Fair? Fair is what the market dictates the going rate is. As long as someone agrees to buy at a given price and someone else agrees to sell at that price then it is fair. Like four years ago when the "fair" price was more like $40k.

Besides, protecting dealer profit is not the main reason for holdback. BMW and a few other manufacturers don't even use holdback. Their invoice is the price. Holdback (as in check or restraint) is used more as a stick by the manufacturers to ensure that the dealerships follow the rules. For example, a dealership could sell a car and then pay other bills instead of paying the manufacturer for the car. If they report the sale within the time allotted, then they get the holdback. If they don't report a sale or go out of business after making a sale, the manufacturer still has the holdback to offset the loss. Holdback is also used to pace the profits of a dealership so that they will have a more constant flow of money coming in to pay their bills. This way the dealership won't get in financial trouble during the lean months and the manufacturer is protected against the dealership going out of business.

Anyway, new cars sales is not where dealerships make most of their money. Used cars and service are where the profit is made. New car sales just brings in the business.

 

Thanks Sheister, very informative.

 

Speaking as a former dealer I can tell you that there are other reasons for the holdback, why it originated and why dealers like them.

1. Salespersons are generally paid a % of the profit on each deal. The holdback is not considered part of the profit for calculating sales commissions. Thus a dealer may sell an S2000 for $500 over invoice and the dealer makes $1500 but the salesperson makes about $125. If there no holdback and the dealer made $1500 the salesperson would make about $375.

2. Most people know about it now but the holdback was a big secret for several years. It allowed dealers to advertise sales with "cars at invoice" and still make a profit. They could also show customers the invoice and say, "See what a good deal I'm giving you, I'm selling it to you for only $500 over invoice so I'm only making $500 on a 30k car". Yeah, right!

 

I am not convinced that the internet displayed invoice price and holdback percentage is all there is to the story. More than once I have purchased cars (not the S2000) at exactly this dealer cost (invoice - holdback). Seems like the sale does nothing more than keep the volume up and feed the service volume. It is hard for me to believe the new car showroom is operated at a net loss.

 

[QUOTE]Originally posted by Sheister
[B] For example, a dealership could sell a car and then pay other bills instead of paying the manufacturer for the car.

 

I have a friend that works for American Honda Finance and he explained it to me this way. The dealerships borrow money from a company to finance their inventory. Even if it is a Honda dealership, American Honda still has to compete with other companies to get the dealership financing business. So, American Honda ends up doing some of the financing, but not all. Like all businesses, some dealerships are operated better than others. Some are so bad about paying their bills that other finance companies refuse to do business with them. In these cases American Honda Finance is often forced to step up to the plate and finance these dealerships inventories in order to avoid having a Honda dealership go out of business. The holdback can help to offset some of these high risk losses, but sometimes it is still not enough. My friend said that if American Honda Finance pulls the plug on a Honda dealership, you can bet that they're millions of dollars in the hole and have no way of recovering.

 

You are correct. That's not always the whole story. Many times there are additional incentives to the dealer, particularly on certain models that are moving slow. This can be in lieu of or in addition to direct manufacturer to buyer rebates. Some dealers refer to this as "trunk money". That is, it's in the trunk when they get the car. Some companies also have an additional holdback called "wholesale finance reserve". I know Toyota does and it's about 2% of invoice.

Also don't forget the "documentary fee" or "processing fee". In our area that can run as high as $400 and is routinely $299. TN has a law that says that dealers cannot waive this fee. If they charge it to only one customer they must charge to all. Last year I bought a new Avalon "at invoice". With the holdback, the wholesale finance reserve and doc. fee the dealer made about $1000. Of course the saleman made nothing!

Also many manufacturers, particularly domestic manufacturers, give a 5% rebate to all cars in dealer inventory when the new models come out.