THE FIRST IN OUR FIVE-PART SERIES ON CAR COMMERCE ASKS:
WHY DO WE KEEP BUYING VEHICLES AT DEALERSHIPS?
TWO 20-SOMETHINGS WALKED into a car dealership . . .
No, that really happened—this isn’t a setup for a joke. More than a quarter of the 16 million new-car purchases in the United States last year were made by that tech-savvy, marketing-averse group known as millennials, according to market-research firm J.D. Power. And virtually all those buyers ended up signing the paperwork and accepting the keys at an honestto-goodness new-car dealership.
How could that be, in an age of painless online shopping, when you can buy everything from shoes to home mortgages via keystrokes, no trial fittings or handshakes required? Why can’t you read the review of a new model on Car and Driver’s website, click the “Buy It Now” button at the end of the article, and walk out to the driveway to await delivery by (large-capacity) Amazon drone?
FAR FROM USELESS
Despite a few experiments with direct sales that have generally not caught on, a notable exception being Tesla Motors’s factory sales model, franchised dealers still control the new-car pipeline in this country. Their reign is unlikely to end soon. “The internet has dramatically changed the car-buying experience, but not the role of the dealer,” Maryann Keller & Associates wrote in a 2014 study for the National Automobile Dealers Association, a group that undoubtedly liked what it heard.
Long-established state franchise laws that largely prohibit direct sales by auto manufacturers are the biggest reasons dealers are mostly impervious to outside threats. The idea behind the franchise system is that third-party businesses can service customers better by fostering competition. A dealer who is independent of the automaker would, in theory, assure a broad inventory, provide competent repairs, and be an upstanding member of the local community, treating neighbors fairly and perhaps sponsoring beer-league softball or a kids’ soccer team. And customers can comparison-shop Chevy dealers easier than if they are taking on Chevrolet itself.
Compared with most purchases, online and otherwise, buying a car is a costly, complicated affair, more akin to a real-estate transaction than buying a shirt. The dealer arranges financing, collects taxes, handles the state registration, and offers an opportunity to see and drive various models before making a decision. It will take your old car on trade and stands ready to provide factory-warranty service and handle recalls.
“There has been a focus on outdated laws that protect dealers, but there is that consumer issue, and it is a real one,” says Aaron Jacoby, chair of the automotive industry practice group at Arent Fox, a Washington, D.C.–based law firm. “Laws are still geared toward protecting consumers, and there is interest in how they will get service for these major expensive things they are buying. How will recalls be handled? How will warranty work be handled?”
While more than a third of customers say they would consider buying a car directly online, according to a study by McKinsey & Company, most want to try before they buy. More than 80 percent of buyers take test drives, underscoring the continued strategic importance of dealers.
The number of dealers is declining, though, and that isn’t necessarily a bad thing. Many marginal operations succumbed to the recession, and manufacturers bought out others that were smaller or less professional. Consolidation has created a national network of some 18,000 dealers today, 18 percent fewer than the 22,000 in operation just 10 years ago. While momand-pop operations dwindle, the largest dealer groups—such as AutoNation, Penske, and Group 1 Automotive—continue to add locations, boosting profit margins and efficiency. Bigger can be better for customers as well. The dealer groups offer more choices, with AutoNation listing some 70,000 vehicles for sale nationwide, all searchable online. Once you find the exact model you’re looking for, the car can be shipped to your local store for delivery.
Buying a new car remains a bricks-and-mortar transaction, an actual physical exchange of paperwork for keys. The sales environment is changing, however, as dealerships face up to the internet’s new reality. Today’s customers, millennials in particular, demand transparency, simplicity, speed, and trust. “Customer expectations are being shaped by retail experiences largely online,” says Jeremy Anwyl, principal of Anwyl Partners and former vice chairman of Edmunds.com, the auto-shopping website.
A tsunami of information is within easy reach of anyone with a laptop or a smartphone. Data-gathering websites detail exactly what dealers pay for cars, while independent companies compile full inventories of available vehicles, reveal what other buyers paid for the exact model under consideration, and connect shoppers to the dealer with the lowest price, often guaranteed in writing. Increasingly, buyers are striking virtual deals with salespeople they haven’t met, filling out forms and initiating the transaction from their living rooms. A study released this year by Autotrader.com, which included a survey of more than 4000 car shoppers, found that 56 percent wanted to start negotiating on their own terms, preferably online, and that nearly threequarters wanted to complete the credit and financing paperwork that way as well.
“You talk to consumers about what bothers them. One is a lack of feeling comfortable with the price, and another is a feeling that their time is being wasted,” reports Anwyl.
So the goal for dealers today is to complete the deal and hand over the keys within an hour. Still, a complicated credit history can stretch the process toward, and beyond, the industry average of four hours.
Another bottleneck in the process is the trade-in. “Why don’t people buy more new cars right now?” asks John Krafcik, president of TrueCar, an online pricingand-information site that funnels buyers to dealers. “Probably because the thought of selling their current car is so horrible.”
TrueCar attacks this problem with a smartphone app to expedite the trade-in process. You snap photos of your car, answer a few questions about its condition, and TrueCar will solicit bids from dealers in your area, then send you back the highest offer. Assuming that an inspection verifies the claimed condition, the dealer will cut you a check for the car or honor the stated value as a trade-in. By the time the TrueTrade process is fully implemented next year, TrueCar says you will be able to take your car to many of the 10,000 dealers in its network to receive the guaranteed price.
Online pricing tools may have helped to reassure wary customers, but some parts of the transaction, such as lease calculations or payments from manufacturers to help cover dealer costs, remain inscrutable. “There is partial transparency,” Anwyl says, “but it is not complete.”
To a public increasingly accustomed to online shopping, the dealer model may seem old-fashioned. But Jacoby, the lawyer, says that automakers and dealers “are slowly figuring out the dance toward how they themselves would dominate the internet.” He points to FordDirect.com as an example. That site—and similar efforts such as GM’s Shop-Click-Drive and Scion’s Pure Process—allows you to build a vehicle to your specification, gives you an “internet price,” and links you to a dealer for delivery. FordDirect claims to have helped dealers with more than 600,000 sales last year.
Another factor in favor of dealers: Customers seem to like them better than ever before. Two of J.D. Power’s studies, the Sales Satisfaction Index and the Customer Service Index, have been on the upswing for years (except for a slight dip in 2015 for the service study), suggesting that dealers have been cleaning up their houses.
“People are more satisfied with dealers today than they have been,” says John Humphrey, senior vice president for global automotive operations at J.D. Power. “It’s evident in trend numbers from our surveys. They’re more satisfied when they buy and when they go for service.”
Adds Anwyl: “It is not inherent in the franchise system that customers can’t feel happy and have a great experience when they buy a vehicle. It does mean that manufacturers and dealers need to clarify their roles and responsibilities and work together.” So while there is still no simple way to buy a car, technology has leveled the playing field. That gives the customer more clout.