Inside The Rise of Stealerships and The Shady Economics of Car Buying

Recently, my truck was stolen, forcing me to get some new wheels. And, for the first time in my life, I’ve been looking to buy a new car. The process has involved hours of searching. Painful haggling. And encounters with many dealerships that, quite frankly, have been downright duplicitous. The whole thing has been kind of a nightmare.

Cars are, of course, expensive, especially with the supply chain fiasco creating shortages. But it’s more than that. Shopping for cars is not like shopping for most other products. Unlike, say, computers or refrigerators, cars are typically not sold for one standard price. Ten people could go into a dealership and each pay a wildly different amount to buy the same exact vehicle.

Economists call this sort of pricing strategy “price discrimination.” That’s when, instead of charging everyone the same price, sellers charge people different prices based on their willingness to pay. In simpler terms, it means that the seller milks as much money as they can out of you. Not all dealerships engage in this pricing strategy, but many do it aggressively, often with snake oil-style salesmanship, deceptive marketing tactics, hidden fees, and overpriced add-ons, like floor mats, alarm systems, or anti-rust undercoating. Some consumers call the outfits that employ these tactics “stealerships.”

The tricky pricing strategy used by dealerships can be maddening for consumers, and I’ve personally found haggling over the price of a new truck with slick, commission-seeking salespeople to be exhausting (Fortunately, my partner has proved herself to be a talented haggler).

A slew of economic studies has found patterns in who bears the brunt of this pricing strategy. It’s not pretty. For example, a number of studies find that dealerships tend to charge people of color more than white folks. Another study finds that older people tend to be charged higher prices than younger people, and that older women tend to be charged the highest price of all.

One study found that dealerships tend to treat a buyer’s decision to trade in their used car like a neon sign on their foreheads, flashing, “Charge me more!” That’s because trading in your used car, while easier than selling it directly, also fetches less money. Dealerships apparently see this as an indicator that you’re either unsavvy or willing to burn cash — so they jack up the price of the car they sell to you. The type of car you trade in also offers a wealth of information on how much they can charge.

In normal times, when supply is ample and dealerships are more worried about getting cars off the lot, it’s common for them to charge less than the Manufacturer Suggested Retail Price (MSRP). But with supply-chain problems creating shortages of new vehicles recently, many dealerships have been charging much more than MSRP. Meanwhile, the dealerships that don’t add markups to MSRP are seeing their inventory depleted quickly, and often have wait times of months or even years for coveted vehicles.

Michelle Krebs is a longtime automotive researcher who serves as the executive analyst of Cox Automotive, which owns brands like Kelley Blue Book and Autotrader. “This is the first time in my career — and it’s a long career — that I’ve seen most dealerships charging at list price or over,” she says. “And it’s simply because there’s high demand, low inventory, and they can do it.” Krebs says she’s seen some cases where dealerships have charged buyers literally tens of thousands of dollars over MSRP.

Automakers vs. dealerships

Dealerships are usually independent franchises of their affiliated automaker, which means they are autonomous businesses that can basically do what they want when it comes to setting prices. But many automakers are not happy with their franchises charging crazy high markups. A recent study from the consumer group Growth for Knowledge suggests that excessive price gouging sours consumers on not just a particular dealership, but the car brand as a whole.

At least some automakers know this. Earlier this year, Hyundai Motor Company sent a letter to its dealerships urging them to end deceptive practices, such as advertising a low price online and then charging a much higher price when customers go into the store. The company complained that sky-high markups were “damaging our brands’ long-term ability to capture new customers and retain loyal ones.”

Likewise, Ford Motor Company urged its dealers to cut down on markups and threatened to cut back on sending them Ford’s most coveted vehicles if they didn’t. And yet the new Ford F-150 Lightning electric pickup truck and the Ford Bronco are some of the most marked-up vehicles on the market, regularly being priced at much higher levels than what Ford has said they should be sold for. The problem for Ford: dealerships are independent and the Manufacturer Suggested Retail Price is just that, suggested.

Newer automakers like Tesla and Rivian have been trying to build distribution and service networks that jettison the use of independent dealerships. They are building a direct-to-consumer retail model in which consumers custom-design their vehicles on the internet and receive them directly from the manufacturer — without dealership middlemen and exhausting haggling over price with commission-seeking salespeople. For in-person needs, these automakers provide their own dealerships and service centers.

However, there are state franchise laws across the country that protect independent dealerships — and these laws have made it difficult to disrupt the dealership system and offer consumers potentially a better way of buying a vehicle.

A V8 political engine

To be fair to dealerships, they do provide important services. They offer a distribution and service network, which is vital to both manufacturers and car buyers. They offer buyers the ability to check out, test drive, and learn about cars at their facilities, which really do cost a lot when it comes to real estate, inventory, and manpower. If the manufacturer recalls something, there are thousands of local dealerships across the nation there to fix the problem. They also, of course, create tons of jobs in local communities.

But, while having a sprawling network of local dealerships may be valuable, this geographic reach also gives them outsized political power. Spread out all over the place, local dealerships are important constituents for a whole slew of federal, state, and local politicians. That — together with the fact that they’re a trillion-dollar-plus industry — makes them an effective lobbying force. And opponents argue that the protective franchise laws they’ve worked to erect and maintain thwart entrepreneurs’ ability to create new, more efficient business models that better serve consumers.

We reached out to the National Automobile Dealers Association (NADA), which represents more than 16,000 dealerships across America, and they provided a statement. “State legislatures passed franchise laws — and continue to overwhelmingly support franchise laws — to separate car sales from manufacturing, prevent monopoly pricing by factories, promote competition in auto sales and service, and keep jobs and investment local,” says NADA Vice President of Communications Jared Allen. “The franchise system delivers these tremendous benefits better than anyone.”

Some of these claims — like the fact that local dealerships create jobs — are undeniable. Others are highly debatable. First of all, there are more than a dozen automakers in the United States, so no single carmaker comes close to being a monopoly. And it’s not clear how adding a middleman to the process reduces prices for consumers, especially when you consider that this middleman often resorts to a slew of tactics that tends to raise prices. Many of these dealerships, by the way, are not mom-and-pop shops; the industry is seeing growing consolidation, with multibillion-dollar corporations now owning hundreds of dealerships across the nation.

For years, the Federal Trade Commission (FTC), the agency tasked with looking out for American consumers, has advocated relaxing state franchise laws so that companies like Tesla or Rivian can create new, direct-to-consumer business models. “States should allow consumers to choose not only the cars they buy, but also how they buy them,” FTC officials wrote in 2015. But franchise laws continue to protect the dealership model and thwart innovation.

Earlier this summer, the FTC proposed new rules aimed at combating the graft and skulduggery found at many dealerships. “As auto prices surge, the Commission is seeking to eliminate the tricks and traps that make it hard or impossible to comparison shop or leave consumers saddled with thousands of dollars in unwanted junk charges,” the FTC said.

The new rules the FTC proposes include a ban on deceptive advertising in which dealerships market cars as way cheaper than they actually intend to sell them for; a ban on “junk fees for fraudulent add-on products and services that provide no benefit to the consumer”; and a requirement that dealerships disclose upfront all costs and conditions for buying their vehicles.

NADA, not surprisingly, opposes these proposed rules. “The FTC’s proposed rules would cause great harm to consumers by significantly extending transaction times, making the customer experience much more complex and inefficient, and increasing prices, and NADA again urges the FTC to go back to the drawing board before forcing implementation of a series of unstudied and untested mandates that will have such significant negative impacts on customers,” says NADA Vice President of Communications Jared Allen.

Buying a car in this bonkers market

We asked Michelle Krebs, the longtime automobile industry analyst, if she had any advice for me — and, more importantly, you, our cherished Planet Money newsletter readers — about buying a car in this bonkers, supply-constrained market. “I always say pack your patience and persistence,” Krebs says. “You have to keep looking, keep shopping. You have to be flexible on your choice. You may not get the brand or car style you want. And, importantly, expand your geographic search. Most people don’t want to shop more than 25 miles away, but you may need to go farther than that.”

In trying to find my new truck, I spent hours searching online and corresponding with dozens of dealerships located up and down the West Coast and farther inland. I found some trucks that were literally priced $10,000-$15,000 over MSRP, and I encountered many of the shady business practices that the FTC is now trying to ban. I also found honest, “no haggle” dealerships willing to sell the truck at MSRP. The catch: I’d be forced to wait at least six months for a truck from them to arrive, and with the theft of my old truck leaving me without a vehicle, I didn’t have that kind of patience.

Luckily, my partner ended up finding the exact truck I wanted, located more than 400 miles away, in Southern California, near her parents’ house. The dealership initially wanted $5,000 over MSRP. But thanks to her fierce negotiations (she’s a lawyer), we were able to talk them down to only $2,000 over. In normal times, that would be a rip-off. But these are not normal times.

Anyways, at least I have a truck again — and, unlike the last one, this one has an immobilizer that might prevent it from being stolen.

By:

Source: Inside the rise of ‘stealerships’ and the shady economics of car buying : Planet Money : NPR

.

Critics by ResonantOne

I want to start off with a disclaimer: I understand that businesses are called “businesses” and not “charities”, and that there are more costs associated with running a business than just paying your employees: there is facility overhead, lease costs, insurance, paying the boss and hopefully making some sort of profit. That being said, there is also a line between “making a profit” and “trying to rob somebody blind”.

A couple weeks ago my mother in law’s Accord starting making some bad popping sounds whenever the car went into a turn. After driving it, I told her it sounded and felt like a CV joint going bad, but I couldn’t really get a good enough look at the axle without a lift so I told her she should go ahead and take it up to the dealership to have them check it out. But, and I stressed this, I said to give me a call after the diagnosis.

So she took it up and sure enough they found the driver and passenger side boots were cracked and leaking grease, which in turn was letting grit in and chewing up the joints. No problem, that’s what I told her to expect. Then came the quote: $1600 to replace the two axles. Now, I had researched this a bit ahead of time and had already told her that if it was the axles I could get two new ones with lifetime warranties for about $80 a piece. So she told them that she wanted to call her son in law to talk it over, and that’s when they started to get really pissy. “Well what do you mean? Why do you need to call him? How much do you think you should pay?” and so on.

Well, she did call me, very upset because she is on a fixed income and now she thinks she’s looking at a $1000+ repair bill. I immediately told her to get her car back because it would take me about two hours to put those axles in and that the price they quoted was beyond any semblance of fair labor.

So she goes back to the service desk and what has happened in the five minutes in between? Somehow the price of the repair has now dropped to $900. She said no thank you and got her car back- among much protest and several dirty looks from the service department. I told her to bring it by this weekend where I will put in the new axles for the price of dinner and a new ratchet.

I guess I’m just left with a question: does anyone that has worked at a dealership want to try to justify how $160 worth of parts and not even three hours of labor gets turned into a $1600 price tag?

I want to start off with a disclaimer: I understand that businesses are called “businesses” and not “charities”, and that there are more costs associated with running a business than just paying your employees: there is facility overhead, lease costs, insurance, paying the boss and hopefully making some sort of profit. That being said, there is also a line between “making a profit” and “trying to rob somebody blind”.

A couple weeks ago my mother in law’s Accord starting making some bad popping sounds whenever the car went into a turn. After driving it, I told her it sounded and felt like a CV joint going bad, but I couldn’t really get a good enough look at the axle without a lift so I told her she should go ahead and take it up to the dealership to have them check it out. But, and I stressed this, I said to give me a call after the diagnosis.

So she took it up and sure enough they found the driver and passenger side boots were cracked and leaking grease, which in turn was letting grit in and chewing up the joints. No problem, that’s what I told her to expect. Then came the quote: $1600 to replace the two axles. Now, I had researched this a bit ahead of time and had already told her that if it was the axles I could get two new ones with lifetime warranties for about $80 a piece. So she told them that she wanted to call her son in law to talk it over, and that’s when they started to get really pissy. “Well what do you mean? Why do you need to call him? How much do you think you should pay?” and so on.

Well, she did call me, very upset because she is on a fixed income and now she thinks she’s looking at a $1000+ repair bill. I immediately told her to get her car back because it would take me about two hours to put those axles in and that the price they quoted was beyond any semblance of fair labor.

So she goes back to the service desk and what has happened in the five minutes in between? Somehow the price of the repair has now dropped to $900. She said no thank you and got her car back- among much protest and several dirty looks from the service department. I told her to bring it by this weekend where I will put in the new axles for the price of dinner and a new ratchet.

I guess I’m just left with a question: does anyone that has worked at a dealership want to try to justify how $160 worth of parts and not even three hours of labor gets turned into a $1600 price tag?

Related contents:

Tesla Stock Losses Top $575 Billion As ‘Investor Patience Wears Thin’ With Elon Musk’s Twitter ‘Circus Show’

Shares of Tesla sank to an 11-month low on Tuesday after a bearish analyst note tacked on to a flurry of concerns for the electric-vehicle maker and high-profile chief Elon Musk—even as one of the firm’s staunchest bulls doubled down on its massive investment.

Tesla stock fell 7% to $628 on Tuesday, pushing the stock down nearly 49% from its all-time high in November and wiping over $30 billion from Tesla’s market capitalization, which has fallen to $650 billion from a peak of more than $1.2 trillion.

Prompting the steep decline, Daiwa analyst Jairam Nathan on Tuesday morning lowered his price target for Tesla shares to $800 from $1,150—telling clients Covid lockdowns in Shanghai, where the electric-vehicle maker operates its so-called Gigafactory, as well as supply issues impacting its Austin and Berlin plants, will cut deeper into earnings than previously expected.

Nathan forecasts the headwinds will push deliveries this year down by 180,000 vehicles, meaning Tesla will deliver 1.2 million vehicles this year, as opposed to the 1.4 million units previously expected.

The note comes one day after Wedbush analyst Dan Ives cautioned Twitter’s shareholder meeting this week will “surely kick off some more fireworks” between Musk and the social media firm’s board, adding to the “major overhang” as investors worry the proposed takeover could divert his attention from Tesla.

“Tesla investor patience is wearing very thin,” Ives said about the resulting back and forth, with Musk suggesting he’ll lower his offer due to concerns about bots on Twitter, while the company’s board says it won’t alter the deal.

Despite the bearishness, Ark Invest, the New York City investment firm helmed by famed stock-picker Cathie Wood, disclosed it bought $10 million in Tesla shares on Tuesday—adding to its stake for the first time since February less than a week after the stock lost its top spot on Ark’s flagship fund to streaming giant Roku.

“This [takeover] circus show has been a major overhang on Tesla’s stock and has been a black eye for Musk so far,” Ives said Monday, adding that “major market pressure for tech stocks” has only added to the uncertainty.

Shares of Tesla have racked up big losses since Musk suggested he would sell about 10% of his stake in November, with prices only collapsing further as the broader market struggles in the face of rising interest rates. Adding to concerns for Tesla, however, “the worst supply chain crisis seen in modern history” has threatened the firm’s production in highly profitable China, notes Ives.

The tech-heavy Nasdaq has plummeted 29% this year. Tesla, meanwhile, has plunged 47%. Even though its stock has struggled, Tesla reported its most profitable quarter in company history last month, posting $3.3 billion in first-quarter income fueled by record deliveries. $199 billion. That’s how much 50-year-old Musk, the world’s richest person, is worth, according to Forbes.

Source: Tesla Stock Losses Top $575 Billion As ‘Investor Patience Wears Thin’ With Elon Musk’s Twitter ‘Circus Show’

Critics by

Taking over Twitter may be good for Elon Musk, but it hasn’t been good for Tesla’s shares. One day after Twitter announced it had accepted Musk’s $44 billion takeover bid, Tesla shares sank 12.2%, wiping out more than $125 billion off the electric vehicle maker’s market value. The falls come as Wall Street fretted about how the deal could impact the electric vehicle maker and its stock price.

When Musk announced he had secured the money to finance the transaction, he said he would cover $21 billion himself, with banks helping finance the other half. What remains unclear is how he will come up with that money — whether he will sell some of the Tesla shares he owns, borrow against them, bring in additional investors, or all three.

There is also growing concern about whether owning Twitter would bring him into conflict over free speech with the government in China, a key market for Tesla where the auto maker also has significant production. On top of that, there is the risk Musk could become distracted by his latest acquisition. Musk is the CEO of Tesla and Space-X and is involved with other business ventures such as Neuralink, which develops brain implant technology, as well as The Boring Company, which makes tunnels.

If Musk does offload some of those holdings, it could drive Tesla’s share price down further. This is something the company warned investors about in its latest annual report, filed in February with the U.S. Securities and Exchange Commission. “If Elon Musk were forced to sell shares of our common stock that he has pledged to secure certain personal loan obligations, such shares could cause our stock price to decline,” the company wrote.

Further reading

Elon Musk Goes On The Attack After Tesla Cut From S&P ESG Index

Tesla Stock Plunge Wipes Out $128 Billion In Value As Twitter Deal Sparks Fears

Tesla’s Cybertruck has become the butt of every internet joke”

Tesla Battery Day recap: Major announcements include Model S Plaid and a $25,000 EV

Tesla Cybertruck may be unsafe for other road users, says Australian safety chief

Elon Musk confirms Tesla’s ‘Cyberquad’ as a Cybertruck accessory”. Engadget

Tesla boasts about electric car deliveries, plans for sedan”

Supply Agreement for Products and Services

Elon Musk: On the Roadster to Mars

Musk Sees Tesla’s Future: Trucks, Transit and Solar in a Push to Sustainability”

Elon Musk Confirms Tesla Minibus Built on Model X Chassis”

Elon Musk hints Tesla may not build a bus after all

Elon Musk was almost killed on a motorcycle, so Tesla will never build them

Elon Musk says Tesla’s next-gen Model 4 will be affordable for everyone

Tesla compact hatchback to launch within five years”

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Burned By Tech Stocks? Consider These 3 ETFs Instead

Unfortunately, hopping off the tech-stock roller coaster may be harder than you think. Seven of the largest 10 companies in the S&P 500 index are in tech (eight if you consider Tesla a tech company).

Tech’s influence on the broader market

The list of S&P 500 tech stocks includes Microsoft, Alphabet, and Amazon. All three have negative year-to-date performance. Worse, these stocks and their large-cap tech peers are heavily represented in index funds and ESG funds, not to mention tech funds.

There are times when increasing your exposure to a broad market index fund can be a defensive tactic. But that strategy won’t help right now if you’re sick of getting burned by tech.

What you can do is increase your exposure to ETFs that invest in stable sectors like consumer goods, utilities, and healthcare. Because these sectors sell products and services that people need (vs. want), they’re less sensitive to temporary economic conditions.

For an idea of how these sectors have behaved differently from tech recently. It shows the performance of three stable sector ETFs vs. the Nasdaq 100 index over the last six months.

Those sector ETFs may look very comforting, but there’s a huge caveat here. Six months is a short window of time.

This is why changing up your portfolio in response to temporary market conditions can easily backfire. When tech eventually stabilizes, you may regret overinvesting in lower-growth sectors.

On the other hand, diversifying more outside of tech — or any one sector — is smart. That’s especially true in two scenarios. One, you may not have realized your heavy exposure to tech if that exposure is mostly through funds. And two, your risk tolerance may be lower than it was when you built your portfolio, and now you’re ready to get more conservative.

If one of those situations applies, read on for some key stats on the three ETFs shown in the chart above.

1. Consumer Staples ETF

Fidelity MSCI Consumer Staples Index ETF holds 99 large-, mid-, and small-cap consumer staples stocks. The fund’s top 10 holdings include Proctor & Gamble, Coca-Cola, Costco, and Pepsi.

FTEC’s 30-day SEC yield, a standardized measure of dividend yield, is 2.11%. The fund’s total average return over the last five years is 9.74%.

Ticker Security Last Change Change %
FTEC FIDELITY COVINGTON TRUST MSCI INFORMATION TECHNOLOGY 108.67 -4.59 -4.05%
KO THE COCA-COLA CO. 64.64 -1.52 -2.30%
COST COSTCO WHOLESALE CORP. 531.72 -30.28 -5.39%
PEP PEPSICO INC. 171.71 -5.79 -3.26%

2. Utilities ETF

Vanguard Utilities ETF holds 64 utilities stocks such as Duke Energy and wind and solar energy-producer NextEra Energy. The top 10 holdings comprise 54% of VPU’s total net assets — a fairly heavy concentration.

The fund pays out a 2.7% dividend yield, per the 30-day SEC yield formula. The five-year average annual returns are 10.87%.

Ticker Security Last Change Change %
VPU VANGUARD WORLD FDS VANGUARD UTILITIES ETF 154.73 -4.71 -2.95%
DUK DUKE ENERGY CORP. 110.09 -3.71 -3.26%
NEE NEXTERA ENERGY INC. 71.02 -2.51 -3.41%

3. Healthcare ETF

The Health Care Select Sector SPDR Fund invests in healthcare companies that are also in the S&P 500. This approach gives you the sector exposure you want, plus a focus on larger, established organizations.

There are 64 stocks in the XLV portfolio, including UnitedHealth Group, Johnson & Johnson, and Pfizer. Like VPU, this fund has a top-10 concentration of more than 50%.

XLV has a 30-day SEC yield of 1.3% and has returned an annual average of 15% over the last five years.

Ticker Security Last Change Change %
XLV HEALTH CARE SELECT SECTOR SPDR ETF 130.28 -3.44 -2.57%
UNH UNITEDHEALTH GROUP INC. 508.55 -15.87 -3.03%
JNJ JOHNSON & JOHNSON 180.56 -3.03 -1.65%
PFE PFIZER INC. 49.07 -1.44 -2.85%

Diversify for stability

The recent tech sell-off is a reminder not to bet too big on any one sector — even technology. To diversify outside of tech and build more stability into your portfolio, consider ETFs in less cyclical sectors. Consumer staples, utilities, and healthcare are three examples.

If tech stocks are roller coasters, stocks in these stable sectors are more like tilt-a-whirls. You may still need a seatbelt, but the highs and lows should be less extreme.

Source: Burned by tech stocks? Consider these 3 ETFs instead | Fox Business

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Tesla Stock Closes Down More Than 12% After Musk’s Twitter Deal

Tesla stock closed down more than 12% on Tuesday as the tech-heavy Nasdaq Composite slipped nearly 4%. Other mega-cap tech stocks like Apple, Amazon, Google and Facebook parent Meta shed more than 3%. Shares of electric-vehicle makers Rivian and Lucid also closed down 9.5% and 8.7%, respectively.

The declines come just a day after Twitter’s board approved Musk’s $44 billion acquisition of the company, showing some of the fall off may be a reflection of investor concerns with the deal. Musk has secured $25.5 billion of fully committed debt, including $12.5 billion in loans against his Tesla stock. The deal also includes $21 billion in equity.

Musk’s understanding of free speech on a global level is somewhat ‘sophomoric,’ says NYT columnist. Despite being the world’s richest person, much of Musk’s wealth is tied up in Tesla stock, meaning he would likely have to borrow against his holdings to fund the deal.

Tesla investors also may be concerned about the possible distractions that could come from owning a platform like Twitter. Musk has appeared to want to heavily influence the company’s operations, which could lead to a time crunch for him. Assuming the deal closes, Musk would be in charge of Tesla, Twitter and SpaceX. He also owns two smaller ventures, the Boring Company and Neuralink.

Automakers, including Tesla, are struggling with the rising costs of raw materials that go into batteries, and a semiconductor chip shortage exacerbated by the Covid restrictions in Shanghai. Tesla said in its first-quarter 2022 earnings report on April 20 that, while automotive revenue was up 87% from the year-earlier period to $16.86 billion, the company lost about a month of “build volume” in Shanghai because of Covid shutdowns.

Tesla generated around $4.65 billion in China in the first quarter of 2022. The Chinese market now accounts for 24.8% of Tesla revenue. Tesla has also been exporting cars from China to the broader Asian and European markets. While it recently opened a new factory in Austin, Texas and another in Brandenburg, Germany, the company is just beginning to increase production in these locations.

“For most vehicles, our delivery wait times are quite long. Those cars delivered in Q1 generally carried pricing set in prior quarters, and at levels lower than cars being ordered today,” CFO Zach Kirkhorn said on the company’s earnings call. “Production is resuming at limited levels, and we’re working to get back to full production as quickly as possible,” he later added.

Tesla doesn’t expect to raise prices again soon, either. Musk said on the same call, “The current prices are for a vehicle delivered in the future, like six to 12 months from now.”

By: Jessica Bursztynsky & Lora Kolodny

Source: Tesla stock closes down more than 12% after Musk’s Twitter deal

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