Manufacturer incentives and cut-rate pricing are eroding European dealer margins on new-car sales.
Consumers arrive at dealerships knowing what incentives manufacturers are offering, said Antje Woltermann, managing director of the German Association for Motor Trades and Repairs (ZDK). They know about cash discounts and 0 percent financing and are unwilling to pay the asking price, she added.
Dealers agree with the ZDK.
"There are lots of discounts. [Incentives] are definitely growing," said Anette Soyer, marketing director for Otto Rupf, a Ford and Hyundai dealership based in Dübendorf, Switzerland.
"We are selling on price, not on product," Soyer said. "We see that money talks."
Anton Reich, who runs Niedermair & Reich, a Ford, Mazda and Hyundai dealership in Munich, says US-style incentives are spreading to Europe.
"The situation will become the same here," Reich said. "I hope not, but I think it will."
Incentives spending up 10%
Incentives spending rose 10 percent last year to E1,100 per vehicle sold, according to a study of six major European markets conducted by PromoCAR/TNS.
Separately, a confidential report obtained by Automotive News Europe shows that dealer margins are being squeezed by rising spending on incentives.
The report, which covered France, Italy, Spain, Germany and the UK, says dealer margins have decreased 2.5 percent in recent years. The report didn't specify during what time period the reduction took place.
The report cites an average margin for dealers in Europe of about 15 percent of the list price of a vehicle. But after dealers negotiate an average 7 percent discount with the customer and cover their own overhead -- another average 7 percent of list prices -- the net margin is about 1 percent.
The ZDK's Woltermann said the heavy incentives have eroded dealer margins but she said that there is little dealers can do.
"They have no choice," she said. "They have to go along with the manufacturers."
Dealers currently make little if any profit from selling new cars.
Woltermann called the lower margins unsustainable for most dealers.
"This is a very big problem," he said. "There is no money in sales. I don't think we'll earn money in the future on new cars. I'm not happy, but I have to accept it."
Other income sources
Dealers are finding other ways to survive. Reich said his dealership earns most of its money in service and aftersales of parts and accessories. His businesses offer service for Jaguar, Volvo, Fiat and Land Rover, which Reich said is quite profitable.
Dealers also can make money on used cars, but Reich said even used-car prices are under pressure due to rising incentives on new cars.
Soyer also said that discounts are affecting used-car sales. For example, a 2-year-old Ford Ka priced at 10,500 Swiss francs (E6,800) is a difficult sell when a customer can buy a base-model new Ka for 9,900 francs, she said.
Automakers like incentives because of their flexibility.
"I think incentives have always been part of the marketing tool kit in Europe," said Jonathan Browning, vice president sales, marketing and aftersales for GM Europe. "The most important thing is to understand the effectiveness of incentives and the intelligent use of them."
The PromoCAR study found significant differences in incentives spending by country. In Germany, automakers spent more than in any of the other five countries surveyed. The German incentives level also rose the most, up 23 percent to E1,347 in 2004. But in France and the UK, spending on incentives was unchanged. The amount in France was E900, in the UK it was about E745.
Automakers also add to the uneven nature of incentives by using them in each market when they need to meet monthly or quarterly sales targets, said Nigel Griffiths, a London-based analyst with Global Insight.
European incentives have risen over the past four years and there is an obvious link between incentives and surges in sales, he said. He expects automakers to boost incentives later this year to move cars that only meet Euro 3 emissions levels and must be phased out by year-end.
Woltermann and Reich said manufacturers have to use incentives because of global production overcapacity. Said Woltermann: "The only solution is for manufacturers to reduce their capacity."