You’re a bit dim.
I merged two related threads. Some of the early posts might be a bit confusing because they’re interpolated with posts from another thread. Sorry.
Gfactor
General Questions Moderator
Why don’t they just eliminate the dealerships altogether and open up company stores? Eliminating the middleman would be good for both GM and the customer.
While it’s not a big deal, there is inter-brand competition among dealerships. To a certain extent, you want dealerships competing, because that way they both buy cars from you.
By selling to dealerships, they actually sell the product. If they own a store that interacts with the end-user then they don’t mark the sale on their books until it’s actually sold (and they don’t get the money)
Care to back that up with some more math? Use your example with 10.5% borrowing costs.
Unless you mean that you have reason to believe that the borrowing costs are always lower than the underlying return. If so, why?
(btw, your initial question asked, in effect, “why doesn’t leverage work” and i was responding to that)
because you wouldn’t borrow the f*cking money if your expected return on it wasn’t higher than the borrowing costs, duh. your jaw-flapping misses the mark: if dealers finance their inventory, then there is leverage in their overall profit margin.
your question should be “do dealerships finance their inventory purchase, or does country bob’s chevvy actually have 20 million dollars lying around to buy some cars to sell to people.” but i suspect you wouldn’t ask that as it’s patently stupid.
additionally, financing of dealing inventory is often done through the car manufacturer’s financing arm - this gives GM, for example, all the reason in the world to give low-cost loans to the conduit between GM and the people that wind up buying its product.
sorry. you’re not necessarily dim. you’re either dim or stupidly argumentative.
No, it did not ask that.
You would borrow the money anyway if you wouldn’t otherwise have enough cash to start or run the business.
Please stop the personal attacks.
**
Gfactor**
General Questions Moderator
[Moderator Note]
Rumor_Watkins, insulting remarks like this are not permitted in General Questions, nor in any other forum besides the Pit. I am not making this a formal warning, since you may not be familiar with the rules here. I would recommend that you read the rules stickies at the head of this forum, and the other FAQ in About This Message Board.
Colibri
General Questions Moderator
Simul-note!
Missed by this much.
operating financing != inventory financing.
this statement you enquired about dealt with inventory financing and how that increases the profit margin of the car sold.
sorry about the personal remarks thingy
I didn’t specifically reference either one. Perhaps you care to explain. (I don’t understand the difference in the context of my point - the guy has X amount of money available and whatever he spends on inventory is not available for operating, and vice versa.)
As I see it, a guy might buy/open a dealership that needs a million dollars (let’s say) in inventory to keep going, but he only has a half million available. What’s he gonna do? Whether borrowing the other half million increases or decreases his profit margin, it makes sense to do it, because the other choice is foregoing the opportunity entirely.
One could argue that the guy should just buy/open a smaller dealership, but there’s probably a minimum size. And plus, there are probably dealerships that have fallen on hard times and have a lower profit margin due to fixed costs but can’t just downsize their operations willy-nilly.
It would make sense if in general the cost of borrowing is lower than the typical return on a business, for the same reason the average rate of returns on bonds is lower than the average rate on stocks. But you can’t assume that in a given case. And even where it is true, the differential might be small.
Part of it is simply quality control. Most people fail to realize what a franchise is. If you stay at one Days Inn that is bad, you assume all are, even though they are almost all franchised and owned by different companies.
The less dealers the easier the control is. People also are very loyal to car dealers that treat them well. Once a dealers franchise agreement ends, he can go with another Car Manufactuer and take his clients with him.
When I used to work in hotels this was a HUGE deal. A successful sales person would take at least 3/4 of their clients to their new hotel. (If it was local and a similar type of hotel)
Places like Car-Max are the way of the future. Indeed in other areas you see this too. TV networks will most likely in the next few decades try to end affiliating with local TV stations and just provide a feed. They will become a service.
Cars are big ticket items so you have to factor in, people will go great distances to save money. So it behooves the manufacture to limit the amount of shopping to quality first, making the customer return.
BTW, don’t assume that the dealer’s interest rate is extraordinarily low, even if obtained from a financing arm of the manufacturer. That financing arm wants to be profitable, too, and it’s also in the interests of the manufacturer to motivate the dealer to move the inventory as quickly as possible. IIRC, dealers typically finance the whole price of the car, or very close to it. If they DO get the thing off their lot quickly, they get a very handsome return on a minimal amount of money. As it sits around on the lot, that return erodes dramatically as they keep paying interest on it.
Even if the differential is small it is magnified by the fact that only x% of your money is put into the transaction
As the original post that prompted your question explained, if the car sits on the lot for too long, then you start getting into issues of it costing too much money because of time - not because of the original terms of the levered transaction.
And what I mean by the distinction between operating financing and inventory financing is tied, again, into the original comment:
When you buy a $22k car for 2k over the dealer’s cost, you think to yourself "ok, i just gave him 10% profit margin. you don’t know what his capital structure is like; for all you know the owner could have a hooker and blow addiction that results in him visiting a loan shark for 40% interest daily. this is irrelevant. what isn’t irrelevant to the car shopper, however, is how levered the item is that he’s buying - it may be worth your while to stop and realize that what you think is a straight 10% profit margin may be closer to 20%, which may prompt you to negotiate for a lower price.
Yeah I didn’t mean to suggest they get 1% financing or anything - it’s just the question that I responded to specifically indicated a lack of awareness of how leverage affects profit margins. (edit: so i just used really really easy numbers because I was too lazy to do the math)
No, because then they end up competing against each other for a limited market share, and so they are disincented to push your product.
How many and where to have dealerships is an inexact science as the variables involved change regularly in time, but is it better to have 3 dealerships with all the same overhead doing the work that could be done with just one now and one set of overhead costs?
I was wondering, based on your example, not what the realtive interest rates are, but what is the amount country bob’s chevy puts up in order to leverage, and what he can borrow against it.
In your example, it was 100 and 100. In the real world?
I dunno, not arguing, just wondering.
Anyone know the particulars?
Actually from looking around a bit it seems that it’s common for 0% of the dealers money to be put into the car and all of it financed. In that case the profit margin as applied to the car itself would be a meaningless, since there is no capital invested - the dealer is hoping that he can get the car sold while the profit exceeds the interest by enough margin to cover operating costs.
OK.
I found it confusing because you were responding to comment about why someone would borrow money without increasing the profit margin.
BTW, here’s an example of a guy who seems to have financed due to a shortage of capital rather than to increase his profit margin.
According to this article there’s another reason a dealer might borrow money without increasing profit margin. Apparently some franchise contracts require it.