Compared to What? : Calculating ’94 Sticker Shock Is a Challenge
Although the Big Three auto makers say they are barely raising sticker prices for the 1994 model year that begins Oct. 1, consumers may do a double take when comparing costs.
General Motors, Chrysler and Ford say their car and truck prices are going up an average of less than 2% on “comparably equipped” models. But auto analysts say the reality is that prices for Detroit’s vehicles will rise an average of about 5% from a year ago.
The difference? In making price comparisons, Detroit-model mathematics don’t count the cost of previously optional equipment that the Big Three have made standard. The car makers also use lower, end-of-model-year prices in their calculations.
“Prices are higher than the auto makers would have you believe,” said W. James Bragg, who runs Fighting Chance, a new-car-buying service in Long Beach. “They obscure it for the consumer.”
Detroit defends its calculations as reasonable reflections of the way people think about car purchases. The U.S. car makers’ price hikes are less than those for Japanese makes, which will be up 7% or more on average due to the rising value of the yen.
And while prices are up overall, there are some bargains to be had. The auto makers are cutting prices on selected models and pushing so-called value packages and subsidized leases for others.
In fact, with the economy weak, some analysts doubt that even the modest price increases that car companies have announced can hold up.
But car companies will certainly try.
In recent years, consumers typically paid less than sticker price for new cars, the result of extensive rebates and incentives. The Big Three hope to reduce such enticements this year.
They also are shrinking dealer profit margins, narrowing the difference between the invoice price that a dealer pays for a car and the sticker price at which the manufacturer suggests the car be sold. Tighter margins allow the auto makers to hold consumer prices down without hurting their profits. But they also curb consumers’ bargaining power, since dealers will be less able and willing to haggle.
Costs aside, buyers will find 1994 models better equipped than ever. More than 60% of the new models come with dual air bags, says the Insurance Institute for Highway Safety. Nine of 10 new models carry anti-lock brakes.
Among the new products--some of which won’t appear in showrooms for several months--are a revamped Honda Accord, the Dodge Ram pickup, Chrysler’s Neon subcompact, Oldsmobile’s upscale Aurora and Ford’s Windstar minivan.
But today’s value-conscious consumers are likely to be less interested in the latest car lines than the bottom line.
Higher prices are likely to worsen the affordability problem that has been building for years. The average new-car transaction price--what the the consumer pays, including options, taxes and dealer’s fees--has been growing more rapidly than personal income for 20 years.
Today, the average car costs $18,044, or 26 weeks of the average American family’s earnings, up from 17.5 weeks in 1973, when the average car cost $4,032, according to the Commerce Department’s Bureau of Economic Analysis. Already, about two-thirds of the buying public opts for used cars.
Detroit, while concerned about affordability, points out that car price hikes generally have not exceeded inflation, counting additional safety and emissions equipment mandated by the government.
Chrysler, for instance, said less than a third of its $244 average 1994 price increase is attributable to higher operating costs or product refinements. The remainder stems from current or future federal safety and emissions requirements, including the addition of air bags, which become mandatory in 1998.
The auto makers point out, moreover, that it is the transaction price--not the sticker price--that has grown, a reflection, they say, of consumers’ taste for better-equipped, more luxurious models.
“If people’s tastes switched from ground chuck to filet mignon, would you characterize that as an increase in the average price of meat?” asked Joel Pitcoff, Ford’s research manager.
Still, the auto companies do not always tell the whole story with their pricing announcements.
In July, GM announced that its 1994 vehicle prices would go up 1.8%. That translates into $290 per car and $445 per truck. But analysts estimate the price increase will average more than 6% per vehicle.
Why the discrepancy? GM and the other auto makers typically report price comparisons on “comparably equipped” models. If an air bag is added as standard equipment in 1994 and it was optional in 1993, the company assigns a price to the air bag and adjusts the 1993 price upward before calculating the price comparison. This is no small matter: Air bags can add $500 to the vehicle’s cost.
For instance, the sticker price on a 1994 Chevrolet Beretta is $12,415, up $1,020--or 9%--from the 1993 model, which carried an $11,395 price tag. By GM’s calculations, the price for the sporty coupe is only up $185, or 1.6%. That’s because $835 of equipment, including an $805 air-conditioning system, was made standard for 1994--and therefore added to the 1993 base price before calculating the comparison.
After customers requested air conditioning on 98% of Berettas sold last year, GM made it standard equipment for the new model year, explained Patrick Campbell, GM’s finance director of North American sales and marketing. The comparably equipped price comparison is a better reflection, he said, of what people really spend to buy the car.
Another complication: The car companies also base their percentage price comparisons on end-of-year sticker prices for the earlier year’s model. If there were several price increases during the previous model year--a common practice--they are invisible to the consumer in the auto maker’s price comparisons.
The auto makers say people want to know what a new model will cost compared to the most recent price. But some critics accuse them of deliberately trying to obfuscate the issue, derisively labeling them perpetrators of “phantom pricing.”
“Car buyers are not idiots,” said Automotive News, a leading industry trade publication, in an August editorial calling for an end to phantom pricing. “They see through the factory subterfuge.”
Even if they do, consumers might find it tougher driving a hard bargain in showrooms this year. The trend toward eliminating rebates, reducing incentives and cutting deal margins could amount to de facto price increases.
“The bargaining potential of consumers is being reduced,” said Maryann Keller, analyst with Furman Selz Inc., a New York brokerage.
Still, many auto industry experts say that this may not be a bad time to buy. The reason: Prices may head higher and rise faster in coming years. Today, there is still more supply than demand in the showroom. And Detroit is trying to keep the lid on prices to regain lost market share from the Japanese.
Honda, Toyota and Nissan are likely to rely more on rebates and dealer incentives--practices they shunned in the past--to hold on to customers and cut prices, which now average more than $2,000 above Detroit vehicle prices. In many cases, too, they are trying to hold the prices on most popular products. Honda, for instance, said it would hold prices on its newly designed 1994 Accord near 1993 levels.
Meanwhile, the Big Three are trotting out innovative ways to entice buyers. California--where Japanese makes sell especially well--is a hotbed of their experiments.
One of the biggest weapons is value pricing--fully loading a model with an option package priced below what it would cost if the options were purchased separately.
GM is leading the pack with value pricing, offering 46 models across seven divisions in California. A significant number of these vehicles are priced lower than in 1993--and better equipped. For example, a 1994 Pontiac Grand Am SE coupe--equipped with driver’s-side air bag, anti-lock brakes, automatic transmission and air conditioning--is being offered at $13,995. GM says a comparably equipped 1993 model was priced at $15,509.
Value pricing can be attractive to consumers--particularly those who like lots of bells and whistles and generally don’t like to negotiate with salespeople. The dealer basically offers a one-price, no-dicker sticker.
* CLEANER CAR
A national effort to improve fuel efficiency is to be announced. A1.
Car Prices: How High Is UP?
U.S. car makers are quoting nominal average price hikes for the 1994 model year.
But prices customers pay at the dealership continue to climb steadily. Chart shows average “transaction prices,” which include options sales taxes and dealer charges.
Behind the Sticker
It can be hard to sort out the facts in auto pricing claims because of the way car makers calculate year-to-year differences. For instance, customers will see a 9.0% increase in the sticker price of a 1994 Chevrolet Beretta from New York from a year ago. But GM says the price of a “comparably equipped” Beretta is up only 1.6%. The reason: The company does not include the cost of air conditioning in its comparison, because the equipment was made standard in 1994 models.
1993 sticker price: $11,395
1994 sticker price: $12,415
Price increase: $1,020
Percentage increase: 9.0%
1993 sticker price: $11,395
Adjustment for options made standard.* -$835
1993 adjusted price: $12,230
1994 sticker price: $12,415
Price increase: $185
Percentage increase: 1.6%
*The bulk of the adjustment, $805, is for air conditioning, which is standard on 1994 Berettas.
Sources: U.S. Department of Commerce, Bureau of Economic Analysis, General Motors Corp.