In an era when every square foot and extra minute along a supply chain mean dollars saved or squandered, it’s not surprising that auto dealerships have been facing uncomfortable scrutiny. Protected by franchise laws, these icons of American commerce struggle to justify their value to customers as well as automakers new and old. It’s in their own best interest to step out from behind their legalized shields and figure out how to adapt.
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The transportation industry, like many these days, is changing rapidly. Public and shared transportation are on the rise. People are less inclined to rush out and buy a car. Cars are driving themselves, and real-time analytics rule. Automakers, keenly responsive to customer trends, are busy creating a new breed of vehicle: the mobile online lounge. Commenting last year on Tesla’s disruptive push for direct sales, an article in Maxim hinted that car dealers have only themselves to fear: “The simple fact is that Tesla isn’t in the combustion engine business; it’s in the killer app business.” Increasingly, new cars and old business models just don’t mix.
“The threat to the car sales status quo isn’t the company itself, but what it embodies: consumers’ increasing comfort with complication and desire for transparency,” the article explains. “We’re all walking around with phones considerably more complicated than automobiles. We buy them online or from polo-shirted undergrads. We also shop for cars online, which gives salesmen, who work on commissions… the existential jitters.”
With most products, technology allows consumers to be in charge of what they buy, and how they do it. Walking into a dealer’s showroom often takes that sense of ownership away. There’s also the widely reported extra cost that comes with dealing with dealers. A 2000 report by a Goldman Sachs analyst estimated that direct sales would save consumers $2,225 per new car, assuming an average vehicle price of $26,000. And that was 15 years ago.
From a supply chain perspective, dealerships’ dubious role in customer satisfaction is readily apparent, but what about upstream? Are they an effective, lean link in the process? Again, the answer would have to be no, although the automakers themselves have helped create the problem.
During the early 1900s, automakers relied on wholesale distributors working under simple contracts. A couple decades later the initial public demand for new cars leveled off, but manufacturers continued to deliver that high volume of inventory to distributors. What started as an easy-sell “pull” system became a hard-sell “push,” and in that shifting of gears, the traditional franchise dealership was born.
It’s an uneasy partnership with a lot of investment and risk on both sides. Franchisors worry that franchisees might exploit their effective local monopoly by overcharging customers and underpaying suppliers, while franchisees worry that the franchisor won’t supply them with a desirable quality product when they need it.
Complex contracts between the two parties are meant to address any incentive and hold-up issues, but unfortunately, market forces don’t always read the fine print. During the Great Depression, for example, Ford and General Motors took advantage of their dealerships by forcing unwanted cars on them. The dealers, with money invested in facilities and an eye on other, more lucrative models, accepted the unwanted cars but petitioned for protective legislation.
By 1956, when the Automobile Dealers Day in Court Act was passed, many states had already created dealer-friendly franchise laws—and they’ve grown much friendlier since. Even if customers would like to buy cars directly from manufacturers (which they would), it’s impossible to do that in the United States. The game is still dealer’s choice.
In 2015, as self-driving cars hit the road in California and Tesla forecasts a 70-percent jump in deliveries to buyers, franchise car dealers are a kink, not a link, in the automotive supply chain. If it weren’t for the franchise regulations, dealerships would be undergoing the same sort of painful evolution that department stores, booksellers, and sundry other manufacturing segments have done. They likely will anyway, but the process may prove long and costly to them and those they serve.
Perhaps nimble and forward-looking dealers might consider following the lead of Brad Miller, who last year adapted Tesla and Apple sales practices at his Honda and Toyota dealerships in Seattle. He’s streamlined the sales process (“One Buyer, One Price, One Hour,” according to his slogan), eliminated the sales commission from the equation, and offered transparent financing based on a credit-score chart on the wall. The same salesperson handles each customer’s purchase from start to finish.
During the first months of implementing the new process, most of Miller’s sales staff walked, and sales plunged from 100 a month to 70. But they’re now back to their former level, and Miller is looking at increasing salaries for his better-trained staff.
“Sooner or later,” he told Stephen Edlestein of Green Car Reports, “everybody will have to sell their cars this way.” You think?
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