Some dealers see benefits, others harm
Photo credit: DAVID PHILLIPS
Toyota, taking a page from the Honda playbook, is preparing to forbid its U.S. dealerships from advertising Toyota brand vehicles at below-invoice prices.
Some Toyota dealers welcome the move, saying it will result in higher vehicle prices and improved gross profits.
Others, such as Earl Stewart, dealer principal of Earl Stewart Toyota in Lake Park, Fla., oppose the move. Stewart said he advertises 75 percent of the store’s inventory below invoice and that is a key reason why his store is among the highest-volume dealerships of any brand in southeastern Florida.
He said he has been told of potential stiff penalties for dealerships that violate the new ad guidelines.
“This is not in the best interest of the consumer, and I’m not going to keep my mouth shut,” Stewart said.
Toyota is preparing to roll out details of the plan at its national dealer meeting early next month in Las Vegas, Stewart and other Toyota dealers said. The ad guidelines are expected to take effect in January, they said.
Asked about the guidelines, a Toyota spokesman wrote in an email: “As is customary at our National Dealer Meeting, we will discuss a number of business-related topics, including marketing covenants.” He declined further comment.
Toyota dealers in several regions of the country told Automotive News they were informed of the new ad guidelines by national and regional Toyota sales representatives.
They described an approach similar to one enforced by Honda in the U.S.
Honda brand dealers are prohibited from advertising vehicles below invoice whether in print, online or broadcast media. After three offenses in one year, a dealership can lose its marketing assistance, which can be $400 per vehicle for many dealers.
Those are among the most stringent ad guidelines in the industry. Honda argues they are in place to protect the brand, which, in practice, has helped Honda vehicles retain some of the highest residual values among all brands.
‘Race to the bottom’
Erich Gail, COO of the 14-store Cardinale Group of Cos., including CardinaleWay Toyota in South Lake Tahoe, Calif., said he’s glad Toyota is moving in the same direction as Honda.
He said advertising below invoice often leads to what he calls a “race to the bottom” on prices as dealers compete for sales with little profit.
“We want to see transaction values hold and appreciate,” said Gail, who also is CEO of ZMOT Auto, a digital marketing company.
Mike Hills, general manager of Bristol Toyota-Scion, said he’s happy to see the program and a strong enforcement mechanism. He said he was told by Toyota executives that ad covenant violators could lose incentives under Toyota’s Delivery Allowance Program for multiple offenses.
Hills, whose store is moving next month from Bristol, R.I., to Swansea, Mass., said Boston-area dealers are offering prices on TrueCar.com and other sites so far below invoice that they are losing money on the deals.
“It would be wonderful if this move could put some sanity into pricing,” Hills said.
Hills added the policy should help eliminate some bait-and-switch tactics, in which dealerships offer superlow prices online, then claim, when the customer arrives at the showroom, that they don’t have the exact car or the customer doesn’t qualify for certain incentives. They then seek to sell the customer a more expensive vehicle.
Stewart, though, opposes the new policy. He said he sells about 250 new Toyotas per month because he advertises his best price upfront and provides a no-haggle, relaxed buying experience for customers.
His is a one-price store, so he won’t come down on price, Stewart said. But three of every four vehicles he lists are priced below invoice, he said.
Stewart said he doesn’t want to advertise the vehicles for more because consumers suffer when their online shopping shows no prices below invoice at any local dealership. He said that’s unfair to customers, and he has asked his attorney to look into whether a case could be made that the impending Toyota ad guidelines could constitute price fixing.
Moreover, the plan threatens one-price stores such as his the most, an ironic twist given that Lexus just announced it is piloting a one-price model at some dealerships, he said.
Stewart admitted, though, that his three sons in the business — Stu, Jason and Josh — think he is wrong on the new policy. They welcome its advent.
In an email, Stu Stewart, general manager of Earl Stewart Toyota, wrote the ad covenants will improve the honesty of industry advertising and outweigh any modest increase in prices they might cost consumers.
“It is our belief that current prices have been artificially suppressed by the combination of aggressive incentives and third-party buying sources,” Stu Stewart wrote. “We feel that a strong covenant will help prices to return to natural levels.”
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