DETROIT – Stair-step incentive programs damage brands by eroding customer trust.
That was the message delivered by National Automobile Dealers Association Chairman Mark Scarpelli during a recent presentation to the Automotive Press Association.
"Any dealer who's had to deal with these programs can tell you that they are not only trust killers, but they're brand killers, too," Scarpelli. "Not being able to offer two customers the same price on the exact same equipped vehicle, just because they came into the dealership on different days of the month, destroys consumer confidence."
Stair-step incentives vary between dealerships, creating confusing about pricing.
"In a world where customers rightfully expect fairness and transparency in price, why do so many manufactures still deploy unfair marketing strategies that produce huge discrepancies in price between various customers – discrepancies that aren't transparent, that can't be explained rationally, and that run afoul of everything our customers really care about?" Scarpelli said.
"Shoppers of brands that use stair-step incentive programs see large discrepancies in price for the same or similar vehicles across different dealers. Or, worse, at the same dealer, but at different points in time. Or, even worse still, a discount applied to a vehicle they don't want, but that can't be applied to a vehicle they do want."
Scarpelli said the lack of consistency, transparency, and explanation is leading directly to a lack of trust in both the individual dealer and the industry as a whole.
"Over time, the consumer's lack of loyalty to the brand will lead to less consumer demand for that brand,” he said.
The 2017 NADA Chairman added that he hopes to continue having constructive conversations with manufacturers about this issue.
"America's dealers and manufacturers have the same exact goal – selling our inventory in large volume and at competitive prices. But we believe that goal should be achieved in the right way: Meaning in a way that enhances customer experience, and that maintains the integrity of the brand," Scarpelli said.
"Ours is a symbiotic relationship that has stood the test of time, and that is ready to take on the next 100 years of making and selling cars and trucks – if we let it. And so to our manufacturer partners, I say: Let us be entrepreneurs. We're pretty good at it."
Hurricane Harvey has finally passed out of the Houston area, but the extent of its effect will take some time to determine.
Houston is one of the 10 largest car markets in the nation. Cox Automotive estimates that Harvey severely damaged or destroyed between 300,000 and 500,000 vehicles in the Houston market alone were.
The impact in terms of vehicle value is estimated to fall between $2.7 billion and $4.9 billion. By measure of vehicle damage, Hurricane Harvey is likely the worst natural disaster in our country’s history.
The storm naturally halted most vehicle sales in the area, both retail and wholesale.
Cox announced that no sales would be held at Manheim Houston, Manheim Texas Hobby and Manheim South Houston during the week of Sept. 4.
Harvey also struck the west side of Louisiana.
Lake Charles Auto Auction, located just north of where Harvey made landfall, postposed its weekly sale to Sept. 1 from Aug. 30.
“We have experienced tremendous volumes of rain and experienced some flooding,” said Lake Charles owner Matt Pedersen, “but nothing like our neighbors in Texas.”
While there are few sales taking place, some Texans are scheduled to come into possession of new vehicles soon, thanks to Toyota and Lexus Financial Services.
The two captives announced they will donate pre-owned Toyota and Lexus cars, SUVs, and trucks to organizations involved in helping move people and property in the recovery efforts.
“Access to reliable means of transportation is a critical element to any disaster relief and recovery effort," said Mike Groff, president and CEO of Toyota Financial Services. "We hope that our donated vehicles will help meet the needs of those affected by Hurricane Harvey."
The finance firms are also offering a payment relief program for its customers affected by Hurricane Harvey, as are most finance providers.
The question now becomes how dealers and their customers recover from this massive natural disaster.
The Houston market already faced many challenges before the hurricane struck.
Key theft already comes at a high price for car dealers, but one city wants to add to that cost by making dealers legally responsible if they fail to take steps to secure their keys.
Chicago Aldermen Pat O’Connor and Harry Osterman have proposed an ordinance that would require the city’s car dealerships to secure all of their vehicles’ keys in a lockbox when the store is closed.
The goal of the ordinance is to prevent stolen cars from being used in other crimes.
Osterman told a local newspaper that police had contacted him about a growing problem of key theft at dealerships.
The City Council’s public safety committee is considering the ordinance. Neither alderman responded for requests for comment.
Key theft has become a major problem in Chicago, and across the nation. Thieves break in at night and, in some cases, run scams during the day to steal a dealership’s collection of keys.
Jamye Tabuchi’s store was recently the target of late-night thieves.
The co-owner of Fall Creek Motors in Branson, Mo., received a call at around 2 a.m. on July 2, informing her that the motion detector at the dealership had been activated.
When she arrived at the dealership, Tabuchi found Fall Motors had been broken into and all of the store’s car keys were stolen.
Security camera footage showed an unidentified individual cutting a hole in the back of the building, going through the garage and into the dealership.
The thief then went into the office, snatching all of the keys present.
“From what I can see as far as on the security footage, it’s only one person but I don’t know if there were more people outside or not,” Tabuchi said. “They seemed to have a pretty good understanding of where our security cameras were and so I only saw one person come across the camera in the back and one from the side of the building.”
Police are still looking for the thief. Fall Creek Motors is offering a $500 reward for information that leads to an arrest.
Sometimes thieves use distractions rather than brute force. This was the case at Golden Motors in Cutoff, La.
Police said that four individuals came into the store during regular business hours on July 7.
One of the four created a diversion, while another stole three keys from behind a desk and left the store.
They then fled from the store, leaving the other two members of the group behind, who were arrested at the scene.
The other two were arrested a few days later on a phone tip. Police believe they were going to use the keys to steal cars from the store.
The epidemic of key thefts is leaving dealerships looking for better security measures.
Tabuchi said that Fall Creek Motors would look into several options – from better security cameras to hiring security personnel.
Cheryl Ryan of Security Key Systems said that the most effective way to prevent key theft is creating a key control system.
A good key control system promotes accountability, just what the Chicago ordinance aims for.
“Unless you have a lock box but even that in itself, you don’t know who has the keys, who took the keys,” Ryan said. “This way if the keys are taken out of the system, you know who took the keys. So I would say that this is probably your best bet in regards to key control.”
Once keys are entered into the system, they can be tracked, letting the dealership know who had the keys. That person is then held responsible.
Ryan said the system guarantees someone cannot break into a dealership and steal the keys.
KAR Auction Services Inc. CEO Jim Hallett said he could sum up the company’s second quarter performance in one word – fantastic.
Revenue increased 9 percent overall, with salvage arm Insurance Auto Auctions leading the way with an increase of 13 percent on 11 percent volume growth.
The strong results for IAA are expected to continue as insurance companies declare more claims as a total loss, the cost for collision repairs, as well as miles driven, continues to increase.
Revenue from ADESA, the company’s auction arm, grew by 9 percent.
ADESA sold 11 percent more vehicles than a year ago, driven primarily driven by increases in the online-only volumes. Same-store volumes at physical auctions grew by only 1 percent.
The same-store decline came mostly from lower dealer-consignment volumes, which were down 5 percent. Same-store commercial volumes were up 14 percent.
This change in mix drove the overall convertion rate at ADESA’s auctions to 61 percent.
“I believe that our consigners continue to be price- sensitive as we see used-car prices decline,” Hallett said. “The good news is, this is a key factor in how much money a commercial consigner will put into a car in order to maximize the value of the used vehicle. “
Hallett said the mix shift to more commercial and less dealer consignment cars will continue as lease returns and repossessions increase over the next three years.
Floor planner Automotive Finance Corp., the third major compenent of KAR, continues to operate “very conservatively,” Hallett said.
The number of loan transactions was relatively flat and revenue declined. The provision for credit losses was 2.6 percent of average loan balances for the quarter.
Hallett said the goods news for AFC was that while the loss provision was high in April and May as the comapny ran off its defaulted loans, June provision’s for credit losses was below the expected loss rates of 1.75 percent to 2.25 percent of average receivables.
“This is a very good indicator for what we expect to see in the second half of 2017,” he said.
The shift to more commercial consignment also helps AFC, Hallett said, as the average loan value per vehicle increases, which will lead to higher revenue per loan transaction.
Independent dealers continue to face big security threats and must stay vigilant in protecting their businesses.
Agents from the Federal Bureau of Investigation updated dealers this summer on the threats they face.
“It’s a constant battle of trying to stay ahead of the bad guys,” said Ed Parmalee, supervising special agent, FBI, Cyber Division.
The top cyber security issues that face independent dealers include social engineering, ransomware and the compromising of business email.
Social engineering is when someone tries to convince someone else to provide money or information by pretending to be someone else. The Nigerian email scam is one example.
Parmalee said one common trick involves a sender posing as a vender and sending a fake invoice to the business, asking for payment.
Another scam involves sending an email to the business to deceive the recipient to provide private or business information because the sender email looks familiar.
Ransomware, which has been in the news periodically over the last several years, occurs when a hacker locks up a business computer’s information, forcing the business to pay a “ransom” in Bitcoin, an online currency, to unlock the computer.
FBI officials said the government does not encourage paying the ransom, but businesses feel they have no choice.
Parmalee suggested dealers isolate the affected computer and to make sure they have a cloud service so they can retrieve any lost information.
“Backups are critical,” Parmalee said, adding that this type of cyberthreat can be “devastating” to a small business.
“This literally could financially ruin you,” he said.
Jared Himmighoefer, also with the FBI, warns businesses not to ignore the threat.
“Anyone can get hit,” he said. “It’s just a matter of when.”
At lease one independent dealer who attended the session said they were hit and had to pay the ransom.
Back-up products like Carbonite could help businesses protect their information.
Alex Tovstanovsky, an Illinois dealer, experienced one attempt to obtain financial information when a caller talked to a staffer, insisting they were from the electric company and claiming that if they didn’t pay a past due bill, the power would be shut down that day.
Tovstanovsky thought it sounded suspicious and it turned out to be a scam.
“It’s a constant battle of trying to stay ahead of the bad guys,” Parmalee said.
Business also have to be careful about offering free Wi-Fi, which opens them up to potential attacks, Parmalee said.
Resources are available for businesses.
The FBI encourages business to report incidents of cyber crime to the Internet Crime Complaint Center (IC3).
There are also Information Sharing and Analysis Centers, including one for the automotive sector, called AUTO-ISAC.
The site offers cybersecurity best practices.
“It’s a really valuable resource,” Parmalee said.
If the Consumer Financial protection Bureau’s mandatory arbitration ban fails to take effect, part of the reasons will be questions about the data supporting it.
The Dodd-Frank Act that created the CFPB specifically required the agency to study the use of mandatory arbitration agreements in finance contracts. The CFPB released the results of that study in March 2015.
In announcing the ban, the CFPB said the study “showed that few consumers ever bring – or consider bringing – individual actions against their financial service providers either in court or in arbitration.”
The Republican Senators who are moving to block the rule cited what they consider poor use of data.
“This rule is based on a political study that 86 members of Congress warned was ‘not fair, transparent, or comprehensive,’” said Sen. Pat Toomey in a release about the Senate resolution. “Rather than reexamine its defective study, the CFPB has chosen to forge ahead with a flawed rule. Congress must now exercise its authority to block it.”
A major problem with the CFPB’s use of the study is an attempt to portray the benefits of class-action suits versus arbitration.
The release says the study found that “over 34 million consumers received payments, and that $1 billion was paid out to harmed consumers over the five-year period studied.”
By contrast, the study found that “in the roughly one thousand cases in the two years that were studied, arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.”
The CFPB release says this proves “(i)ndividual actions get less overall relief for consumers than group lawsuits because companies do not have to provide relief to everyone harmed.”
While this is true, the amount individuals actually received is far greater under arbitration than class action using these examples – $4,615 on average of arbitration vs. $29 for class action.
“If finalized, this rule would actually cost consumers more in the long run by pushing consumers into class action lawsuits as opposed to arbitration,” said Sen. Mike Rounds.
Terry O’Loughlin, director of compliance for Reynolds & Reynolds, said the payment per consumer might prove small, but the cost of the company being sued is huge.
“Even just defending them can be very expensive,” O’Loughlin said.
The CFPB does give a secondary reason in favor of class actions and that is their ability to promote behavioral changes.
Another unusual aspect of the CFPB’s use of data in creating this rule comes from the use of alerts issued by law firms.
These are summaries sent out to a law firm’s client and others that provide information on recent activity on everything from legislation to court decisions to regulatory actions.
Joann Neddleman, an attorney with Clark Hill, said the CFPB used an increase in alerts warning of class-action lawsuits as part of its justification for the arbitration ban.
Neddleman said attorneys at her firm can’t recall another time alerts were cited in this way.
Buyer optimism, a healthy economy and a generous supply of vehicles are keeping the classics and collectibles market in high gear.
John Crispeno, Manheim Pennsylvania marketing manager, said it is a buyers’ market for classic cars at the auction.
Sellers had the upper hand from 2012 to 2015, “with big gains,” but pre-election doubts drove the prices down last year and they are remaining steady.
The economy has a “huge effect” on the classics market, Kinney says. For many, these (purchases) are indulgences.
Some high-line car purchases are like fashion accessories: what’s “in” comes and goes. Others with deep pockets purchase vehicles as investments.
Those with more modest bank accounts may be more cautious, trading by the old saying don’t spend more than you can afford to lose.
Demographics will play a big role in the future of collectibles. Like most businesses, the classic car market needs to attract younger buyers to keep the hobby relevant.
Barrett-Jackson, the Scottsdale, Ariz., auction long associated with a January mega-sale of collector cars, said it sold 630 vehicles in Connecticut in June for $23.4 million. Customers included younger buyers and tastes ran to collector pickup trucks and “custom vehicles professionally restored or modified,” the company said in a press release.
Millennials and Gen-Xers appear to be attending its auctions in greater numbers, the company says. And two young teens, working with a parent, rebuilt a Bandit Trans Am and sold it at the auction.
While interest in and prices for American cars from the 1950s are flat, and European make values generally are not increasing, muscle cars have recovered from their post-recession doldrums and are in great demand, according to recent Hagerty valuation reports.
“Sales of muscle cars from the ’60s through the ’80s are very active,” said Dave Kinney, publisher of the Hagerty Price Guide. “Younger baby boomers are buying them.”
The Manheim Riverside, Calif. auction began selling classics and collectibles in 2016 and is now hosting a monthly classic/muscle car sale through 2017, says Manheim spokeswoman Jennifer Sheran.
Broad dealer interest shows that consumers still want the classics, she says.
Each Manheim auction determines its interest level in classics sales, Sheran said.
Mark Ford, Manheim’s regional vice president for the Southeast, warns that classic cars are not for all dealers.
“It is a big investment for a niche market, so it is not the right inventory choice for just any dealer,” Ford says. “You have to be an expert if you are buying a classic car to truly understand what you are getting.”
In an economic downturn or period of slow growth used-car dealers may be able to take advantage of reduced prices on collectible vehicles, Kinney said.
“Having a few classics on the lot can be a good draw,” he said.
Consignment dealer Gateway Classics in Dearborn, Mich. is having a banner year. Among the 75 vehicles in its expansive showroom in June was a 1935 Ford roadster with 85-horsepower flathead V-8 priced at $70,000. A 2010 Corvette ZR-1 with supercharged 6.2-liter L59 V-8 had an asking price of $95,000.
“Beginning in January the market has been very strong,“ says Tony Saif. Gateway, with headquarters in Illinois and operations in 10 states, claims to be the world’s largest classic car company.
Figuring a price with the seller is tricky, Saif said.
“It’s hard to separate pride and price,” he said.
Saif says one of the most surprising transactions in recent months was a 1950 Dodge Power Wagon, completely restored with updated engine. It sold for $145,000.
Competition for vehicles remains stiff, although sale results are mercurial.
Gooding & Company, a California-based company that sells at the three top venues for classics sales, reported sales of $43 million at Scottsdale in 2016 and $33.4 million at this year’s January event. RM Sotheby’s totals in Arizona were $62.8 million in 2016 and $53.8 million in 2017.
At Amelia Island off the coast of Florida, Gooding sold $60.2 million in 2016 and dropped to $30.6 million in 2017. RM Sotheby’s reported sales of $38.6 million at Amelia in 2016 and 79.9 million this year.
Part of the success of the 2017 RM Amelia sale was the addition of a private collection that was offered at no reserve. RM boosted its Monterey, 2016 sale in the same manner, hosting a pre-sale auction of a private collection.
Some auctions use classic cars as a way to do more than make money for themselves.
ADESA Boston recently hosted its 17th annual classic car show and motorcycle run raised $17,300 through a live auction, show entry fees and sponsorships. All proceeds benefit JDRF, a leading advocacy group for people with type 1 diabetes.
Cash-strapped states are looking for ways to raise revenues and in many cases that means higher taxes on used cars.
South Carolina recently raised the cap on its motor vehicle sales tax to 5 percent of the sales price or $500. It had been $300.
The extra money is supposed to go directly to infrastructure improvements, such as road repairs. The tax has been renamed the infrastructure maintenance fee.
Used-car dealers in the state wanted to take the opportunity to eliminate the cap entirely, said John Brown, executive director of the Carolinas Independent Automobile Dealers Association.
The cap, even with the higher limit, means that somebody buying a $10,000 used car pays as much in sales tax as somebody who buys a $100,000 new car.
“It has an impact on the people who can least afford it,” Brown said.
The change also means South Carolina dealers will have to pay the sales tax as soon as the title changes hands. Before they could pay it on a monthly or quarterly basis.
The state legislature also increased the gas tax, adding to cost to the cost of car ownership.
Brown said the entire package was the largest tax hike in South Carolina history. Gov. Henry McMaster vetoed the bill, but the legislature overrode him.
Oklahoma legislators also passed a sales tax increase that isn’t called that. In this case, it is a decrease of an exemption.
Vehicle buyers in the state had paid an excise tax of 3.25 percent, but were exempt from Oklahoma’s 4.5 percent sales tax. Under the new law, vehicles sales are taxed at 1.25 percent, along with the excise tax.
Rose Morgan, executive director of the Oklahoma Independent Automobile Dealers Association, said her group partnered with Oklahoma Automobile Dealers Association to prevent the change in the tax law. However, that became difficult in the end as the bill was passed out of committee by a 15-13 vote at 11 p.m. on May 23 and the language only became public on May 24, when it passed the full legislature by a vote of 52-47.
Oklahoma has only one legislative body.
The tax change went into effect July 1, but it faces several legal challenges. A state law prevents the legislature from passing revenue increases in the final five days of a session, which is what happened in this case.
Supporters of the change claim it only reduces an exemption rather than creating a new tax and is therefore within the rules.
The Oklahoma Supreme Court rejected one request to block the tax change, but will hear other arguments in the fall.
Morgan said dealers should continue collecting the tax until then.
California recently raised its tax on gasoline and its fees on vehicles to pay for road repairs.
The state offers a good lesson in the challenge dealers face in opposing higher vehicle taxes.
A tripling of the state’s vehicle tax was a major driver of the recall of then-Gov. Gray Davis in 2003.
California residents voted Davis out of office and replaced him with Arnold Schwarzenegger.
The new governor killed the tax hike, but as Larry Laskowski, the executive director of the Independent Automobile Dealers Association of California, explains, consumers still wound up paying more for their cars.
That is because Schwarzenegger raised the gas tax and other fees.
So one way or another, the state gets its money.
The Consumer Finance Protection Bureau created a rule banning mandatory arbitration agreements in contracts used by the entities it oversees, which includes auto creditors and buy-here, pay-here dealers.
The move opens up these firms to class-action lawsuits. The existing agreements specified that consumers must settle disputes via arbitration and were barred from joining class-action suits.
"These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” said CFPB Director Richard Cordray. “Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
Supporters of the bill consider it a blow to big banks. Some point to the recent Wells Fargo credit card scandal as reason to ban arbitration.
“We fought for this rule because it provides a valuable check against corporate misconduct and are pleased that the CFPB has adopted it to protect the public interest,” said Massachusetts Attorney General Maura Healey.
However, the rule covers all firm overseen by the CFPB, regardless of size.
"This rule will force small businesses to bear additional costs in defending class-action litigation, particularly meritless suits," said Steve Jordan, CEO of the National Independent Automobile Dealers Association. "Those costs will ultimately be borne by consumers, and in the case of those who are credit-challenged, it could prove to be too much."
Industry insiders have been waiting for this rule since Congress passed the Dodd-Frank Act that created the CFPB. The Act specifically called for a study into the impact of arbitration on consumers.
The CFPB released the findings of that study in 2015 and a rule has been expected ever since.
But many thought that might change with the election of Donald Trump and an anti-regulatory climate in Washington.
The Republicans in Congress can still squelch the rule before it takes effect in three months by invoking its Congressional Review Act authority.
This would kill the rule and bar the CFPB from creating a replacement.
Attorney Michael Benoit said dealers should start contacting their Senators and Congressmen to push for the CRA.
Benoit said affected parties could also take the CFPB to court, arguing that it lacks the authority to interfere in private contractual agreements.
Until the matter is settled one way or another, Benoit recommends continuing with business as usual.
“It’s a little early for dealers and finance companies to take any action other than exploratory actions into what they might do,” he said.
The Consumer Financial Protection Bureau’s ban on mandatory arbitration agreements faces almost immediate opposition from lawmakers in both Houses of Congress.
On July 10, the CFPB unveiled a rule banning mandatory arbitration agreements in contracts used by the entities it oversees, which includes auto creditors and buy-here, pay-here dealers.
By July 20, several Republicans announced they intend to file a Congressional Review Act (CRA) joint resolution of disapproval in the Senate against the arbitration rule. The move came soon after the ruler was formally noticed in the Federal Register and became subject to the CRA.
“Members of Congress previously expressed concerns with the proposed version of the rulemaking – concerns that were not addressed in the final rule,” said Idaho Sen. Mike Crapo in a press release announcing the intention to file.
Crapo is chairman of the Senate Banking Committee. His counterpart in the house, Texas Rep. Jeb Hensarling, also announced that the House Financial Services Committee has introduced a resolution of disapproval to stop the rule.
The House resolution was initially sponsored by Pennsylvania Rep. Keith Rothfus.
“The CFPB’s anti-arbitration rule hurts consumers and it’s another example of the problems caused by this rogue and unaccountable agency,” Rothfus said in a release. “We know that consumers get better results through arbitration than through class action lawsuits.”
The Congressional Review Act permits Congress to overturn an agency rule within 60 legislative days after an agency has submitted the rule to Congress. Once the rule is overturned, another rule cannot replace it.
Some member of Congress have voiced their opposition to repealing the rule. Massachusetts Senator Elizabeth Warren, the architect of the CFPB, took to Twitter to voice her disapproval.
“We must have the CFPB’s back as Wall St's buddies in Congress try to roll back the rules,” she tweeted.
However, the CRA only requires a simple majority vote in both houses, so Warren and other critics can do little to stop the repeal.
The Senate resolution has 23 co-sponsors. The House resolution is cosponsored by all 34 Republican members of the Financial Services Committee
The CRA was only successful once between its creation in 1996 and this year. But it has been used 14 times so far this year.
Many CFPB watchers were surprised Director Richard Cordray went ahead with the rule.
“It was pretty bold of him to go forward,” said Terry O’Loughlin, director of compliance for Reynolds & Reynolds.
Classics continue to sell for record amounts
Copart Launches Annual Contest
Rental Cars Perform Well
If a Tree Falls on a Dealership, Will the City Allow It to Rebuild?
IADA Honors a Pair of Veteran Dealers
STERLING HEIGHTS, Mich. -The Michigan Independent Automobile Dealers Association honored Jerry Drouillard and Maurice VanCoillie…
Jerry Hinton, general manager of ADESA Portland, is the incoming president of the National Auto Auction Association. He has been married to Dawn for 33 years. They have two children,...