NADA in New Orleans

I just returned from New Orleans and the National Automobile Dealers Association’s national convention. Like most of the attendees the first thing that stuck out was the lack of people. This is usually a convention with tens of thousands of participants, vendors, and guests. Like all businesses, car dealers have been hit hard by the recession and conventions are simply not in the budget for most.

All, however, was not lost. Those who did attend were able to look through the vendor’s booths with ease and attend workshops that we all hope will help increase our business. I know that Walker Automotive sent four managers with great expense simply to give each manager an opportunity to bring one nugget of information back to the dealership that would increase the bottom line. The expense was justified if each of us attending was able to bring back a single idea that improved our business.

From my perspective, that one nugget was some perspective on advertising. Anyone who watches the car business knows that we spend considerable amounts of money on advertising. Imagine the cost of T.V., Radio, billboards and newspaper ads every week. Add on top of that the amounts we spend on yearbooks, youth basketball and soccer, stadium billboards at little league and you begin to get the picture. The traditional media has always been the way we advertised – until recently.

Sure, you still see Walker Automotive in those traditional places but you also see Walkerautomotive.com prominently displayed along with the traditional ads. And what was surprising about this year’s NADA convention was that not one single traditional media company was there vying for our business. With all of the billions of dollars car dealers, manufacturers and suppliers have paid over the years, the biggest traditional media outlets like Cox, Lamar, Gannett, Clear Channel Communications were all absent. NADA in New Orleans was the one place where they had the opportunity to re-engage the car dealers and sell us on the benefits of traditional advertising. So what did they do? As an industry they decided to boycott. Amazing and stupid all at the same time.

What it proves to me is that our decision to shift advertising dollars to the internet was the correct decision. Like most businesses, we started with a simple toe in the water approach and a basic web site. Over the years our approach is getting more sophisticated and we buy leads, optimization, and use search engine marketing. I, for one, have touted the cost benefits of online advertising over traditional media for a while. The cost is less, it is measurable, and it allows you to instantly contact the prospect. So what did NADA prove to me? That just as I have given up on traditional media, they too, have given up on me.

As one of the biggest manufacturing and retailing sectors in the U.S. economy, the automobile industry is clearly a top choice for stimulus plans aimed at reviving the economy. Two of the proposals being considered:

1. Tax breaks for consumers who buy new vehicles and/or fuel-efficient hybrids. The desired incentives would be a combination of new incentives and extensions of credits already in the tax code. One proposal supported by Democratic Sen. Barbara Mikulski of Maryland and Republican Sen. Kit Bond of Missouri would permit new car buyers to deduct auto loan interest and sales tax on their personal income taxes.

2. “Cash for Clunkers”. This initiative encourages consumers to upgrade their older cars to cleaner, more fuel-efficient models. Drivers would get up to $4,500 in vouchers when they turn in an old fuel-innefficient vehicle for a vehicle that gets good gas mileage.

THE REAL COST OF ELECTRIC CARS

As the world watches oil prices rise and fall like a tidal surge and environmental groups continue to push for more green cars, the real cost of alternative fuel vehicles has to be examined. Obviously, the role of electric and hybrid vehicles will play an enormous role in reducing greenhouse gasses around the world. But industry and government has to ask how much will the conversion cost and is it worth it?

According to a study conducted by Boston Consulting Group, a management consulting firm, the fuel savings will not be enough incentive for consumers to switch to electric cars without some other incentive from the world’s governments. According to Boston Consulting, electric vehicles could conceivably make up a significant amount of the world’s fleet but not nearly a majority. According to Boston Consulting the costs of creating an automotive market dominated by electric cars are prohibitively high.

So what will cause a major shift? The most likely scenario is when oil prices rise over $150 per barrel and world governments mandate stricter standards. Experts estimate that about 3 million electric vehicles and 11 million hybrid vehicles will be sold globally in 2020. If that number is accurate, the alternative fuel vehicles would only make up about 28% of vehicles sold.

To support a market for that many electric vehicles, governments would be required to spend about $140 billion for industry support while reaping a relatively small $12 billion savings by switching to electric vehicles in Europe and the United States. Most of the industry support would be required to offset the high consumer cost of alternative vehicles. The fear is that the technology will be extremely expensive and without corresponding consumer support. Currently, the cost of a hybrid vehicle is about $7,000 more than its non-hybrid counterpart. While that amount is expected to decrease by 2020 it is still a hard sell for both dealers and consumers for the small amount of fuel savings. This hard sell is compounded by today’s relatively low fuel prices.

An article by USA Today on January 12, 2008 exposed the United States Army’s inability to control inventory. Like many business owners across the country that have an inventory, the Army has fallen into the trap of ordering too much, ordering things they don’t need or holding onto items that they cannot otherwise sell. According to the article, the Army has more than $3.6 billion in excess spare parts. Of that amount, the Army will never need some $900 million of the equipment that it has in storage. According to USA Today, the Army has “too little of the parts it needs and too much of others it doesn’t largely because it doesn’t set cost efficiency goals and has problems with the computer models it uses to forecast demand…”

The good news is that the business owner can learn from the mistakes of the Army. Any business that has an inventory also carries a debt load on that inventory. While the widgets sit on the shelf they are costing money. There is a price to purchase the item and a holding cost to have the item in inventory. As the item gets older, there is a risk of the part becoming obsolete. At that point, it is essentially worth zero because there is not market for it. The cost of a single obsolete part may not be significant, but the cumulative effect can be crippling.

Any business that carries an inventory needs to be accountable for proper inventory control. This means upholding a level of service that allows customers to purchase out of stock, avoids obsolescence, and generates a profit. To accomplish this, inventory managers need to be experts in inventory control, merchandising, pricing and profit. The good news is that a host of computer programs are available for every size business to automatically analyze inventory and alert the inventory manager when parts should be reordered to allow for a “just in time delivery.” This task is made even easier with the availability of overnight shipping.
Most inventory managers struggle in 5 crucial areas.:

1. Obsolete parts: Managers want to retain obsolete parts that cannot be sold in hopes of the sucker who walks in one day for that exact part. Don’t wait. It is a hard pill to swallow, but if the part is obsolete take the loss and sell it on e-bay, at a garage sale, to a junk shop or simply throw it in the trash and take the tax write-off. Continuing to hold the part only takes up space and costs more money;

2. Wrong Product Mix: Know your customers and what they are ordering. Have the correct product mix in your inventory for ultimate profitability;

3. Excess Stock: Don’t order too much just because you think you will sell more. Look at the selling history or “demand” for that part and order according to the demand history;

4. Poor marketing and merchandising: Every retailer has to market their product. Do so by whatever means possible. In the age of the internet, e-mail and blogs, guerilla marketing is a snap;

5. Poor use of compute information. Trust your technology. If you have a compute inventory manager and the parameters are correct then trust the information it is giving you.

Proper inventory control is crucial because obsolescence is one of those items that can creep up on the uninformed. Letting inventory get out of hand is a sure way to financial ruin. To avoid a listing in the bankruptcy filings, watch your inventory and your manager. This is the only way to insure that you do not fall into the same trap as the Army.

There is a new target for auto thieves and it can cost you thousands of dollars without your car even being stolen. What is the new hot item to steal? Catalytic Converters. A catalytic converter is used to reduce the toxicity emissions from your motor. Why are these hot items? First, they contain three precious metals: platinum, rhodium, and palladium. As of October 2008, platinum was selling for $1,019 per ounce. This is a nice payday for a thief who can crawl under a car undetected and steal the device in less than two minutes. The thieves then sell the converters to recyclers for $20 - $200 per converter depending on the type and amount of metal used.

Thieves are targeting victims by staking out large parking lots and working in teams. The thieves are able to slip under vehicles and cut out the converters with battery operated tools in a matter of minutes. Targeted vehicles are usually trucks or SUVs since they are easy to crawl under. The average insurance claim for this type of theft ranges between $2,500 - $3,500 per vehicle. Consumers can protect themselves from this type of theft by parking in well lit areas with a lot of pedestrian traffic.

TIRE TIPS

Tire inflation is the single most important, and most often overlooked, part of automotive care. Operating a vehicle with just one tire underinflated by 20% (about 8psi) can reduce the tire’s life by 9,300 miles and can increase fuel consumption by 4%. Owners should check tire inflation at least one time per month and periodically review their vehicle’s computer based system for tire pressure readings.

The tire pressure monitoring system which is standard equipment on all 2008 or newer GM models, uses a direct measuring sensor in each wheel. A warning is displayed to the driver whenever pressure drops below 75% of the recommended pressure. Weather can affect the reading because of the temperature changes that occur in the tire when the temperature increases during the day.

In Louisiana, weather typically rises substantially during the day in winter. This can cause the tire pressure monitor to alert the driver. All that may be necessary is the addition of a minimal amount of air into the tire. Additionally, customers who have tires replaced or rotated at non-GM dealership facilities may experience problems with the monitor after the change or rotation. This is because non-GM repair facilities either do not have the equipment to reset the monitor or are unfamiliar with the monitor’s operation and repair. If the vehicle is brought to the dealer because another facility was unable to reset the tire monitor or the malfunction is cause by another repair facility there may be a small charge for the reset.

For best results, have all maintenance done by the factory trained technicians at the GM dealership. Important information to know is that when the tire pressure light remains solid to indicate low pressure then air needs to be added. If, however, the light blinks for about a minute and a service tire monitor message displays, then there is a malfunction in the sensing equipment. At that time, a review and possible repair by your GM trained technician might be necessary.

2008 IN Review

What happened to the U.S. automotive industry this year? The “Big 3” does not build undesirable cars. They still outsell everyone else in the market with more than 8 million sales last year. Their customer loyalty is unparalleled and according to J.D. Power and Associates, the Big 3 builds some of the most dependable vehicles on the road – better than Toyota, Lexus, Infiniti and Volvo. Further, in an apples-to-apples comparison, American manufacturers match or beat their competitors in fuel economy on models with the same footprint and powertrain.

Every manufacturer is hurting in this economy. Sales in every car and light truck segment are down compared to last year. Country of origin had no influence. Vehicles from the U.S., Japan, Europe and North Korea all fell 32-38% in November. Both cars (-36.5%) and trucks (-36.8%) fell. The Honda Civic fell 66%, Toyota Carolla 59%, and the Ford Focus 74%. So what happened?

A combination of high oil prices, the banking/mortgage debacle, and a slowing economy worldwide all contributed to the cause. In late spring, oil prices rose to unprecedented levels. In June, prices per barrel were at $145 with speculation that prices could rise to $200 a barrel. Consumers shifted to small cars and values of trucks and SUV’s plummeted. Because of the falling values, auto lenders took a bath on leases when residual values fell on the vehicles they were taking on lease returns. For instance, an SUV may have had a residual value of $20,000 but when it was turned in the market price was only $12,000. The finance company had to absorb the $8,000 loss. This loss was absorbed along with all of the home mortgage losses in their portfolios. The result was that auto lenders quit leasing, essentially cutting off low payment options to millions of buyers.

In the beginning of the third quarter, banks tightened credit standards essentially denying credit to millions of consumers. Most car buyers need credit to purchase a vehicle. Without financing options available to the majority of buyers retail sales fell. When credit is available rates are unfavorable compared to the glory days of 0%. Add to this the negative press surrounding the economy and the Big 3 and consumer confidence started to fall. That lack of confidence translated directly into the showrooms of all manufacturers.

The Big 3 CEO’s, unions and the federal government all share the blame for the sector’s woes. Without giving any one of them a pass, it is hard to image that any companie's business model could have predicted this perfect storm. Where the industry ends up is now in the hands of the congress. However, one thing is for sure – the loss of any one of the American manufacturers will reverberate throughout the economy to suppliers, consumers, charities, municipalities and more in the form of lost jobs, revenues, charitable contributions and sales tax revenue.

Do you ever wonder how your credit score is calculated? Your credit score or FICO is a three digit number designed to gauge your creditworthiness. Lenders use this number to determine if an individual is worthy or receiving credit and, if so, at what interest rate. The FICO score can affect your ability to borrow money for everything including home mortgages, credit cards and auto loans. The score ranges from 300 to 850 and is calculated by Fair Isaac Corporation. Fair Issac is a NYSE listed company that collects information from the three leading credit agencies, Equifax, Inc. Experian, PLC, and TransUnion, and analyzes the numbers to include in the credit score.
According to Fair Isaac, a credit score is made up of of five components:

• 35% reflects payment history, i.e. whether you pay your bills on time to one of the lenders that reports to the credit reporting agencies;
• 30% reflects amounts owed and how credit limits compare with balances owed. The more you carry, the lower the score;
• 15% reflects length of credit history: The longer the history, the better credit lenders can gauge your ability to pay them back;
• 10% reflects new credit – how many accounts you opened recently;
• 10% reflects credit mix – credit cards, student loans, medical etc.
  

You cannot get your credit score free but you can get a credit report for free one time a year from each of the reporting agencies. A free report can be obtained from annualcreditreport.com. Wall Street Journal, December 31, 2008