Art Spinella, president of CNW Marketing Research in Bandon, Ore., doesn’t hesitate to pronounce direct Internet auto sales a dead issue. “This is a case where theory ran smack into reality,” he said. “It came from people who didn’t know the auto industry.”
The Franchise Law Gorilla
At the height of the dotcom boom, start-ups like CarOrder.com, Autoallies.com and Dreamlot.com envisioned buying cars wholesale from car companies and circumventing dealerships to sell them. They thought they could become the Priceline or Expedia of the automotive world. But car companies weren’t interested in empowering third-party sellers and the start-ups underestimated the tenacity of auto dealers defending their turf. The result is most attempts died off after burning through millions in investments.
Auto manufacturers did try their hand at selling cars via the Internet, but before they got very far they ran head-on into the massive legal barricades that state legislatures had erected over the last 50 years to protect dealers from automakers. These were “iron-clad franchising laws,” said Jack Gillis, director of public affairs at the Consumer Federation of America in Washington, D.C. “For the most part, the laws have been interpreted to not allow manufacturers to directly sell the vehicles.”
Dealership franchise laws are found across the country -- and almost nowhere else in the world. As franchisees, dealerships are independent businesses that sell vehicles under strict terms set by automakers. They would normally have little leverage but state laws tip the balance in their favor on some issues. Aside from blocking automakers' direct retail sales, they often prevent them from packing too many dealerships in a specific geographic area or closing one without "due cause."
Dealers even lobbied to beef up the franchise laws to counter these new threats from the Internet, so it wasn’t surprising that the manufacturers took a beating in the lawsuits that followed. One Texas judge derided the very thought that a long-standing legal bulwark protecting franchisees could be dismantled with the click of a mouse.
A Step Closer
So manufacturers proceeded with a different model: Give customers on the Internet as much information on the vehicles as possible and then refer them to a bricks-and-mortar dealership in their area. Manufacturers now offer online experiences that have largely replaced the need for shoppers to visit dealers to grab a brochure. Most of these sites also allow visitors to shop virtual new car inventory.
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Independent or so-called “third-party” auto sites, including AOL Autos, Edmunds, AutoByTel and many others also took up the mantle of providing information, selling advertisements and services alongside to pay the bills. Shoppers still rely on these middleman sites for invoice and market pricing, objective vehicle comparisons, expert and owner reviews, cost to own estimates and more. The better sites have also developed their own services to allow shoppers to request price quotes from multiple dealers and even see an Internet-only version of the local dealer’s best deals.
These approaches remain the model today. “I think the business model is a good one,” said Corey Perlman, a former GM Internet specialist and the author of eBoot Camp: Proven Internet Marketing Techniques to Grow Your Business. “People are making 95 percent of the decision on the Internet, and they still head to the dealership to kick the tires and do the test drive.”
Missing Out On Savings
But could a good system get better? Consumer advocates still like the idea of direct sales, arguing that buyers opting out of the showroom pressure cooker could save $1,200 to $1,500 per vehicle.
“It has tremendous potential as we become extraordinarily comfortable buying things on the Internet,” said Gillis, who estimates that 10 to 15 percent of car buyers would be willing to buy a car directly, without a visit to a dealership. Still more would consider it if there were a return policy or a test drive could be arranged for them. “My guess is that there would be some dealers who would be willing to be paid to do the test drives,” he said. “That would make it easier for dealers to swallow the concept.”
The oft-cited direct sales model of a decade ago was Dell Computers, but there’s an auto industry precedent as well. Taking advantage of Brazil’s more open franchising environment, General Motors has sold its popular Celta model directly to customers over the Internet for a decade, according to a 2009 study by the U.S. Department of Justice. Consumers save six percent on the purchase and are able to track it online from the factory to a dealership of their choice. The study touted the approach as a way for automakers to cut costs and build sales.
Savings come by building precisely the cars and amenities that people want based on Internet orders, moving away from trying to guess what customers want. When manufacturers misread consumer trends, they have to resort to expensive dealer incentives to move inventory and incur the costs of storing unsold vehicles, Gillis said.
According to the Justice Department, an Internet-based system proved it could slash about $2,000 from the cost of vehicles by building them to order.
Not everyone agrees, however. A National Automobile Dealers Association white paper, written at the height of the frenzy over Internet car sales a decade ago, argued just the opposite: That Internet orders would needlessly complicate a finely tuned production system.
There are already outliers paving the way for changes to this decades-old dealer system. For instance, BMW owns and operates its own dealerships in major metropolitan areas in Germany, in effect competing against its own franchisees. Also in Europe, “gray market” brokers capitalize on the manufacturers’ price differences across Europe, buying lower-cost cars in Eastern Europe and shipping them to Britain, Germany and other countries, circumventing home-market dealers.
Here in the U.S., eBay Motors, the online auction service primarily known for selling used cars, could be a test case for new car sales. GM launched a partnership with eBay in 2009, and there are plenty of dealers using the site to sell new cars. “People are buying cars over the Internet on eBay without a test drive, but they are getting such good deals that they don’t care,” Perlman said.
For shoppers who know what vehicle they want to buy and are looking to avoid haggling price with a dealer, “Best Deal” pricing is available from online sites like AOL Autos and through club memberships such as Costco and American Express. Some start-ups, like CarWoo, have crept back onto the scene to help eliminate pricing hassles for a fee.
But for all its power to transform commerce, Spinella doesn’t think the Internet can change car buying much more than it already has. For one thing, it would take a massive assault to dislodge dealers from their last bastion: Closing the deal and financing. He also points out that customer behavior is exceptionally slow to change. Research shows that people buying new cars still do so within 60 miles of home, something that hasn’t changed in years, even since the widespread acceptance of the Internet.
“Today you certainly don’t buy a new car over the Internet,” Spinella said. “But you almost do.”