Are dealers abroad a goody-goody?
Let’s begin by looking at how things are “there. Many Russian buyers, especially those who have had experience with dealers when buying a new car think that the tricks, deceit and cheating they encountered are typical mainly for our country, while abroad the concept of communication between seller and buyer is built on mutual honesty. To say that this is not true is to say nothing, and to prove it, let’s take a look at a recent piece by Tom McParland in Jalopnik magazine. Two factors make his story especially vivid: first, the dealer’s apparent attempt to make a profit at the expense of the customer, and second, the atypical scheme we use to get that benefit.
Can you, the author asks, imagine a situation when you come to the supermarket for some product, after studying the prices you decide not to buy it, but on the way out you meet a couple of guys sent by the manager, who don’t let you leave and make you come back and buy it? The situation is obviously absurd, but visitors to car dealerships in the U.S. find themselves in it more often than you might think. And in the story of the representative of the law firm to which McParland refers, a woman who came to buy a car, faced a double deception of the car dealership, which eventually turned into threats and deterrence of the buyer literally by force. It started quite routinely: the female buyer was offered to sign a contract with the price of the car higher than the one agreed earlier, and she saw the trick after she had signed it. In fact the sale had already taken place, but the manager insisted on signing some other documents (what kind of documents the lawyers didn’t specify in their story), from which the deceived woman refused and tried to leave. Out of the salon, she found that her car … blocked by another car, which was parked by the salon employee. Virtually cornering the buyer, the manager continued to actively coerce her to sign the remaining documents. The woman was able to leave only after calling the police. The ending of the story, of course, happy – given the narrator in the face of the law firm, it could not be otherwise. With the lawyers’ support, the woman managed to get compensation not only for the fraudulent price of the car, but also for the moral damage she received when she was trapped face to face with an aggressive manager. According to the company representative, the total amount of compensation was $100,000, which was enough to cover the cost of the car she bought (and the cost of legal aid, of course). But what is the share of buyers who in such situation gave up under pressure of managers and overpaid for the car – the question is open.
Another example mentioned by representatives of the same law firm is the “hide the keys” trick. It usually happens if the client comes for the next technical service, and during the waiting time he shows interest in buying a new car and handing over his car in trade-in. Having realized that he is almost a ready buyer, the manager of a car dealership gives out a scintillating show, the keynote of which is the inability of a client to just turn around and leave – because his car stays in the repair shop with the keys. In the most severe cases, the car can be returned only under threat of a police call.
This is the end of Tom McParland’s material, and the list of dealer tricks, of course, is only the beginning. The next “dirty trick”, practically unknown in our country, but popular in the USA, is giving the customer a lease instead of a loan. In our country leasing remains a business tool, not much in demand among individuals, but in many other countries, including America, it is a popular scheme to buy a new car, along with a loan. No wonder that inattentive customers are sometimes sold a leasing product instead of a loan product. To do this, dealers start diverting the buyer from the price of the car in favor of a low monthly payment, along the way by including additional services and options, such as their own service contracts, in the price. Thus, the buyer is left with three times the loss: he buys something he doesn’t need at an inflated price, he becomes tied to the dealer by the terms of the service contract, and as the cherry on the cake he takes the car on a long-term lease (which is actually leasing) instead of buying it as he was going to. A particularly “pleasant” surprise in the form of the residual redemption value awaits the most inattentive customers, who faithfully pay the lease payments for several years, only to find out at the very end that the car is still not theirs.
Numerous stories on the web prove that the tricks described above and atypical for our dealers are fully complemented by the problems we already know. Substitution of the present contract for a “preliminary” contract with an understated price, imposed services like service contracts, additional accessories and services, including anticorrosion (yes, dealer anticorrosion at triple price is not a purely Russian know-how, they do it in America), selling cars damaged during transportation and repaired on site as brand new – all this was mastered by foreign sellers even before ours. Selling “for a special price” a few cars that are “reserved” for you by phone and “sold” a minute before you enter the showroom is an ancient and ubiquitous trick. And Hermes himself told to underestimate the value of the car accepted in trade-in. Not any dealer will give the market price for your car, since it is purchased not to stay as a dead weight in a parking lot of a dealer, but to wash it and sell it at the market price for the next day.
About what techniques of additional earnings dealers use in Russia, we told in detail in a separate article. So we will not repeat it and for useful information on how to save nerves, money and time, we will address you to it, and now we will pass from suffering of buyers to suffering of dealers.
Dealers are signaling – business is at risk
A curious story took off a few days ago: Hyundai dealers collectively complained to the association “Russian Automobile Dealers” about the launch of the official distributor of Hyundai Motor CIS service for the online sale of new cars. According to, for example, AutoBusinessRevue, the initiators were large dealer networks in St. Petersburg, but colleagues from Moscow and the regions also joined the appeal. Interestingly, the platform for online sales was launched at the end of last year, but during the hot New Year’s Eve it did not seem to cause any significant damage to the dealers. But now, when popular cars in showrooms is not found, and that appears, immediately hang accessories and options for a hundred or two thousand, the relevance of online shopping for customers has increased at times, as well as its demand. Buyers, frustrated with the dealer’s “overpay or leave” approach, are looking for ways to get the car they want without the extra cost, and direct sales from the distributor have become the best solution.
In such a scheme, the dealer simply becomes the point of delivery of the ordered and paid for car, receiving a fixed compensation from the distributor for this procedure. This is what upset the salespeople: in their appeal they explicitly point to the reduction in income due to the inability to work directly with the customer and sell them additional products.
The implementation of such project by distributor means for Hyundai dealers the loss of a significant part of the profit due to the lack of direct contact with the customer and the lack of sale of additional products such as car loans, insurance, car sale in trade-in. The continuation of such a distributor’s policy will mean the loss of the investments, previously invested by dealers in the construction and development of Hyundai dealerships
Appeal of Hyundai dealers to ROAD
The next day ROAD issued a statement in support of the dealers. Chairman of the Regional Council of the ROAD in the North-West Federal District in his address said that the government gives preferences to automakers that establish localization, but ignores the dealers as market participants involved in the further life cycle of the car – sales, service, insurance, crediting and utilization. he also emphasized that dealers provide work not only a tangible number of their own employees, but also “tens of small businesses that are their suppliers”.
It should be taken into account that the dealer as an integral part of the process unfairly does not receive support from the state, which becomes an obstacle to the implementation of the whole process, from the production of cars to the final disposal of it. In their turn the manufacturers, taking advantage of the lack of state policy in the sphere of car dealerships, do business without being guided by the industry as a whole.
In any case let us remind you of the obvious fact: dealers are private business which is not directly connected to car manufacturers, official importers and distributors. Accordingly, each dealership is a private investment, so it is at least strange to reproach businessmen that their main goal is to make a profit. And with that in mind, the dissatisfaction caused by “online” also seems fair enough. After all, at the time of making the decision and calculating the profitability and payback of a car dealership, this variable was not in the equation, and it was impossible to predict its appearance. Accordingly, the distributor’s decision does affect the dealership network, potentially reducing its profits.
To gauge how dramatic the situation is for salespeople, you have to roughly understand how they make their money. Anyone who is even slightly familiar with the industry knows that the margin on the sale of a “naked” car, especially a mass and not very expensive one, is small – about 5%. With this in mind, the business actually stands on two pillars: additional products and after-sales service. And the new online services can affect not only the first, but also the second, but we’ll go in order.
Car sales via the Internet first of all knock the first pillar out from under the dealer’s feet – the sale of additional products. When a customer comes to a dealer for a car, he is forced to have a dialogue with him, and, as we know, this dialogue is often built by the dealer from a position of strength. In order to get a car, the customer is usually forced to concede one way or another by agreeing to at least part of the terms “offered” by the dealer. And dropping the skepticism about the mechanics of sales and quality of installation of additional equipment, it is worth adding that some customers knowingly overpay the dealer, preferring to get the whole complex of services in one place, quickly and with a certain warranty. Another additional condition is the current market reality: lack of money from buyers, multiplied by a sudden shortage of cars from sellers, which adds to the process of buying excitement. And this is where the online service comes in, allowing the customer not even to communicate with the dealer as equals, but to ignore him altogether. Experienced buyers know that credit approval can be obtained in advance at a convenient bank at a favorable interest rate, as well as independently arrange the necessary insurance products. Thus, the dealer has absolutely no influence on the buyer’s decision: he cannot offer (and still less impose) any additional equipment, or service contracts, or credit and insurance services in those companies with which he has a mutually beneficial agreement.
Now let’s move on to the second source of dealer income – after-sales service. Online sales of cars do not affect it directly, because serviced even the “Internet-buyers” will still be the usual scheme – at official dealers. However, the redistribution of sales may ultimately cause losses of some sellers and their closure. ROAD President Vyacheslav Zubarev also points this out in his appeal.
Hyundai has already said that it plans to sell 50% of its cars directly. But then what will happen to 50% of car dealers? How will they recoup their investment and why will the concern open new dealers?
Undoubtedly, the statement ROAD is a bit thickening the colors here: mathematically, the transition of 50% of sales online does not mean a reduction in sales of 50% of dealers to zero with their subsequent bankruptcy. But the ROAD president also has some logic: such a critical change in the sales scheme could really undermine many market players, especially in large cities, where the number of dealers can even be called a surplus, and competition between them is high. It’s not difficult to understand what it will lead to in terms of service: the remaining dealers will receive the whole volume of warranty cars, which will cause their overload, and at the same time the growth of service cost due to decreased competition. The car owners will have queues to get the service record and increased cost of service maintenance, which will only cause the aggravation of one more dealer problem: the reduction of the car servicing share at authorized dealers. After all, in Russia the percentage of those who service a new car at a dealer is lower than abroad. In recent years it has been declining and is now about 80% during the warranty period, and after it is over it collapses at times, if not by an order of magnitude, and the closure of some dealers can provoke a new round of this decline.
On the other hand, the buyer is not interested in the dealer’s problems, especially now, which is also quite fair. He is more concerned about his own freedom in deciding how much he is willing to pay personally to the dealer. And online sales have predictably become a “revolution” in this industry, further spurred on by quarantine measures and the accompanying development of e-commerce in general. In the near future we should see a development in the automotive industry, because online showrooms have been launched not only by Hyundai, but also by other brands – Volkswagen, BMW, Renault and so on, including even Lada. Dealers, in turn, are ready to go all the way: in particular, they have already voiced their intention to appeal to the FAS, if the situation with online sales will not be “resolved.
Maybe you are ready to give up your dealers?
On the background of the “expected but unexpected” conflict of interest of dealers and distributors, there were “revolutionary” opinions from the buyers. In particular, some declare their willingness to completely abandon the dealers as intermediaries between the manufacturer and the buyer. They propose to solve the warranty issue by having service centers certified by the manufacturer, partially created on the basis of “former” car dealers, to give credit and insurance services to specialized companies, and the buyer himself can handle the additional equipment.
Of course, in reality, this model is fully inapplicable in our country at least because of the attitude of most customers to the purchase of a car as a very responsible event. In countries with a high level of income the proportion of those who can choose a car like a refrigerator and order it without a preliminary test drive is higher. In Russia a car is usually bought either “for good and long” or for a few years, but with the expectation of preserving the maximum residual value for later sale. So the approach to choice of the car as scrupulous as possible: personal test-drive and study of the secondary market is almost obligatory. Although, maybe we are mistaken, and you are ready to refuse from dealers long ago to save time, nerves and money?