Shrinking Supplies Cause Used-Car Bargains to Disappear

Count on digging deeper to buy a used car for junior.

Prices for used cars hit a record high in April and are poised to go even higher as production cutbacks during the recession and the more recent Japanese earthquake have made used vehicles a hot commodity, prompting dealers to dive into the depleted pool for cars to fill their lots.

The one-two punch has added between $1,500 to $3,000 to the price of some used cars just in the last six months, meaning more money for trade-ins and a tougher time for shoppers looking for a deal.

"The price of used cars is just crazy right now," said Adam Lee, chairman of Maine dealer Lee Auto Malls. His dealership is paying hefty sums for cars it normally might not purchase to have a full inventory. "It can be a piece of junk -- cars we used to pay $2,000 or $2,500 for, we are now paying $5,200 to $5,500," Mr. Lee said.

Dealers say the prices of used vehicles will continue to soar as inventories of lower-priced and economy cars shrink. Japanese auto makers Toyota Motor Corp. and Honda Motor Co. have warned their production could be limited through year-end. U.S. dealers say they expect to exhaust existing inventories and face severe shortages of new Japanese cars by July.

The topsy-turvy market has dealers who once quickly dumped trade-ins to wholesalers now holding onto those vehicles to fill out their shrinking inventories. The move is raising the value of trade-ins, helping dealers convince customers to buy brand new cars.

Stephanie Samuels went shopping for a used car but found prices for a late model car nearly as much as for new -- and financing for the new car easier to obtain. "I was looking at buying a 2009 Ford Focus which was going to cost me about $16,000," Ms. Samuels said. "But for a couple grand more I could get a new Focus and a better interest rate. So now I am shopping new."

Last Friday, wholesale auto auction house Manheim, a unit of Atlanta-based Cox Enterprises Inc., said its index hit 126.6 in April and adjusted wholesale prices of used vehicles rose 5% from a year ago. It's the highest level the index has reached since it started tracking prices in January 1995. The index sets its baseline of 100 at January 1995.

The biggest increases are for fuel-efficient cars and small SUVs, where prices are up as much as 20% since January, according to Kelly Blue Book Co., which tracks trade-in values. For example, it says the average trade-in of a mid-size car, such as the 2008 Ford Fusion, rose $1,800 to $11,375 between January and May. Average value of a hybrid car such as a four-door Toyota Prius hatchback jumped $3,775 to $17,040 in those four months.

"It's going to be a seller's market out there," said Alec Gutierrez, Kelly Blue Book's manager of vehicle valuation. "Consumers will probably have to pay a premium for new or used cars but you also have this awkwardness in the market because if you want to wait to buy, but have a car that's worth a lot of money, you may want to trade it in."

The change in used-car pricing began in 2008 as the recession and fewer new-car leases pushed used vehicle prices to record lows. North American new-car sales fell to 13.2 million in 2008 from 16.1 million a year earlier, then to 10.4 million in 2009. They only inched up to 11.6 million last year.

High gasoline prices have spurred the run-up. High-demand used vehicles made only in Japan, such as Toyota's Prius, are expected to climb further.

Prius shoppers "may want to hold off until Toyota ramps up its production later in the year," said Jonathan Banks, executive automotive analyst for the National Automobile Dealers Association. "There will be a new car shortage; there is no way around that."

While consumers may suffer, U.S., German and Korean auto manufacturers that are unaffected by the Japanese component shortages and rental car companies will benefit. Hertz Global Holdings Inc. last month raised its outlook for the year in part on high residual values for its rental fleet.

"It's definitely good for new car sales," said Volkswagen of America Chief Executive Jonathan Browning. Higher prices act as a disincentive to buy a used car because new cars come with warranties, and better financing rates than used cars. In VW, Toyota and BMW's case, they also come with free maintenance for a several years.

Bill Bushnell, the general manager of Toyota Carlsbad, Carlsbad, Calif., said he normally carries only 100 used cars on his lot. He is in the process of acquiring 300 used cars from others.

"I'm loading up on them now to carry me through the summer," he said. "You will see a huge shortage in used cars come August."

(Source: The Wall Street Journal, 05/09/11)

New Profit Potential of Leasing Appeals to Dealers

A lease customer used to bring little or no profit to the finance office.

Dealerships primarily sold extended service plans. And with the typical lease at 36 months, leased vehicles were under warranty throughout the contract.

But now leasing is on the rise, climbing to nearly 19 percent of overall vehicle transactions in 2010, up from 13 percent in 2009 during the economic crisis, according to R.L. Polk.

And many dealerships are making bigger profits on sales of protection products such as tire and wheel coverage and dent and ding repair. Some sell an average of one or more products per lease. Why the change?

-- More protection products are available for lessees.

-- Dealers are tailoring their presentation of protection products to lease customers.

-- Manufacturers' finance arms -- which write most of the leases -- are offering incentives to entice lease customers to buy protection products.

"There are more products to offer than there were in the 1990s," says industry veteran Marv Eleazer, the finance director at Langdale Ford Co. in Valdosta, Ga. Eleazer leads an F&I managers' discussion group on Facebook.

"Menu sales presentations have gotten better," he says. "By that fact alone, people are buying more products on leases."

Insurance product sales for finance managers involved in the Facebook discussion group vary widely, from $300 to $1,400 per deal.

Generally, dealers gradually have become less dependent on service contracts for F&I income. CNW Research in Bandon, Ore., reports that service contracts' share of F&I profits has declined steadily to a low of 27.1 percent in 2010, from a high of 44.8 percent in 1990.

New opportunities
Mark Levy, finance director for Thompson Toyota in Edgewood, Md., has been in the auto retail business for 32 years, mostly in finance. For 12 years he ran an independent leasing company.

"Traditionally, the back-end gross on a lease was virtually nonexistent," Levy says. "Now leasing creates opportunities. You just have to have the right products."

Levy says lease customers often choose the Lojack security system or Dent M.D., a dent repair service. A paint sealant and fabric care combo is also popular.

To present the products, Levy uses Zurich's electronic menu software, which allows him to customize menus to suit lease customers. Service contracts obviously are out.

While customers are still seated at the salesperson's desk, Levy introduces himself and conducts a 17-question survey to determine their driving habits and gauge their interest in various protection products.

His store averages 70 new and 15 used vehicles a month, and 12 percent of new vehicles delivered are lease deals, about double from a year ago.

At least 75 percent of those lease customers buy one or more protection products, and the profit on a lease transaction runs about $750 per car.

Boston consultant Demitrious Kourias says some dealers are bundling protecton products into attractive packages designed for the lease customer. For example, a package might contain tire-and-wheel coverage, dent removal, windshield protection and roadside assistance.

Many have developed a product menu aimed at lessees, says John Jameson, CEO of general agent Dealers Resources Inc. in suburban Detroit.

In Waupun, Wis., Craig Bunkoske, business manager of Homan Auto Sales Inc., has seen lease penetration climb to 10 percent from zero over the past six months. He's making $1,200 to $1,500 per lease, $700 of the gross from product sales.

"We have decided to set up a customized menu for our lease customers," says Bunkoske, whose company operates a Chevrolet-Buick store and a Chrysler-Dodge-Jeep store that together sell 125 new and used units per month.

The menu will include maintenance plans, paint sealant, fabric care, windshield protection, wear and tear coverage, lost key replacement and tire replacement. Prices range from $195 for key replacement to $795 for interior and exterior protection.

The pitch
And the sales pitch? The products protect customers from paying hefty wear and tear charges when the lease expires.

"Usually, a customer who has leased before has experienced this firsthand," Bunkoske says. New lease customers "have heard the horror stories, or we can give examples."

A similar approach has helped publicly held Sonic Automotive Inc. boost product sales to lease customers.

In 2006, Sonic, the nation's third-largest dealership group, introduced electronic menus for all customers, including a menu targeting lessees. The lease menus offer fewer products, typically tire and wheel coverage, lease wear and tear, anti-theft and paint protection.

"We saw product sales increase for all customers," says Richard O'Connor, Sonic's vice president of F&I.

Sonic currently averages one product sale per lease customer, compared with more than 1.35 products per finance customer, O'Connor says.

Lease product sales are lower because adding products has a sharper impact on monthly payments, he says. The cost is spread over a shorter period. Leases tend to be 24 to 36 months, well below the 60 to 72 months typical of a finance contract, O'Connor says.

Hennessy Automobile Cos. finance exec Joel McGlamry says it's not as important to have a lease product menu as it is to cater to each customer's individual needs.

McGlamry, vice president of finance operations at the Atlanta-based dealership group, says a quarter of his customers lease. The group's 11 stores of mostly high-line brands sells 15,000 new and used units a year. "There are no canned word tracks and one-size-fits-all closes," McGlamry says. "The F&I manager must ask the right questions, listen to the answers and tailor the presentation on the fly."

The custom approach is snagging up to $1,400 per lease, $400 in product sales, he says.

Luring lease customers
The automakers' captive finance companies are the nation's largest vehicle lessors, and Toyota Financial Services is the biggest of them all, reports Experian Automotive.

Toyota Financial has promoted leases aggressively for the past few years and has tweaked its product lineup, adding an expanded maintenance plan in February.

Later this year it will roll out wear and tear coverage protecting lessees against hefty charges for wear and tear at the end of the lease.

The new maintenance plan has had "an excellent response" from dealers and customers, says Mike Scully, national products manager for Toyota Financial.

Lessors typically roll the cost of guaranteed asset protection, or GAP, into leases. But Toyota Financial leaves off GAP so that dealers can sell it separately.

Toyota and Lexus dealers are seeing brisk sales on GAP, which covers the balance of the auto loan if the vehicle is totaled or stolen. Toyota Financial's GAP sales for Lexus and Toyota have increased 25 percent in its last fiscal year, Scully says.

Other captives are sweetening product offers with incentives. Mark Powell is a financial service consultant for publicly held Penske Automotive Group's Mercedes-Benz and Audi stores in Chandler, Ariz. Penske is the nation's second-largest auto retailer based on new-vehicle retail sales.

Powell says Mercedes-Benz Financial allows dealerships to residualize the cost of its Star Service Maintenance Plan, which means the plan is treated like an add-on such as a sunroof.

The vehicle's residual value is its estimated worth at the end of the lease. If the residual value is 50 percent of sticker price, the customer would pay the equivalent of $400 for an $800 plan.

VW Credit Inc. adds 1 percentage point to the residual value if an Audi lease customer buys a maintenance plan. On a $50,000 car that would be $500.

Powell says leasing accounts for at least half of the sales at Penske's Mercedes and Audi stores in Chandler, Ariz. And 90 percent of customers purchase maintenance plans.

With lease promotions, product incentives and new product offerings, Powell and others like him say the lease is no longer a losing proposition for the finance office.

(Source: Automotive News, 05/04/11)

Auto Industry's in Upheaval, and Detroit 3 Are in the Driver's Seat

Detroit is up. Japan is down. Toyota is losing market share and General Motors is awash in profits.
Who'd-a thought?

This is clearly not the same plot the auto industry has been following for the past few years. This is a paradigm change in an American auto industry accustomed to decades of tough times for Detroit.

"The renaissance of the Detroit 3 is well on the way," AutoNation CEO Mike Jackson told Automotive News last week. "The profit results, product lineup and consumers' opinion will allow the domestics to have market share growth for the second year in a row. We will see a remarkable recovery in market share as the domestics drive toward 50 percent."

Flash back just five years: Detroit was the City of Gloom. Market share dwindled year after year. Ford Motor Co. suffered from poor quality and botched vehicle launches. Chrysler Group's lousy performance was about to earn it a divorce and good-riddance from Germany's Daimler. At GM, the buzzards were circling in the guise of stock speculator Kirk Kerkorian.

All the while, the Japanese auto industry grew bigger, richer and more prominent in the United States. The term "Big 3" was retired in favor of "Detroit 3" to address the rise of Toyota Motor Corp.

Back to May 2011, and things are a little different. As in the-world-has-turned-upside-down different.

As the U.S. economy continues to recover, the Detroit companies are well positioned to profit from rebounding auto sales. The Japanese Big 3, meanwhile, can't exploit that growth. They're choked by a dramatic production collapse stemming from the March 11 earthquake.

GM and Ford Motor Co. are now making boatloads of money, and death-threatened Chrysler Group, which just reported its first quarterly profit in five years, is soliciting money from the private sector to repay government loans. Chrysler even said it's running out of room for the 1,000 engineers it's adding at its headquarters in Auburn Hills, Mich.

In April, Detroit's market share was 46.5 percent, up 1.5 points from a year ago. Japanese brands were at 35.5, down 3.4 points.

Toyota and Nissan Motor Co. expect to lose money for the next six months. In the United States, Japanese brand dealers are running out of inventory as the benefits of a U.S. recovery are passing them by.

Could a new reordering of the industry be under way?

Japanese automakers often have overcome adversity in North America. But at the moment they have a very full plate.

Last week, American Honda Executive Vice President John Mendel informed Honda's dealers by letter that Honda's "overall production volume will be at significantly reduced levels as we continue production adjustments through the summer months."

Consoling the dealers for the loss of sales, Mendel said, "You have overcome significant challenges throughout the years and yet, in the long run, you have all prospered.

"We will work our way through this difficult time and we will all be stronger in the end," he wrote.

German, Korean brands up
It's not just Detroit that's thriving in North America. The Germans -- BMW, Mercedes-Benz, Audi and Volkswagen -- also are cleaning up.

In April, the BMW brand outsold Mercedes (not including Sprinter vans), pushing ahead of Mercedes through the first four months as the top-selling U.S. luxury brand.

Lexus, which held that sales title from 2000 through 2010, is running a distant third, and has no prospect of catching up because of production constraints.

And Hyundai and Kia continue to snap up market share. The Koreans are introducing hot new models and are desperately searching for U.S. production capacity.

Sales of the small Hyundai Elantra, redesigned this year and now built in Montgomery, Ala., topped 22,000 in April -- more than twice its volume from a year ago and nearly 13,000 more than the fast-selling Ford Fiesta.

After a record 2010, Hyundai's U.S. sales are up 31 percent and Kia's 42 percent through April, in a market that's up 20 percent.

Combined, the companies accounted for nearly 10 percent of the U.S. market last month. For the first time the Koreans outsold the combined European brands in America.

But as U.S. demand grows, Japan finds itself unable to produce even half enough.

Toyota CEO Akio Toyoda recently said it will take until the end of the year to fully restore vehicle output to normal levels -- and this as U.S. consumers clamor for exactly the sort of fuel-efficient cars that made Japan rich.

"This month, next month, as we get into the summer, we'll certainly be seeing inventories declining," Randy Pflughaupt, Toyota group vice president of sales administration, said in a conference call last week after reporting Toyota's April sales increase of just 1 percent, in an overall market that rose 18 percent.

Big change in small cars
In a man-bites-dog twist, Detroit's big gains in April were powered by selling larger numbers of fuel-efficient cars and lower incentives.

That reverses the U.S. industry's familiar trends of recent years. In part because of impending shortages of vehicles, Detroit 3 incentive spending is at its lowest point in five years.

As the Japanese competition scales back on incentives and sales -- Nissan postponed its annual May Tent Sale -- U.S. automakers are toning down their discounting. Autodata Corp. reports that Chrysler's average incentive spending per vehicle was $2,806 in April, a 23 percent reduction from a year earlier. Ford was down 20 percent and GM was down 14 percent.

In April, as gasoline prices topped $4 a gallon in some markets, Ford, propelled by higher car sales and the popularity of its small Fiesta and mid-sized Fusion, reported first-quarter net profits of $2.6 billion, its best first-quarter result since 1998.

GM last week also posted a quarterly operating profit of $2.0 billion, excluding special items -- its fifth straight quarterly profit since emerging from bankruptcy.

In April, GM sold 25,160 units of the compact Chevrolet Cruze, whose Eco version is rated at 42 mpg on the highway. The Cruze was nearly 2,000 units behind Honda's Civic but topped the Toyota Corolla by nearly 1,000 units.

GM CEO Dan Akerson remarked at a recent industry gathering that when soaring gasoline prices spooked consumers in 2008, GM didn't even have a competitive small car to sell.

"We're finally seeing the Honda Civic buyer," said Michael McGuire, dealer principal at McGuire Chevrolet-Cadillac in Newton, N.J. He said that in addition to older, traditional GM buyers looking to downsize, the Cruze appeals to younger people who generally have stuck to Japanese brands.

UBS Securities analyst Colin Langan wrote in a research note this week that things should get better for GM as the year unfolds. Langan said GM stands to pick up 1.1 percentage points of market share at the expense of Japanese automakers because of Japanese production constraints.

GM's U.S. market share grew to 19.6 percent through the end of April, from 18.7 percent in the first-quarter of 2010, according to the Automotive News Data Center.

Langan wrote: "GM will be the biggest beneficiary of the upcoming Japan-related inventory shortages."

Never say always
Not everyone believes the sea change is permanent.

"It's not impossible that on a short-term basis you may see some market share variations, because of the impact that the earthquake has in the minds of people," Carlos Tavares, chairman of Nissan Americas, told Automotive News. "Monthly bumps may happen. But we need to judge on a full fiscal year basis."

But it is clear that for the first time in recent history, U.S. automakers believe they have the opportunity and the vehicle lineup to reclaim some of the market they have lost to the Japanese.

"What we need to do is really make sure that the quality, reliability and durability of our cars is an unexpected surprise for people," Mark Reuss, GM's North America boss said last week. "It's sort of a once-in-a-lifetime opportunity for us to get people into our cars and trucks and have them experience the excellence of the product that they may not have given us consideration for in the past.

"We're taking it very seriously."

(Source: Automotive News, 05/09/11)

Why Do Sales Incentives Fail?

When sales incentives fail, the most common reason for the failures is that many of the company's salespeople lack key talents required for sales success. When salespeople lack these talents, no amount of incentives will cause them to suddenly sell more effectively. A more likely outcome is they will start to press harder to close sales and suffer a decline in sales performance!

In other cases sales incentives fail because the contest is "stacked" in favor of certain salespeople. Look closely at your sales team and your company's sales incentives and contests while considering the following questions:

* Do the same salespeople consistently win all of the contests and incentives?
* If some salespeople service larger or more productive accounts, are your contests and incentives structured to enable all of your company's salespeople to have a fair chance of winning?
* Are the incentives generating incremental sales, or are they simply rewarding salespeople twice for results they would have produced without a special contest or incentive program?

Social Network Advertising Nudges, Doesn't Drive

According to a recently released report, a collaboration between Forrester Research and GSI Commerce, social media rarely leads directly to purchases online. Less than 2% of orders were the result of shoppers coming from a social network during the holiday shopping period between November 12 and December 20, 2010.

Addressing social marketing, Fiona Dias, executive vice president of strategy and marketing for GSI Commerce, says "...buying things from retailers is maybe 10th on the list of things they want to do on Facebook...from a retail and commerce perspective, social media seems to have no effect..."

She says, though, that social media outreach is somewhat effective for distributing news about short-term deals, as 5% to 7% of purchases are influenced by social media activity.

What does seem to work, says the report, is more traditional online marketing, including email and search advertising. Most consumers in the study were exposed to some form of marketing by the retailers before they made their purchase. 70% of transactions in hard goods categories (like lawnmowers) and 82% in soft goods categories (i.e., clothing) occurred after the consumers had engaged in some interactive marketing tactic before their purchase. 40% of hard goods transactions and 60% of soft goods transactions came to retail websites directly from email and search

The report found that consumers are exposed to online advertising early in the purchase funnel; display ads are the first touchpoint for 13% of soft goods buyers, for instance.

While organic traffic is the most cost-effective way to attract shoppers, it is also difficult to achieve because most buyers simply do not arrive at a site directly. Across the board, the shoppers in this study touched some retail marketing vehicle before completing a transaction. More often than not, these shoppers either searched explicitly for a product on a search engine such as Google or they received the retailer's promotional email.

While many shoppers in this study were only exposed to one marketing program before completing a purchase, many others were exposed to multiple marketing touchpoints prior to the completion of their transaction. In fact, 45% and 53% of hard and soft goods transactions, respectively, touched at least two marketing touchpoints.

While retail marketers employ a variety of tools, "traditional" tactics continue to be most effective, says the report. More consumers who completed transactions during the holiday season touched email and search campaigns in their purchase journey than any other marketing tactic. 40% of hard goods transactions and 60% of soft goods buyers came to retail websites from email and search specifically.

Display and affiliate marketing also exhibit strong influence in the purchase funnel. While search and email get the most credit for driving sales, other tactics like display and affiliate marketing may be receiving less credit than they are due, because most retailers employ "last-click" analysis. Any tactic that tends to be primarily a "first click" will consequently be undercounted in its contribution to sales. Display ads, for instance, are the first touchpoint for 13% of soft goods buyers, but those shoppers then click on other marketing messages, which ultimately receive "credit" for the sale.

Social tactics "came alive" during key dates for soft goods, but social tactics were largely ineffective in driving sales. The data from this study indicated that less than 2% of orders were a result of shoppers coming from a social network.

While hard goods retailers in this study experienced no change in the number of orders that resulted from links from social sites, soft goods retailers experienced a 45% lift in orders that resulted from those same types of links on Cyber Monday versus during the rest of the holiday season.

The most significant finding from this retailer data was that email marketing not only continues to stay alive, but is the strongest tool for reaching busy shoppers. That said, retailers should also consider several other key opportunities that surfaced in the data:

• Attribution modeling is critical. While "last click" is typically the most commonly accepted standard for how retailers look at the effectiveness of their marketing programs, it is an inadequate measure of a marketing tool's success.
• Because shopping behavior around key dates is different from the rest of the holiday season, retailers need to plan accordingly. Promotional dates tend to attract more deal-hunters who are more open to email messages and discovering deals while other dates are more likely to engage "spearfishers," consumers who are more likely to be looking for specific products by using tools such as search.
• Hope for the best, but expect the worst with social. While the usage of social networks continues to grow, there continues to be the hope that they will one day provide a viable marketing vehicle for connecting with shoppers. This past holiday season demonstrated that social networks continue to be inexpensive ways to promote messages and are therefore relatively low-risk.

(Source: The Center for Media Research, 05/11/11)

Older, Wealthier Mobile Users More Ad Receptive

New data from mobile ad network Jumptap shows that older, more affluent consumers are more apt to interact with ads than younger mobile users who are less well-off. Those 40 and over were almost five times more likely to engage with an ad than people below that age, and those making more than $50,000 were twice as likely to do so than people making less.

The findings were drawn from an analysis of the 10 billion ad requests made to the Jumptap network by its audience of 83 million unique users in April. The research also found that 58% of mobile Internet users are getting content through their browser, compared to 42% via ad-supported apps.

Smartphone owners skew older and wealthier than feature phone users, and are typically heavier mobile data users. That may explain, in part, why older, more affluent users had higher ad interaction rates on Jumptap's network.

The company also said advertisers are increasingly trying to target consumers on mobile phones by demographics, location, device type and time of day, among other criteria. "Targeting is being adopted at a faster pace than what was seen on the PC Web," noted Paran Johar, chief marketing officer of Jumptap, which last week announced raising an additional $20 million in venture funding.

Last month, Android again accounted for the largest proportion of ad requests on the mobile ad network, with 39.1% share. Apple's iOS was second, with 29.8%, followed by Research in Motion's BlackBerry OS, at 24.8. However, iOS still leads in user engagement.

Android led the U.S. smartphone market overall in the first quarter, with a 34.7% share compared to 27.1% for BlackBerry and 25.5% for iOS, according to figures released last week by comScore.

Separate findings from mobile ad optimizer Smaato Monday showed the top 20 U.S. mobile ad networks had an average fill rate of 23% in the first quarter. The average among the top 40 global networks dropped to 20% from 23% a year ago. Smaato's metrics are based on over 150 million unique monthly users, eighty billion ad requests and 60 connected ad networks delivering mobile advertising in some 220 countries.

(Source: Online Media Daily 05/11/11)

Star-Telegram announces layoffs to cope with ad slump

Wortel blames the economy...has he considered that newspapers have gone the way of cassettes, VHS and landline phones?  Just a thought. ~ Curt
 

The Star-Telegram announced today that it would be laying off more workers to cope with the continuing slump in advertising revenues affecting the industry.
 
Publisher Gary Wortel said 45 positions were being eliminated at the company, in addition to several unfilled positions.
 
The cuts will affect almost every department at the paper, including advertising, news, production and circulation. This is the second job reduction of the year at the Star-Telegram; the first occurred in early February.
 
"In a sign that the economy hasn't bounced back from the greatest recession of our lifetime, many of our customers -- including major national, retail and real estate advertisers -- have had to reduce their spending. Though we remain optimistic for the long-term, reductions in current expenses are necessary to combat the ongoing weakness of the economy," Wortel said.


Read more: http://www.star-telegram.com/2011/05/11/3067728/star-telegram-announces-layoffs.html#ixzz1MGAUONsP