Fleet Sales Don’t Compare to Retail Sales – Even With Trucks
If you’ve been following the auto industry long enough, at some point you’ll hear someone talk about the negatives of fleet sales. What follows is a basic review of the difference between a fleet sale and a retail sale and an explanation of the fleet buying process. If you’re interested in why fleet-heavy truck sales figures from Ford, GM, and Chrysler should be discounted when compared to Tundra sales, this post might be interesting to you.
If not, you might want to skip it (there is some math involved). Here we go.
What’s A Fleet Sale?
There is a fair amount of confusion in the general public about what constitutes a true “fleet” sale. Auto dealers are likely to blame for this confusion because they often advertise special “fleet only” pricing to the general public, yet these public “fleet” discounts are nothing more than a sales gimmick.
Most auto manufacturers define a “fleet” as a business that owns at least 15 vehicles OR a business that purchases 5 new vehicles every year (see the fleet eligibility requirements for Ford, GM, and Chrysler). If you meet these requirements, you’re given a Fleet PIN code, J-status code, etc. This code gives dealers permission to offer you special fleet pricing that’s not available to the general public (more on that in a minute).
However, if your business doesn’t own enough vehicles (or buy enough new cars each year) to qualify as a true “fleet” business, you may still be able to work with the fleet salesperson at your local dealership. He or she will offer you “fleet” pricing, which in reality is nothing more than retail customer pricing presented as a special program. In the car business, this is known as a “fleetail” transaction.
Dealers like “fleetail” business a lot. It’s more profitable than true fleet, and unlike true fleet it can be reported as a retail transaction. This is an important point – fleetail sales are considered retail sales in terms of reporting. That means that all the retail sales figures you see from manufacturers include this minor fleet/small commercial business.
So, to summarize: true fleet customers have a special PIN code, and everyone else is fleetail which is really just retail. Got it?
Fleet Pricing 101
Once you’ve got your fleet PIN code, your dealership fleet sales person can use all of these tools to find the best deal:
Special Orders: Trying to save every penny? A Ford, GM, or Chrysler fleet salesperson can build you a truck that has only the features you want to pay for and nothing else. Compare this to buying a new truck off the lot with a pre-set package and you can imagine the savings.
Volume discounting programs galore: The complexity of fleet discount programs can best be described as Byzantine – prices will very wildly depending on specific options, the exact number of vehicles ordered, the time of year, etc. There are a lot of different ways to slice this pie.
Special off-the-book discounts – If a big fleet customer is thinking about placing a large order, the dealership can call their manufacturer fleet rep for an even better offer than anything published in the fleet guide.
Special off-the-book financing rates – Big fleet orders cost millions of dollars, and they’re rarely paid in cash. Therefore, fleet sales people can call their financing company (i.e. Ford Motor Credit) and he or she can offer the fleet buyer a special interest rate, adjust the salvage value or term of the fleet lease contract, etc. to help the dealer earn the business.
Depending on make and model, dealers can offer true fleet customers a price that’s 10% to 20% less than dealer invoice price minus all incentives…plus special financing rates. For this reason, it’s often said that automakers make little to no profit on a true fleet customer.
Why Fleet Customers Are Fundamentally Different Than Retail Customers
Pretend that you are the purchasing manager for a large corporation, and that your job is to get the best possible value for your company’s dollar. When it’s time to buy a vehicle, there are three factors you should look at:
- Up-front cost and financing options. How much is the initial cash outlay? What is the time value of our money? How can we maximize cash flow?
- Salvage value. How much can we sell our fleet vehicles for when we’re done with them? Even better, how much can we get the manufacturer to agree to buy our vehicles for when we’re done with them?
- Operating expense. How much will it cost to use our fleet vehicles in our day-to-day business?
As a purchasing manager, you plug everything into a spreadsheet for each manufacturer, calculate your total cost, and then issue a P.O. No comparisons. No test drives. No consulting Consumer Reports or Edmunds.com reviews…just cold hard numbers. That’s your job.
To see which of the three factors has the greatest impact on a purchase decision, let’s run a theoretical comparison. Let’s say that all the vehicles we’re considering have the same operating costs, MSRP, and invoice price, but that:
- Vehicle #1 is available with a 10% discount and a 20% salvage value
- Vehicle #2 is the same as #1 except that the up-front cost is 5% lower
- Vehicle #3 is the same as #1 except that the salvage value is 25% higher
We’ll also assume that the vehicles are depreciated 33% each year, and that the interest rate is 7% calculated on the total cash balance at the beginning of each year. The results?
|Vehicle 1||Vehicle 2||Vehicle 3|
|Invoice (90% of MSRP)||$20700||$20700||$20700|
|Total up-front cost||$18630||$17595||$18630|
|Total cost to own||$16636.9||$15457.07||$15486.9|
As you can see, salvage value has less effect on total cost than up-front pricing. This is important to understand, because it’s the key to the fleet business – no one cares if your fleet trucks don’t hold their value. The most important number is the up-front price.
Therefore, fleets aren’t buying the best trucks, they’re buying the cheapest trucks…which is why fleet sales don’t matter. Fleet buyers aren’t voting for the best product – they’re voting for the lowest cost.
Granted, we’ve made some assumptions:
- Operating costs aren’t identical, but they’re close…according to Intellichoice, the maintenance costs for a 2010 F150, 2010 Silverado 1500, and 2010 Tundra are all within $100 of each other per year.
- We’ve also assumed that up-front pricing is the same, but clearly that’s not the case. Manufacturers tinker with fleet pricing in order to maintain production. Chrysler was running near 40% fleet earlier this year, and it’s no secret Chrysler’s ultimate survival is still to be determined. Anyone want to guess if they were offering fleet customers an incredible discount last year just to keep the factories running?
- We’ve assumed a 7% cost of money, but historically that’s incredibly low. As the cost of money increases, the importance of a lower up-front price increases as well.
- We haven’t given cash flow enough weight in our calculations. A lot of companies would rather pay a little more in the long run than risk capital. That’s one more reason that fleet buyers are more concerned about up-front costs than they are anything else.
Do retail buyers think the same way as fleet buyers? No.
First of all, retail discounting isn’t nearly as dramatic, so the up-front cost differences are smaller for retail buyers than they are for fleet buyers. Secondly, a retail buyer is much more concerned about resale/salvage value because their rate of depreciation is much slower. Finally, retail buyers consider a lot more than price – safety, perceptions of quality and reliability, tow ratings, comfort and convenience, etc.
Retail consumers are buying a specific make or model because they think it’s the best, but that’s simply not true for fleet buyers. They’re buying the cheapest truck available. Therefore, fleet sales should never be compared to retail. Ever.
Filed Under: Auto News