Wholesale Discounts

[Inkman]

What's the conventional wisdom with wholesale discounts? I have been made aware that my wholesale customers are being offered better discounts than I currently am giving. We have everyone at 25% off list, but I was told by a steady customer of mine that a local, smaller dealer was offering some sort of discount that ended up looking like 32.5%(???). If this is what it takes to stay in the game then this is what we'll do, but I've always been apprehensive about going to 30% because it restricts your flexibility with those inevitable returns from your customers. Any thoughts?

[Richard]

Before you change your discount structure, look at a few things....find out what your break-even point is, your expense struture, ect. I had one of the few body shops I deal with try to pull this on me, told me that one of the other dealers had gone to 30% off, so I agreed to do the same, and took an utter bath in returns.

Instead of deeper discounts, maybe you could offer better (faster) service? Free OVN on all orders would probably cost you less, and better serve the body shop customers too.
Look at each Customer's purchases. Look at your return policy also, is it too strict or too loose? Let this smaller local dealer have some of your 'bad' accounts, the ones that have high return rates, pay slow, ect. They won't be able to offer that deep discount long.
There are better ways than giving up the money!!

(PS, I am one of those Smaller Suburban Dealers, and I tried undercutting the 'Big Boys' once....so I AM speaking from experience here. A small dealer, working from a small inventory, CANNOT compete against a large dealer working out of a $2-5 million dollar inventory. Even with the improvements in PDC's (GM) I can't fill all orders within 24 hours, which is what you MUST do for bodyshop operations.)Good Luck!!

[This message has been edited by Richard (edited 03-26-2001).]

[Gary J. Naples]

The cost of doing business puts a logical limit on how low you can price. If you make changes that reduce the cost of doing business, then you can reflect the overhead reduction in your customer priceslower prices, better discounts, etc. However,
when a business entity has to stock a large inventory, has to carry receivables, and has other relevant expenses, capital turnover can't help but slow down. If you reduce the price of parts or goods that you sell to one group of customers, other parts or goods have to be marked up proportionately to offset the overhead loss. If not, you lose money. In the case of a smaller dealer, the overhead should be lower. Consequently, they might be able to get away with a more aggressive discount.

Richard had some good alternative suggestions contrary to reducing price. You may also want to perform a cost accounting on your individual wholesale customers. This will help you determine which customers are profitable relative to your departments corresponding overhead expenses and effort expended.

Gary J. Naples
GNA

[gizmo]

Don't go overboard with discounts!

I'm a technician. I work for a large multinational corporation that is controlled by Ford Motor Co.

We buy parts from local dealers at ridiculously low markup. We aim for cost + 5% when searching for a parts supplier.

I have no idea how our vendors turn a profit at these rates. It would seem to me that 5% markup would not even cover their employee expenses, let alone the other overhead costs involved with maintaining a huge inventory and delivering the parts on time to multiple locations.

Last year we purchased over $2 million worth of parts from our Ford dealer. I'd be shocked if he made $2000 in total net profit.

Sooner or later he'll realize that our account is a loser...then we'll be searching for a new dealer. Don't let it be you!

IMHO, you should strive to retain profitable accounts & let the unprofitable accounts go elsewhere.

[Daryl]

"Paying for the privalage to sell a part"

is a term I would use to describe deep discount dealers. As stated above there are many factors to explore before discounting anything you sell. If it is not profitable, why do it? When you play the discount game, do not be upset if the only thing you win is a headache. I like to think of it as a carnival game - sure its fun(easy), I cant help but get a prize(cash for parts), and guess what - it seldom happens. We loose, we quit. Same with wholesale. Know your limits. Any fool dealership can sell cheap parts. Right or wrong, damaged or late, they can sell parts. Sell your service, and your wholesale customers will stick by you.

[tjsmith]

Daryl, I agree with what you've stated, the main thing that I agree with is "sell your service"...I have found this to be very true. I took over a small GM parts dept. that had no wholesale business what so ever, & I knew that I could not out discount the "Big Boys" because I had tried once before & got burned, but I figured out what I could do, is out service the bigger dealerships & it worked. The main thing that I had to realize is that I did not want all of the business just a piece of the pie. And I got it.

[GaryE]

Check all your expenses that go along with your wholesale sales. I have fought discounts for 15 years. For the last five years we have been competing with 5 other dealers in our metro area (we are the smallest of them) for business. I have refused to go to more than 25% because at 25% we have about a 3 to 5 % net profit. This does not include returns. To me 5% is acceptable, below that is not.

[Chuck Hartle]

I'll throw in my two cents here for what it is worth. Extensive experience in this area has proved two things.
Wholesale shops and Body Shops that are serious about customer satisfaction look at pricing from the local dealer a secondary. They want "SERVICE".
As one of the largest wholesale distributors of Mopar parts in the Country, we were always challenged by smaller dealers trying to undercut our pricing. Some of our accounts would try these dealers and eventually almost all of the good shops would return to purchasing from us sooner or later.
A lower overhead by a smaller dealer usually means less experienced people to process and specify the parts and the old saying "a horse that poops fast doesn't poop long" took a hold of the smaller dealer's inability to sustain long term customer satisfaction to the wholesale customers.

If you have the services, the personnel, and the inventory to sustain long term commitments to your customers you will win out in the long run.

Ironically, as of May, Daimler-Chrysler will join Ford Motor Co. in not allowing dealers to return sheet metal products under the 30 day return program (Daimler-Chrysler is extending their's to 60 days in May). What this does is devastate a small operation trying to break into the sheet metal business as now the only way to return high dollar sheet metal will be their ability to build return allowance or PIPP to send it back.
Hold your price level and don't give in to the discount whores! It is a no win situation and once you have implemented a new discount structure lower than your current one, it is next to impossible to take back. Emphasize service and hold to a reasonable discount structure. You will win out in the long run.

Chuck Hartle'