How About Some Restructuring In the Auto Retail Arena?

By Brendan Moore

02.24.2009

There’s been a lot of chatter about the auto manufacturers restructuring, the auto suppliers changing their operating models, the vehicle finance companies changing their credit criteria and product mix, and, of course, the government has weighed in with new regulatory hurdles like CAFE and emissions policy.

But the only thing we hear about retail auto dealers is that there are too many of them, particularly in regards to the domestic manufacturers. The plummeting economy seems to be taking care of that issue for the most part, and there is little doubt that many more retail dealerships will succumb in 2009.

But my concern is not less dealers, although that certainly needs to happen in the domestic retail network.

No, my concern is the franchise dealer system. It is time for this retail system to be restructured in a way that will be beneficial to both the consumer and the manufacturer. As it stands now, the franchise new-car dealer system has obvious benefits for only one constituency – the dealer.

Ask any new-car dealer why new cars are sold only at new-car dealerships, and he/she will tell you that only a dealer can comply with all the regulations governing new car sales, only a dealer can be expected to supply warranty work to those customers that need it, only a dealer that is an independent business person is going to muster the necessary incentive to make that dealership a success, and on and on.

Well, that’s true. And it’s true because auto dealers in every state have, through campaign contributions and ceaseless lobbying of state politicians, of both parties,  made it impossible for anyone except a dealer to sell new cars. In fact, in many states, it is a criminal act for any manufacturer to sell a new vehicle to anyone other than one of the state’s new-car dealers. And they have also been able to shape the legal language around just what constitutes a dealership and a new-car dealer, thereby ensuring that a “dealer” will look just like what a dealer looks like today. Lastly, they have also been extremely successful in making it very difficult for manufacturers to terminate franchises and brands.

In effect, the dealers have their own monopoly on new-car sales, supported by state statute.

Let me tell you something that some of you probably don’t know.

Big-ticket items like televisions (and radios in their heyday) and washers and dryers, and stereo systems, etc., used to be sold through dealer franchise networks. For instance, if you wanted an RCA television in the 50’s (when they were still made in the US), you had to go to a store that was an authorized RCA dealer and buy one. That retail outlet might have a couple of other makes of televisions that it had a franchise for, but probably not more than two or three. You could choose among the makes they had there at that store, and for other makes you had to go to a place that had a franchise for those particular manufacturers. It took a while to go from store to store to compare prices, feature, specifications, etc. and retail prices to consumers were probably higher than they should have been. The manufacturers spent a lot of money coordinating their retail dealers’ inventory, marketing dollars, resolving complaints about customer treatment, etc.

Does this sound familiar?

Of course, all of that is long gone now. You can go to any number of big-box electronics stores tomorrow and peruse 15, 20 different brands of televisions. You can compare prices, features and specifications on the spot. You can buy that television at the store or at the store’s website. Same thing for a washer, stereo, etc. It’s the same with an expensive computer, except that you can also buy that computer online directly from the manufacturer, not just a retailer or the retailer’s website. The old franchised dealer model was discarded long ago and the manufacturers have a much more efficient distribution system for their products, and consumers benefit through greater choice and better pricing at the retail point of sale.

There is another aspect of the franchise new-car dealer system that would be considerably improved by reform and restructuring, and that, of course, is the buying experience. There is no need to detail how much some people hate the process of buying a car from a dealer. I’m sure most of you have a bitter anecdote to tell about buying a car from a dealer.

Think about the last time you bought a television from Best Buy or ordered a computer from H-P or Dell. That was a very different experience than the one you had last time you bought a new car, wasn’t it?

Imagine if you could go to a big-box new car dealer where the salesmen didn’t descend on you like hungry vultures, where the prices were stated clearly, where you could compare many makes, where they didn’t try to sell you undercoating and credit life, where the F&I guy didn’t try to jam you on the rate, etc. You could buy the car there, or, you could order it directly from the manufacturer and save some money. There would still be physical sites where you could take your car for warranty work or service; these would be approved by the manufacturers through some certification program.

Now, since I’ve had the opportunity in a previous life to break bread and drink cocktails with many, many dealer principals, I can tell you that the very first reaction from those dealers, when asked about whether new cars could ever be sold that way, would be that a car is not a television or a computer. They would say that the transaction is much more complex than that. It needs to be insured, it needs to be licensed, it has an MSO first, and then a title of ownership and there is usually a lien against that title by a lender which we’ve arranged. There isn’t anyone except a dealer that can do those things.

I will also tell you that in regards to customer complaints about being treated badly, or lied to, or defrauded, etc., every dealer principal I’ve ever met has said something along these lines: “Well, sure, there are some bad apples among the dealer ranks, just like any business, but that sort of stuff never happens in my store.” If I had been at the NADA (National Automobile Dealers Association) convention in New Orleans last month, and asked 100 dealers to comment on that negative perception consumers have about the buying experience, all 100 would have given me the same basic answer – that kind of stuff doesn’t happen out on the sales floor at my dealership. I know, because I’ve heard some variation of that statement from hundreds of dealers.

I’ll address the first statement; that only a dealer can do all the things required of the average new car purchase. My response would be, yes, that is true. At this time. There are many businesses that manage very complex transactions in order to conduct commerce, and I think there would be many new and existing companies that could easily keep track of all the moving parts in a new-car purchase.

Regarding the fact that every dealer principal believes in his heart of hearts that every customer that walks into his single-point, dual-point, etc., dealership gets treated with respect, is not lied to, is not “put to sleep in the box”, is not intentionally confused with the “four-square” selling system, never has his/her trade low-balled by the used car manager, etc., well, someone’s doing it. That perception by consumers didn’t generate itself spontaneously. If 100 out of a 100 dealers, wait, make that 1000 out of a 1000 dealer principals, say that nothing like that happens over at their place, then who is doing these bad things?

It doesn’t make sense, does it? It’s not logical.

That’s one reason that opening up the state eligibility parameters regarding who can sell new cars would improve the buying experience. There are good dealers, in fact, there are some great dealers. Anyone who says all dealers are the same should have their head examined. In a more competitive distribution structure, these good dealers would still thrive, but the ones that are not everything they should be would soon go under in the rising tide of different kinds of point-of-sale methods.

You might ask at this point, “How do the manufacturers feel about this?”

The manufacturers are in kind of a tough spot concerning the franchise dealer system. They pay lip service to it, because it’s their only distribution model. But there are many auto executives that would love to have a more efficient distribution model for their cars and trucks, and, make the buying experience uniformly more positive for their customers. Right now, their customers are both the dealer and the consumer, since the dealer has to buy the cars from the manufacturer before they can sell those cars to the consumer. If the manufacturers could sell directly to consumers, either through their manufacturer-owned dealerships, or, directly over the internet, one can easily imagine the positive changes that would occur in pricing and levels of customer satisfaction connected to the buying experience.

The franchise new-car dealer system is an antiquated distribution model and is hurting consumers and the auto manufacturers. When we’re discussing all of these massive changes to the auto industry, shouldn’t we also look at the retailing of those vehicles the manufacturers are producing? After all, it’s our tax money propping up the industry. Don’t consumers deserve a break, particularly if they’re funding this revitalization?

And, since the manufacturers are so beleaguered right now, don’t they also deserve a break from this incredibly inefficient distribution model that also, in some cases, fosters considerable negative reaction towards their products?

The answer, of course, is yes to both questions.

Since states have the autonomy to control the dealer franchise laws in their particular state, these changes don’t have to happen at the federal level. If just one large state opened up their eligibility criteria regarding the retailing of new cars, other states would have to follow suit as buyers flocked to that state and the improved retail model. The states get a lot of money from the tax revenue that comes from auto sales and no state wants to lose that money, so…

Now, will it happen? Not likely, as automobile dealers, even in their current emaciated state, are still a formidable political force. What is more likely than this sort of change is that the dealer franchise laws will remain as they are, thus continuing to hold manufacturers back from realizing their full market potential and making customers pay more for their new vehicles than they have to, as well as leaving many of those buyers with a bitter taste after the transaction is completed.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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13 Comments

  1. If I wanted a dealership where the prices are stated clearly and the salesmen do not descend like vultures then I wold go to a Saturn dealership.

    I guess that model does not work, or GM wouldn’t be planing on killing Saturn.

    As far as I know, you can go to the dealership and order any model you like, in any trim, in any built configuration. Certainly you can with Ford. Want a Fusion with a stick shift, blue paint, power whatever? Your dealer will be happy to order one for you. It will take a couple months, and the cars on the lot will be cheaper, but that has to do with the “discount sales” model and not the dealership model.

    Now if I could get a car built to order over the internet, then delivered to my doorstep, that would be pretty cool.

    I suspect that it would still be cheaper to go down to your local dealer and by one of whatever the sales manager ordered too many of though.

  2. Your comment about Saturn’s no-haggle policy and it’s failure only holds up if you can prove that Saturn’s failure was not due to other factors. Which you cannot, because it was due to other factors, like tired product for a number of years. Saturn did not fail because it had no-haggle pricing, people didn’t say, “I’m not going to a Saturn dealership because they have that no-haggle pricing and I just hate that”.

    I don’t see how changing these franchise laws could do anything but lower prices.

    Regarding your last comment, sure it would be cheaper to get one off the lot, even in the new retail environment after the franchise laws were changed. Just like it is cheaper to get a wide-screen plasma TV that is a floor model.

  3. Amen, brother. I hate dealerships. They’re all crooks.

  4. Where are these good/great dealerships you’re talking about. Are they in the United States? Because I’ve lived in eight states, bought a new car in seven of them, and I didn’t like any of those dealerships and their sales staff. I bought six Toyotas, one Chevrolet truck, one Nissaan and a BMW. Liked all the vehicles I got, but hated having to buy them at the dealership. Service departments were all good, though.

  5. Interesting ideas here. I believe that the no-haggle pricing policy did hurt Saturn, at least over the past few years, because as Saturn lost its unique models and was basically building versions of the same models found elsewhere in GM (Aura=G6, Sky=Solstice, Outlook=Acadia, Vue=Equinox, Ion=Cobalt, only uglier), buyers were in effect forced to pay a large premium for the Saturn dealership experience.

    When I was shopping for a family hauler a few years ago and was considering minivans and the GM Lambdas, I went to a Saturn dealer to check out an Outlook. The salesman was VERY helpful and kind, and the Outlook was nice, but at the end of the day, not being able to use GM Card earnings at the time (December 2007) and the inability to negotiate on anything other than my trade-in value killed the idea of buying an Outlook for me. The fact that it didn’t have sliding doors and that the Enclave was available if sliding doors hadn’t become a must-have feature sealed the deal for me, and I bought a Sienna AWD for about the same price as an Outlook, but got thousands off MSRP and some goodies that GM still doesn’t offer like laser cruise control, plus three power doors.

  6. Maybe I’m the wierd one here, but I LOVE haggling. I wouldn’t think about buying a Saturn b/c of their no haggle dealerships. Paying whats on the sticker makes me feel like I just got robbed. Yes, I know that if a dealer makes the deal, he’s making money, regardless of what he tells you. However, I enjoy whatching them squirm and call me back after I walk away. One time, I walked over to the dealership across the street, and the salesman came and got me. He literally walked over to the competition and said “Please come back, I’ve got you a better deal than these guys, I promise.” Classic.

    If all dealerships became a one price model, I would never buy new again. You should have seen me at a flea market in Mexico…I was in Heaven.

  7. Well, Chris H, I’m sure there are other people like you, but I think most people just want to buy a car with as few hassles as possible. In fact, they just want to buy whatever they buy with as few hassles as possible.

    Slippery Slope, I want to point out that you said “Amen, brother. I hate dealerships. They’re all crooks.”, but the author says right in the post that there are some good and great dealerships. SO you completely agree with him, but then you contradict what he wrote by saying all dealers are crooks. Did you even read the article?

    As far as Saturn, product is what brought them down when they didn’t share cars with the rest of GM, and then when they did share cars with GM, no-haggle pricing didn’t bring them down, but it sure doesn’t help when someone is deciding between an Aura and a Malibu, and the Chevrolet dealer is willing to knock a few hundred off sticker.

    Personally, I would be digging it if the retail model for cars opened up. The last three cars I bought, I knew exactly what I wanted, and I could have oredered it online. If I could order online from the factory (and not have to go through the “dealership buying experience”) and have it show up within a month, I’d be one happy guy. Especially if they were having a sale that month and I got $500 off MSRP.

    I agree that change is long overdue in retail auto.

  8. Nice, well-reasoned article of the type I’ve come to expect from autosavant. :)

    As for the complexity of the process, I don’t think I buy the dealer argument. Anyone can buy a used car private sale and do the necessary paperwork on their own – it isn’t hard, and it could be made even easier. The credit card companies have credit evaluation and distribution down cold. So the only piece that’s missing is some way of handling liens, and with a suitable incentive (like lots of new interest payments) I bet the credit card companies could figure something out.

    How about this: You call up your credit card company and say “I’m planning to buy a car”, and they say “OK, we’ll give you up to $20k for a single lien-secured transaction at x% for the life of the loan”. You go to the “dealer”, pick out your car, they enter the VIN and swipe the card, and you’re done – the forms come out with the lien info already included. The dealer doesn’t even need a finance department. And as an added bonus, you’ve only got one payment to make every month. And even dividing the payments between balances at different interest rates is something the credit card folks already know how to do (to their advantage, naturally, but if this caught on competition could take care of that.)

    What the new car business really needs is for somebody like Wal-Mart to get into the game. You know, there are going to be a ton of empty Circuit City stores soon – how about turning them all into indoor car showrooms selling cars from multiple manufacturers.

    As for service, somebody like Pep Boys or Monro Muffler (only, you know, less shady) could get the certifications from the manufacturers to do warranty work – maybe even bring some competition into that game as well.

  9. I won’t pretend that things are always better outside the US but in this case it appears to be so. New car dealers in Oz are typically franchise dealers (like in Chris’ RCA example) or they are owned by the company outright. The look and feel of each showroom (and often the service department) is defined largely by the specification of the manufacturer/distributor based on signage/literature/colour scheme….regardless of location. You know you are walking into a Ford or Mazda or Saab or Mercedes or Hyundai dealership for example whether you are in Melbourne, Perth or a small regional centre…even if they are on the same lot (as most in Oz are multi franchise dealerships)…because each one has the same distinct feel. A bit like McDonalds or Starbucks. And this makes people feel comfortable & supported.
    The shopping experience is still the same as in the US….no-one really likes car dealers!!

  10. I’ve been talking to lots of salesmen at dealerships the past few weeks. Where do they get these guys?

    Is a car dealership society’s safety net? The last rung before unemployment or incarceration?

  11. Order a car from a dealer and when it arrives they will jack the price up and tell you it is high demand or limited allocation.

  12. Car dealers and politicians – two of the most trustworthy types of people around.

    Together -I’m sure they make quite a team.

  13. I never heard about this before. The dealers, the UAW, the companies, the federal regulations, etc, it sounds like 360 degrees of a bad business to be in.

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