Independent Auto Dealerships: An American Gray Swan?

Chickens come home to roost, and canaries meet their demise in coal mines. But hey, we knew there was a high probability of each happening eventually, right? However, when a black swan shows up with severe impact and consequences, everyone is caught off guard. I’m wondering if it’s a black swan when you could have seen it coming?

A swan of a different color

Oddly enough, definitions of the term usually include ambivalent statements concerning hindsight:
“A Black Swan event is an event in human history that was unprecedented and unexpected at the point in time it occurred. However, after evaluating the surrounding context, domain experts (and in some cases even laymen) can usually conclude: ‘It was bound to happen.’”
—Black Swan

“A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.”
—Investopedia

Maybe the writing was on the wall telling a story of imminent change to an industry’s business model, and maybe, instead of evolving, companies dug in their collective heels and fought change tooth-and-nail. And then they got run over by progress, and the competition left them in the dust. Would that qualify as a black swan event?

Maybe that’s just a gray swan. But these things do happen. It happened to the personal computer industry when Michael Dell began selling computers directly to the public by mail order and then online in 1996. His recipe for success: Build the computer exactly to the customer’s specifications, after the customer orders it; cut out the middleman and dramatically cut the price.

If we pay attention, we may witness the same kind of transformation for the new-auto sales business model.

Shining a light on an existing issue

The Covid-19 pandemic has exposed or magnified many current trends, one being the flagrant willingness of shoppers to buy anything and everything online—if possible. This includes automobiles.

Leading the way in the customer-centric auto-buying experience is the used-car sales industry. Companies like Vroom, Carvana, and CoPilot have ridden a windfall in traffic as stay-at-home purchasing and home delivery have increased. And, although this isn’t the only way to buy from Carvana, yes, they really do have automobile vending machines....

Much of the evolution in the way we buy cars is due to new technologies. For instance, Montway Auto Transport offers a vehicle home-delivery service—an end-to-end automotive transportation solution for dealers to provide estimated delivery dates and shipping prices on their website.

“Dealers are offering significantly different car-buying experiences today with white glove and VIP services, like home delivery, in today’s customized, online buyer experience,” says Dimitre Kirilov, president and CEO of Montway Auto Transport, one of the largest third-party logistics companies in the United States. “The role auto transport has in sourcing and moving inventory has never been more important with today’s high-value new and used cars, especially as American cars average over 12 years old—an historic number which will likely drive sales this year.”

One of the shiny parts of Montway’s gig is providing a website-integrated widget that allows dealerships to easily expand their targeted audiences with nationwide selling opportunities. This includes an online dealership portal—a managed service that allows dealers to handle consumer shipping requests, provides full transparency from quote to delivery with visual status charts, and more.

The problem with auto sales is the new-car sales model; current state laws prohibit OEMs from selling new vehicles directly to consumers (D2C). Selling directly would cut out the dealership franchise—the middleman—and all the associated price markup fees. This could theoretically save car buyers an alleged 30 percent of the cost of a car. Whether that’s true remains to be seen. Without dealer franchises, would OEMs accrue the cost of a brick-and-mortar sales facility and pass the cost on to the customer as usual? Or, OEM dealers could move to a model where customers order their vehicles, then the OEM manufactures their cars, à la Tesla. That would generate tremendous savings on static and unsold inventory, which could lower the retail cost of a vehicle... could.

It’s no secret that the decades-old pushback against D2C new-car sales is a movement comprising independent auto dealerships and the legislators who enact protectionist policies (one might assume in trade for generous campaign contributions). Check out the fate of pro-consumer bills in legislative voting.

As far as I can tell, there’s not one single state that allows D2C sales of gas-powered vehicles. Although many faux D2C bills have been passed, they contain clauses that render the entire bill moot except for electric vehicles. Check out the clauses on this list of regulations by state, and you’ll see what I mean.

Forcing multipliers

The fact remains that, from a customer point of view, buying from a traditional dealership sucks is unappealing, to say the least. Whether boomer, gen X, or millennial, prospective car buyers are doing far more research online, and buying online is also becoming more common.

Millennials are twice as likely as boomers to buy a car entirely online
—cars.com

For the record, I didn’t set foot inside the dealership where I bought my last truck (I’m a boomer/gen X). I had narrowed my choices online down to two models, and affordability dictated the rest. Paperwork? Online. Trade-in? They drove my new truck to my house and drove away in my old truck. The deal was struck with a 10-minute phone call.

Now, my experience was with a brand-new vehicle. But OEMs apparently are taking notes on current used-car trends, as evidenced by General Motors launching an online used-vehicle market, CarBravo, this spring. The move will allow the automaker and its dealers to challenge online used-car retailers like Carvana and Carmax.

Ford has already dipped a toe in the water with its Ford Blue Advantage program, which allows prospective buyers to browse inventory online before contacting the independent dealership. Ditto for Toyota.

And then there’s Tesla—the OEM leading the charge for D2C auto sales. Tesla has been fighting—and winning—a prolonged legal crusade to turn the tide of dealership protectionism. Tesla doesn't have dealerships, per se, but it does have service centers that serve as physical touchpoints for prospective buyers to see and drive the various models (models available are limited) and ask questions. What’s missing are the dozens—or hundreds—of vehicles ready to be driven off the lot. The actual purchase takes place online, whether at the dealership... er, service center... or on your laptop at home. This business model appeals greatly to my sensibilities, although the downside may be that test-driving the car you want could be a challenge.

Drivers Only shows the ins and outs of the Tesla purchasing experience in this 22-minute video:

How would it look if the standard auto OEMs adopted Tesla’s way of selling cars?

Is a gray swan coming?

So, if Tesla’s D2C tactic proves to be a big enough differentiator in profits compared to OEMs selling via dealership franchises, and if used-car sales take an even bigger market share due to online buying trends, will automakers rise up and bury the dealerships that have become an overweight liability in high seas?

Perhaps then everyone except independent dealership owners will look on and say, “It was bound to happen.”

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