Buying a new car will never be the same, and discussing this change on Feb. 11 were Donald L. Keithley of J.D. Power & Associates and Keith Naughton of Business Week.
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OnlineHost: Welcome to Business Week Online. Tonight we talk about the revolution in car-buying, with you -- not the dealer -- in the driver's seat (the Cover Story in the Feb. 19 issue of BW). Our guests are Donald L. Keithley (DnKeithley), partner in charge of dealer relations for J.D. Power & Associates, and Keith Naughton (NaughtonBW), Detroit correspondent for BW and principal author of the story.
JackBW: Good evening to all. Welcome, Don Keithley and Keith Naughton of Business Week in Detroit.
DnKeithley: Hi, Jack and Keith. Glad to be here tonight.
NaughtonBW: Hi, Jack and Don.
JackBW: Don is in Las Vegas at the National Auto Dealers Assn. meeting. Keith, as the author of the BW Cover Story on the revolution in buying a car, you get to ask the first question.
NaughtonBW: Don, consumers have been complaining about the car buying experience for years. Why, all of a sudden, are we seeing a real revolt, with new ways of buying a car emerging?
DnKeithley: This has been building since 1989. That was the year that production of autos built in the U.S. greatly exceeded demand. This led to the concept of almost-new cars, important for two reasons: (1) it represented great value, (2) as used cars, franchise rules did not apply. The net result is now, seven years later, lots of choice in the form of used-car superstores is coming to the public. The term we at J.D. Power use to describe this is a consumer-driven marketplace.
JackBW: Before we go further, Don, tell us what J.D. Power does in the auto world.
DnKeithley: J.D. Power is a marketing information firm that reflects the voice of the consumer through millions of surveys of consumer opinion. Each year we get feedback concerning quality, customer satisfaction, and the personal relationship with auto dealers. In addition to this consumer orientation, we have established networks of other important contributors in the auto industry, such as leading-edge dealers, the auto manufacturers, and companies that provide services back to the industry, such as GE Capital, which provides auto financing.
JackBW: Keith, we've lost Don for the moment. Describe briefly this revolution the Cover Story talks about.
NaughtonBW: Well, I just wanted to add to what Don said in the beginning. There was another important development in new ways to buy a car in 1990, and that was the arrival of Saturn, which offered no-haggle pricing and good customer treatment. Many traditional dealers have tried to copy Saturn, with mixed results. But now these used-car superstores, like CarMax, have taken the Saturn concept and given it a new spin by offering these giant auto supermarkets, with all brands available. That could be the look of the future for auto retailing.
JackBW: This leads directly to our first audience question, from Hutch003.
Question: How can I get a good deal on a used car?
JackBW: You've partly answered this already.
NaughtonBW: Well, if you're lucky enough to live in the hotbeds for these new superstores -- which is the Southeast and Texas -- you should shop CarMax, Car Choice, and AutoNation. Otherwise, there are any number of new and used car buying services on the Internet and with consumer organizations. You can even shop for new cars at Sam's Club.
Question: Can you give us Internet and other online addresses for the services you talk about?
NaughtonBW: I figured I'd be asked that, and I can offer you two Net addresses. Here they come -- http://www.autobytel.com, and http://www.dealernet.com. The first one, autobytel, is basically a broker, who has negotiated low prices, many near invoice. The second, dealernet, is a consortium of about 125 dealers who offer mainly information about car specs and general information on prices.
NaughtonBW: The trick to getting a good deal on a new car is to gather a lot of info. You can find invoice prices on the Net at the places I mentioned. You can also find them at your local bookstore in things like Edmund's Buyer Decision Guide«MDNM». Once you know the invoice price, you know where to start dickering up from. Besides price, you also should read the buff books like Car & Driver and Automobile to get the reviews on the newest cars. And most important, test drive a lot of cars. That's the best way to know what you like.
JackBW: I think you anticipated this question from Aniemer in Bellevue, Wash., Keith.
Question: Please ask if the no-haggle dealers actually offer better pricing, thanks.
NaughtonBW: This is a hard question to answer because everybody has a different definition of no-haggle. This is why, again, it's good to seek out those invoice prices to keep even the no-haggle dealer honest.
JackBW: Try this next from GRogers975.
Question: What are the difference between MSRP [manufacturer's suggested retail price] of the new super car marts and a normal car dealer other than selection?
NaughtonBW: Since these new car marts deal only in used cars, they don't have MSRPs. So the best way to check if you're getting a good price at, say, CarMax is to check their prices against the blue book«MDNM» prices. The blue book's official name is the NADA Official Used-Car Guide.
JackBW: JimA109007 goes to the heart of the matter, perhaps.
Question: The only thing worse than new car shopping is used car shopping. It's not the showroom, but the quality of the salesmen. How are the mega used car lots going to address used car salesmenship as the real issue?
JackBW: Is salesmanship different at the new places?
NaughtonBW: They are attempting to address that by not hiring traditional used car salesmen and by not paying them on a commission that encourages them to put you into a car you can't afford. For the most part, CarMax and the others lessen the importance of the salesman in the entire process. All the salesman does is direct you to a computer kiosk to let you do your own browsing for selection and price.
JackBW: Take this next from BobA in New Jersey.
Question: The most infuriating expense of owning a car (aside from the initial purchase price) is service -- i.e., paying a dealer $300 for plugs, plug wires, and a distributor cap. What are auto malls and these other new car retailers going to do about that?
JackBW: Don Keithley is back, thank goodness.
NaughtonBW: Don has some thoughts on factory-authorized, independent service outlets.
DnKeithley: Whatever those problems are, the situation is getting better rather than worse. Consumers tell us at J.D. Power that vehicle quality is getting better and that service intervals are getting longer.
JackBW: POOLPARTY gets to us from the dealer's side.
Question: I am the GSM [general sales manager]«MDNM» «MDRV»«MDNM»«MDRV»«MDNM»of an auto dealer. Why is everyone out to get a car dealer? How come I can't get the true price of carpeting or tires?
NaughtonBW: I think just about everyone has had a bad car buying experience. Consumers are demanding better treatment when they are making such a major purchase.
DnKeithley: One of the reasons might be the trade-in of a vehicle for a new car. In order for pricing to be straightforward, those transactions have to be separate. Such formats as the used car superstores, such as CarMax, do separate these transactions.
NaughtonBW: Don, tell us how the dealers at the national dealers' convention in Las Vegas right now are reacting to all this hostility directed their way by consumers and the media.
DnKeithley: Dealers are accustomed to this kind of negative publicity -- so that is not really a new story. What is new now is that both dealers and manufacturers have received a wake-up call brought by these new retailers who are just now entering the auto retailing industry.
JackBW: DataBurst asks this one.
Question: What do you do in price negotiations if the dealer won't come close to the price you want, even though you know they will make a $1,000 profit on the deal?
NaughtonBW: Walk away.
DnKeithley: First, you need to do your own homework, and such information is readily available today. Then you have two basic choices as to how to proceed. One, armed with this info, you can do the shopping process yourself -- and some people prefer this -- or you can take advantage of third parties who can act as an intermediary. These are referred in the BW story, and some names that do provide this fee-negotiation assistance are Sam's Club Buying Service, Auto-By-Tel on the Internet, or you may be a member of a credit union where you work. With this kind of option, someone else has already defined the basic purchase relationship for you.
NaughtonBW: There's one more service I ran across doing this story. It's called Consumers Car Club, and it's a broker you reach by phone. The number is 1-800-CarClub, and they charge a $60 fee to negotiate for you.
DnKeithley: Also, for more information about many aspects of car buying, please stop by J.D. Power's Web site at http://www.jdpower.com. I won't be in personally to respond to messages, though, until later on in this week.
JackBW: DCraig801 looks ahead.
Question: What do you see as the future for existing francise dealerships?
DnKeithley: Dealers need to pay attention to these new retailing trends, the examples being set by Saturn in the new-car arena, and CarMax and others in the used-car arena. Many of the amenities that are provided in those models, and described in the BW article, such as child-care centers, touch- screen computers, and no-haggle-pricing environments can be and are being replicated by forward-thinking retail car dealers. What will not happen is to ever go back to the old way of doing business.
JackBW: DONLBRY in Spartanburg, S.C., asks the next one.
Question: What's wrong with making $1,000 on a $20,000 car? That's only 5%.
DnKeithley: The future will be determined by consumers' perception of value. There's nothing wrong with making X dollars of profit as long as value has been provided. Having said that, the new-car environment is intensely competitive and likely to get more so, rather than less. For consumers, this acts to hold the price down and gives leverage to consumers in purchasing.
NaughtonBW: Don, tell us about your predictions on factory-direct car stores and third-channel distribution.
DnKeithley: The first step is now coming to the marketplace. Stores like CarMax are changing the way the consumer approaches buying a car. That model is called multibrand comparison shopping. It is the way that most retailing is conducted in the U.S. How quickly these other developments occur will depend on how responsive the public is to buying cars similar to the way we buy shoes or other products. My personal belief is that this new form of shopping, where the consumer goes one place to compare many different brands of car, will be very popular, and within a consumer-driven market, this will put tremendous pressure on new cars to be marketed similarly.
JackBW: Will any of this affect leasing? LARUE52 and Mambo Sun both want to know.
Question: I'm thinking about leasing a new car for the first time. What should I beware of?
NaughtonBW: You can negotiate on lease payments just like you can on the price of a car. There is particularly a lot of room to negotiate on the downpayment, if any. But it is harder to get a read on what is the "real" price you are negotiating from.
DnKeithley: The emphasis should not be on the negatives of leasing. Instead, the advantages that leasing offers as being practiced by the car makers are of great benefit to consumers. The typical short-term lease of two or three years gives all the options to the consumer. If you like the car, you can purchase it at the end of the lease period. If you don't like it, you can walk away with no obligation whatsoever, in most cases. Leasing doesn't work if the person plans to drive a lot of miles under most programs, which are geared toward 15,000 annual miles with surcharges beyond that.
JackBW: Several people have asked about how much wiggle room they have on specific models.
NaughtonBW: It depends on the popularity of the model. The hottest models command the highest prices. It's a simple law of economics.
JackBW: Do you suggest looking in the blue book, or one of the Web or online sites?
NaughtonBW: Yes, check blue book for used cars and invoice prices on new cars from all the services that we've previously mentioned.
JackBW: Try this next.
Question: When it comes to defending themselves against the new types of auto retailers, what aces do traditional dealers have up their sleeves?
DnKeithley: An example is in the BW article, called Driver's Mart. This is a group of nine of the most prominent auto dealers, new car dealers, coming together to redefine customer treatment and handling. These dealers have such new-car franchises as Saturn, Lexus, and Infiniti and have experimented with various customer-handling approaches. They feel they can do anything that an outsider such as a used-car superstore like CarMax can do and do it better. It does require very large amounts of capital -- in other words, investment funds -- to play this game.
NaughtonBW: One other thing the traditional dealer has is access to closed auctions of off-lease, low-mileage used cars. CarMax and the others can't get into those yet. So that means traditional dealers are getting some of the best used cars on their lots.
DnKeithley: That's right, good point.
JackBW: Kelli47920 on Long Island has the vexing question (to many of us) of trade-ins.
Question: What is the proper value for a trade-in, as compared to its blue book value?
JackBW: TYRANNYxxx also asked about trade-ins, especially if you owe money on your present car.
NaughtonBW: The best way to get a handle on used car values is to check the blue book.
DnKeithley: The blue book guide that you as a consumer purchase at the bookstore provides the retail value of various used-car models. You cannot expect to obtain that price for a trade-in. The dealer has to buy at a wholesale price and then add reconditioning expenses, inventory, storage, and marketing expenses and absorb these costs prior to reselling to a customer. Therefore, better information is prices at auctions. This is not as readily available to the individual consumer, however.
JackBW: What about financing in these new places?
Question: What about the captive financing arms of the manufacturer? Will they follow suit?
NaughtonBW: CarMax is using its financing background with consumer electronics.
DnKeithley: These new entrants to the business represent a great potential market for any number of finance providers. By category, these are indeed the captives that were mentioned, but other major players are independent banks -- for example, NationsBank based in the Southeast is very aggressive about entering this market -- and independent finance companies such as GE Capital would be another category. So there is great competition to service these new markets and lots of good choices available for you as a consumer.
JackBW: MKFergus takes us back to the car that apparently started it all. How does it rate, Don?
Question: Why was the Saturn such a hit? Not very much seems to be known about it yet.
DnKeithley: Saturn had the advantage of the proverbial "clean sheet of paper." They worked with many constituencies to develop an overall value proposition. For example, dealers and the manufacturer jointly determined the culture for the Saturn buying experience. Even the union, UAW, was involved as a contributing constituency. The result is a new culture at all levels but, most important, within the dealership itself as it relates to the consumers who shop there. The result has been that the shopping experience and the ownership experience, meaning taking the car back for service, have turned out to be as important as the physical vehicle itself. This is illustrated by Saturn finishing at or near the top of several of our J.D. Power consumer surveys.
NaughtonBW: Indeed, the truly startling thing about Saturn is not the car itself. Saturns are nice little cars, but they are not spectacular. What is outstanding is the kind of treatment customers receive from the moment they walk in the door and continuing throughout their entire ownership of the car. No one else offers that for a car that is that inexpensive. You have to buy a Lexus to get anything close to that ownership experience.
JackBW: LectricWi asks this about used cars.
Question: What is the best way to get a used car checked out before you buy it? Some auto shops offer such services, but charges vary. What is a fair price for such a checkup?
JackBW: Do the superstores offer any such service you can trust?
DnKeithley: That's a difficult one. I'd say as a ballpark figure that you should be able to get such an inspection for less than $300 and as little as $100. To respond to these kinds of concerns, the typical used-car superstore format includes a 169-point inspection procedure, three-day exchange, and in some cases return privileges if you change your mind, and other extended warranty protection that can be purchased, etc.
JackBW: If you're lucky enough to have a local mechanic you have confidence in, take it there. And that's it for tonight. Thanks to Don Keithley of J.D. Power. And thanks to Keith Naughton of Business Week in Detroit.
NaughtonBW: It was a pleasure.
DnKeithley: Thank you. We survived with a bit of tech trouble!
JackBW: Special thanks to all of you who asked questions. And apologies to the many whose questions we didn't have time for. Transcripts of this and all BW Online conferences are available soon after the event. Look in BW Online under Talk or under Search. Thanks again and goodnight!
Copyright 1996 by The McGraw-Hill Companies, Inc. All rights reserved.
