Everybody knows the Internet fundamentally changed commerce. We can find and buy just about anything online now, even cars. But Internet commerce also causes what economists call creative destruction, in which some businesses win and others lose out because they can’t adapt to the new reality.
Right now, there’s momentum building that’s likely to change the way we buy cars in a fundamental way, and more importantly how automakers sell cars to us. This change is coming in a variety of ways, but the bottom line is that the traditional auto dealership is likely on its way to join the livery stable as a relic of a bygone age.
Here’s one problem: automakers are heavily dependent on their dealer networks today, and auto dealers have spent the last century protecting themselves with state laws that inhibit competition from any other mode of car-buying. Consequently, no automaker is going to come out and say that they’d like to ditch their dealer network and go to direct sales. Instead automakers prefer bland statements about how dealers are important partners in customer service and delivery, the backbone of the brand, and so on.
Instead of listening to what automakers say, it’s more instructive to watch what they do. Because what they’re doing points to a future where you’re more likely to do business directly with the automaker than through an often-problematic middleman.
Think about this have you ever had a bad experience at a dealership? Most people have, and they either clench their teeth and bear it or they just go to a different dealer for that purchase. In the struggle to make a profit in a low-margin business, dealership employees can create bad blood for a brand as often as they create a positive image.
One bad experience with a dealership can turn the buyer, as well as the buyer’s friends, family, neighbors, and co-workers, entirely against a brand. When you compare the frequently tedious dealership sales experience to a smooth online sales process with clear pricing, it’s hard to imagine many people choosing the dealer.
There’s always an alternate point of view, and auto industry tracker Bob Reisner, EO of Nassau Business Funding & Services, thinks that dealers will thrive and gain more power in the future.
“I can’t see existing auto manufacturers getting rid of dealers,” he told Digital Trends. “First, there are the state franchising laws that require dealers and, more importantly, protect dealers from franchise termination. It will be very hard and expensive for manufacturers to terminate dealers of existing brands. Dealers and their associations are among the strongest political operators in many states. They as a group are difficult for state politicians to vote against.”
“Second, technology is going to severely change the auto manufacturing business,” Reisner continues. “The effort to respond to rapid technological change will use up the capital capacity of these manufacturers and starve them of the cash needed to fund the development of a [corporate] dealer network. So, there’s probably not enough political power, cash, and managerial bandwidth to develop a dealer alternative. The existing dealers are going to have the stronger hand and will force margin and price concessions from existing auto manufacturers.”
To Reisner’s point, Tesla is the first truly new car company in decades, which means they had no existing dealer contracts. Tesla set the automotive industry on its ear by refusing to franchise any dealers. Instead, the company sells directly through its own stores and online. Lawsuits by car dealers followed as early as 2012. Today 10 U.S. states prohibit Tesla’s business model entirely, and 7 more limit the number of Tesla’s retail outlets.
With that direct sales model in place, the company started taking reservations for its Model 3 sedan in 2016. Over 100,000 people placed deposits before the Model 3 prototypes were even revealed, and total reservations surpassed 350,000 units within weeks based on cars that buyers had seen only in photos. In the end, more than 500,000 deposits were placed before the first Model 3 was delivered.
Automotive journalists have had a lot to say about Tesla’s ability to deliver the Model 3 in quantity, and some early reservation holders have asked for their money back, but no other automaker has ever had a customer response to a new model even remotely comparable to the Tesla Model 3.
What automakers will surely notice about Tesla’s business model is that the corporate HQ controls the entire customer experience. Most importantly from a corporate perspective, all the profit in the transaction goes right back to Tesla.
You can see more evidence that the automakers are changing the game with the advent of the subscription model. Lincoln, Cadillac, Porsche, Mercedes, BMW, Audi, and Volvo are all testing subscription models in place of selling or even leasing you a car.
In a subscription model, you can trade in your car for a different model to suit your needs. Some subscriptions limit when and how often you can trade, but others have liberal policies.
For example, you can trade your subscribed Cadillac up to 18 times per year. There are even subscription services like Flexdrive, Clutch, and Carma where you can subscribe and take your pick from different manufacturers.
Exact terms vary, but the main selling point of all these subscription services is that you get to bypass the process of buying a car through a dealer and just show up to take delivery. Your subscription is with the automaker, not a dealership. As these services gain popularity, dealerships become nothing more than outlets hired to prepare and deliver a vehicle that remains the property of the manufacturer throughout its life.
Another factor changing the traditional dealership model is the mega-dealer. These nationwide dealership chains are huge corporations in their own right, rather than locally owned franchises. Lithia Motors, Inc. is one such dealership chain that is publicly traded with a $2.5 billion market capitalization. The AutoNation dealership group has over 300 individual dealerships and more than 26,000 employees.
Locally-owned dealerships have a tremendous incentive to sell out to these mega-dealers because margins in the new car business have been squeezed to the minimum, and longstanding dealerships may find the biggest asset on their balance sheets to be the urban and suburban land underneath the buildings. As local auto dealerships are absorbed into these large conglomerates by the hundreds, it’s even harder for the remaining local dealers to compete.
Veteran auto industry executive Bob Lutz believes that auto dealers have, at best, about 20-25 years left. Speaking to a meeting of SAE professionals in April 2018, Lutz said that dealers were a “threatened species” because of bulk buyers like Uber and Lyft, and the likely development of fully autonomous vehicles. Social scientists are already predicting that the Peak Car era is over in urban areas.
Automakers are also stepping in to help auto dealerships meet the requirements of the connected age. Most dealership websites offer you the chance to use chat services to talk to someone who supposedly knows something about the cars you want.
What they don’t tell you is that even though the person on the other end of the chat responds with your local dealer’s name, he or she is probably an employee of the automaker, based at or near the brand headquarters. These employees can give you general details on the car you want, but if you ask about inventory, pricing, trade-in, or a test drive, they’ll hand you off to a phone call with a sales representative at your local dealership.
Automakers offer this service so that dealers (who are often not tech-savvy) don’t have a wide variation in their Internet response. A standardized chat service for the whole brand keeps the brand image under control. That’s great for dealers today, but it can just as easily lead to a smooth changeover to direct corporate sales.
Finally, take a look at the short-term rental business. Mercedes-Benz owns Car2Go, BMW owns ReachNow , and GM owns Maven. In each of these cases, the automaker has created a wholly-owned subsidiary entity to rent cars for an hour or a day, with a local service center to keep them maintained. This model neatly bypasses dealers and traditional rental agencies for occasional urban drivers.
There’s a lot of uncertainty in the future of mobility. Access to vehicles is changing to meet the needs of new generations who don’t necessarily share the values of the past. Combine that movement with the never-ending quest to cut prices and maximize profits and it’s hard to imagine the traditional car dealership thriving over the next 30 years. Automakers aren’t revealing their plans yet, but you can be sure that change is coming, and soon.