By on March 1, 2018

bark lecture

Over the years, every single time I’ve written about dealers and questionable business practices, the feedback from readers is invariably the same — kill the dealer model. Nuke it from orbit. We would all rather deal directly with the manufacturer than some slimeball franchisee. We want to order cars exactly the way we want them, down to the color and trim, and we want them delivered directly to us without the hassle of spending the day at the dealer saying “NO” to Tru-Coat.

Well, I should clarify — not all readers feel this way. Any reader who works for (or has previously worked for) a dealer will tell us all that we need the protection from OEMs that franchise agreements provide the customer. They tell us that competition in the marketplace is good for the consumer, and that it helps the local economy to have franchises around America.

But what would really happen if OEMs got their way and were able to sell directly to the consumer? What if all the dealers disappeared tomorrow? Would you be happy with the result? Or would it damage the customer? Who would benefit, and who would suffer under such a model? Let’s look at it objectively.

Thanks to Henry Ford, the barn door on the franchise model is already open, and it has been for a hundred years. If OEMs had controlled their own distribution from the get-go, we’d be having a very different discussion than we’re having right now. But they didn’t, and now we have Ford and Chevrolet stores in places like Silver Lake, Indiana, because a hundred years ago — hell, even twenty years ago — the infrastructure of the nation wasn’t designed to support people traveling a hundred miles to buy a car.

Of course, things have changed since then. If you want your first glimpse at what life would be like without dealers, we don’t have to go too far back into history to see how the OEMs would like to control their distribution. In 2009, after the government bailout of GM and Chrysler, the American giants took advantage of the opportunity to cut thousands of dealers across the country. Many of those dealers petitioned to keep their points open, and some even sued, but at the end of the day, about a third of GM dealers and about a quarter of Chrysler dealers got the ax. Yes, the struggling economy was given as the main reason, but OEMs were secretly thrilled to be able to consolidate their sales to a smaller number of dealers. They didn’t have to continue to support a sprawling network of dealers that sold 10-15 cars a month throughout flyover country.

cars dealer dealership, Image: HappyAlex/Bigstock

If OEMs were able to cancel franchise agreements tomorrow, that consolidation would increase significantly. If we assume OEMs have little to no interest in selling early-model, off-brand, and non-certified used inventory, then they would need to have much more volume per rooftop to be profitable. If we get your dream world, where you can order your car online and have it delivered to your driveway, then that opportunity for retail volume shrinks even more. A market like Dallas/Fort Worth might currently have about 15 Chevrolet stores — under OEM ownership, that number would be cut in half, if not two-thirds. But that’s just the big markets. What about small markets?

You could guarantee the closure of every small town Ford, GM, and Fiat Chrysler store in America. OEMs have no interest in running a store that sells 20 new cars a month. And while the opportunity to order your own car online and have it delivered to your house sounds appealing, what happens when that new car breaks and it requires warranty service? Your average Chevrolet Sonic customer isn’t like your average Tesla Model X customer — he can’t afford to be without his car for more than a day or so, and he doesn’t likely have another option when it comes to transportation.

Would OEMs open up rural service centers, or authorize independent shops to perform recalls and warranty work? Possibly, but it’s unlikely. More likely, customers would have to find some way to get their broken cars 50 miles to the closest dealer, then figure out some other way to make it to work on those days they don’t have a car.

Ah, but at least you wouldn’t have to deal with negotiating all day at the dealer. That’s because there would be no more negotiation. For those of you who love the sound of that idea, well, you didn’t love it enough to keep Saturn or Scion in business. And while the marketplace has decided they like the idea of paying one price at CarMax, that’s largely due to the distrust of car dealers when it comes to used car pricing and quality. While people might say they like the idea of not negotiating on a new car, it will take a generation to break people of the desire to do it.

Rallye Mitsubishi Gatineau – Image: Mitsubishi Canada

But, there is an undeniable truth in the car business — the customers who scrap for every dime on a deal are the least satisfied, and the customers who got bent over the deal desk are the happiest. If you knew that everybody who bought a BMW 340i paid exactly the same amount that you did, and neither a penny more or less, would that make you happier? It actually might.

And wouldn’t OEMs be able to charge less money for cars if they didn’t have to pay greedy franchisees to sell them? Well, maybe. They still have to deal with the same shrinking margins that the franchisees do, they still have to operate brick-and-mortar retail facilities, and they’d have their own direct digital sales model to compete with. So while you might see more sales or incentives, it’s doubtful that MSRPs would decrease much, if at all.

However, at least we’d all get what we want — the ability to spec out our car online and get exactly what we want. Or would we? I don’t think so. If anything, trim levels and color options could potentially decrease. Why? Keep this in mind — as it stands now, the real customer of the OEMs is not you, it’s the dealer. With many OEMs and with many dealers, whatever comes off the truck is what they get. In order to get some F150s, the dealer has got take some Fusions and Tauruses, too. Once the OEM can no longer offload whatever come off the line onto unwilling dealers, they’ll have to seriously streamline their production to make sure that every single car gets sold.

That could mean the elimination of not only low-volume colors and trims, but models, too. But wouldn’t they be able to make the cars as the orders come in, you might think? If that was your first thought, I encourage you to go dunk your head in a bucket of ice. Then, I encourage you to take a tour of the Honda Marysville plant or the Toyota Georgetown plant. These facilities are not designed for custom orders — they are designed to churn out 800 cars a day. Right now, they might be able to handle the very few custom orders they get. If the floodgates open to customer online ordering, they’re going to have to reduce those options significantly.

How about financing? I think you’d get reduced to two options — captive financing or bring your own. It seems unlikely that OEMs are going to want to lose any of that finance money to banks. Would that make them be more or less competitive? I’m honestly not sure. But what it would do would prevent you from getting bumped a few points on your loan by a sleazy finance and insurance manager. Overall, I think this is a win for customers — unless you’re subprime. OEMs aren’t likely to want to finance subprime buyers in house, so customers who might have been able to convince Wells Fargo to give them a 6.9 percent loan on a new Focus are probably going to be Kia shopping in this Brave New World.

So what’s the verdict? If OEMs had never established the dealer model, we might all be better off for it. But now that it exists, and the business has been designed to support it from top to bottom, I don’t think that we can roll it back into the ocean without some serious negative impact to the consumer base as a whole. Be careful what you wish for.

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95 Comments on “Bark’s Bites: The Day the Dealers Died...”


  • avatar

    Thanks for the article, Mark. How much of a factor do you think folks being more and more comfortable with online purchasing enters into the wish of ordering your car online? My guess is younger folks fall into that category more so than older ones. If it went that way exclusively, I wonder how one would easily be able to test drive a prospective purchase. I think that would only happen if buying used. I would trust a used lot less than a dealer – at least until I find a used lot I feel I can trust.

    I definitely get the “order exactly what I want”, but you make a good argument as to why that most likely wouldn’t happen in reality.

  • avatar
    PrincipalDan

    Why do we want, what we know we can’t have?

    True that if the dealers would go away there would likely be a whole new set of problems that would have us pining for “the good old days.”

    • 0 avatar
      jalop1991

      “True that if the dealers would go away there would likely be a whole new set of problems that would have us pining for “the good old days.” ”

      100% this.

      I bought a new car a couple of months ago. The dealer absolutely earned my business. He had the right price out of the gate, no hassle (I discovered that as I shopped around and found the other dealers to be typically shady and shoddy). He found me third party financing at an incredibly low rate that I did not find on my own in a few days’ looking. And he was very knowledgeable about the specialty car I bought, because the new car manager owned one himself. IOW, he was a car guy.

      Don’t paint all dealers with the same brush.

      • 0 avatar
        ect

        Also, the truth is that there is no need to look at the question of who sells cars as “either or”.

        In Ontario, Mercedes-Benz has a network of corporate stores and franchised dealers. All of them have access to the same inventory – both on hand and in transit. We shopped a corporate store, heard what they could offer on a specific vehicle, and then went to a dealer – who both understood that he had to beat the deal offered by the corporate store (which we did not disclose), and happily did so. By a considerable amount.

        Our experience was not unique. We did this because a couple of friends who have M-B products both advised us that we should do it. And it worked.

        A friend of mine who is a retired C-suite executive from a very well known car company has lamented to me that their dealers never wanted to compete against each other for business, which he and his colleagues found very frustrating. In the M-B world in Ontario, the dealers are very happy to compete against the corporate stores. So maybe multiple sales channels work best for the consumer.

  • avatar
    Sub-600

    An OEM direct to consumer model might reduce the number of silver and gray cars on the road. Financing should be a BYOB situation, don’t finance with the stealership. The same would hold true if the OEM tried to finance you, have financing in place beforehand.

    • 0 avatar
      arach

      I’ve never seen a bank be able to touch oem financing.

      0%? 0.9%? no bank is going to do that.

      And I know some people like to say “To get 0% you have to give up X,Y,Z incentives”. Sometimes- but not always.

      I was a cash buyer offered 0.9% when I bought my last car. How do I turn down 0.9%? There’s people paying guaranteed 1.5% right now. Sure sign me up.

      the OEMs tend to give the best rates to anyone responsible enough to actually be financing (credit scores above 750). If your below 750, you shouldn’t even be buying a car you can’t afford.

      • 0 avatar
        Sub-600

        My credit union doesn’t care which model I buy, OEM financing is usually targeted to specific vehicles, which is fine if that’s what you’re looking for.

      • 0 avatar
        jalop1991

        I agree, but it’s not so much OEM financing–it’s who’s doing the shopping.

        Me? I can find 2.89%, and struggle to get lower.

        But I applied online at the dealer, and he called me a couple of days later and said “I found you 1.86% for 60 months”. Jesus. That’s virtually same as cash.

        And HE found it, not me. That’s because…drum roll, please…he does this for a living.

        If the dealer model goes away, watch the balloon squeeze out in another place and suddenly we have “shopping consultants” to do many of the things the dealers used to do.

        Remember–they sell 10 cars a days. You buy a car every 10 years–IF you buy a new one at all.

        • 0 avatar
          notwhoithink

          “And HE found it, not me. That’s because…drum roll, please…he does this for a living.”

          It’s not that he’s better at finding rates, is that he deals in bulk with multiple lenders so they give him wholesale rates, and then he can decide how much to mark them up. If you’re dealing with your individual bank/credit union you’re getting 1-2 loans every 5-7 years, so they’ve not going to offer you the best rates to earn your business.

          But I have literally never seen had a BYO rate that a dealer couldn’t beat. I still do the BYO research up front (unless I’m buying new and can get 0% from captive financing) because I want to get an idea of what I can qualify for in order to push the dealer’s finance guy, but I’ve never actually used the BYO.

      • 0 avatar
        White Shadow

        That’s because you’re not truly getting that low financing. It’s subsidized by the purchase of the car, but you just don’t see it.

  • avatar
    28-Cars-Later

    This has partially happened as most new car dealer profits in recent years have been generated by the service and used car sales departments. An automobile is complex enough to require specialized service, and those service centers will always exist so long as there is a need. Even if new car sales came directly from the factory, the automakers will partner with service center owners or managers to ensure the product requires “just the right amount of service” to be in the black every year. This is already happening with “lifetime” fluids, less than reliable drivetrain technology, constant computer patches, etc. In frank terms, you will pay the vig proles.

    • 0 avatar
      George B

      28-Cars-Later, I’ve never understood why car dealers make customers deal with whatever car salesman is “up” and then make the salesman and customer follow a script created back in the 1940s when there was a shortage of cars. By the end of the process I vow never come back to that dealership. If the profits are in the service, why not find a way to eliminate the stereotypical car salesman and convoluted sales process that repels people?

      • 0 avatar
        dwford

        As the article states, the attempts to eliminate the negotiation process with Saturn and Scion repelled customers accustomed to negotiating.

        • 0 avatar
          zamoti

          Having worked at a Saturn dealership during it’s heyday, I can tell you it wasn’t the financing that was keeping people away. It was the fact that we had a coupe, a sedan and a wagon for sale. Upon growth we had two sedans two wagons and a coupe for sale. This was right at the beginning of the SUV era and these cars were lot poison.
          I get the feeling Scion was more of the same. They had a funny looking toaster for sale and a non-sporty camry coupe. Then they got some ugly hatchbacks and eventually a pointless sedan.
          Spot a pattern?

      • 0 avatar
        28-Cars-Later

        I’ve never sold new cars but I agree there is a certain process they all seem to follow and I too an not a fan. Historically there were profits on new floorplan but this has been eroded away over the years by the information age. Now a basic profit is built in called “holdback” but on a percentage basis it is not usually high, and I doubt it covers a lot of other dealer expenses (dealer specific tax/fees, floorplan costs, interest on floorplan, depreciation on loaners etc).

        @dwford

        Turf sums things up nicely, I am quoted in the link I posted with some Saturn history.

        @zamoti

        Read the article in my link. Leading up to 1995/6 there were something like 450,000 units moved, GM failed to reinvest in the marque and by about 1998 the product was stale. Three years earlier they were clearly not lot poison, at least until that point.

  • avatar
    SCE to AUX

    “…you didn’t love it enough to keep Saturn or Scion in business”

    Saturn and Scion died because of their product offerings (or lack of), not the fixed-price sales model.

    In contrast, Tesla isn’t struggling with the fixed-price model, and it’s because people love the product.

    I have no concerns with non-negotiated pricing. If you don’t like the price, just shop a different brand. If the mfrs gouge customers, it’s because customers are willing to pay. Why do you think sports figures make so much money?

    • 0 avatar
      28-Cars-Later

      Saturn was a much more complicated situation.

      driventowrite.com/2015/10/29/saturn-5-years-dead/comment-page-1/

      • 0 avatar
        turf3

        Saturn was left to die on the vine because it was one CEO’s ewe-lamb and when he was ousted and replaced, the replacement CEO had to make his predecessor’s creation fail. I think it was Roger Smith that initiated Saturn and Stempel that cut it off.

        For the first few years the cars sold quite well and had a good reliability reputation (unlike everything else GM built at the time). But Saturn weren’t allowed to keep developing new cars. And then they were forced to sell re-badged Opels, which had none of the characteristics of the real Saturns. And when the cars started to suck, GM’s response was to put forth a new ad campaign.

        So, after a few years, no one wanted to buy Saturns, and then Mr. CEO could point to poor sales and say “see, doing things differently doesn’t work after all, we have to kill Saturn”. And did.

        It didn’t have anything to do with the fixed-price model.

        • 0 avatar
          zamoti

          I was at training in Spring Hill during the time when Cynthia Trudell was brought in to lead. While it was mainly a bunch of us dumb sales goons doing trust exercises and testing out cars on a soapy skidpad (that was fun), some of those higher in the ranks were quietly saying that this was the beginning of the end. I figured it was the typical noise that is made anytime a new boss showed up. Guess they knew more than I had imagined.

        • 0 avatar
          dukeisduke

          Not to mention that Chevrolet despised Saturn, because they knew it took small car development money away from them. But then, Chevrolet couldn’t be trusted to build decent small cars, after the Vega, Chevette, and Cavalier were foisted on the public.

          Saturn was a kick in the nuts to Chevrolet management.

    • 0 avatar
      TwoBelugas

      Good point! They are just having trouble servicing their cars.

      https://teslamotorsclub.com/tmc/threads/long-wait-time-when-calling-for-service.97268/

      Notice the perceived decline in service in last few years

  • avatar
    cicero1

    some other things to consider:

    if dealership employees were OEM employees, the UAW would surely be involved.

    Would OEM really want the added liabilities of owning hundreds of lots/ offices scattered over 50 states, with different zoning, tax, wage laws, etc.

    what about accounting for when vehicles are “sold” and booking revenue. That would surely change.

  • avatar
    sportyaccordy

    For most people, buying a car means about as much as buying toilet paper… it is just mired in the agony of the typical dealership experience. The few folks who enjoy custom orders (and can afford new cars) probably already make them.

    The point about service really kills the whole “manufacturer direct” model. What manufacturers should do is operate the dealerships and services themselves and keep the profits.

  • avatar
    IBx1

    Why not both? If I’m nitpicking to get exactly the custom set of options and colors I want, I expect to pay what it says on the online configurator and understand I’ll have to wait and won’t get a deal unless I back off and take the generic black interior model on the floor.

  • avatar
    poggi

    ” If you knew that everybody who bought a BMW 340i paid exactly the same amount that you did, and neither a penny more or less, would that make you happier? It actually might.” It’s personality issue. Some (lots) of folks are so drilled into being treated “fairly” that they’d be willing to pay more as long as everyone paid the same (see “union mentality”). These are the same folks who hate to haggle and fall for the “one price” canard, not realizing or wanting to admit they’re getting screwed on their trade. Even for them, CarMax’ low offers are a solution, but, in Indiana, buyers pay sales tax on the amount of the new car, NET of trade value; so, selling to CarMax means taking a 7% sales tax hit.

    • 0 avatar
      MrGreenMan

      That personality issue is called envy.

      There’s a reason that so many services make money catering to it; people make lots of money with “sin” businesses.

  • avatar
    TW5

    Dealerships have nothing to offer customers as a population. Dealers only benefit the subset of customers who negotiate for unrealistically low prices, built on the backs of inefficient floor plan arrangements and redistributed profits from other customers who’ve been screwed. In other words, the dealer will let me walk off the lot with a steal because they sold 10 other vehicles for top dollar to suckers. Plus, I can do the “I don’t care about interest rates spiel” and then pay the car off after the fact, and the dealer might not care, even if they lose the incentive money because they ditched interest on their floor plan.

    Even though most of the B&B know how to play the dealer game, F-you-buddy isn’t a car shopping paradigm that benefits anyone in the long run. Biggest criminals, liars, and cons are the ones who lift consumer surplus from the dopes. The commercial degeneracy promoted by the dealer model is hardly surprising.

    The corporate model would be superior for customers, if for no other reason, because it would decouple selling and service. Selling locations would be centralized, since car buying is something the average American does only a few times every decade. As Mark points out, DFW would probably only have 4-5 super dealers after consolidation, but the manufacturer would still operate most of the service locations, and they would probably add quite a few since car sales are no longer a prerequisite of operating a service location. This would improve service for customers. It would also lessen the incentives for the down-payment-on-a-new-car-would-cost-less-than-this-fake-repair-quote-we’re-giving-you. Sales people would also benefit from centralized selling locations. Okay, there would be fewer sales staff, but their sales volumes and incentives would be higher in many cases.

    Generally speaking, the auto manufacturers need to consolidate a great deal of the auxiliary industries to avoid robber-barons from preying on their customers. They should control selling. They should control service. They should control financing.

    But most importantly, they should control insurance. The manufacturers effectively control all of the parts manufacturing, and all of the service personnel, all of the vehicle replacement, etc. Why do they let insurance companies take huge amounts of consumer surplus and manufacturer profit? Furthermore, overtime manufacturers would be thinking about the insurance cost aspect of vehicle ownership, and they would make smart decisions to insurance costs and premiums.

    • 0 avatar
      87 Morgan

      I respectfully disagree with just about everything you have put forward.

      I am most interested in the following comment: Why do they let insurance companies take huge amounts of consumer surplus and manufacturer profit.
      What profit are you referring to? State Farm posted an auto u/w loss of $7B in 2016 and $4.1B in 2015.

      Auto insurance and Auto manufacturing/retailing are not even remotely associated other than the word Auto is used in both.
      Using the same premise, NBC should be in the business of making televisions because they produce TV content.

      https://newsroom.statefarm.com/state-farm-2016-financial-results/

      • 0 avatar
        stingray65

        Actually RCA (a major radio and TV manufacturer) was the founder of NBC. GE was actually the parent of RCA and is the current partial owner of NBC.

      • 0 avatar
        TW5

        Everything is driven by manufacturing. They tried to separate the retail aspect, but, naturally, they have to keep advertising because basic value chain says retail, sales, and marketing cannot be separated from manufacturing. Manufacturers of small-ticket consumables don’t have the ability to bring retail in-house. Manufacturers of big-ticket durable goods can bring retail in-house, and they should.

        Regarding insurance, the entire industry is the automobile manufacturers and auxiliary companies, except the actuarial services. The manufacturers can buy that if they were inclined. And if the dealer/service model was corporate controlled, even more of the collision repair industry profits would belong to the manufacturers, which would allow them, if so inclined, to give some back to their customers in the form of lower premiums.

        You are right though that the insurance industry is far from a sure thing at the moment.

    • 0 avatar
      Lou_BC

      TW5 raises some interesting points. Separation of sales and service alone would be a great idea. As long as technicians meet a standard, why shouldn’t they be allowed to service any vehicle? That happens already once warranty expires. If companies don’t want to play ball, especially in lower volume rural areas, legislation could force companies to open it up to any qualified technician. Competition might just drop service costs.
      I wouldn’t want car companies involved in insurance.

    • 0 avatar
      trackratmk1

      The idea of someone paying more in order for someone else to pay less is true to a point, but there are very few customers getting “screwed” today, and if you do manage to get screwed by a dealer, look in the mirror for a substantial portion of that blame.

      Try to find me a store advertising prices for their new inventory OVER msrp. The information advantage is squarely in the hands of the customer now, so their research on what a fair price is has been done before arriving on the lot. Will a dealer sell a car over Msrp to someone willing to pay it? Absolutely. The same way you’d be happy to take the full $100 you offered your old lawn mower for on Craigslist… maybe there’s a buyer out there for full price, or more, but most will try to beat you down and reach in the middle.

      Further, dealers don’t arbitrarily price cars. Trade prices are a lot more arbitrary than new prices, but even those offers have some basis in reality. No, the varying price of a new car… the “haggle” everyone thinks they need to do, is more often than not just over the last few hundred dollars of price that a dealer will dig derp into their pockets to earn your biz to lure you from a competing store. The rest of the discounts? They’re from the manufacturer, and ALL dealers have access to that money. The dealer doesn’t want to spend their own money on a customer, they want to spend the OEM’s. If it takes a couple hundred to steal a deal they will, but it’s never thousands… the thousands off is always the mfr subsidy, and you can get those thousands at any dealer.

  • avatar
    BuckeyeBird

    Dealers will die along with the death of car ownership – and we will have the joy of dealing with whichever 3 or 4 companies (Silicon Valley, Detroit or Beijing…) win the “mobility” platform wars. If you think Kia of Bedford is out to screw you, just wait until you have to deal with an oligopoloy brought to you by your friends from Uber and Google…

  • avatar
    stingray65

    The franchise model developed as the cheapest way to quickly build up a dealer network, and also helped automakers during sales downturns because they could keep production up and just ship excess cars to their dealers who were stuck with the inventory costs (channel stuffing that is still done today). Having a dealer in every town with more than 300 people (for mass-market brands) was most important for servicing, not sales because until 40 years ago cars got oil changes, grease jobs, and tune-ups 2-3 times per year, and larger repairs were also more common. It wasn’t until the 1950s that dealers typically carried more than a few demonstrator cars, and most people ordered what they wanted at the dealer. If they lived close enough to the Detroit, many even picked up their new cars at the factory to save on delivery charges.

    Today servicing needs are much reduced, reliability is much improved, and today’s large inventory dealer has become the sales driver in large part because a large number of new car sales are impulse purchases, and most people have become too impatient to wait a few weeks or months for their custom ordered new car to be built. I think a conversion to OEM run sales channels could potentially lose a lot of those impulse purchases (i.e. I saw that red Mustang parked in the front row of the dealer and I had to have it). OEM owned channels would also put an end to channel stuffing during sales downturns, which means production lines would need to become much more flexible, and I assume the UAW would just love (sarc) to send members home on unpaid leave whenever management deems it necessary to provide that flexibility. Franchise dealers can be a royal pain to both OEMs and consumers, but they do serve some very valuable functions to both, even if some of car enthusiasts don’t always see it. I also have a feeling the Mr. Musk might wish to have a lot more retail outlets if he ever gets Model 3 production up to speed, but given Tesla’s lack of profitability it is hard to see how he will do it without resorting to the franchise model.

    • 0 avatar
      trackratmk1

      Great post, wholeheartedly agree. Interesting to note the changing role of the service lanes. Without the regular lube jobs and tune ups, more franchise dealers are advertising their ability to service all makes and models to fill in the gaps. I wonder if any mfrs are looking to get ahead of the curve and use their dealers to add corporate legitimacy to the Wild Wild West of the indie repair shops that are becoming less and less qualified to fix these increasingly complex machines.

      Say for instance, the Audi brand becomes known for more than just buying an Audi Car, you could also buy Audi Service. Not just for Audi’s, you could potentially get your Kia fixed with Audi Service, if you were willing to pay, but Audi Service’s promise may guarantee a higher level of service, including more transparency about work performed, extra disclosure, better customer care, Audi loaners, etc… of course you pay the Audi service premium. Most dealers do this already but it’s not widely known. Mfr’s may be smart to market their profitable service departments as an extension of their OEM brand, earning their dealers earn more money, and then of course profit sharing back with them through their existing franchise agreements. The biggest obstacle is that no mfr would honor warranty work performed at a competitor’s store, and would never certify their techs to work on another brand.

  • avatar
    stuki

    What a weird, artificial strawman of a dicothomy: Either “manufacturers controlling distribution” or today’s franchise dealer model. Do you really believe one of those are the way most of the world’s goods are distributed? Does Amazon have an exclusive, state granted franchise to sell anything it sells? And only within a certain area? Why can’t dealers sell cars, Amazon sell cars, Ebay sell cars, some dude in China sell cars, I sell cars, what have you? You know, as in: Let’s pretend we still retain some trappings of a once-were free country?

    “Exclusive Franchises” are pure insanity, or intentional graft and privilege peddling, from the get go. As is all “managing” and restricting how people buy and sell goods and services amongst themselves.

    Just treat cars like tennis socks. Done. You’ll get optimal efficiency of distribution, without anyone supporting political campaigns and running around suing each other, over “exclusive” rights to be all the inefficient, privileged and leeching you can be.

    • 0 avatar
      TW5

      There is no comparison between capital-intensive durable goods, like cars, and nondurable consumables. Nondurable consumables are not special enough to warrant direct interaction with the manufacturer. The savings on each direct transaction would be nominally miniscule. Furthermore, showcasing a variety of similar consumables is quite valuable to customers, and transparency actually helps induce consumption. The manufacturers don’t fret if the retail channels start driving down prices slightly. As long as production is relatively stable, manufacturers are happy.

      Car manufacturing and car sales are not similar. Consumption is infrequent. The manufacturers cannot sell their goods to retailers at 50% MSRP. Manufacturers do not benefit from side-by-side point-of-sale comparison shopping because the variance between vehicles is extreme compared to consumable products, thus point-of-sale marketing costs would be prohibitive.

      The issue is not that dealers are the wrong sort of retailer. The issue is that dealers and retailers are the wrong retail model. The manufacturers created a monster, and they can’t figure out how to deal with it. The dealers have become so powerful they often control local and/or state government in certain regards. Huge dealership corporations like AutoNation threat manufacturer leverage over the dealer network.

      • 0 avatar
        stuki

        Yadda, yadda, yadda… Thiiingz aaaare diiiferent thiiis tiiime. Theeez are speeeecial snowflakes. Fundamental laws of economics doesn’t wooork nooow. Like, the law of gravity doesn’t work, because, like capital goods. It’s like a maaarket failure. And a gravity failure….And socialism reaaallly does work, it just diidn’t work in all the special snowflake cases where it’z been triiied….

        I guess it will never end…

        • 0 avatar
          trackratmk1

          @stuki, exactly. Why not cut the BS political clout of new car dealers, who rely on protectionist laws to save them from competing biz models, and let the vehicle producers sell them as they see fit? The dealers ARE valuable, and mfr’s may decide to continue to rely on them, in addition to corporate stores, pop up stores, online retailing, and as yet undiscovered methods of retailing. The key here is let the OEMs decide if they want to use dealers, or some other novel way, and let the market tell them what’s effective. Seems to work fine in other countries… the U.K. has automaker corporate stores, independent new car dealerships, and dealer-group rooftops like Autonation, all selling cars in harmony.

  • avatar
    sirwired

    I’m not following the argument that the colors and options would decrease. Dealers don’t order rare colors/options because they don’t want a particular combo taking up space for months; the rare combos might as well be entirely unavailable.

    If cars were built-to-order, that doesn’t happen. It DOES increase uncertainty for parts/assembly suppliers since they have to guess how many of X widget the automaker is going to order next week, but that’s a lot easier than trying to balance the production of complete configurations.

    You can custom order a pickup truck easily, and there ARE OEMs that readily accept custom orders, so why is that not mainstream?

    • 0 avatar
      danio3834

      Dealers don’t personally order a huge number of vehicles that end up on their lot. A large portion of it is pushed on them by the manufacturer. It’s all planned out well in advance. X percentage of production will be this package, X percentages of others. There some room left for customer sold orders, but the majority of production that’s scheduled to make the plant viable is what the manufacturer tells the dealer it will be in order to make it predictable for the required lead times.

      If every vehicle were custom order, it wouldn’t be economically viable to offer great variety because demand would vary wildly leaving stockpiles of certain pieces and shortages of others.

      The only way the variety wouldn’t decrease is if the OEMs kept the same stocking levels that the franchisees do unwillingly. They wouldn’t.

    • 0 avatar
      Steve65

      As a person who spent 25 years in various aspect of inventory management and production planning – flexibility is expensive, and the complexity of the planning grows exponentially with every potential variation.

      Inventory planning is something that looks trivially easy to someone who’s never done it. On paper, nothing could be simpler. In reality, there’s never a day when everything hits its target. Delivery trucks break down. Suppliers drop the ball. Missed forecasts leave you with a warehouse full of X when the market suddenly shifted to Y. Belgian production managers ship your order for El Paso to Dallas because “they’re both in Texas, how hard could it be to get it to the warehouse?”

      You can order custom pickup truck easily because the huge volumes and huge profit margins cover the elevated costs of stocking multiple versions of every configurable part.

    • 0 avatar
      krhodes1

      Building all cars to order (be that order from a dealer or an individual) can be done – BMW does it today. But that is also part of the reason a 3-series is $10-15K more than a Camry. BMW can get the pricing that allows it to do that, non-premium makes can’t. I assume, but don’t know, that the other premium Germans operate the same way. The cheapest way to make cars is to make them all as similar as possible.

      • 0 avatar
        la834

        What I want to know is – why? Until the late 1980s, all of the American manufacturers offered even their cheapest cars in all sorts of special-orderable configurations. I was with my dad when he ordered a 1982 Pontiac Phoenix; even that cheap-ass car offered about 20 exterior colors, 5 fully-coordinated interior colors, any mix and match of body style, 4 or 6 cylinder engine, and manual or auto transmission. Bench or bucket seats, three different styles of steering wheels, optional gauge clusters, lighting packages, suspensions, audio systems, cloth or vinyl upholstery, power or manual seats, and maybe 30 other individual factory options. This was on a CHEAP car mind you. On the mid-size or big cars, you could really build your car to your taste, choosing, say, whether you wanted an analog or digital clock.

        Why was this possible in 1985 but not today? I can see why offering 7 different interior colors or four different fabric choices or six drivetrain choices would drive the costs up, but I can’t understand why with today’s automation I’m forced to pay $1200 for an automatic transmission on anything but the lowest trim level. I think a good system would be to allow elaborate custom orders at an extra fee, say $300 if I want to custom-spec my car. I’d gladly pay that and wait a few months.

  • avatar
    gtem

    To your point about service in rural areas, any OEM that wants to stay in business in such locales would be quite well motivated to open factory service centers. If they didn’t competitors would obviously win once people learn that buying a Mazda (for a realistic example) might not be the best idea if they have to drive over an hour away for service or repairs. They’d rather buy a Ford or whoever else commits to maintaining a local presence for after-purchase support.

    • 0 avatar
      sirwired

      Not to mention that a service center doesn’t have to be a dealership. Not that there would be much to a “Dealership” if most cars were custom-ordered; one or two of each model the OEM felt like selling there hanging around for test drives, and you are ready to rock. That’s totally supportable in rural areas.

  • avatar
    Steve_S

    There still needs to be dealerships they just don’t need to be independent franchises. These OEM dealerships would still make money on trade ins and leases but new car buying would be much cheaper as they would be sold to customers for about as much as a dealer really buys them for. No invoice price, holdback, dealer marketing incentives etc etc. If the manufacturer wants to move last years model they offer a discount like an other manufacturer of any other product does now.

    In stock vehicles could be paired down to a handful and you could incentivize shoppers to order what they want. Some can wait 4-6 weeks for a new car some need a new on right now (accident or the car died). If you want one right now you take from stock otherwise order.

    A dealership for me is for test drives and warranty repair/service other than that I don’t need them.

    I bring my own financing and settle on a price before I walk in the door as it is now.

    • 0 avatar
      danio3834

      Franchise dealers operate on razor thin margins. If anything, OEs would try and gross more on each retail sale to make their margins more in line with the rest of their operations. It’s a no-win for them.

  • avatar
    Jason801

    “Your average Chevrolet Sonic customer isn’t like your average Tesla Model X customer — he can’t afford to be without his car for more than a day or so, and he doesn’t likely have another option when it comes to transportation.”

    He actually would have other options, because the eradication of the dealer model would not happen in isolation in a static world. The need for a solution begets the existence of the solution.

  • avatar
    CincyDavid

    I leased my last car from a dealer 50 miles away, and don’t intend to set foot back on their lot until I turn it in at the end of the lease. I’ll have 4 oil changes, a couple of tire rotations and several sets of wiper blades that my local tire store will deal with in the interim.

    I don’t like the existing dealer model, and even when I THINK I got a good deal I still have nagging doubts that they ripped me off somehow.

    Reminds me of a couple of sales guys I overheard in a Nissan store about 20 years ago…one was bragging to the other that he “cracked” a buyer…turns out he “cracked the guy’s skull” and hammered him on the deal. I get it, I’m in commissioned sales too, but that just adds to my vibe that every time I go to a dealership they’ll at least try to rape me.

  • avatar
    jammyjo

    I can only think of the efficiencies – customers getting what they want without getting screwed or bankrupted, speeding up the buying process.

  • avatar

    Quick point: I believe Japan and much of Europe both operate with mainly manufacturer-owned retail. As I understand it, the normal model in Germany is to buy to order, not off the lot, and price negotiation is minimal.

    It’s a bit moot to talk about transforming the US retail environment, as there’s so many state-level obstacles and existing agreements that I don’t think any existing auto maker (aside from Tesla) has the appetite for overturning it.

    Would it actually be worse, though? Yes, a GM-owned country-wide retail network would probably focus on mainstream option packages, but they’d also be a lot more likely to do transfers from dealer to dealer.

    • 0 avatar
      87 Morgan

      Nope
      Most are franchise. Their are some factory stores, but the article below will provide some insight into how ‘great’ the factory model so loved here would work.

      http://europe.autonews.com/article/20130522/ANE/130529962/daimler-may-sell-company-owned-german-dealerships-to-cut-costs

      • 0 avatar
        sirwired

        If OEMs turn out to not be very good at running dealerships, so be it. But I certainly don’t see any need for there to be laws in place that prevent them from even trying.

        • 0 avatar
          trackratmk1

          @87 Morgan, poignant link. Good read, too bad from 2013. Wonder how it played out over there.

          @ sirwired – Absolutely. That needs to be said more I think.

  • avatar
    ajla

    Well why not both?

    Custom order and delivery might not work well for hoards of CUV and Camcordia buyers, but if someone wants a special Ram 3500 or GT350, why not allow factory ordering without any dealer involved?

    You and your brother have both written about how the current dealership model hurt the Focus RS and other niche vehicles.

    • 0 avatar
      PandaBear

      It is not always the dealer hurting it. Manufacturer could make it easy to order but a lot of the automation efficiency will be lost.

      So if you have to send a worker to reconfigure the line for one car vs 20 cars (a friend from NUMMI told me they have to switch color every 20 cars to avoid stressing out the employees), the cost of that labor is now 20x as much, plus you have 20x as much chances of making a mistake.

      If I can’t charge you more I’d like you to pick the plain vanilla too.

  • avatar
    MrGreenMan

    There was a lot of dealer hate on TTAC during the deathwatch.

    You can trade a devil you know who might also serve on the school board because he wants his property taxes kept low for a devil who won’t know you and thinks that two- and three-letter naming schemes, like 2LT and LTZ and LZ2 are the perfect way to comprehend one of your top-two ongoing living expenses, but it’s still one devil or the other.

  • avatar
    Boxerman

    The single worst car buying experiences I have had have been with manuf stirrer owned dealers.

    Who wants to deal with a giant faceless corporation full of unmotivated people parroting some corporate bs mission statement crap.

    At least with franchises there are still enough that are owned by actual people who care enough that there is someone to talk to.

    Can you imagine how lame servicing would be at an oem.

    Dealers need to keep customers comming in and happy with the product or competition wipes them out.
    Manufacturers they take decades to react and what’s their feedback loop? Some lame online survey.

    If you dont your dealer experience just go to a different dealer or shop dealers online. Want to save on a new car purchase put some effort In, same as anything else in life.

    Personally I would be unlikely to buy any car from a manufacturer.
    I think Volvo is nuts with its new polestar

    • 0 avatar
      danio3834

      This is a really good point. The truth is that if you get bad service at one dealer of a certain brand, you can go to another that is run really well. This is especially important after the sale, once you already own the car and need warranty service.

    • 0 avatar
      jalop1991

      “Can you imagine how lame servicing would be at an oem.”

      It would more resemble the Wal Mart customer service/returns desk than not.

  • avatar
    eggsalad

    Re-write franchise agreements so that dealers maintain their independence in used cars and service, but make the new-car sales part as delivery agents.

    • 0 avatar
      danio3834

      Easy! Dealer groups have lawyers too, though.

      Frankly, if anything, I think it should be the other way around. OEMs should control service instead. This is where most people get jerked around in the worst way.

      • 0 avatar
        Lou_BC

        @danio3834 – That is a very interesting point. They’d have more control on warranty costs and assessing intangibles that affect long term durability.

  • avatar
    Nick 2012

    I work about 10 minutes from Silver Lake, and the Ford dealer family has been there for 90 years. They’ve got some other businesses selling buses, tractors, western wear, and ATVs. Support quite a lot of community events as well.

  • avatar
    danio3834

    The bottom line is that the retail new car business is a low single digit margin business. Not only that, it requires a high level of initial capital investment and cash flow. In other words, it’s easy to lose your a$$. Auto manufacturers are in the wholesale business, and aren’t interested in juggling a low margin high risk retail business. They’ve tried it in recent history (Ford Collection) and got out.

    Thinking that “cutting out the dealer” will save money by cutting out the middleman is a fantasy as well. Assuming service levels and inventory availability remain constant, the overhead costs are still there. A large public OEM wouldn’t be satisfied with 2.5% return. So if anything, prices would likely increase.

    People may not like dealers, but they’re still the best model to give the consumer the best potential deal. Not to mention carry a ton of inventory so the car you want is more likely to be ready for delivery today. Once the majority of people have committed to a purchase, they want to drive it right away, not wait months for build and delivery.

    • 0 avatar
      trackratmk1

      All true. Many people forget the costs of real estate, headcount, benefits, etc associated with running a point of sale location. But as said elsewhere, let the manufacturer decide what’s best. Perhaps they see the value in running a retail corporate owned store in high priced urban city centers, a la Apple store, where it doesn’t make much money and a dealer owner wouldn’t be interested, but it’s worth it to have a showroom footprint for awareness with really good product specialists and excellent customer service.

      At the end of the day, we don’t need the laws that say “franchise only”, let the OEMs decide how to sell their product.

  • avatar
    Kendahl

    Option choices already are shrinking. Porsche supports custom orders but the buyer has to wait months before delivery. Porsche also has a long option list but the buyer who selects from it pays through the nose.

    At low volume dealerships, only the showroom would close. The service department should be able to continue as usual. Service departments could still be franchise operations but controlled more tightly (e.g. fast food restaurant franchises) than are dealers.

    Anytime a trade in is involved, there is room for negotiation. Even if the price of the new vehicle is fixed, the allowance for the trade in isn’t.

    Negotiation isn’t difficult. For anyone willing to make even a minimal effort, it’s easy to play competing dealers off against each other.

  • avatar
    PandaBear

    Businesses come and go, dealership is just a middleman holding the bag when the time is bad and skim a bit of the cream on top of the milk when time is good.

    If there’s a market with only 20 car sales a month, no matter what models the dealer / OEM show room will close. Unless, the money is elsewhere like financing, insurance, repair, used cars, etc.

    Manufacturer runs incentive based on inventory, demands, and supplies, regardless of whether it is one price dealership or bargain your way dealership. If toilet paper at Target goes on sale every other month, you bet cars will too regardless of who sell them.

    Seriously, dealerships are not really that special and precious, especially now they are consolidated into big dealer groups and mom and pop got driven out of businesses already.

  • avatar
    Prado

    Everyone paying the same could be successful, if the price floated based on supply and demand. I don’t see why consumers would reject a floating price where we accept it on everything else. A steak this week may cost more or less than last week. We may adjust what we buy, but we accept this is how the world works. The biggest issue with the Scion and Saturn pricing was that when demand softened, the cars were overpriced, and that price should have been lowered.

    • 0 avatar
      trackratmk1

      The thing that irks people isn’t the changing prices over time, it’s the changing prices TODAY. One store may offer a BonazaWagon for $29,995 while another claims it’s $27,495. Ultimately, if the customer reads the fine print, they’ll realize all dealers will get close to the same price using manufacturer incentives, but one dealer may kick in a few hundred extra to steal your biz from the other BonanzaWagon dealer 20 minutes away.

      There just isn’t thousands of dollars of margin in new cars anymore, unless you’re playing in the $60k+ price bracket.

  • avatar
    ravenchris

    As long as the ‘big money’ owns policy makers, the current marketing/distribution structure will remain intact.
    You respond by thinking/planing how will use your money in the most efficient manner.
    Ruggles demonstrated how the ‘big money’ thinks.
    It is up to us

  • avatar
    ravenchris

    As long as the ‘big money’ owns policy makers, the current marketing/distribution structure will remain intact.
    You respond by thinking/planing how will use your money in the most efficient manner.
    Ruggles demonstrated how the ‘big money’ thinks.
    It is up to us

  • avatar
    ravenchris

    As long as the ‘big money’ owns policy makers, the current marketing/distribution structure will remain intact.
    You respond by thinking/planing how will I use my money in the most efficient manner.
    Ruggles demonstrated how the ‘big money’ thinks.
    It is up to you to use the information.

  • avatar
    Tele Vision

    Thanks, all, and I would read it all again. I’m 47 years old and I’ve bought two new cars in my life and doubt I’ll ever do so again. It’s a cold rip-job. I save some money and buy what I need or want in a year or two with cash on the barrel. Usually less cash than is being asked for, too. I’m cool with my fellow man but I’m also cool with his taking the depreciation hit due to wanting the newest F150 immediately. It almost feels like theft – until I recall buying those two new vehicles.

  • avatar
    05lgt

    B(m)ark, I’m not certain, but aren’t your customers dealers? That’s not the best footing to “look at it objectively” from. Your honestly held beliefs aren’t automatically objective just because you hold them.

    • 0 avatar

      I work with tier 1, 2, and 3 customers, so I have all the horses in the race. I have Mercedes-Benz dealer customers—go read my CLA 250 post from last week and tell me if you think I’m not objective.

      • 0 avatar
        05lgt

        I read that, and enjoyed it and this piece. If it were another outlet your brother might call that “the wobble” though. We all have viewpoints and none of them are truly objective. When you’re as involved in the topic as you are on this one a disclosure for the readers who haven’t read almost every piece you’ve written here could head this type of nit-picking off.

        Disclosure: I lack maturity. I’m trying to figure out how to get Alexa to make her fart sound on a timer so I can set surprise time bombs in other peoples houses.

      • 0 avatar
        05lgt

        another later thought: your customers are dealers, your CLA 250 piece didn’t say anything bad about Merc dealerships, just the OEM. You have called out dishonest dealerships though. just not in that piece.

    • 0 avatar
      trackratmk1

      @LGT Devil’s advocate – Bark, you’re the devil now – Would you rather read a writer who researches a topic but has no experience (hence no bias), OR read someone who actually knows the insides and outs of an industry from spending their whole life in the middle of it, and is passionate enough to write about it?

      • 0 avatar
        05lgt

        Oh, I’d definitely rather read the researched and knowledgeable writer. I just prefer when they show some evidence of introspection and acknowledge their own inherent bias. I think that makes for better thought out pieces and better reading. Then again, I can hardly form a sentence most days, have no ability to hold a readers interest, and so my critiques are worth every penny I charge.

  • avatar
    Pete Zaitcev

    I was sick of this argument back when it was about Obamacare. Oh we cannot ditch it now, [several] people got insured and depend on it! Well guess what? I don’t care. It wrong – end it now. It’s like not be willing to obliterate HAMAS because it operates schools and hospitals. This sort of hostage-taking is a part of the plan, in fact.

  • avatar
    PentastarPride

    I would consider buying new if it means t cutting out the middle man. Besides the measurable savings you get by letting somebody else take the depreciation hit (which is unavoidable no matter what) the big reason why I don’t buy new is because I don’t like the dealership experience.

    I’ve accompanied my wife off and on when she wanted to buy a new car on trade. It was a excruciating process. It’s like they don’t want to sell you a car. “Oh, that’s not in stock and won’t be for a while, even though our site shows that we have that specific trim and color. Let me show you something totally antithetical to what you came here looking for. You have your own financing? Our packages are better even though the math says otherwise and you did your homework. I can’t let you leave this office in good conscience unless you buy this extended coverage.”

  • avatar
    markf

    “well, you didn’t love it enough to keep Saturn or Scion in business.”

    They both did very well initially, then GM/Toyota started treating them like GM and Toyota regular dealerships and started building crappy cars, that is what did them in, not the sales model

  • avatar
    Jack Denver

    If dealerships are really of such great value to manufacturers, why do car dealers need special laws forbidding manufacturers to even try selling direct?

    In order to shrink the # of Genesis outlets, Hyundai is paying dealer who are losing their franchises in some cases millions of $ each (in larger markets) – if the franchise for just one sub-brand is worth millions of $, how much is say a Toyota or Chevrolet franchise worth in a major market? These franchise values represent the present value of the future earnings stream which indicates to me that these franchise throw off a lot of profit every year. If you squeeze the dealers out of the picture, either consumers will pay less or manufacturers will make more but someone will lay claim to the profits of the middleman.

    I think instead of this special pleading on how wonderful dealers really are for customers, we should get rid of the protective laws and let the market decide whether they really are wonderful or are just “rent seeking” because local dealers are a powerful political lobby on the state level. If they really are that wonderful then they don’t need special laws that no other business has to “protect” them. We protect widows and orphans not fat cat car dealers, or at least we should.

    • 0 avatar
      trackratmk1

      “If dealerships are really of such great value to manufacturers, why do car dealers need special laws forbidding manufacturers to even try selling direct?”

      The million dollar question. Let the market work.

    • 0 avatar
      bikegoesbaa

      Bingo. If dealers add value to the process of buying a car then they have nothing to fear from eliminating the laws that mandate their existence.

      Why not roll back the laws and let customers make up their own mind about who to buy from?

    • 0 avatar
      White Shadow

      “If dealerships are really of such great value to manufacturers, why do car dealers need special laws forbidding manufacturers to even try selling direct?”

      That’s the same question I’ve been asking for years. Let a manufacturer offer cars direct to consumers and their franchised dealership network would die an agonizing death. Dealers know this, which is why they are protected. And it’s big business, so they lobby to keep their interests protected. But yeah, dealerships would be dead meat without that protection in place to keep manufacturers from selling direct.

  • avatar
    White Shadow

    There’s so much assumption (much of it seemingly incorrect) that I don’t even know where to start. Economics and a free market economy goes against much of what was written here.

  • avatar
    WallMeerkat

    Look at the UK market for a horrifying glimpse of the future.

    Niche models – gone. Sedans – gone.

    Want a standard spec CUV? That’s all you have.

  • avatar
    John Horner

    1) OEM run dealers/service centers isn’t the promised land.
    2) People who like to spout off about business models on the internet have rarely run a business.
    3) Whoever owns it, running a dealerships costs money for the land, building, utilities, insurance, staff, etc. “Eliminating the middle man” doesn’t necessarily mean lower consumer prices.
    4) It takes a lot of capital investment to provide up to date dealerships and service centers. Do the OEMs really want to have another need for capital?
    5) Right now dealers carry the financing costs of holding inventory waiting for the buyer.
    6) Build-to-order is real life is as popular as manual transmissions.
    7) Tesla continues to loose money at a rapid clip. “Yeah, but Tesla does it” isn’t a sound business argument.

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