Employee discount deals on new cars, currently a popular incentive in the United States and recently introduced in neighbouring Canada, may be an expensive programme for participating dealerships, according to buyers guide Edmunds.com.
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In June, the first month of its US employee discount programme, the discount from GM’s average sticker [retail] price increased $US952 compared with May and Edmunds said dealers shouldered 71% of that difference.
“In essence, GM dealers purchased most of the sold vehicles at [ex-factory] invoice price, expecting to sell them above that amount, but the employee discount deal dictates that those vehicles be sold for approximately 3% below invoice price,” said Edmunds analyst Jesse Toprak. “This represents a painful cut in dealer profits, especially for models that are in high demand compared with supply.”
However, the reduction of profitability is not as great as it may appear.
For each vehicle sold, dealers collect “holdback” from the manufacturer. In the case of GM dealers, the holdback typically equals 3% of the total maximum suggested retail price (MSRP).
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By GlobalDataDuring the “Employee Discount for Everyone” programme, GM has increased the payment to 5% of MSRP.
Edmunds’ research indicates that rather than pocketing the savings, many consumers presented with generous incentives will buy a more expensive vehicle. In June, GM set a new record for average MSRP of vehicles sold in a given month, $32,712. Just a month earlier, the average GM vehicle sold had an MSRP of $31,181. As holdback is calculated as a percentage of MSRP, dealers benefit from this “upgrade” trend.
Toprak speculated that the dealers may also be receiving “volume bonuses” from the manufacturers, who are delighted to have the cars moving off the lots so quickly. For example, GM enjoyed a 41% increase in June sales compared with last year.
Perhaps even more significantly, the additional sales offered increased opportunity for dealers to make money on vehicle trade-ins, dealer-installed options, and finance and insurance products.
Phil Reed, Edmunds’ consumer editor, stressed that buyers should research and examine each component of every car deal, no matter how generous the incentives.
“It is easy to spend away the savings. Consumers should decide ahead of time which vehicle they truly want to buy, know how they will finance the vehicle, learn the true market value of their trade-in, and carefully consider inevitable questions such as whether to buy an extended warranty.”
