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Incentives - Part 1

Yesterday we had a captivating conversation with The Colonel. It struck us that we can connect numerous dots from back in the day to 2014.

Lets resume this morning...

Q: Incentives, continuity, loyalty what can you tell us?

A: Incentives at the time were a "tool" to attract opportunistic customers, and to tempt new customers. Continuity implies that once attracted you want to set up a deal that has easy continuity. Loyalty we all know that leasing has a higher loyalty than a purchase.

Q: Does it still apply today?

A: The incentives absolutely, continuity no, loyalty not as much...its a new world order.

Q: Tell initiate, strategise, incentive programs required access to massive amounts of data.

A: Think about this...back then there was software to search the database from a variety of perspective.

Q: Big Data existed way back in the day...

A: Sure it could look at finance and lease portfolios from a myriad of perspective to develop incentives, strategies, within a specific budget.

Q: The manufacturer has a budget of X for a specific model, the financial service provider develops an incentive program, the budgeted cost...and so on.

A: Precisely, and today its easier and faster. When the 0% is announced, there is a good amount of background work done prior to the announcement.

Q: We have the impression that there was a gradual build up, with some manufacturers being more conservative than others.

A: Yes it was gradual through the years. Today its strategic and tactical on the part of the manufacturer. Yes in Canada some manufacturers were (notice past tense) more conservative.

Q: In an environment of constant incentives the impact is lost on the market. The customer is always expecting an incentive.

A: That was the concern way back in the day. In 2014 does anyone know what a "heads up" deal is all about? I don't think so...its a huge ball of "dynamic pricing". The constant for the customer is $500 per month.

Q: For the customer its: lets wait till the end of the month, roll over the deficiency, and continue at $500 per month.

A: Its that simple...notice the strength of the advertising last month (November) towards the end of the month. Customer run on a 10 to the 40th month.

Q: Will incentives go away?

A: Who wants to stop moving iron?

Q: Will they go away and show actual "heads up" numbers, with actual rates? Obvious that MSRP's are elevated to uphold an incentive structure.

A: Lets look at an example: The MSRP is 35K, the real price is 29K (6K incentive), the rate is 0% for 84 months (the actual rate would be 6% and the 6K incentive supports the rate), and the deficiency on the trade is 7K.  

Q: Its a deal, but it does not look or feel like a deal.

A: Precisely...with widespread dynamic pricing actual transaction numbers are unimaginative, while losing resonance.






We are fortunate, The Colonel is hanging out with us this morning. As you know he has been around the auto business for a few years. We heard that at one time he was criss crossing Canada to educate dealers on incentive programs, and leasing.

Its from back in the days when vehicles were sold "heads up" (no incentives, no programs), the customer was expected to have equity to do a deal.

Lets get this conversation going...

Q: Colonel, its December, as usual you are in good cheers this morning.

A: Thanks guys, another year almost done, Christmas around the corner, and a record for auto sales. Its a good time to be in the auto business in Canada.

Q: Tell us about selling vehicles "heads up" with no incentives, programs.

A: Simple MSRP, cost, do a deal somewhere in between. Trade ins were rarely upside down, and if it was upside down there was no basis to continue.

Q: The onus was truly on the dealer to sell vehicles and close deals.

A: Precisely....back to the showroom craftsmanship that is lacking today.

Q: We heard that incentives/programs had a negative aspect back in the day.

A: The auto business is product driven to this day. Incentives implied a weak product, an inability to compete heads up. The concern was always what happens when the incentives end?

Q: To digress for a moment, today we all know what happens when incentives end. Or when everyone gets on the incentive vector.

A: On the vector you move a ton of iron...

Q: Could it be that Lee Iacocca, K cars, buy a car get a check, contributed to the negative perception of incentives.

A: Its the classic paradox: Don't go there it can be addictive....Go there it moves iron. In addition to the mentality of "Our product is so good it does not need incentives"

Q: Leasing must have compounded the "fear factor"?

A: Open end (lessee responsible for the residual) leasing was a formidable fear factor at that time.

Q: Back in the day advising a dealer to get on the incentive program, and promote leasing would generate a good amount of push back.

A: Its sure did...the classic case of "We don't do it that way here"

Q: We heard that incentives, leasing, open end leases, arrival of the GST had a dramatic impact on the auto business.

A: Yes...very dramatic...imagine the manufacturers that promoted incentivised open end lease, and now the vehicles are totally upside down with the arrival of the GST.

Q: The customer was "hung out to dry" with an upside down residual.

A: Absolutely...but the manufacturer spent money (incentives) to capture this customer, and leaving him upside down was not productive for business...there was no continuity.

Q: This opened the door to closed end (lessor responsible for the residual value) leasing and planted the seeds for remarketing initiatives.

A: Closed end leases improved the continuity and loyalty. Although it was a scary thought at the time of carrying a massive residual value liability.

Q: Colonel...many points of this conversation resonate with 2014.

A: can connect a lot of dots to 2014.

We will continue...




How Much a Barrel?

Last week we saw a pivotal moment with oil taking a huge downward slide. Accompanied by global reverberations, and needless to mention a gazillion pundits expressing opinions.

In our case lets stay close to home. The Colonel is with us this morning enjoying a cappuccino.

Q: Colonel did you see this coming?

A: There were varied opinions as to which direction OPEC would take, lets cut production and keep everyone going, to lets uphold production, generate a price drop, stifle competition.

Q: OPEC did not drop the price?

A: No, they are upholding current production, the markets dropped the price.

Q: Will cheaper gas encourage CMS (Citizen Main Street) to acquire vehicles that consume more gas.

A: I don't think so...CMS will make the same choices irrelevant of the price of gas. Keep in mind that we have gone to $1.50 a liter for premium...did it stop the sale of pick ups, are folks driving slower?

Q: Gas is a necessary ingredient for transportation and the savings will go elsehwere.

A: Precisely, and look at the game in the GTA assume regular is $1.00 a liter, as you have seen premium is an additional 18 one time it used to be 10, then creeped to its 18 cents on its way to 20. The rationale must be that if you have a vehicle that requires 92 octane, you can afford the price of premium.

Q: You have been pumping premium for decades.

A: You got it...60 liters at 1.50 is 90, at 1.20 is 72. Will I purposely use more gas since I saved $18.00 in my

Q: In reality the price per barrel is on a global scale; it will impact country specific economies.

A: the time your pump it in your vehicle its all played out.

Q: China is a huge beneficiary of a lower price.

A: Absolutely....

Q: Canada is on the losing end...

A: Yes...but the silver lining is that it will incite further conversations to actually making something again in Canada.

Q: Remember our Bitumen Bubble conversation.

A: Yes...consider the game today, you  have bitumen, I have crude, the other guy has fracking. We are all going to produce at the same rate. Lets see what price the market will put on the oil.

Q: Will cheap gas encourage the sale of pick ups in Canada.

A: Think about it....might just do the opposite.

Q: Cheaper crude has a global impact.

A: Huge...with a myriad of ramifications...totally HUGE.




The Evolving Ownership Model

In Canada we are setting an auto sales record this year that has never been seen. A few months ago we mentioned that free flowing money was powering auto sales. As usual (not to brag) we were ahead of the "pedestrian opinions" in making it clear that money was super charging sales. 

Its interesting to see main street catch up to the fact that money is super charging auto sales. While being fixated on an antiquated ownership model

Think about this for a moment....

A few years back at least 50% of Canadians did not own a vehicle, it was leased. Is it fair to say that in Canada vehicle ownership was never a high priority. 

Canadian banks were not allowed to lease vehicles, while some manufacturers abandoned the leasing segment. Did CMS (Citizen Main Street) have an overnight epiphany, and do an immediate about face from leasing to ownership? What do you think? 

Reflect on this...

The monthly payment for a vehicle persists in the + or - $500 per month range, its almost a constant through the years. Be it a lease or a finance the monthly payment remains constant.

The interest rates are subsidized by manufacturers at close to 0% for the term of the financial product (lease or finance).

The finance terms are getting longer to keep the payments at $500 per month and to roll over deficiencies.

The auto business works best on a 36 month cycle, not an 84 or 96 month cycle. While CMS starts considering a new vehicle in the 24-36 month time frame.

Its obvious that CMS does not have a strong desire to actually own, or have equity in a vehicle.

Consider the following...

Executives, captive finance companies and the mainstream media remain attached to a conventional ownership model, and the notion of equity in a vehicle. Its been a valid model for countless decades. While keeping in mind that we were at 50% leasing penetration a few years ago. The "ownership model" was already strained at the time.

Independent financial service providers understand that manufacturers have little choice than to continue subventing interest rates for the mid term. While facilitating rolling over deficiencies. In addition these providers do not subscribe to an ownership model. They make a credit decision based on risk, and ability to repay on a monthly basis. Until the vehicle, the deficiency fit within the risk parameters its all good.

Ownership inexorably morphing into mobility...

CMS has a strong and enduring appetite for new vehicle mobility (transportation) at $500 per month. CMS has less of an appetite for actual ownership (equity), vehicle maintenance, issues with older vehicles.

Manufacturers, dealers, financial service providers, the auto industry is providing mobility at $500 per month. While being creative and innovative to continue providing mobility for $500 per month.

Did manufacturers ever think that shifting the lease residual risk to CMS while reinforcing an "ownership model" with finance terms. Would migrate into a "mobility model" with CMS empowered by manufacturers to stay mobile at $500 per month.

What do you think?





GT-R in Alberta

A breathtaking "Epic Drive" in Alberta with a Nissan GT-R