How About Some Restructuring In the Auto Retail Arena?
By Brendan Moore
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.
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