JOHN CAMPBELL : Driving a Hard Bargain : Dealer Says New-Car Customers Face Lots of Price Hikes

Sales of domestic autos are plummeting, demand for import cars has slumped since mid-year and industry pundits say that 1990 holds only more of the same. But they also say that the weakened market won’t create much in the way of bargains for car shoppers.

The reasons are a combination of costly government safety requirements, paper-thin dealer profit margins and consumer demand for standard features that once were expensive options, says John B.T. Campbell III, president and chief executive of the Campbell Automotive Group in Irvine.

The upshot is that auto prices are expected to be up slightly next year and, except for the now-ubiquitous manufacturers’ rebates and a few fire sales by distraught dealers, it won’t be a buyer’s market out there, he said.

Campbell started his professional life as a certified public accountant after graduating from USC with a master’s degree in business taxation.

But in 1978, at the ripe old age of 23, his father persuaded him to join the auto group, which began in 1965 as a Volkswagen dealership in Buena Park. Campbell hired on as controller and became president in 1980. Campbell Automotive Group was formed in 1984.

The transition from CPA to car dealer--even at the executive level--was disturbing, he said, because he found he had entered an industry, “where people hold onto their wallet when they hear what you do.”

But Campbell is determined to change that image. To help further his goals he has done things such as instituting a dress code for sales people and a pay system that downplays commissions.

Today, Campbell Automotive Group operates 11 new-car franchises on six lots in Orange and Riverside counties. All carry the Campbell name and all are run as units of the same business--part of a deliberate campaign to build an identity that transcends the kinds of cars being sold.

For Campbell is one of a new breed of so-called “super-dealers” who are banking on consumers shifting loyalty from car brands to dealerships as the differences among autos--in price, quality and appearance--disappear.

In an interview with staff writer John O’Dell, Campbell shared his views about what car dealers and their customers can expect in 1990--and beyond.

Q. It’s almost Christmas. Is that a good time for car sales?

A. December is the worst month because we’re competing with Santa Claus and not many people give cars as presents. The best months are usually in the spring. But that varies a lot now because an awful lot of sales these days are driven by manufacturer rebates.

Q. About those rebates. When we see an ad that says ABC Motor Corp. is rebating $1,000 on every XZ-10, it sometimes also says the actual savings may vary because of dealer participation. What does all that mean?

A. Dealer participation in a $1,000 rebate means the manufacturer has required the dealer to contribute a portion of it. So if the dealer doesn’t want to participate, then the net savings to the consumer may not be the entire $1,000. But only a relatively small percentage of rebates require dealer participation. The car makers have been getting away from that.

Q. Rebate programs are a manufacturer’s way of boosting poor sales. We’ve had a lot of them in the last half of this year and apparently are going to see more in 1990. Just how bad will things get next year?

A. Well, 1989 was tough and 1990 will be tough too. But it is not like 1974, when we had an industrywide depression. We will hit about 14.5 million car sales nationwide this year. That’s the fifth- or sixth-best year in history. The big problem is that dealer profit margins already are pared to the bone and the industry keeps dishing up more and more manufacturers and models, and that siphons off customers. Dealers have to keep slicing the same pie into smaller and smaller pieces.

Q. How small?

A. There were about 150 various car models five years ago, there are 260 now and there will be almost 300 by the end of 1991. We are going to see a thinning of the dealer ranks simply because there are not enough buyers to go around anymore. And now we’re into the same manufacturers having their own marques and then selling the same cars to other manufacturers to sell under their names. Mitsubishi does it with Chrysler, Suzuki with (General Motors’) Geo. I think that what that does is blur the manufacturer’s image in the marketplace. I mean, what is this car? Is it a Mitsubishi or is it a Plymouth?

Q. Why, if things are rough, are we told that there won’t be a lot of car bargains available?

A. One thing to be recognized is that in the price the consumer pays for a car there’s a manufacturer’s cost, a distribution cost and the dealer cost. I can’t speak for the others, but dealer margins are paper-thin right now. We have been keeping records in our company for 12 or 13 years, and in terms of percentage of sales price, dealer margins are at their lowest level. And dealer profitability is the lowest in the 25 years the National Automobile Dealers Assn. has been keeping records. The average new car dealer now is earning at or below 1% on sales, which is a very, very razor-thin margin. I think the margins at the dealer level are low as they’re going to get.

Q. Is that the only reason prices won’t fall?

A. No. With all the government regulation and consumer expectations, there’s a lot more in a car than there used to be. For 1990 we’re seeing the largest percentage increase in the price of cars that we’ve seen in this decade. A lot of that is because of air bags, passive restraints, new shoulder harnesses in the rear seats. . . . A lot of these things are quite expensive. And that is tending to push the price of cars up. There’s a value there for the consumer. But it increases the price. Also, look at what is standard on a car now--what’s expected by the consumer--versus what was standard 10 or 15 years ago.

Q. For instance?

A. Things like fuel injection are almost a standard item in cars today, but were only in exotic cars 10 or 15 years ago. And look at the quality of materials being used; the horsepower you’re getting per liter of engine. There have been tremendous improvements. You used to get stripped versions that had no carpets. They had vinyl seats. No radios. Now, even the stripped-down versions of the cheapest cars have carpeting and a lot of those other things. Power equipment, air conditioning, cruise control, sunroofs--all these kinds of things are quite common, and the quality of installation is up dramatically from what it was some years ago. So the consumer is demanding more.

Q. Is this demand for options an acquired taste? Or is it that dealer margins on the add-ons are higher than on the base vehicle so dealers crammed the cars full and “helped” the consumer develop a taste for the fully dressed car?

A. That was true some time ago, when dealer margins on add-ons were higher. But it’s been 15 years or so since the markup on accessories has been significantly different from the markup on the car. I don’t think that the demand is being pushed by dealers, I think it’s being driven from the consumer level.

Q. Speaking of markups and accessories, some of the scandals in car dealing today have been with the sales and pricing of relatively inexpensive add-ons like identification etching systems and extended warranties that wholesale for $50 and retail for $1,900. Is there much abuse in this respect?

A. Our industry is like any other: We have bad ones and we have good ones. Is there gouging? By all dealers, no. By some dealers, yes. How pervasive is it? It goes on. It definitely goes on. One of the things we based our company on is the fairness of our pricing. We don’t do that (gouging). We have maximum pricing so that our sales people cannot get overzealous. We audit all sales and we’ve refunded money to customers before when we charged over our maximum pricing. That’s what we are doing. And there are other dealers that do that too.

Q. The commission system means that the higher the price, the more money the sales people make. Are dealerships run on the commission basis because there is no other way to structure them?

A. Other dealers have experimented with not paying commissions, and it generally hasn’t worked well. Among other things, the commission is an incentive for the sales force to sell cars so the dealer makes a profit. But we are experimenting now with some alternative pay plans. They are very complex and I wouldn’t want to explain them, for competitive reasons. But basically they preserve an element of commission and offer other things to try to develop some employee longevity--turnover is a very big problem in our industry--and also to encourage people to make customer satisfaction a goal.

Q. Are you trying to wean the sales person from the idea that he is working for himself?

A. Yes. In terms of the horse-trading that goes on, though, I don’t see anything that is going to change that, even though I frankly would like to see it change. There doesn’t seem to be too much on the horizon to change people’s idea that they are supposed to negotiate the price on a car.

Q. The price of cars seems to get higher and higher.

A. The average is about $14,000 this year and it is going to be in the $15,000s in 1990.

Q. Aren’t prices getting into the unaffordable range for many people?

A. There are arrangements with no down payments and with smaller down payments, and there is a lot more creative financing going on. Then there’s leasing of course, and there’s been a revolution in extended terms. It wasn’t that long ago that 36 months was the standard car loan. It is almost 60 months now. And there are car loans being offered at 84 months, and even a few at 120 months.

Q. Does anyone keep a car long enough to pay off a seven- to 10-year loan?

A. It is a problem, and I think we as an industry now are paying for it. Obviously, if you have a seven-year car loan and you put very little cash down, then you don’t have equity in that car until possibly the last year or two. So if you go to trade it in after three of four years you might discover than instead of getting something for it, you’ll have to pay $2,000 to $3,000 cash just to get out of it. So you hang on to the old one. That has created some slack in sales.

Q. A moment ago you said, “Then there’s leasing.” What is the benefit there? Taxes?

A. Not if it’s a personal lease. If it’s a business car and you have some business deductibility, then whether you lease it or purchase it there can be a tax benefit. But the basic benefit is lower payments.

Q. Most leases are the closed-end leases. How do they work?

A. A closed-end lease means that if you keep the car to the very end of the leasing period and are within the mileage--there’s usually a mileage restriction of 10,000 to 15,000 miles a year--and there’s no damage to the car in excess of normal wear and tear, then you can return the vehicle and walk away from it. That’s what a closed-end lease means. And that is what 99.5% of all leases nowadays are.

Q. The car dealer’s image has not been a great one over the years, and car buyers tended to be brand-loyal rather than dealer-loyal. Is this changing?

A. We think so. As more and more nameplates and makes are available, and as they become more and more alike, and as the quality becomes more on a par from maker to maker, the dealer will make as much difference to a buyer as the car. And so our whole strategy as a company is based upon building and forming customer loyalty to the dealer. We think that, as cars become alike, the customer will buy what we sell because he’ll say, “Gee, this Nissan, this Toyota, this Mazda, this Honda, they’re all pretty much alike. But that dealer really takes care of me.”

What we’re trying to do is create a positive feeling by operating with honesty and integrity and with a long-term view and commitment to generate customer satisfaction and enthusiasm and help improve our image. I think that’s the only way that a company like ours will achieve what we want to achieve. And as we do this kind of thing and it works, then other people in the industry will have to follow.

Q. Some dealers seem to be successful with huge volume on one particular brand. You and a few others seem to be going after success by offering a lot of different makes on a lot of different lots. Is that just a business preference or is there more to it?

A. I think it is a business preference and a business philosophy. The industry is going more towards what we discussed earlier, where the image of the retailer will be important, and we want to be representing more franchises in more locations. We also want to maximize our sales from any given location with any given franchise. But you have to ask whether you want to keep this one dealership and put all of your resources into building it as big as you can? Or do you want to try and network out?

From our standpoint, you can only get so big in one location. Having multiple locations and multiple franchises makes us bigger and lets us draw from a bigger pool of customers. If you were a single-point little supermarket in the 1950s and you had decided not to try to expand and become a chain, you wouldn’t be here today. There aren’t many one-store supermarkets left. And that’s a little bit of the philosophy that we have. I’m not saying that the individual car dealerships will go away, but I think there will be fewer and fewer of them, over time and that, to be one of the major survivors, we’ll need to be a large diversified chain with a good public image.

Q. I’m taking this opportunity because not too many of us get to sit down with a car dealer and ask him, “What does this mean?” So, what are the basic charges that a dealer adds on to the manufacturer’s suggested retail, and where does your profit margin come from?

A. I can only tell you what our situation is. When we buy a Ford, we pay Ford Motor Co. a certain amount. That’s the invoice amount. The car comes in with a manufacturer’s retail price on the sticker. There already is a margin between that and our cost, the invoice price. And in our company we have a policy that we do not mark cars up over manufacturer’s suggested retail price except to add equipment at a reasonable price. So we might take the manufacturer’s suggested retail price and if we add air conditioning or put some kind of special wheels on it, we will add that to the sticker at a reasonable retail price.

Q. At the typical dealer, if there is such an animal, what is the major profit center? Service, parts, sales or what?

A. There is no such animal as a typical dealer in that sense. Some dealers make most of their money on sales, and some on something else. But basically, without good new car sales you can’t make it.

Q. Otherwise why be a dealer?

A. Right. The other areas are profit centers, but if you’re not doing a reasonable job in new car sales then there is no way anything else can help. On the other hand, with the slim margins on new cars in today’s market, if you don’t have a good service and parts business you’re not going to make it either.

What’s happening now is that dealers are having to be more well-rounded. The guy out there who used to make money by selling 300 cars a month and ignoring service--those guys are going away rapidly because without people’s business back there in service they can’t make it. So I don’t think there is any one you could say is where you make it or you don’t make it. In today’s market you have to make a little bit in all places. In new cars, used cars, parts, service and body work or else you’re not going to be one of the survivors. And to do that, you have to have customers who come back.