact post-owned. I digress.

Up until the start of this century, new car dealers’ guidelines called for one used car sale for every two new sold. So a 200-a-month dealership expected to retail 100 used. Today the best stores want a ratio of 1:1; and making that easier is the fact that the quality of used cars is much better than it was decades ago. The downside, for many dealers, is that customers hold onto their cars for much longer periods. Therefore, they can’t trade for enough nice used cars to retail, and they’re forced to use the auctions.

Second, since just before the Financial Meltdown, the bottom-earning 50 percent of the American public was already struggling financially; costs of living were rising, while wages had been stagnant for decades. Since 2008, that demographic has struggled even more, returning to pre-meltdown earnings only recently. Many in that wage demographic have turned into used car buyers over the past few decades.

And new retailers have come up with eye-catching ways to sell them. Only, when you see their corporate financial numbers, it makes you wonder again what Wall Street is thinking.

Great Advertising Cultivates Gullibility

One such company is Carvana. You see their ads all the time; they’ve got that eight-story car vending machine in Frisco where you can drop a token into a slot and get your car, or they’ll deliver to your home. And we’re not going to question the quality of their vehicles, but recently the company announced that it has to depend less on auctions — and the extremely high prices that used cars sell for there — and instead attempt to buy more vehicles for resale from the public. You know, like car dealers do.

Here are Carvana’s numbers over the past two years: In 2017 gross revenues were $859 million, it lost $154.3 million, and sold 44,252 vehicles. Translated, that means their yield per car sold against gross revenue was $19,411, with a loss per car sold at $3,486. Meaning, in 2017 Carvana would have had to sell each product for $22,898 just to break even.

Then came 2018, a phenomenal year for growth. Revenues more than doubled to $1.96 billion, losses jumped to $254.7 million, and Carvana doubled its sales volume to 94,107 units. That’s an average yield of $20,827 per car and a loss of $2,706 per car; their break-even price per vehicle for 2018 would be $23,533. But that’s over six hundred dollars per car more than the previous year’s break even point.

Here’s the point; iseecars.com sent out an email last week saying that in many cities, buying from one of these Internet-based used car operations saved the average person around 5 percent. However, DFW buyers saved barely over 1 percent buying used cars online instead of from local franchised dealers. What that email didn’t state was who had the better cars for the money. Then again, for pure price shoppers getting the best vehicle doesn’t always come into play. It also didn’t mention that these online operations seemed to mirror Tesla’s: Sell a lot of cars, get a lot of buzz, make no money doing it.

Keep in mind that in 2018, if Carvana had jumped the cost of all of its vehicles by the $2,706 it needed to break even, it probably would not have sold 94,107 used cars. And if it raised the price more than that, so it could turn a profit, sales would likely have been much lower.

The question is, who’s funding this? In what alternate universe does this make fiduciary sense?

How Cool Is That?!

Again, to reduce their exposure to used car auction prices Carvana’s new ads state that they want to buy your current vehicle direct, whether you buy a vehicle from them or not. So, being a sport, I put in my wife’s 2017 Jaguar XF 3.0 Premium with just 11,000 miles on it, no damage, no problems with the vehicle whatsoever. And my computerized offer came back at $23,208.

So I called Ronnie Dempsey at Autobahn to get another bid, which came in at $24,875. Still, that’s a wholesale bid, not retail. So I went looking on Carvana for a 2017 Jaguar like ours; there was only one 2017 Jag with twice the mileage and a small diesel, and not the Premium edition, and it’s offered for $30,800. More than seven grand more than they offered for our Jaguar, which again is a premium model with more equipment, in mint condition,and with half the miles.

That’s how you use a car buyer’s bias against them. Many are so sure this is a better way to buy a car because it’s online and it “cuts out the middle man” — that being your local dealer — and somehow saves them aggravation and money to boot. Yet, the local dealer offered us $1,667 more for the Jag, not to mention they also discount the cars on their lot.

A Distinction without a Difference

Last week this column covered things that break on cars, extended warranties and goodwill from manufacturers. It brought fewer negative emails than you might think. But one in particular tickled me. Nice guy, numerous great conversations, but he actually started his last email with this line, “We’ve been blessed to have good independent mechanics along the way.”

Then he went on to name those great mechanics — who, as it turns out, I’ve worked with for years in the industry. And he is right, all were first-rate mechanics and just plain good people. But, as I pointed out, they didn’t leave the dealerships over ethics or being forced to do the wrong thing. They were great mechanics when they worked at Bill McDavid Honda and Ryan Mercedes; they only started their own shops to get a bigger cut of the flat-rate book prices for repairs. Yet he suggested they were great because they were “independents.” That too is bias.

Not all dealers are great and sometimes with the best ones a problem can arise. A used car can look great and still have problems no one could see, either in person or online.

But like Saturn, these Internet based upstarts are not a different kind of car company. And in fact, a Saturn wouldn’t rank in the Top Five of great compact cars in the era in which they were sold. That’s just not what the ad campaign led you to believe.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA,and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com