Moving the Metal

Metro Detroit has the highest lease rate of cars and trucks in the nation — a market condition that challenges dealers and automakers to move vehicles at sometimes-reduced profit margins.
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Dynamic duo Mark Snethkamp Jr., general manager of Highland Park-based Snethkamp Chrysler Dodge Jeep Ram, and his sister Jennifer Bierkle, sales consultant, and their family have been selling cars since 1926.

PHOTOGRAPHY BY CJ BENNINGER

Metro Detroit is a market all to its own when it comes to buying and leasing vehicles. The behavior of auto consumers in the region isn’t like that of their counterparts nationwide. Here, we’re much more likely to lease than folks in California, Nebraska, or Maryland.

And the friends and family deals, the ones the automakers sometimes extend to everyone? They’re pretty ubiquitous in the metro Detroit region, given the fact that so many people have a family member or a friend who works at an auto company. When those factors are combined with some of the unique points that define the relationship between automakers and dealers, the challenge on the sales floor is to achieve consistent sales every month.

In fact, a regional dealer’s profit margin doesn’t necessarily hinge on the ability to sell cars sufficiently above invoice. FCA US (Fiat Chrysler) dealers, for example, work with what’s called the Volume Growth Program, or VGP, which incentivizes them with straight cash payouts from the manufacturer if they move a certain number of vehicles each month. Last November, certain Chrysler dealers were required to have sold or otherwise moved 131 vehicles by the middle of the month in order to receive $200 per vehicle from the manufacturer. From that point, the dealer had until the end of the month to hit a total of 379 vehicles sold or otherwise moved, which would result in another payment of $700 per vehicle.

Any dealer who could hit both marks would get cash payments totaling $900 per vehicle directly from the manufacturer. For those who fall short? The dealer gets nothing. The sale quotas vary from one month to the next, but the basic system is always the same.

So why would it make sense for OEMs to pay dealers to move cars after the dealers have already paid an invoice to take the cars in the first place? The reward for the OEM is that they can’t get dealers to order new cars until the previous ones are cleared away. That eliminates the problem of cars sitting at the factory because dealers, still looking at aging inventory, won’t order new ones until what they’ve got on hand is gone.

Ryan Roscia, president of Dick Huvaere’s Richmond Chrysler Dodge Jeep Ram SRT in Richmond (northern Macomb County), says VGP adds to existing incentives to offer cut-rate deals just to move cars. “We’ll go below our cost at times because we know that if we hit that number, we’ll get that big check,” he says.

Mark Snethkamp Jr., general manager of Highland Park-based Snethkamp Chrysler Dodge Jeep Ram, agrees. “You might even lose money on the sale just to get the metal on the road if you have a number you’re trying to hit,” he says. “In some cases, we lose quite a bit of money if we need (to move) just one or two more cars.”

 

That doesn’t mean the program doesn’t work. Chrysler’s goal is to keep vehicles moving. VPG does that so efficiently, other OEMs have co-opted the idea themselves, Snethkamp says. “Chrysler’s been successful with their month-over-month (program),” he says. “They like to call it their ‘Ironman’ streak. They have 66 months of month-over-month, year-over-year sales. The other manufacturers have been watching it closely and they’ve got their own versions of VGP, so it’s not unique, although Chrysler may have invented it.”

Not every OEM has a program similar to Chrysler’s. Joe Serra, president of Southfield-based Serra Automotive, says GM dealers generally have to follow a more traditional model of earning their margins by selling vehicles for prices above dealer invoice — although GM brings special programs to the table at certain times.

“If they do it, it’s more on a monthly basis, and it might be on a particular vehicle line,” Serra says. “But a lot of manufacturers nowadays are establishing targets, and you need to hit the targets in order to receive certain dollars. That’s obviously a challenge, because those numbers keep growing. You might hit it one month, and one could argue you might be penalized because you (then) set the bar even higher.”

The distinctively Detroit popularity of leasing presents multiple challenges for area dealers. In December 2014, Consumer Reports said leases on new cars represented 29 percent of all new-car deals. But at the Dick Huvaere dealership in downtown Richmond, leases represent more than 70 percent of his deals. Snethkamp says it’s 75 percent of his dealership’s annual transactions, and he’s seen as high as 85 percent at other dealerships in the area.

“Our market is so saturated with leases, and in a heavy lease market, the consumer doesn’t care about the ancillary markets,” Roscia says. “They’re just going to turn it back (in two or three years), so they don’t care too much about aftermarket accessories.”

Mark Snethkamp Sr., president of the Snethkamp Automotive Family in Highland Park, which owns or is a partner in four dealerships in metro Detroit and Lansing, says the high lease rates cut into transaction margins. “Your used car sales suffer because a $20,000 used car might cost more per month than a $40,000 car on a lease,” says Snethkamp, whose son recently succeeded him as general manager of the Highland Park dealership. That also affects the business potential of maintenance services, because new cars and lease cars under warranty don’t generate as much revenue as customer-paid maintenance for older vehicles.

The younger Snethkamp believes there are advantages to such high leasing rates, particularly in the relationship-building category. “I get to see my customers every two or three years,” he says. “Without the high rate of leasing, it would be more like every six years.”
Serra believes that’s precisely why high lease rates are actually good for Detroit dealers.

 

“Leasing is a huge advantage,” Serra says. “I get what they’re saying about potential maintenance work, but even if you lease you still need to maintain your vehicle, and the advantage of leasing is that the ownership cycle is shorter. You’re talking two to three years instead of five or more. One thing I love about the Detroit market is that customers understand and appreciate leasing. I go to some markets and leasing is just not as well-received. Maybe the dealers don’t understand it.”

Jim Seavitt, president of Dearborn-based Village Ford, goes even further in his appreciation of Detroit’s high leasing rates. “I’m grateful to be in the Detroit market and have 70 percent of my dealership leasing because I committed to that, as did the Detroit area, years ago,” he says. “You’re not going to have someone in the car for seven years. They’re going to be, hopefully, a two-year lease — we’ve done three years — which means you’ll have the customer back in your showroom in two years.”

Seavitt says Village Ford did experience a short-term issue recently when Ford moved from mainly two-year leases to three-year leases, as it created one year in which not as many leases were turning over. But he says it was a one-time glitch that corrected itself the following year.

While leasing means less revenue from maintenance and after-market product sales, Seavitt considers the tradeoff more than acceptable.
“Absolutely, that’s the deal you made,” he says. “We have customers who are under warranty and have lower payments. We have happier customers. You do lose revenue from service work, from rustproofing, and from revenue banks that pay you for getting the cars financed — which could be $700 or $800 per car — but we still maintain the cars and trucks, and they do get sold or leased again.”

And then there are the friends and family deals. Area residents will recognize the occasional ads — often starring automotive workers — offering employee pricing for everyone. They were especially prominent during the latter part of 2015. But even when the discounts aren’t being offered to everyone, dealers still find themselves giving the discounts frequently because there’s hardly anyone in the Detroit area who doesn’t have a family member or a close friend who can get them a deal.

“It’s a madhouse,” Roscia says. “Everybody knows somebody who works at a factory, and I always joke that it’s a race to the bottom because low monthly payments sell. That’s what moves the needle.”

Move the needle they do, but that’s not necessarily the same as generating healthy margins. “They have a fixed price that they purchase the car for that’s less than half what dealers around the country sell their cars for, and the margin is less than half,” Mark Snethkamp says.
And while friends and family members of automaker employees may enjoy the discounts, those same bargains can make it more difficult for customers to get access to high-demand vehicles.

“All these friends and family coupons, they’re great, they generate business for us,” Roscia says. “But what it’s done is that the factory’s gotten wise to it. Let’s take, for instance, a Grand Cherokee. They’re now getting wise to the fact that they, as a corporation, can make more money on a Grand Cherokee in other parts of the country. Certain high-profit vehicles, they’ve shifted to higher-margin regions. That also puts pressure on us because it strips the profit vehicles away from the market.”

Roscia also believes the diversion of higher-profit vehicles to non-Detroit markets is becoming systematic. “A team Chrysler hired from Boston over the summer figured out that FCA’s margins were much lower than Ford or GM, so what they did was reprice all the vehicles, all the MSRPs, to be in line with the other manufacturers. And that pointed a spotlight around the notion that, hey, if we’re doing this, we can make more money on certain model lines in other markets, so let’s throttle back on sending them to the Detroit market where we’re not making as much (profit).”

 
>> on a clear day
General Motors Co. and its dealers like Somerset Buick GMC in Troy don’t have monthly sales quotas, but they do use an array of promotions to drive sales.

What’s more, savvy potential buyers have learned how to game the system, and they know they can get the best deals late in the month, as some anxious dealers check their volume and become willing to do almost anything to meet their quota.

“The customers know,” Roscia says. “They’ve learned over the years that if they wait until the end of the month, the offers are likely going to be better.”
The prevalence of special deals, as well as the popularity of leasing in the Detroit market, leads to other market complications. For many dealers, it’s difficult to sell used cars because the easy availability of special deals for new cars — not to mention relatively low monthly payments for those who choose to lease — reduces some of the incentive to buy used cars.

If it seems fundamentally unsustainable to keep moving cars at little to no margin, only to have area dealers made somewhat whole via cash payments from the manufacturer, it does make sense in metro Detroit. Serra says friends-and-family deals are good for dealers.

“All that, to me, is just an additional rebate, an additional incentive,” Serra says. “Personally, it’s a positive because, as you know, in today’s market there’s a tremendous amount of rebates and incentives that are available to any consumer. The manufacturers treat us fine, and it’s all relative.”
So what to do in response to such built-in challenges? Online sales help some, but for the most part it’s a matter of going as hard as possible to meet those monthly numbers. “What we’ve done is play the game, and we play hard,” Roscia says. “At the beginning of every month we put the gas pedal to the floor to get those volume numbers.”

It’s worth remembering that being in Detroit also has some advantages for auto dealers.

“Proximity to the manufacturer is always helpful, because when we meet other dealer groups around the country and they’re not in Detroit, they don’t have access to the factory people like we do,” Mark Snethkamp Sr. says. “If we need parts or specialty things from an OEM, we know who to call and who to get ahold of. A lot of dealers around the country don’t see their factory representative for a month or two. That’s one of the benefits of being in Detroit. We have very good access to our manufacturers.”db

 

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