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Manufacturer-to-Dealer Incentives: Deal maker or deal breaker?

By Rick Kranz, Contributing Editor on March 21, 2017 9:00 AM
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Shopping at the end of the month could save thousands on the purchase of a new car or truck. Automakers sometimes add unpublicized automaker-to-dealer incentives during the month to sweeten retail deals and push slow-selling models. This incentive is in addition to any national and regional retail rebates that are advertised.

Generally speaking, there are at least three criteria manufacturers use to determine automaker-to-dealer incentives: regional inventory, dealer inventory, and the most controversial, stair step. The strategy varies from automaker-to-automaker, but don’t expect a hot-selling crossover, for example, to be offered with these additional rebates. These automaker-to-dealer incentives generally are announced to a dealer around the first of the month.

Patience is a virtue

Simply, negotiating a price at the beginning of the month and then returning to that dealer at the end of the month to renegotiate the price for that same, exact model could result in significant savings.

“We have heard this strategy can be effective in certain situations. If you are not pressed for time it may be right for you,” said Brad Korner, general manager, AIS Rebates/Cox Automotive research, a sister company of Kelley Blue Book. “At the same time, you do run the risk of missing out on the exact product you want, color and model, for example, as the dealer may sell it before you return at the end of the month,” Korner said.  “If ‘the deal’ is the only thing that matters to you, it’s not a bad strategy to try, but it’s not guaranteed to work.”

If this strategy sounds appealing, Korner suggested negotiating the price for two or three vehicles at the beginning of the month “in the event one sells there (likely) is still a backup.” This strategy can be used whether buying or leasing a vehicle.

The payoff

That approach paid off last month for resident near New Haven, Conn., who was shopping for a 2017 Buick Verano.  The shopper received an additional $2,500 in discounts between the lease deal offered at the beginning of month and the deal he accepted at the end of the month, according to an AIS Rebates/Cox Automotive source who assisted a friend. A 2017 Verano with the sport touring package was leased for 39 months; it carried a $26,125 sticker price. The deal at the end of the month required a $4,000 down payment for a $246 monthly payment.

The shopper was elated with the cost of the lease and the fact that the 2017 model had the same optional equipment as the 2014 Verano he had that was nearing the end of its lease. The Buick shopper likely qualified for lease pull-ahead incentives (usually three months), bonus cash of some type if the vehicle selected was on the lot, lease loyalty cash, capital cost reduction on the new lease or some combination of all three. Programs differ by brand.

An Illinois Chevrolet dealer said deals get better as the end of the month approaches. That’s when Chevrolet generally starts boosting the automaker-to-dealer incentives on certain models. But it is a challenge for dealers to keep up with changing incentives.

Also: Kelley Blue Book Best Buy Awards of 2017

The dealer angle

“Last month was a complete mess,” said the dealer who asked not to be identified. GM announced a wave of automaker-to-dealer incentives at the beginning of the month and then changed the program on Feb. 15.  “But on the 20th they changed it again because sales were so bad. It was difficult to figure out what was going on,” he added. “GM always says, we don’t want to get into this, but as soon as sales slow they go crazy at the end of the month. If I was buying a car I would wait to the last week. We do 50 to 60 percent of our sales in the last week.”

Automaker-to-dealer incentives also are known as conditional cash because the dealer may or may not apply all or a portion to sweeten a deal. These incentives are not publicized so a customer has a difficult if not impossible time determining how much if any additional money is available to them. However, a buyer should ask if there is any conditional automaker-to-dealer cash and the amount that is available to improve the deal. Of course, the dealer may not answer the question, but it doesn’t hurt to ask, especially if you’re shopping more than one store.

If sales are slow in a specific geographic area the automaker may add regional rebates that may or may not be disclosed to the public. For example, if there is a high inventory of Ford Focus models in the Milwaukee area, the automaker may offer higher incentives in that area than in nearby Chicago where the inventory level is under control. Check an automaker’s website, and if requested type in the shopper’s zip code. The automaker limits regional rebates to buyers residing in specific zip code areas. There also could be conditional automaker-to-dealer incentives based on zip codes that are not revealed.

Inventory levels a factor

Another formula addresses each dealer’s new vehicle inventory. The automaker will selects the model or models by VIN on each dealer’s lot that will receive the conditional automaker-to-dealer incentive. If there are two or more identical models at the dealership with the same optional equipment only the model with the a specific VIN will be eligible for the automaker-to-dealer incentive. The others do not and could cost buyers thousands more.

The number of vehicles receiving the vehicle identification numbered rebates depends on a dealer’s sales volume. Smaller volume dealers may only have three, four or five vehicles receiving this rebate that month while larger volume stores likely will have considerably more. It is wise to ask the salesman which models have the largest retail and conditional rebates. The savings could be significant if the buyer is willing to take a model in a different color and a different level of optional equipment.

Finally, there is the controversial stair-step formula.

Also: Class of 2018 – New Cars Ready to Roll

More sales, more incentives

“This is a practice where automakers reward dealers for hitting certain sales targets.  If they hit their target in a month or beat it, they receive money for every vehicle (or model) sold,” Korner said. “If they fall short, even by one or two sales, they miss out on all the money.”

For example, last month Chevrolet offered some Illinois dealers a $1,000 conditional incentive on each Silverado pickup sold if the dealer met that month’s sales objective. Keep in mind that this is also a discretionary rebate that doesn’t have to be part of the deal.

While the stair-step formula “is not uncommon, not everyone uses it,” Korner said. “Frankly, dealers don’t like it as it disrupts the natural competitiveness. This is obviously an aggressive incentive for dealers as it may lead to a willingness to lose money on individual sales in an effort to reach the overall target.”  The result is that larger dealers can often undercut smaller ones. Korner said “stair step rewards the volume dealers who advertise heavier and in some cases pull consumers from another dealer’s primary market area.” This essentially cannibalizes a division’s sales with costly incentives.

However, although a large dealer could have a better bottom-line price, that’s not the only thing to consider.

“As it’s difficult to track and know the details of stair-step incentives, this is not necessarily a tack to take,” he said.  “Again, by focusing only on ‘the deal’, a buyer may be giving up other benefits of a new car purchase such as (dealer) location, service reputation, a relationship with the dealership. If you have a trade in, each dealer will approach that differently as well.” Korner cautions that “A big dealership is not a guarantee of a lower price.”


 

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