Bill Keefe doesn’t want to jinx it, but he believes his Mazda-Kia store in Amherst, N.Y., has cracked the code of the Internet shopper. In fact, his store has claimed record months leading up to July. A key reason for that is Carfax, the very company that many say has taken transparency too far.
“I love Carfax, but this new thing they have is nonsense,” says Keefe, used-car manager at Northtown Automotive Companies. “But as much as I hate that it’s on there — because I don’t think they are in the business to know what the heck the market’s doing on these cars — they chose to get in this game, so those are the rules I have to play with.”
The “new thing” is Carfax’s History Impact Tool, a price calculator the company describes as the “first-ever value guideline that shows how much more or less than the retail book value consumers would be willing to pay for a specific vehicle based on its history report.”
Answering via e-mail, Carfax officials say its new tool can also be used to the dealer’s advantage: “Dealers can input any of the current retail book values they use into the first box of the Price Calculator to help determine how those values are affected by the vehicle’s history and make their purchase decision accordingly.”
Jimmie Powell, general manager for Investment Automotive Group, an independent store in Centerville, Utah, first experienced Carfax’s new tool in July, when a customer in the market for a 2008 Toyota Sienna asked, “Well, Carfax said it should be worth $440 less. What are you guys going to do?”
His answer? “I just said that’s based on retail pricing, and we’re way below retail,” he recalls.
As for where that $440 price subtraction came from, he says: “I have no idea. It did have a clean report, so the only thing I could figure was that it had two owners.”
Powell is puzzled by Carfax’s tool, but he knows all too well the company’s influence on car buyers. Coming off a record 80-unit month in March, his store replaced Carfax with a lower priced service. Sales plunged by more than 50 percent over the next two months. In June, he brought back Carfax and sales picked up again.
“I think the Carfax name is something people are looking for,” he says.
A Two-Horse Race
Several vehicle history services have come and gone over the years, but Carfax and Experian Automotive have emerged as the two main players. Their mission statements are similar, but the two companies have taken divergent paths.
Carfax was founded in 1984 by Ewin Barnett, whose initial objective was to combat odometer fraud. The company has since grown its database from 10,000 records to eight billion today.
A major turning point in Carfax’s history occurred in 2000, a year after it became a wholly owned subsidiary of the 140-year-old R.L. Polk & Co. What the company did was launch a $20 million campaign to educate consumers about the risks of buying used cars, urging them to buy a Carfax report online or demand one from their dealer.
Carfax didn’t launch its dealer site until two years after it made itself available online to consumers. Today, the company lists Kelley Blue Book, Edmunds, MSN Autos, AutoTrader.com, Yahoo! Autos, and AutoMercado.com as its partners.
Experian Automotive entered the segment 10 years ago to serve the auction market. As Andy Sheehan, the company’s senior executive of product management and marketing, recalls, results of the company’s AutoCheck reports were announced as vehicles rolled through the auction lanes, notifying dealers of any title issues. Today, more than 90 percent of vehicles at auction are scanned by AutoCheck, which also is used by the NADA Used Car Guide, eBay Motors, JM&A Group, CarsDirect online, CarSoup, and Aspen Marketing Services.
“Our business has really grown through partnerships, first in the auction market and then extending to DMS (dealership management system) providers such as ADP and Reynolds and Reynolds,” says Sheehan. He points to Hurricane Katrina as a major driver of his business segment, but credits the Internet for fueling adoption over the last five to seven years.
Carfax says the Internet’s impact was felt much earlier than that. “The Internet boom in the late ’90s really helped launch our consumer business and an ad campaign was a logical next step,” Carfax officials wrote of the company’s milestone consumer campaign in 2000.
In recent years, both companies have sought to deliver their information in a customer-friendly manner. In 2007, Experian Automotive moved to a zero-to-99 scoring system that allowed both dealers and consumers to quickly assess a vehicle’s condition.
Carfax’s latest attempt at helping its customers understand its reports is the History Impact tool. As for what Sheehan thinks of the new feature, he says: “On that front, our policy isn’t to play in the pricing game and drive value adjustments. That’s the dealer’s territory.”
Transparency Gone Wild
It’s a good time to be in the vehicle information business. Consumers are buying based on needs, not wants, which has driven haggling to a 16-year high. That’s according to CNW Research, which reported almost half of finance customers and approximately two-thirds of cash buyers rejected the dealer’s stated price.
Michael Royce’s BeatTheCarSalesman.com is feeling the impact of today’s penny-pinching consumer — but not for the reason he hoped. “The number of how-to-buy Websites has skyrocketed, impacting the number of visitors I receive,” Royce writes via e-mail. “The bigger the Internet gets, the more likely it is that small sites like mine go
Royce, the auto industry’s version of the masked magician, has been educating consumers about what he calls salesmen’s tricks since he launched his site in 1996. A favorite interview subject for national media outlets, his ideal dealership is one that doesn’t employ salesmen. He would prefer a showroom staffed by car enthusiasts whose only job would be to educate consumers about vehicles.
Kelley Blue Book’s James Bell, an executive market analyst, says dealers only have themselves to blame for today’s haggle-happy shopper. “People walk into the dealership with their guard up because dealers have taken advantage of people for decades and have earned that reputation,” he says.
Bell says what’s needed is a culture change. “Dealers need to realize that they’re not going to make a lot on the front end, and they need to look at the sale as a tip-of-the-iceberg investment toward a better customer relationship.”
As for the hot search topics on KBB.com, Bells says consumers are zeroing in on used vehicles and certified pre-owned units. Most consumers, he adds, have three to four vehicles in their consideration set before they settle on a particular model. Proximity is a big consideration when it comes to choosing a dealer.
Bell says dealers need to realize that consumers aren’t out to rob dealers; all they want is a fair price. But what’s fair isn’t so clear, especially when the very tools helping dealers source vehicles at the right price are being used by consumers to undercut their margins.
“What makes for better margins is consumers being anxious to buy. For that to happen, you need a strong economy so [consumers] aren’t concerned about losing their jobs and that last three or four dollars of the price,” says Paul Taylor, chief economist for the National Automobile Dealers Association (NADA). “The reason you hear used-car managers grumbling is because they’re paying more for products without having the array of choices they’re used to. Now they’re facing customers who are asking why truck prices have gone up 15 to 17 percent in a matter of a few months.”
Retail gross profits, according to NADA data, have increased 6 percent on new sales and 23 percent on used between December 2009 and April of this year. As to whether Taylor thinks the launch of Carfax’s new tool in April would show up in the association’s second quarter data, which wasn’t available at press time, he says other factors need to be considered.
In June, the housing market suffered another blow with the National Association of Realtors reporting a 5.1 percent decrease in sales of occupied homes. Claims for unemployment insurance also jumped by 37,000. It was Taylor who said at this year’s NADA conference that his 11.9 million-unit year was based on consumer confidence rising with an improving job market. Housing was another key factor.
California was one of the states Taylor singled out in his annual press conference in February, and it came up again in July. Taylor notes that California was one of eight states in the first quarter to realize a jump in home values, with prices increasing 2.9 percent. New-car sales, the state’s dealer association reported in July, jumped 23 percent in the first half compared to the same period last year.
The other problem is the economic downturn has forced more drivers to hang onto their old cars. That has resulted in eight million fewer vehicles entering the market in the last two years. Taylor says that’s one of the main reasons auction prices were already approaching five-year highs in January.
Taylor says the higher prices, coupled with tighter credit for credit-challenged borrowers — who are seeing less than 10 percent approvals on subprime loans — is pushing many consumers out of the market. However, he thinks the higher prices could jump-start the new-car market by pushing today’s price-conscious shoppers off the used lots. If that happens, the industry’s shortage of desirable used vehicles could be solved.
Bridget Townsend runs DealerTrack’s AAX inventory management business, and she has a similar assessment. “The used-car market is highly dependent on the new-car market,” she says. “I’d say, especially when we’re looking at the used-car market, we’re to a degree at the mercy of the new-car market. And we have only recently seen that start to rebound.”
The New Order
Townsend adds that while things seem unpredictable these days, they’re not. Her team can predict what outside factors such as a rise in gas prices will have on the market, and she says what has happened over the last few years has given her team a wealth of data to predict the outcome of further market volatility.
“It is really easy to get shaken in this environment, especially when you see what is going on with this Carfax tool,” she says. “For us, it’s making sure our dealers have the same information that the customer has and that they don’t lose their confidence.”
As for finding the right price these days, there are several schools of thought. Townsend says dealers don’t necessarily have to offer the lowest price if they can articulate why their unit is priced higher. Some market experts are even placing a number as to how low dealers need to be, and sixth from the bottom seems to be the most popular guess.
Northtown’s Keefe eliminates negotiations altogether by pricing his vehicles below his competitors using the PriceDriver feature on DealerTrack’s AAX system. Not only does it allow him to hold gross, but it’s also creating a better selling environment for his F&I department.
“We are still negotiating, but on a much smaller amount,” says Keefe, who served as a finance director for nine years. “For us, it’s about the experience. You come in here and the cars are priced a little lower. There’s a certified warranty that comes with the car, and certified financing is at a low 3.9 percent, so suddenly you’re not fighting with the F&I guy for a lower rate. And we can wrap a warranty for pretty cheap.
“Doing it this way just makes it easier for the F&I guys, because they’re spending more time selling than justifying their rate,” he adds, crediting his dealership’s success this year to his veteran F&I team and a spiff program he created to reward service advisors for teeing up F&I product sales.
Investment Automotive’s philosophy on retailing speaks to what it takes for dealers to operate in today’s environment. “We’ve done pretty well in making sure we buy right. And if we make a good deal and buy a car right, we pass it on to the consumer,” Powell says. “We don’t mark it up more just because we bought it for less.”