Final Frontier: Below Dealer Cost


By JONATHAN WELSH
Plunging auto sales are making this one of the worst times ever to sell cars. But if you're one of the relatively rare consumers shopping for a new vehicle, you're already in the driver's seat.

Many dealers have unusually high inventories they want to sell in a hurry, so buyers willing to research price trends, visit numerous dealers and negotiate assertively can pick up a set of wheels at discounts unheard of just a few months ago.

Overall, the average transaction price for passenger vehicles has fallen 2.9% in the past six months, to $27,941, while the average cash-back incentive rose 2.3% in April from a year earlier, to $2,628, according to market research firm J.D. Power & Associates.

But for shoppers, the potential savings are substantially greater. Auto makers are offering generous deals, including cash-back offers and low financing rates, across a wide range of vehicles. Many that once sold at a markup are suddenly available for well below the sticker price -- and often less than dealer cost. Flashy new cars, even some 2010 models, already come with low lease rates and hundreds or thousands of dollars in rebates.

"There's no question that you should get a screaming deal," says Scott Painter, chief executive of TrueCar, an online service that tracks new-car purchases. He says the slump in sales has resulted in discounts so steep that new cars can sometimes be less expensive than comparable used ones.

According to data from TrueCar, in July 2008 dealers sold about 21% of 2009 model year vehicles for less than what they paid for them. By March this year, they were selling 25% of 2009 vehicles below cost.

Dealerships, meanwhile, have been closing at an alarming rate -- 960 in 2008 and an estimated 1,200 by the end of this year, according the National Automobile Dealers Association -- driven mainly by slack demand and tight credit. Now car makers General Motors Corp. and Chrysler LLC are planning to close thousands more, opening the door for even better deals.

"With excess supply, it's going to get very aggressive out there," says Gary Dilts, a senior vice president at J.D. Power. "Dealers have to get rid of a lot of 2009 vehicles, so we think it's going to continue to be a consumer's market for the next three months."

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Selling at a Loss
Paul Taylor, chief economist at the National Automobile Dealers Association, says GM has 111 days' worth of inventory, Chrysler has 114 and Volkswagen AG has 115. With inventories so high, car makers are offering bigger incentives than usual, and dealers are sometimes willing to let cars go even at a loss.

Among the biggest price swings are those in categories that were popular last year even as the overall auto market sagged, driven by rising fuel prices and a general glut of new cars. Some models that were new at the time attracted buyers seeking the latest design, but mostly it was small cars and gasoline-electric hybrids that dealers couldn't keep on their lots.

Many people recall how hot the Toyota Prius hybrid was last summer when gasoline rose beyond $4 a gallon. People lined up for a chance to buy the fuel-frugal sedan, and many paid above sticker price. Dealerships nearly never had any on the lot because most were spoken for and snapped up as soon as they arrived. Trying to keep pace with rising demand, Toyota Motor Corp. increased production.

Today there are Priuses gathering dust in showrooms and dealer lots, largely because falling gas prices have made them less desirable. According to data from TrueCar, buyers have recently paid an average of $23,324 for the Prius Touring, the top-of-the-line model. It seems like a good deal because it is well below the $25,020 sticker price but less than $100 above the invoice price of $23,269. Yet several buyers have paid below the dealer cost of $22,784.

As Toyota launches a new Prius for 2010, today's price for 2009 models could be $8,000 lower than six or eight months ago, according to Jesse Toprak, an analyst with Edmunds.com, the car-shopping Web site. He says some people paid $3,000 or $4,000 above sticker price for the Prius when fuel prices were near their recent peak. Now prices have swung to the opposite extreme -- $3,000 to $4,000 below dealer cost .-- in some cases...