Lowell's

What you told us: How Zappos would fix cars

This week we asked for your help in defining an astoundingly great car repair experience.  We summed it up this way: How would Zappos fix cars?

In Wednesday's post, we talked a little about what Zappos does and why customers love them, including the famous I Heart Zappos post.  And in the past two days, we've gotten some really great responses on Twitter, Facebook, and here on the blog - including one response from a Zappos employee!

Over on Facebook, Joan commented that she thought that Zappos was actually the "Lowell's of selling shoes".  (We heart Joan.)  We love that sentiment and will try to live up to it, but still think we have a lot to potential to improve our own customer service.

On Twitter, Jim suggested that Zappos "would come to your house and fix it at night while you slept".  Allan and Mari joked about needing to buy parts online from Amazon (an allusion to Zappos' recent purchase by Amazon.com).

But the strongest theme running through the comments: The need for greater transparency in auto repair.  I'll run through some of the comments, and then talk a little about what Lowell's does (and what we could do based on your comments).  On Twitter, Jupiter said he'd like to prevent that "being had" feeling, perhaps by getting greater detail on what was being repaired and why it was needed.  Ace Weekly chimed in "They would spoon you before giving you the bill?"  Here on the blog, Letha (a Zappos employee) shared a friend's experience with a body shop which sent her daily text messages about the status of her car after a wreck, including a countdown to when it would be ready.  Jim added this comment:

"The thing the frustrates me about car repair is the unexpected nature and size of the expense. It would be nice to provide as part of the service an educational piece that says here are the expected life cycles for key systems for your car and what you might expect to pay. And here are indicators of failure so we can start to diagnose these issues BEFORE they happen. At some point, owners need to start BUDGETING for system replacement and failure and that takes planning and information."

What's clear from this last batch of comments is that automotive service is all-too-frequently a kind of mysterious 'black box' where a car goes in one side and nasty, unpleasant surprises emerge from the other. 

At Lowell's we try to prevent such surprises in the following ways:

• On each invoice, we print a list of factory-recommended maintenance given vehicle mileage, including a rating of the severity or urgency of each one, and pricing.  We try to review that list with our customers when they pick up or drop off their vehicle.  We sometimes fail to discuss maintenance needs during busy pick-up and drop-off times.
• We always get customer approval before doing work on a vehicle, providing customers with estimates of the costs before we do the work.  If they are available, we'll also offer less-expensive alternatives, like fixing or cleaning a part instead of replacing it.  (Ace, we try to reduce the need for 'spooning' whenever possible.)
• When we call a customer to get approval, we tell them what a technician found and explain why action might be needed.

Based on your comments to us, here are some ideas of what we could do:

• Explainers.  For frequently-done maintenance and repair service items, we could provide detailed "explainer" sheets, including text and pictures regarding what the service is, why it is needed, and what a part might look like when it needs replacement. 
• Schedules.  With ongoing maintenance, it is easier to implement Jim's suggestion that we provide more of a roadmap of service.  And we do that, to some extent, with our list of factory-recommended maintenance.  But it is very difficult to predict with accuracy when something will break and require repair, and for many repairs there are few warning signs until something breaks.  When visible, we'll tell customers about signs like brake or belt wear or engine leaks.  One idea: We could take pictures of the actual parts that are wearing or of the places that are leaking, to show the thing that needs service.
• Convenience.  Not sure yet how we might do something like this, but Jim's other suggestion of working on vehicles overnight is interesting.  Perhaps we could pick a car up and have it back in the morning for very basic items, but a big part of our process is communicating back to customers about what we find (and they probably won't welcome updates at 2 in the morning).  But Jim's suggestion got us thinking: Are there other ways we could make getting auto service easier?
• Updates.  As a mechanical shop, most of our repairs are completed same-day, so we almost never have the 20-day delay in getting completed that Letha's friend had at the body shop.  But Letha's post got us thinking: Are there other ways you'd prefer to be contacted?  While the phone is our usual way of updating customers, we do frequently find ourselves in a kind of phone tag during the service approval process.  We could provide more contact alternatives: text messages, Twitter DM's (direct messages), etc. 

Which of these things would matter to you?  What other things would create an astounding car repair experience for you?

We really appreciate your thoughts, and please, keep giving us ideas on how to improve.

How would Zappos fix cars?

We spend a lot of time thinking about how to make our shop a better place for our customers and our community.  We feel like we're pretty good at the basics.  Just a few examples:

• We have an expert staff who know how to get cars fixed.
• We have a lot of nice touches for customers who wait on their vehicles: 5-cent Cokes, complimentary coupons for a drink and snack at Third Street Stuff, and we encourage customers to take our waiting area magazines with them.
• For customers who can't wait around, we have a complimentary shuttle to take them back home or to work.  For longer repairs, we provide complimentary loaner vehicles.

These (and many other) touches have helped us a lot.

But "It can always be better" is my personal motto.  This isn't some pessimistic, glass-half-empty statement; it is a fundamental belief that we can always improve the way we do things.

So we've been thinking about companies that really excel in customer service, and one name keeps popping up: Zappos. 

Zappos is a world-class online shoe and clothing retailer who has gained a fanatical customer following because they do a lot of things right:

• They offer free shipping (both ways).  While not promised, the shipping is often next-day.
• They have a 365-day return policy.  If your shoes don't fit or don't look the way you expected, return them at no cost.
• They have round-the-clock customer service.
• They have a positive culture which puts a premium on providing astoundingly great customer service and having fun.
• They have an enthusiastic staff which has permission to make things 'right' for customers with frequent pleasant surprises like this one.

Zappos recently agreed to be acquired by Amazon.com, and there has been a lot of concern about their ability to maintain their unmatched customer service. 

But for us, Zappos presents an interesting question:

How would Zappos fix cars?

What would an astoundingly great car repair experience be like?  Please share your thoughts in the comments below. 

We can't wait to see what you come up with.

Lowell's Bluegrass Vehicle Report

Today, we are pleased to release the Bluegrass Vehicle Report 2009.  Using state registration data, Lowell's compiled statistics on vehicles in seven Bluegrass counties.  We've put the results together in a fun and informative format which shows details about the automotive marketplace in and around Lexington.

In addition, Lowell's is releasing Lowell's School Tools.  School Tools is a companion guide to the report which helps teachers, parents, and student create their own fun and interesting findings from the automotive data.  More about School Tools can be found here.

Among the more interesting results from the Report:

• Toyota is the #1 brand of vehicle in Lexington.  The 33,624 Toyota vehicles on the road put Toyota ahead of both Ford (31,018) and Chevrolet (29,712).  Toyota nameplates are on 15.4% of the cars on the road.
• A lot of Toyotas.  All of those Toyotas, placed end-to-end, could fill all 4 lanes of New Circle Road, completely encircling Lexington.
• A lot of gas.  Lexington drivers consumed over 156 million gallons of gasoline in 2008 -- more than enough to fill Rupp Arena from floor to ceiling.

You can see all of the results here:

Bluegrass Vehicle Report 2009

View more presentations from Rob.

Or, you can download a PDF of Bluegrass Vehicle Report 2009 (1886.4K).

[where: 111 Mechanic St, Lexington, KY 40507]

Dealership troubles

In January, the Wall Street Journal ran a page one story about the troubles facing two dealerships in southeastern Kentucky.  One of them, Johnny Watkins, had filed for bankruptcy.

At the time, we predicted that there would be a lot more dealership closures in 2009, especially in smaller towns. 

Then, a couple of weeks ago, we received an auction notice to liquidate the assets of Maysville Ford.
 
Why is this happening to dealers in small towns?  There are a few key reasons:

• There really isn't enough critical mass of car sales to support a dealership in a small town.  So dealers have to draw customers from nearby cities, usually with discounts that squeeze their profitability.
• The most profitable part of the dealerships come from service to vehicles after the sale.  When out-of-town customers purchase from a small-town dealer, they tend to have their cars serviced somewhere else, as the dealer is too inconvenient for frequent maintenance.  So small-town dealers lack the service customers that larger dealers have.
• The heavy reliance on car sales (and the lack of substantial service sales) means that small-town dealers are much more sensitive to economic downturns.  As car sales plummet, the service business is what has sustained many big-city dealers.  The smaller dealers just don't have that cushion.

The economic realities of being a dealer in a small town mean that a lot of them won't survive over the next couple of years.

[where: 41056]

Toyota is #1. And will stay there.

In 2008, Toyota became the largest carmaker in the world, producing nearly 9 million vehicles.  Toyota surpassed General Motors, who had held that title for 77 years, by over 600,000 vehicles.

As Toyota specialists, we're pleased.  As lifelong fans of GM, we're also a little sad.

Both manufacturers downplayed the significance of Toyota's ascension to the top of the sales charts, which is the culmination of a decades-long steady climb by Toyota and a precipitous drops by GM, especially in the past year.

While GM executives are optimistic about a return to the top spot, the Lowell's Corporate Office of Fearless Predictions says that won't happen.  Toyota will remain #1 for the next 20 years or more.

As we've noted before, GM and the other Detroit automakers have structural disadvantages in their business design relative to Japanese automakers which their executives have been either unwilling or unable to decisively address.

Meanwhile, Toyota has historically invested in new technologies and new capabilities long before the market demanded them, and stood ready to take advantage of sudden shifts in market demand.

Toyota isn't always right -- they released their huge 2008 Tundra and Sequoia models right into the teeth of $4 gas -- but they almost always put themselves in position to be right.  With gas prices lower, their big models may get some traction, especially against similar GM, Ford, and Dodge models.  When gas prices shoot back up, they can rely on the Prius and their other hybrid models to continue their market gains.

Toyota consistently makes collections of bets which advantage the company relative to its competitors.  When those bets don't work out (witness the Tundra), the Detroit 3 suffers more than Toyota (witness the sudden implosion of Detroit's truck-heavy business).  And the other bets Toyota makes (like hybrid, solar, and electric vehicle techologies) more than compensate for the ones that don't succeed.

That's why Toyota will stay in the top spot.

Dealership Economics: Wall Street Journal Edition

Here at Under the Hood, we've spent a lot of time analyzing the automotive industry.  You might remember the three-part series about the economics of dealerships (Click here for Part I: Car sales, Part II: Service, and Part III: Toyota) or the entries about the problems of the Big 3. 

Today, The Wall Street Journal has Page 1 profiles of two car dealerships in London, Kentucky (about 75 miles away from us here at Lowell's).  The profiles echo a lot of the themes you've heard here:

• How the financial fundamentals of dealerships have been deteriorating.
• How the Big 3 have too many dealerships (look closely at the WSJ "Dealership Decline" chart).
• The relative strength of Toyota and the Japanese carmakers versus those from Detroit.

My guess: In 2009, we're going to hear a lot more Johnny Watkins-type stories of dealerships going out of business, especially in smaller towns.

[where: London, KY 40507]

Toyota developing a solar car?

In another example of Toyota's consistent ability to anticipate the future and develop for it, the Nikkei is reporting that Toyota has a completely solar-powered car in the works. 

This follows similar reports in July showing spy photos of a next-generation 2010 Prius which would help power its hybrid engine with solar panels.

Toyota already exemplifies how a relentlessly innovative company can come to dominate its industry.  It appears poised to continue that domination for a while.

The Big 3: Saving the industry

As the Big 3 executives have returned to Washington asking for emergency funds with gestures that are both symbolic (driving in hybrids and taking $1 salaries) and substantive (slashing the numbers of dealers and brands), the question remains: Should we bail out (or invest in) the auto industry?

In my last Big 3 post, I said that I couldn't support a bailout.  But that was before the execs got flamed for their corporate jets and came back to congress in hybrids with business plans...  What do I think now?

I'm really disappointed. 

While many of the figures in the business plans are truly staggering (GM plans to fire up to 35,000 employees), my reaction to the plans is this:  Not enough. Not nearly enough.  My criticism flows along three lines of thought: 

1. There appeared to be no cooperation among the Detroit automakers in drafting their plans, especially with regard to an inspiring "moonshot" style project to create a new generation of vehicles.
2. There was little to address the huge overhang of retiree obligations which created much of Detroit's disadvantage to begin with.  The labor concessions the UAW appears prepared to accept are minuscule by comparison to the ongoing burden the retirees pose.
3. The measures outlined in the plans -- while aggressive on the surface -- offered little in terms of real, structural changes to the way the Big 3 operate.

The current proposals still smack of "life support" rather than a true plan for vibrant growth.

But rather than sit back and take easy potshots at the executives, I thought it might be more productive to outline what I had in mind.  So (using my beloved GM as an example), here is my not-so-modest proposal:

Scale Back the Brands.
GM has proposed scaling back or selling their Hummer, Saab, Saturn and (maybe) Pontiac brands -- leaving them with Chevrolet, Buick, GMC, and Cadillac.  That is still 2 brands too many.

They should pour all mainstream car and truck efforts into the Chevy brand and clearly distinguish luxury vehicles with the Cadillac brand.  Just drop the rest.  To paraphrase John Moore, if Pontiac went out of business tomorrow, would any of us really care?  Buick?  GMC?

I can hear the objections: But Pontiac produces iconic performance vehicles like the Firebird and Grand Prix and GTO, right?  Oh, they don't anymore?  I think the nation will be OK without the G6 or the Torrent, as well-made as they might be...  The Buick brand is surprisingly strong in China, but the appropriate Chevy or Cadillac models should be rebadged as appropriate for that market.

Concentrating on two brands would rid GM of the ridiculous 8x duplication they have today in product development and marketing.

(Ford should drop the Mercury brand, and Chrysler should just become "Dodge" and focus exclusively on trucks and minivans.)

Revamp the Dealer Model.
GM's dealer network is broken -- too many dealers chasing too few car sales, and doing so in the wrong way.  They've proposed cutting nearly a quarter of their dealers, but they should cut closer to half of them. 

One way to speed the process?  Get rid of dealers who won't accept the following: All dealers must accept a flat pricing model with no typical dealer shell games.  By adopting the major innovation that Saturn offered to the market (and which GM is currently offering through their "Red Tag Event"), GM might be able to offer a competitive difference in the notoriously awful purchase experience.  Doing so may draw buyers back to the showroom.

They'd also begin to align the dealer's interest with that of the customer.  The dealers that still want to use smoke and mirrors to drive their profit?  Get rid of 'em.

Moonshot.
Establish a semi-public National Automotive Technology Institute (or some such entity) with the explicit objective of crafting an inspirational next generation of smarter, more desirable, more fuel-efficient vehicles within the next 3 years. 

Force the Big 3 to contribute their energy and talent to the venture.  Connect the Institute to the best private- and public-sector initiatives on energy, artificial intelligence, and vehicle design. 

Motivate the best and the brightest individuals to develop a true national energy program in which we 1) drastically curtail petroleum use, and thereby 2) stop funding despotic regimes who dislike (or terrorize) America the most: Russia, Venezuela, Iran, and Saudi Arabia.

How to fund this?  Any dollars used to fund continuing operations at the Big 3 must be matched dollar-for-dollar with funds for the Institute.

Scale Down Retirees.
The one problem that there is no real solution for is the retiree obligations.  Both the UAW and Big 3 management colluded for years to create monstrous future pension and health obligations for retirees that both sides knew was untenable. 

They are both to blame.  So they both must pay. 

First, the retirees must accept significant reduction in their benefits.  As painful as that might be, it is better than the alternative of no benefits if the Big 3 go belly up.

Second, the company must meet what remains of its obligations to the retirees.  But everyone knows that they can't afford even a reduced set of obligations.  So, in exchange for a federalization of the retirement programs (as well as in exchange for a cash infusion), the companies must give up a significant chunk of their equity to taxpayers, to ensure that they are an ongoing concern.

As long as they abide by the other elements of this not-so-modest proposal, a public investment in the Big 3 should turn profitable within the decade as Americans (and the rest of the world) come back to attractive, affordable, and fuel-efficient American cars.

Have I been over the top?  Perhaps... But really saving the auto industry will not be accomplished through bland half-measures.

[where: Washington, DC]

Driving off a cliff

U.S. auto sales drove off of a cliff in November.

The numbers from Autodata show that the industry as a whole is down almost 37% from last November, and GM and Chrysler are especially hurting, with sales down 41% and 47%, respectively.  Toyota fared better than the industry average, but still lost a third of its sales from last year.

Industry sales have been down all year, but the November numbers were especially shocking. 

In this post, we'll look deeper into the numbers to see what they say about the industry and what they say about the market.

Cars and Trucks
One of the things that jumps out about the sales figures is just how dependent the Big 3 are on truck sales.  Combined, the Detroit automakers derive two-thirds of their sales from light trucks.  Chrysler sells three times as many trucks as it does cars. 

Toyota, Honda, and Nissan get most of their sales from cars.  In fact, I was surprised to see that the "Japan 3" sell more cars in the U.S. than the Detroit 3.  Toyota has the largest share (21%) of cars in the U.S. market.

So when gas prices topped $4 per gallon earlier this year, the sales of gas-guzzling trucks fell off dramatically.  Because of their dependence on trucks, Detroit suffered far more than the Japanese and European automakers.

Essentially, customers shifted their purchase patterns to cars when gasoline prices became a burden, and that helped Japan at the expense of Detroit.

November was different
But what happened in November was fundamentally different from what happened earlier in 2008.  In November, car sales and truck sales both declined at about the same rate.  The truck / car differences we described above disappeared (along with $4 gas).  In November, all of the automakers were hit pretty hard.

So what is going on?

November is different because customers stopped buying vehicles, regardless of whether they were a truck or a car. 

In most of 2008 vehicle purchasing decisions were affected by fuel economy -- and the market shifted to buying cars from buying trucks.  In October and November, purchasing decisions were affected by the overall economy -- and vehicle buyers disappeared. 

All of this has amounted to a fatal one-two punch for Detroit.  Wobbled by disappearing truck sales when gas prices were high, the knockout punch for the Big 3 came when the overall market dried up.  While the economic downturn has hit all of the automakers, Detroit has crumpled under the weight of its legacy burdens.

As the Big 3 executives go back to Washington (this time driving hybrids instead of riding in company jets) to ask for emergency funds, I'm still wondering: What will change?

Why we specialize in Toyota (and Lexus and Scion)

When Suzanne and I bought Lowell's back in July, a lot of our friends and family wondered why the business focused exclusively on Toyota brands (Toyota, Lexus, and Scion).  There are historical reasons, but there are also significant benefits to our customers.

At first, specializing in one brand seems like a very limiting choice, since only a fraction of the cars on the road are Toyotas.  Why not serve the whole market?

There are three basic reasons we specialize:

1. It makes us better.  With cars becoming more and more complex, keeping detailed knowledge of the unique properties of all of the brands becomes impossible.  By getting specialized training for Toyota, we're better able to recognize problems unique to Toyota vehicles.
2. It makes us faster.  Our specialized knowledge lets us diagnose and repair problems faster than a multi-brand repair shop can.  We also stock a variety of original Toyota parts so that we can perform most maintenance or repair in the same day as the vehicle came in.
3. It makes us more affordable.  Servicing today's more complicated vehicles requires very specific parts and equipment, which is costly to keep across multiple brands.  By focusing exclusively on Toyota, we can keep our inventories smaller and our equipment more up-to-date.  These lower costs help us keep prices lower.

Finally, this combination of better, faster, and more affordable reinforces itself: When we have deeper expertise, we provide superior service faster, which helps us keep costs (ours and yours) lower.

[where: 111 Mechanic St, Lexington, KY 40507]

The Big 3: Thoughts on a bailout

No matter how far you've gone down the wrong road, turn back.  (Turkish Proverb)

In my last post, I chronicled what I think has caused the collapse of the American auto industry: heavy retiree costs; poor timing; and the current economic slump.

As auto executives went to Capitol Hill with hat in hand (after stepping off of their private jets), the question of the day is: Should we bail out the auto industry?  I'll outline my thoughts on that issue here, and would be interested in what you think.

I feel that I pay taxes to contribute to the general well-being of the community, state, and nation (which, ultimately, will pay me back).  My hope is that those tax dollars are allocated to the beneficial initiatives that one person or business cannot afford alone: things like roads and infrastructure, national defense, police and fire protection, and the like. 

I also hope that some dollars are dedicated to the cooperative "moonshot" projects that make our country, community, and industry great.  These include things as grand as the Marshall Plan to rebuild Europe after World War II or actually going to the moon in the Apollo missions, as well as more pedestrian initiatives like DARPA (the defense research agency which spawned the internet and many other technology advancements) and SEMATECH (the government-sponsored semiconductor industry consortium which helped build huge international advantage for companies like Intel and AMD).

So is bailing out the auto industry (and its suppliers and all of their employees) worthy of such "moonshot" status?  I think that it is... IF...  It is in the national interest to preserve the domestic automakers.  The ripple-effects of the collapse of these companies, the loss of so many jobs, and the subsequent social and economic ramifications could push the overall economy into a state of depression.

But....

While I think that preserving the American auto industry is a potentially noble pursuit (worthy of my tax dollars) and I think that it could contribute to the well-being of my country and community, I haven't heard a plan to preserve the industry. 

I don't think a bailout is warranted until 3 basic questions are answered:

1. What is going to change?  Before we can devote tax dollars to companies which are burning cash at record speed, we need to know what is going to change...  None of the executives or labor leaders have offered any ideas on why a big pile of money will change their pattern of losing it.  A government bailout won't help until the companies do business differently.  And the Big 3 haven't talked about doing business differently.
2. Where are the cars?  Where are the market-changing cars that the market wants?  Until Detroit has innovative and desirable vehicles which people will buy, they won't be economically viable.  The Big 3 executives have offered lots of promises, but not much evidence that such vehicles are ready to go.  And there is no talk of an inspiring "moonshot" project to make Detroit vehicles worth buying again.
3. What happens to the retirees?  Detroit is struggling in part because of its massive pension and insurance obligations -- much of it for retirees.  How are they going to restructure those obligations without a) unloading them on taxpayers, or b) depriving the retirees of promised benefits?  So far, I've heard nothing productive in this regard.

A bailout will fail if all it does is prop up an already-failing industry.  Until the companies and the congress talk about permanently and productively changing the way the industry operates, a bailout just staves off the inevitable. 

Detroit has been on the wrong road for 35 years or more, and they're running out of fuel.  We shouldn't give them more gas until they change where they're headed...

[where: Detroit, MI]

The Big 3: Why they are failing

I grew up outside of Detroit, and most of my family still lives up in Michigan.  My grandfather enrolled in General Motors Institute (now Kettering University) on the GI Bill after fighting in World War II, and eventually became an executive with GM.  Many of my aunts and uncles still work in or around the auto industry.  Growing up, my family only owned GM vehicles: My first car was a 1971 Oldsmobile Cutlass which I drove to 200,000 miles.  My second vehicle was a 1971 Firebird, which I still have.

I love GM (even though I'm committed to Toyota now).  And I love Detroit (and all of their pro sports teams - Even the 0-10 Lions.)

So it deeply saddens me to have watched the slow, inexorable slide of the American auto industry as it now approaches complete collapse and its executives beg for bailouts from Washington.  It is a tragedy not only for the formerly-huge companies, but for all of the employees and suppliers and employees of suppliers in Michigan and across the country.

There are probably hundreds of factors in the Big 3's decline.  Here are three which I think are most important:

• Pension, Insurance, and Retirement: Throughout their history, the automakers increased pension and retirement benefits for their employees to avoid boosting wages.  This allowed the companies to skip the short-term pain of paying more for labor, but the long-term effect was disastrous: Many employees had 20- or 25-year careers with generous 40-year retirements paid by the company.  Multiply this by tens of thousands of retirees, and the financial obligation weighs heavily on each car sold.  GM reports that health care obligations alone cost them over $1600 per vehicle.  Toyota's costs are closer to $200 per vehicle.
• Wrong Vehicles, Wrong Time: Something happened to the cars Detroit produced around 1973.  The vehicles got bigger, less powerful, and less well-built -- all just as the energy crisis started to hit.  For the past 35 years, American automakers have had a horrible sense of how customer needs changed.  Their responses have typically been "too little, too late".  In the 70's they missed the need for fuel-efficient cars.  In the 80's and 90's, they skimped on quality as Honda and Toyota offered the world's most popular models.  In this decade, they poured all of their new-product efforts into the highly-profitable SUV and big truck segments.  Then gas hit $3 and $4 a gallon.  Detroit then scrambled to show it planned high-MPG "green" vehicles (like the Chevy Volt) by 2010 to 2012, while Toyota and Honda had well-proven and popular technology in the marketplace.
• The Soft Economy: As the overall economy has weakened, people are buying fewer cars.  The freeze-up in financing has compounded the automakers' ability to entice customers to buy their vehicles.  As sales across the industry have fallen off, the Big 3 are in the weakest competitive position.

These factors, when combined, account for the implosion of the automakers.  As 1) Detroit has failed to deliver what the market needs, and 2) the overall market shrinks -- resulting in a 45% sales drop in just one year for GM -- the industry can't afford to pay for the massive obligations represented by its retirees.

So that's my Cliff Notes version of what's wrong with the Big 3.  In my next post, I'll explore whether a bailout of the industry makes sense.

(P.S. If you are interested in an extended discussion on GM's pension obligations, check out Roger Lowenstein's While America Aged, which devotes about a third of the book to how GM got into this situation.)

[where: Detroit, MI]

Dealership Economics, Part III: Toyota

In the first two installments of Dealership Economics, we talked about why the car sales process is so vague and about the importance of the service department to the dealership's business.  In this post, we'll look at what the dealership company's financial statements say about Toyota's position in the auto industry.  

With the financial crisis at GM, Ford, and Chrysler (more on this in an upcoming post) making front-page news every day, you might wonder about the implications for Toyota in this economic downturn.  Toyota has definitely been hurt by the recent slump (see here and here), although it is not in the disastrous financial shape that Detroit's automakers are in.

So how will Toyota fare relative to the industry?  We can learn a lot when we go back to the dealership company we looked at in our other posts.

When we look at the numbers, two things jump out right away.  The first is that the Big 3 automakers' share -- in both number of cars and dollar amounts -- has eroded dramatically in just one year.  In just one year, the Big 3 has shrunk from over 35% of this company's car sales to under 30%.  Even if the economy were stable (which it obviously is not), such loss in share indicates that Detroit isn't making cars that people want.

The second number which jumps out is Toyota's share.  Even as the economy is deteriorating and car sales are slumping, Toyota grew its share of sales to 21%.  So, while the industry is getting weaker in a weak economy, Toyota's position within the industry is getting stronger...

So, what does this mean for the long term?  When the economy recovers, Toyota is in the best position to lead the automotive industry.  In addition, the long-term bets that Toyota made years ago (hybrids, flexible manufacturing, etc.) have helped sustain it through these difficult times.  In the end, Toyota will emerge as the dominant player in the auto industry.

Dealership Economics, Part II: Service

In Part I of Dealership Economics, we looked at the financial reasons the car sales process is so perplexing.  In this (shorter) post, we'll look at where the service department fits in to the business.

When someone buys a new car, there is a widely-held myth that they are required to return to the dealer for service to keep their warranty valid.  In fact, you can service your car elsewhere, and the warranty still holds -- and there is a section of your owner's manual which should state this fact.  But the superstition persists, and is often reinforced (or, at least, not refuted) during the sales process.... Why is this?

I think it goes back to the economics of the dealership.  As I looked over the financial statements of the dealership company, I saw one set of statistics which really jumped out at me:

• 85% of a dealer's sales is generated from car sales (58% from new cars, 24% used cars, and the rest from finance, insurance, and "other").
• The remaining 15% of sales comes from the service department.

That might not be so surprising... But here's where it gets interesting:

• The service department generates almost half (45%) of the dealer's profit

The cars are expensive, but contribute relatively little profit to the business.  The service department is relatively small, but generates huge profits for the dealer...

It is to the dealer's benefit to maintain the warranty myth, and keep as much of that service business to themselves as possible. 

If you have a relatively new Toyota, Lexus, or Scion, and would like to service it at Lowell's, you shouldn't let concerns about the warranty hold you back. 

Dealership Economics, Part I: Car sales

I hate going to the dealership to buy a car.  I don't like the haggling over the price, and I don't like the games they play (like "I'll have to run that by my manager...").  While there are a few dealers who are "up-front" on prices (for example, I shopped at CarMax for my last vehicle), most are less-than-forthright when it comes to pricing.  Why can't they just tell you what the price is? 

For fun, I like to look over financial statements for different kinds of companies (I know... I need to get a new hobby).  This weekend, I was looking over a the earnings for a company that owns several dealerships, and I learned some really surprising things about the economics of dealerships which helps me understand why the purchase process is so convoluted.

This particular company sold new cars for an average of about $30,000.  Out of that $30,000, it paid the car manufacturer (Toyota, GM, Ford, etc.) an average of $28,000.  Out of the $2,000 that was left, about $1,500 per vehicle goes to things like rent, salaries and commissions, and advertising. 

That means that when this company sells a new car, it will make only $500 in profit for its owners.  I say "only" because they have to buy a car for $28,000 and keep it on the lot and hope that it does eventually sell...  That's a pretty big risk to get less than 2% in return.

This helps me better understand three distinct behaviors I've noticed at dealerships:

1. Vague Pricing: The dealer can take advantage of a customer's lack of knowledge about pricing to generate much higher profits.  If, for instance, they could convince an uninformed customer to pay $1,000 over what other customers would pay -- $31,000 -- then most of that extra $1,000 is profit and the dealer stands to make about $1,500.  So, by getting the customer to pay just 3% more, the dealer can triple its profit.  Being vague pays off.
2. Needless Add-ons: I remember shopping for a new Accord in Lexington many years ago (this was before I met Lowell), and not being able to find one without pin-striping.  There were usually a host of other add-ons -- special floor mats, trunk liners, wheel locks, etc. -- as well.  I knew I didn't want to pay $150 for $5 worth of colored tape, but a "plain" Accord didn't seem to be an option.  But if the dealer gets customers to pay a few hundred dollars for some cheap "special" options, then they significantly boost their profit.
3. Pushing Insurance: When the deal was closing, I always wondered why the dealers would push insurance so hard -- openly questioning the quality of their product by telling us all of the things that could go wrong with the car.  Well, it turns out that the company I looked at made nearly as much by selling financing and insurance for the car as they did from selling the car itself.  Much like the add-ons, this is where the dealers can really grow their profits. 

So, the next time you are looking to purchase a car, don't be surprised if you see these strange, infuriating tactics. 

In Part II of Dealership Economics, we'll look at how the service department fits into the business.