Markup on cars found high

European Stars and Stripes, Darmstadt, Germany

Customers of the military’s $250 mil­lion-a-year overseas auto sales program generally pay more for cars than they would in the United States and get less consumer protection, research by The Stars and Stripes shows.

Price surveys conducted by the news­paper and scores of interviews with cus­tomers and auto industry experts reveal that:

⦁ The new-car price ceilings imposed by the military are widely ignored. A Stars and Stripes survey of 1992 model cars on sale in Europe showed more than one-third were being offered at prices ex­ceeding contract limits.

⦁ The markup on cars sold through the exchange service typically is 20 percent to 50 percent greater than in the States.

⦁ On-post auto sales companies are exempt from U.S. consumer protection laws, some host-nation statutes and mili­tary legal review or enforcement.

⦁ The agency responsible for monitor­ing sales practices – the Army and Air Force Exchange Service —earns $3 mil­lion annually from the sale of new cars, yet provides only cursory customer pro­tection services.

Some 16,700 American-made cars were sold under government auspices at military installations around the world in 1991. Nearly 80 percent of those were sold to servicemembers, civilian employees and family members in Europe.

AAFES Europe oversees the sale of 97 percent of those vehicles at nearly 70 lo­cations, while the remaining 3 percent are sold at Navy exchanges in Italy, Spain and Great Britain.

Automakers and AAFES officials say the program provides customers with the same or better opportunities found in the stateside car market. In advertisements and pamphlets distributed by sales agents, the exchange service promises car buyers that they will receive a car equipped exactly as ordered, service from experienced salesmen, consumer protection and a fair price.

In many cases, these representations are not true.

According to the exchange services’ contracts with automakers, car prices are to be fixed and no bargaining permitted. Vehicles can be delivered anywhere Americans are stationed.

Customers can buy a car already in stock or place an order with the factory. Every step of the process —from ordering to financing to delivery — can take place in an AAFES new car sales office.

But simplicity does not mean risk-free. There is no “money-back guarantee,” and exchange officials said about 450 customers file written complaints with AAFES Europe each year. However, AAFES does not keep track of all telephone complaints, nor is there a record of complaints filed directly with the automakers or the sales companies who represent them.

Nor is it known how many of the nearly 5,000 people who cancel their new car orders each year do so because of dissatisfaction.

Of the written complaints to AAFES, 40 percent are from customers unhappy with salesmen, according to figures provided by AAFES headquarters in Dallas. An additional 30 percent involve warranty repair problems, and 20 percent come from customers who were delivered cars that did not match their orders.

Other customers complain about delivery problems, price changes and payments that are made for months before their cars arrive.

AAFES officials responsible for monitoring new car sales and enforcing the AAFES contract with the automakers say they are empowered by the contract to intervene on behalf of unsatisfied customers.

Still, they refer most cases to the sales companies, which they say are better equipped to handle complaints.

It is an arrangment that surprises some auto industry experts.

“I’m not sure I understand how the military can promote the sale of cars and at the same time be responsible for consumer protection, but it sounds even more confusing than what occurs in the States,” said Peter Brown, editor of Automotive News, a monthly American magazine covering trends in the world auto market. In the States, consumer protection is most often provided by state and independent organizations.

Brown was one of several auto market experts interviewed by The Stars and Stripes. Without exception, all of the analysts cited flaws with the AAFES system, ranging from inflated pricing to the lack of consumer protection.

The pricing structure for cars sold on military installations is determined by contracts between the military and the Big Three U.S. manufacturers —Chrysler, General Motors and Ford.

Essentially, these contracts give companies exclusive on-post sales rights, free office space and equipment and a price markup of up to 7 percent per vehicle. Also, AAFES buys 108 full-page advertisements a year in The Stars and Stripes to promote the companies’ products. The advertising is worth about $140,000 at current rates.

In return, the manufactuers pay AAFES from $175 to $185 for every car sold.

“Wow, I’d like that contract,” said Jack Gillis, director of public affairs for the Consumer Federation of America in Washington, D.C. Gillis said that most stateside dealers add about 6 percent to the wholesale price, also known as the invoice price, before they begin dickering with customers. Very often dealers settle on a much lower price and normally only luxury cars have a larger markup, he said.

The no-bargaining rule is not intended to achieve the lowest possible price, according to AAFES, but is supposed to protect military members from price gouging. The 7 percent cap keeps prices in check, they say.

“What we do is provide customers with an opportunity to order an American-made car or truck of their choice under controlled and protected conditions at a fair price throughout the model year,” said Thomas Gallagher, chief of the AAFES Automotive Branch at the headquarters in Dallas.

But it also penalizes the astute buyer, says Gillis. In the United States, a careful shopper can buy an American-made vehicle at $200 over invoice price, or even less, he said. On a $15,000 car, that is a savings of $900 when compared with a car with a 7 percent markup.

Although the contracts give the exchange services the authority to police the pricing policies of the contractors, surveys and interviews with AAFES officials indicated that there is no systematic enforcement program.

In November, Stars and Stripes reporters obtained price quotes on 21 models of 1992 cars in Germany, the United Kingdom, Belgium and Italy.

In eight cases, the prices quoted exceeded wholesale prices by 8 percent or more, with a high of 26 percent. The average markup for 21 cars in the survey was 9 percent.

The findings were nearly identical to those in a Stars and Stripes survey of 1991 models conducted in June 1991.

The AAFES program is designed to protect customers from “misleading deals,” often found in the States, said Jeff Gardner, general manager of Military Car Sales, the Germany-based sub-contractor that manages Chrysler and General Motors sales in Europe. Dealers off-base and in the States often use a new car as a way to sell very high-priced op­tions and to get used cars at very low prices, he said.

The much touted “$99 over dealer in­voice” is sometimes a scam used to draw in customers, who then end up paying extra for options, Gardner said.

“That can’t happen with our program: Everything we sell, every price we charge, is checked and approved by AAFES,” Gardner said.

According to AAFES officials in Dal­las, this is not true. Only a few prices are checked each year, and those are se­lected at random. There is no policy for how many prices should be checked or how often, they said. In March, Gallagh­er said the last random check occurred “a couple of months ago, I think.”

Gillis also notes that the AAFES markups seem especially high in this period of soft car sales. “In the U.S. it’s clearly a buyer’s market,” Gillis said. “That’s because American automakers did such a lousy job predicting the mar­ket. You can get a great deal out there.”

The Big Three automakers just report­ed their worst year in nearly a decade. General Motors plans to close 21 North American plants and cut 71,000 jobs dur­ing the next four years. Ford’s losses in ’91 were nearly $2.5 billion, the worst in the company’s history.

The military new-car program was au­thorized in 1962 by Congress to allow Department of Defense employees sta­tioned outside the country to buy vehicles under controlled conditions for delivery either in the States or overseas. Congres­sional mandates restrict sales and adver­tising to American-made cars. Gillis lik­ens the program to mail-order shopping.

“It’s really just like ordering out of a Sears and Roebuck catalog,” Gillis said. In his opinion, salespeople are essentially order-takers, processing the paperwork and ordering the car from the States or from storage in Germany.

The dealer, in this case a company hired by the manufacturers, “simply or­ders it from the factory and delivers it to the customer. A minimum expense for the dealer,” Gillis said.

Minimum expense and healthy mark­ups mean big business for companies in­volved in the new-car program. Based on the average price of a 1991 automobile sold through the AAFES program, $14,850, manufacturer’s gross sales to the military in Europe this year will total $248 million. AAFES reports that its share of the profits is about $3 million.

But AAFES and the auto manufacturers only provide the means for new-car sales. William Munn, marketing manager for AAFES Europe, emphasized that the ex­change does not sell cars. “All we do is pro­vide them a place to do business,” he said.

The meat of the program —sales to customers — is handled by a number of intermediary companies subcontracted to process orders, transport and deliver cars and monitor warranty service.

Chrysler and General Motors have hired Overseas Military Sales Group of Woodbury, N.Y., to sell their cars to the military overseas and to service the war­ranties on cars delivered to Europe. The New York company created Military Car Sales for its European operations.

Ford relies on its network of German dealerships to handle sales, deliveries and warranty repairs.

It is at the subcontractor level that the actual markup is determined. The manu­facturers sell their cars to OMSG and Ford Deutschland at normal wholesale prices, and these companies raise the price to satisfy their profit requirements, according to Eugene Leavy, executive di­rector of OMSG. Neither company would reveal its annual profits.

RFP Estimate