I recently found a car that a distributor sells cheaper than the official company. How can the distributors in genral afford this decision financially?
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What do you mean by a distributor sells for cheaper than the official company? Where are you located? What brand of car?
Because in the US at least, you cannot buy a vehicle directly from the manufacturer (other than Tesla, Rivian), you always buy through a franchise dealership (eg. Bob Smith Ford or Toyota of Springfield). What a brand has as MSRP and what a dealer sells for are not the same — historically the dealers typically had to offer discounts off MSRP to get buyers although in recent years they’ve actually been able to add on “market adjustments” on top of MSRP. But dealers don’t themselves buy at MSRP, they pay an invoice price that’s $1000’s less, plus there are often additional manufacturer hold-backs and incentives for selling certain quotas that provide additional payment from manufacture to dealer. And there are all sorts of additional revenue opportunities for dealers, from the various fees they charge (doc fees and such), to add-ons like warranties and accessories, to kickbacks from financing partners.
It can be a number of things:
1. The distributor is taking less of a profit.
2. The item has been on the lot/warehouse for some time and the costs of keeping it in inventory are increasing. This makes the distributor want to get rid of it in favor of higher margin items.
3. The distributor has local competition that s pushing prices down.
4. The distributor is engaging in a price war. Unlikely for a car, but you can look into diapers .com v amazon for an example.
5. That car has some issue and the distributor is being shady.
Generally the price “from the manufacturer” is the MSRP or manufacturer suggested **retail price**, meaning they expect a customer could buy one of them for that price.
This does not mean when the distributor gets it from the manufacturer in large quantities (wholesale) they pay that much.
In reality they pay the manufacturer less than the suggested retail price, and the expectation is they can sell at the suggested price and make a significant amount of profit. However they might choose to make less profit per-unit by selling at a lower price, but selling more of them, therefore still making a large profit. Or they might find the item isn’t as popular as they hoped and people won’t buy it at the MSRP, and they need to sell it lower, potentially losing a little money, just to get back some of the money they originally spent on their unprofitable inventory.
They dont sell at a loss. If they are seling the car at a “loss”, they sell additional things such as assists or electronics for 2-3 times higher than average and get the total value where it was supposed to be. Alsoc There are international laws to restrict dumping products into markets to kill off competitors. So in general, things may seem to be sold at a loss but in reality they are not.
If you call up my company and need part number 123456, I’m going to quote you $200.
If Bob over at Bob’s Part House calls, he’s ordering 200 of them, so he’s going to get a better deal, let’s say $125.
He’s going to sell it for $175. He makes less per unit, but he’ll sell them quicker than me. I hold less inventory on hand and only have to do one sale, and only support one customer. Sure, I make less per unit, but a lot less headaches for me, so I can focus on making more parts.
In general when a “factory” sells to the public, they do so at the “manufacturers suggested price”. Resellers get a discount on that price and some are willing to take less profit in exchange for more market share.
The manufacturer doesn’t sell it at their cost because then the resellers would be unable to compete and would stop selling the product. The manufacturer doesn’t want this because the resellers provide marketing and distribution services that the manufacturer doesn’t have.
They’re selling cheaper than the *retail* arm of the manufacturer.
Using some approximate numbers:
* A manufacturer will have a cost ex-works (meaning at the factory’ gates ) of 50
* They will sell to a Wholesaler for 70 (guy handles the logistics and warehousing)
* Wholesaler will sell to retailer for 80
* Retailer will sell to final customer for 100.
The manufactuer can have its own retail operation, but will usually be more expensive:
* they’re not that good at retailing, it’s not their job, so they have worst costs
* they have no interests in undercutting their Trade (wholesaler/retailers) who are their biggest customers.
It’s even sometimes the other way around, the manufacturer sells directly and with high prices to provide a “price umbrella” to the Trade, so they keep selling its products.
Edit: I missed that OP was talking about cars, my comment was more general. Same principle though.
Factory/manufacturers are the last places to offer a deal. They rely on distributors and stores to sell, unless they are a direct to consumer business (the holy grail but harder to achieve).
The manufacturer can outsell and undercut any distributor because they make the item. But they don’t have enough customers to make this happen, so distributors often have agreements or informal ones where the manufacturer won’t undercut the supplier in exchange for selling their product to a lot of customers
Manufacturers don’t want to undercut their distributors. If they sold direct to customers for less than distributors, their distributors would be pissed (and manufacturers need them to handle the logistics of getting their products to consumers).
Manufacturers may offer their products direct to consumers at a higher price than their distributors because the higher profit makes it worth their while, and it doesn’t happen often enough to cut into their distributors’ business.
Surprised I haven’t seen the right answer here. The sale of the car is the least profitable part of the distributors business. The finance department and the service garage are the most profitable parts of the business. Add ons are also pretty profitable. They will sell you the car for a discount (called a loss leader) but they will make more money off you in the long run off of other products and services.
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