The way I understand the car business is all wrong
On the drive to Tahoe, we listened again to one of my favorite podcast episodes of This American Life: 129 Cars.
Ira and the gang spend a month at a Jeep dealership on Long Island as they try to make their monthly sales goal: 129 cars. If they make it, they’ll get a huge bonus from the manufacturer, possibly as high as $85,000 — enough to put them in the black for the month. If they don’t make it, it’ll be the second month in a row. So they pull out all the stops.
The car business is hard. Margins are as low as 3%, only slightly better than supermarket margins. Every month, every quarter, every year, the counter starts at zero. That’s how sales works, you say. The difficulty for a car dealer is that success is defined by a magical new sales target, handed down monthly from the manufacturer. Being profitable depends on making the incentive bonus every month.
It does make you wonder why car manufacturers keep a network of car dealers. It seems so expensive, and complicated with the many rebates, bonuses, inventory management, and competing nearby dealers from the same brand.
Tesla went direct to the consumer, except for in Texas where they weren’t able to bend the rules. I do not understand the protectionist laws in place favoring the network of car dealers.
The podcast episode also reiterates how sleazy this business is. If they do not make their money on with the price of the car, they will stuff profit into the extended warranty, or with some add-on protection packages. The customer doesn’t know how to gauge whether these are good items to purchase, and the dealer is not offering them in good faith either.
“Buyers are liars”, that’s how the dealer looks at the customer. There is also the cat and mouse games the sales agents are playing with the sales floor manager. It is one big bazaar, except that if you are in a Moroccan bazaar you know you are being swindled.
With the covid-19 pandemic, I expected car dealers to be suffering tremendously. You were to shelter in place, rather than shop for a car. Where were you heading to anyway, that you needed a car.
This could be a moment to make a great deal, and replace my aging 2005 Volvo as it neared 200,000 miles.
It was true for the first 3 months that few cars were sold. Then with the gradual reopening of businesses, Ira Glass commented in the episode’s epilogue that car sales went bonkers.
How did this make sense? Companies had been laying off people. Some companies even closed their doors for good. Congress passed a very large economic rescue package. The world economic news was terrible as well. This didn’t seem the time to make a large purchase. I figured people would reason that the resting piece of metal in their driveway, could make it another few thousand miles.
There lies the issue. Car purchases aren’t rational decisions. This is what Keynes meant when he wrote about Animal Spirits.
This is why the This American Life producer ended up buying a Jeep rather than the more reliable, more practical Honda Pilot she wanted to buy in the first place.