On allocation and maximizing profits

A few days ago I got a call from a friend in the north. A very agitated one. 

He was pissed. We're not talking politics or anything of the sort, but rather the practices of automobile dealers when it comes to buying their vehicles.

You know the drill. A brand launches a model that instantly becomes the hot item in the market, and given the popularity allocation becomes difficult. And so dealerships squeeze interested customers into buying on the dealer's terms. We're talking about outrageous in-house insurance premiums that are 2x to 2.5x the normal rate anywhere else. We're talking about in-house financing rates that no one in their right mind would say yes to. We're talking about zero free items (e.g. tint, mats, etc.) and shoving in overpriced accessories that the buyer doesn't even want to get.

They'll say take it or leave it, because if you say no to any one of those conditions or even hint at negotiating, the allocation goes to someone willing to subject themselves to those terms to get the car. They will not even blink if you drop a bag full of cash in front of them; they want the transaction. And they do it with a smile.

This isn't new, and it's something I've had to do myself when I was a dealer sales agent before. I call it showroom pusoy.

For the unfamiliar, what I'm referring to is that 4-player Filipino poker game that we play during family gatherings. My uncles used to play it, and even I became fairly good at it at a young age.

Each player is dealt 13 cards (52 in the deck) and the game is to have two 5 card hands (straight, flush, full house, etc.) and arrange them by having the strongest at the bottom, the secondary set in the middle, and the remainder on top. For instance, if you're able to build a full house and a flush, the full house is at the bottom, the flush in the middle, and the remaining 3 cards up top. Typically I try to reserve a pair for the top; if you're really lucky, you can even get a trio up top. 

The three players face off against the banka (the bank) or the fourth player that has been designated as the dealer. The goal is to beat the hand of your opponent across each level respectively; meaning your hand beats the opponent at the bottom, in the middle, and up top. You win if you beat your opponent 2 out of 3, but if you complete a clean sweep that's called pusoy. And your opponent -whether it's the banka or another player- pays double his bet.

If you notice, that's exactly the game of the auto dealership. The house -the banka- plays to win, and they play for the pusoy every time if they have their hands on a popular car that the market sorely wants and that customers are willing to endure long queues for. They hold the cards, they stack the deck, and it's up to you if you want to play.

The Pusoy of Buying Cars image

Why do auto dealerships do that? It's easy enough to understand: they are maximizing the profit of the transaction. It's about markups and commissions. That's why insurance rates, financing rates, and accessories sold at dealerships are ridiculously high.

In-house insurance or in-house financing aren't actually “in-house”; the dealership isn't the service provider but merely another agent for the actual insurance company or bank. That's why even if you sign an in-house insurance or financing agreement, it doesn't say Brand X dealership, but the name of the bank or insurance company. And the higher the rate they can bundle a product with means a higher commission. The same goes for the accessories sold on-site; these are typically on a consignment basis from the local distributor or importer, and it's up to the dealership to add a markup.

Some are wondering why dealerships have to resort to doing this when there's already the mark-up on the vehicle itself when they acquire units from the manufacturer/distributor. The truth is the markup isn't as high as some would think. The more popular the brand means they command more sales, and the manufacturer/importer can sell the vehicle at a higher price with less room to maneuver for dealerships to profit for the SRP. The less popular the brand, the higher the mark up for dealers because they don't command the market like the top brands. That's why showroom pusoy is far more common in the strongest brands in the market versus the smaller ones.

I'll just guess here because my inside knowledge of dealer markups is quite outdated already, but I wouldn't be surprised if dealerships of top brands only make about PHP 200,000 on the high side to about PHP 50,000 per unit or maybe less. It sounds like a lot, but take a look at a dealership the next time you walk in into one. How much would you think it costs to lease the lot, put up that building, maintain it, employ people, stock units and parts, get all the service equipment, keep the AC running, supply free coffee, and pay taxes? That is when it becomes clearer why they do that and why sales agents are given those kinds of marching orders. If anything, it could even be critical because not only do you have to worry about demand outpacing supply, but also the issues strangling unit production like the chip/parts shortage. You can't sell as many and units profit from the unit mark up if unit supplies are just trickling in. 

Some wonder why the brand isn't doing anything to address this issue for the sake of the customers, and the answer is rooted in the political relationship that exists between dealers and the brand. Think of it like federalism in the US. The dealerships are the individual states with their own government, while the brand is the federal government. The latter cannot simply tell the former to do something against their will and not expect pushback.

The truth is that the brand (AKA: the distributor or manufacturer or planta) has to tread very carefully. Dealers are not subordinate franchisees (some are brand/manufacturer owned, but not all). They are treated like shareholders and partners because they have a lot of skin in the game. An auto dealership is a major investment.

Perhaps the best example of that is what happened between one distributor and its dealers. The head of the brand was given the mandate from global HQ to revamp the aftersales service of dealers; practices that were giving the brand a bad rep among customers. That boss came down hard on the dealer principals, but the result wasn't what he was expecting: all the dealer principals stood up, and walked out. The hardline approach was not well received, and he was promptly recalled abroad and was replaced by another boss that smoothed things over. Diplomacy was the better option, and from what we understand the service has since improved or is in the process of improving.

In the case of unfair dealer sales practices, you can expect the same. A brand can't come down hard on dealers for how they sell a car. Even with the price; if you notice, the term is manufacturer suggested retail price (SRP) and not manufacturer dictated retail price because dealers can't be told how much they can sell a car for. It's only a "suggestion". 

Really, it's all up to the dealers to police themselves over their own business practices, and that's why you have dealer groups or associations. They want to keep things fair and competitive when it comes to discounts, free items, and so on and so forth, but they won't exactly police themselves when it comes to finding ways to make a buck.

Some may also wonder: If the brand can't or won't step in, why not the Department of Trade and Industry? If you go that route, it's going to take a long time and it's going to be a tiring battle. Many of the things that we mentioned seem unethical, which is probably why the terms are only said and not written. They will never write down you have to buy this car with these accessories and that insurance rate and at that interest rate. I'm no lawyer, but I think the key consumer right to consider is the right to choose, and dealerships that exercise these pusoy practices aren't exactly depriving the consumer of that right. The consumer can always walk away, and that's going to be the key to change.

If a dealer is shoving unwanted accessories down your throat to get an allocation, or if a sales agent is pushing for exorbitant in-house financing and insurance premiums, then go to another dealer. There are plenty to choose from. If all the other dealers do the same, go to a different brand altogether. Is that car you're looking at THAT much better than everything else in our very diverse and competitive market? 

The Pusoy of Buying Cars image

If you patronize a brand and a dealership knowing that you're subjecting yourself to these practices, then that's telling them that they can get away with it. That is telling them that what they are doing is OK. Would you willingly keep go back to a restaurant if you're getting slow service while sitting at dirty and oily tables and with wait staff that always seem to behave so poorly? Is the food that good that you can't go somewhere else?

If you want things to change, they won't come from the top and go down. It has to come from the ground -from customers- and go up. They will only change when they realize that what they're doing isn't OK and that it's costing them their position as sales leaders.

That's the thing about pusoy or poker: you can always fold and walk away. You don't have to play their game.

I won't name brands or dealers. I don't really need to; you probably already know which ones we're talking about. I'm just avoiding getting sued for defamation, but consumers need to be heard. No, not amber.