Elephants in the Room! Startling New Studies Revealed!

ruggles/Wards

Two important automotive conferences were held in New York City recently in conjunction with the New York International Auto Show. The first conference was the J. D. Power Automotive Forum, followed the next day by the Driving Sales President's Club Event. The conferences had at least one thing in common. They both were launching points for two new surveys regarding what consumers supposedly want in their retail shopping experience, based on consumers answering questions to survey questions. AutoTrader released its new survey at the Power conference while Driving Sales revealed its own survey the next day at their own conference. The presentations of these survey results were rife with anecdotes. Both "studies" "proved" what some people have been trying to prove for decades, that consumers prefer not to negotiate and don't like the sales process.

...the continuation of attempts to predict auto buying behavior by asking survey questions instead of observing actions...

I was reminded of the infamous J. D. Power survey released at the NADA convention in 1993, where they showed that consumers didn't like to negotiate, which "proved" that the Saturn way of doing business was going to take over auto retail. Interestingly, J.D. Power was also selling consulting and training services to teach dealers how to implement the "new sales strategy." At the time, Saturn dealers were doing really well while GM was losing about $1500 per vehicle. Unfortunately for J. D. Power, no one taught the OEMs that for the "Saturn Method" to work over production can't be part of the equation and true "success" includes OEM profit. [The Prof adds: in the pre-internet days Saturn dealerships were also few in number and widely dispersed, which was important in limiting the ability of consumers to play dealerships off against one another]

At the same 1993 NADA convention new research was published by an Arizona research and marketing company that showed the exact opposite of what the Power survey had said. The different results were achieved by merely changing the wording of survey questions. At the time it seems that consumers really do want to negotiate, they just want to be guaranteed a win. They want to play poker with you. They just want to see your cards first before placing bets.

The marketplace ultimately proved who was right and who was wrong. Saturn proved many things. It proved that fresh product enthusiastically received by the consuming public is essential. And we know GM subsequently starved Saturn for product. After all, why give a division product unless they have proven they can move the metal? Saturn proved that some consumers prefer their business model. They also proved there aren't enough of them to make for a viable division. Saturn introduced a stellar vehicle in the Aura. Yet, consumers voted with their feet. Instead of buying the very competitive Aura and its consumer friendly sales model, they went in hordes to Toyota and Honda to get abused by the so called traditional sales model. Go figure.

Later in the decade Ford attempted to show the industry how to do auto retail based on how consumers respond to survey questions. The Ford Collection lost hundreds of millions of dollars and was one element of the underlying dissatisfaction that cost Ford CEO Jacque Nassar his job. [The Prof adds: the Explorer-Firestone rollover issue was a factor, too]

Both of this year's surveys ignored some "elephants in the room." While demonizing the "old methods," as if there is such a single thing, they failed to tell us exactly how to do what consumers want us to do while still making money. After all, new cars aren't sold for profit these days anyway. Dealers typically pay off more at their floor plan lender than the customer just paid for their new vehicle. And after paying each new vehicle's share of the overhead, our industry is selling new vehicles for about break even. And to add insult to injury, consumers still aren't happy.

I'm living proof that there is no such thing as the "old method" of selling new vehicles. I started in the business in 1970, selling in a One Price store, although it wasn't called that back in the day. We called ourselves "Moral Motors." The anecdotes related by those who try to demonize "the old ways" might describe some stores, but they certainly don't describe them all. There has never been a single way for dealers to run their sales operations. Auto retail has ALWAYS been about relationships and satisfying customers. This has never changed. As a consultant/ trainer over 20 years ago, we taught sales people to open dialogue with prospects by saying, “Before you leave, we want to make sure we provide all the information you need to make a practical purchase decision, including some numbers to think about.” Today that's called "transparency."

Even though the consumer today has ready access to all sorts of information, they "know" less today than they ever did because of the complexity that exists today. Much of that complexity was created by OEMs when they curtailed dealer markup and hid gross profit behind invoice, something I seriously doubt consumers would call “increased transparency.” The vast amount of information available today is like drinking from a fire hose for consumers. Auto buying consumers have more information, yet know less. Over the last few years I have visited hundreds of dealerships. I have seen a consistent pattern of sales people attempting to deal with consumers who think they know a lot more than they do. It is an art to correct your potential buyer on their misconceptions while still maintaining a relationship to allow them to do business with you afterward. Many of our sales people fail miserably at this. [The Prof adds: with sales staff turnover, don't be too sure consumers aren't the more informed party! But remember too brand proliferation: can you name all 600 makes on sale in the US market??]

I am able to do my own research. Since it is informal I don't try to calculate a "margin of error" or use lofty terms to describe my methodology. I am regularly in front of groups of college students. My own personal study group is my 22 Gen Y nieces and nephews. Further, I am regularly in front of a large group of retired millionaires at a retiree forum in my home town. This gives me the opportunity to conduct show of hands type surveys. Example: "How many of you think an auto dealer is entitled to a return of 10% on the sale of a new vehicle?" EVERYONE in the room raises their hand. A little later I'll ask, "How many of you, after you get home after buying a new car, would be upset if you find out you paid the dealer a $3K profit." EVERYONE in the room again raises their hand!!

For those who think the Ford Collection, Saturn, and Priceline outcomes happened ages ago and are no longer valid, a Dallas company specializing in lease comparison software, Cybercalc.com, recently did extensive surveying which “proved” consumers prefer to get their deal structured and “locked in” before revealing who their identity. The initiative was called AutoBids Online and a small fortune was invested to create a software platform to enable consumers to anonymously enter a marketplace where dealers would bid for their business, thereby locking in an offer before the consumer’s identity was revealed. This would seem to prove that the AutoTrader survey results on this issue are valid, right? In talking to CyberCalc CEO Jeff Cook about his expensive lesson as it regards auto buying consumers, he says, “I have some GREAT software for sale if anyone thinks the market is now ready for this. When we did this a few years ago, it clearly wasn’t, despite our extensive surveying.” Perhaps it was the $29 consumers had to pay top enter the marketplace? One would think that would be a small price to pay for avoiding the “old method grind,” right?

This is not to say that the Internet hasn’t forever changed some things about our business. Dale Pollak and others have definitively proven that if a dealer prices his/her vehicles wrong, their inventory will never be seen by consumers doing routine searches. But this has been proven by actual consumer behavior, not by surveys.

So what are the "elephants in the room" ignored by these recent surveys? In our bid to thrill consumers shouldn't we ask them about how we answer the phone? After all, a HIGHLY valued relic from the past, Jackie B. Cooper, used to point out that the dealership telephone operator talks to more potential gross profit than any employee in the dealership. "And who gets paid the least?" Jackie would ask. These days the telephones are answered by an IVR system (Interactive Voice Response). en Y calls them "bots." AND they are universally reviled. Why are no studies focused on how our customers like the way we answer the phone?

Another elephant? Even the best sales process can turn counterproductive when executed crudely. The least polished of our sales people make up the VAST majority these days. Why? Because WE have run off most of the good talent. Our industry has cut the upfront markup, increased the holdback, increased the pack, taken away demos, cut fringe benefits, instituted full retail markup internal charges, etc., etc., and we wonder why we are left with the unpolished and unpracticed sales people? When you turn over employees it is because you either did a bad job of hiring, or a bad job of managing. Why ignore this while focusing on peripheral issues?

Perhaps the most outlandish claim "proven" by the Driving Sales survey is that our industry is losing up to 5 million new vehicles sales each year because consumers don't like our processes. This is referred to as lost "headroom." This assumes that consumers who don't like the first dealer they encounter, exit the market instead of exiting that dealership and visiting another. I have run this claim by a number of industry economists. I first started asking about "lost SAAR" when I heard TrueCar's Scott Painter claim that new vehicle retail could be doing 20 million SAAR if we eliminated the "friction" in the sales process. The unanimous responses from these numerous industry economists and other experts uses terminology reminiscent of Norman Schwartkop's reference to "bovine scatology."

At least we all got to listen to Warren Buffet and Larry van Tuyl at the J. D. Power conference and Maryann Keller at Driving Sales. Maybe it’s just that I take comfort in listening to common sense from people closer to my age bracket, or maybe I just like listening to common sense from whomever it comes from.

Some high points, or low points of the conferences, depending on one’s perspective follow. According to the AutoTrader study:

Consumers want a change in the car buying process, but they failed to define either “old process” or “new process.”

There is no such thing as “the old process.” Dealers used to compete with other dealers to provide an experience acceptable enough to consumers to gain their fair share of sales and gross profit. It seems like any new process would work the same way. If there is a single universally acceptable new process that would accommodate the 30% of buyers who are in the Buy Here/Pay Here or subprime credit category, as well as the near prime tiers, and would take negative trade equity into consideration, as well as “fast track” credit buyers, AND allow for dealer Return on Investment, we’d all like to hear about it.

Consumers want to test drive new vehicles at a central location without sales people present.

What they failed to ask is how much more consumers would be willing to pay for this.

Consumers dislike the process as it is today...

...yet that process sells 14 million plus new retail units per year. Perhaps consumers would prefer if the FTC would allow dealers to fix prices so everyone could pay the same price? Why not ask consumers how they would like that?

Consumers prefer to remain anonymous until they lock in a deal.

Of course they do. So what?

Dealers have always been free to adapt to whatever they believe consumers really want.

A lot of money has been invested in attempts to do business based on what consumers say they want in surveys with Saturn and The Ford Collection being the best examples. Maryann Keller mentioned the Priceline experiment, which didn’t work. She should know. She ran it and is completely upfront about the experience. Who better to tell us about the difference between what consumers say and how they actually behave than the world’s leading auto analyst who also spearheaded a well financed attempt to appeal to consumers based on their stated preferences? What has changed since those expensive experiments failed? Why are people still continuing to try to prove that consumers behave the way they say they would on surveys?

From Driving Sales: Rachel Richards, listed as Vice President and Chief Marketing Officer from Sonic Automotive, the country’s fourth largest automotive retailer, gave a presentation on their new retail initiatives called “One Sonic - One Experience.”

One would think that Richard’s previous career experience with Ford Motor Company might have provided some insight on the difference between what consumers say on surveys and how they actually behave in the real world. As I understand it, the new program is still in pilot stage and has not been rolled out across their system. My understanding is that they have 15 sales people at one pilot store who also do their own F&I. When I asked if they would all be AFIP (Association of Finance and Insurance Professionals) certified, she told me she didn’t know what that is, and that a different department was responsible for the F&I element. I can only imagine the regulatory vulnerability associated with having 15 sales people all trying to do their own F&I. I’m sure time will tell, as it did with the Ford Collection.

What seems to be inevitable is the continuation of attempts by some to predict consumer auto buying behavior by asking them survey questions instead of merely observing their actions. After all, we have many talented and experienced experts who are in the trenches on a daily basis. Why not just ask them?

Transparency and the Car Business

The new buzz word in the Auto Industry these days is “Transparency.” Let’s face it, the word is nothing more than the current euphemism for “One Price,” which has been proven to be an abject failure. The demise of the Ford Collection is the prime example. There are still Dealers using “One Price” as a strategy of Negotiation, but “One Price” ONLY works when there is more demand than supply. A Dealer’s fantasy is to wake up one day and find out that has nearest competitors have all gone “One Price.”

We could revisit the Saturn debacle, but why? How many times does the lesson have to be learned. Does anyone actually think Saturn was a success story?

Ever notice how it is the Silicon Valley types who want to change our business? Ever notice that they have never sold cars on commission or owned a Dealership before they set out to give Consumers what they think they want. These people are experts at running focus groups, although they don’t know the right questions to ask or how to interpret Consumer answers.

So lets set out to thoroughly discuss the issue of “Transparency” as it regards the Car Business.
“In economics, a market is transparent if much is known by many about:

• What products, services or capital assets are available.
• What price.
• Where.

There are two types of price transparency: 1) I know what price will be charged to me, and 2) I know what price will be charged to you. The two types of price transparency have different implications for differential pricing.

A high degree of market transparency can result in disintermediation due to the buyer's increased knowledge of supply pricing.

In economics, disintermediation is the removal of intermediaries in a supply chain, or "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.

This can also happen in other industries where distributors or resellers operate and the manufacturer wants to increase profit margins, therefore eliminating intermediaries to increase their margins. (In the case of the Auto Industry, the “intermediaries would the franchised new vehicle Dealers.)
“Disintermediation” initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers bypass the middlemen (wholesalers and retailers) to buy directly from the manufacturer, and pay less. (Buyers can also pay MORE because the manufacturer controls the market. Competition between Dealers is what maintains the price equilibrium Consumers aren’t smart or knowledgeable enough to appreciate.)
Price transparency can, however, lead to higher prices, if it makes sellers reluctant to give steep discounts to certain buyers, or if it facilitates collusion.” Excerpts from WIKI

In legal terms, and in the context of the Auto Business, “Transparency” means fully disclosing all information mandated by all applicable laws in exactly the way the law demands these disclosures take place. There is NO legal mandate that the Consumer has to be happy with the transaction. We have always known that a “Good Deal” is largely a state of mind.

Definition of “NEGOTIATE,” Merriam Webster:

• to confer with another so as to arrive at the settlement of some matter.
• to deal with (some matter or affair that requires ability for its successful handling): manage
• to arrange for or bring about through conference, discussion, and compromise “ More WIKI Excerpts

A brief historical reference of Transparency Regulation in the context of the Auto Business:
New vehicles did NOT have a stated and posted price until 1958, when a law sponsored by Senator Mike Monroney of Oklahoma was passed. Trucks did not have a priced Monroney label until much later. “The window sticker was named after Almer Stillwell "Mike" Monroney, United States Senator from Oklahoma. Monroney sponsored the Automobile Information Disclosure Act of 1958, which mandated disclosure of information on new automobiles.” WIKI and commonly known

Even if the Consumer is prepared to pay the Auto Dealer’s asking price, the value of any trade in has always been a matter for Negotiation. There is no single wholesale value for any Pre-Owned vehicle. A vehicle is worth whatever a wholesale Buyer will pay at auction in a competitive bid situation on a given day. Typically, Retail Buyer’s want Retail for their trade, thinking the Dealer should sell their trade at Retail just to get their money back, for the privilege of selling a new vehicle.

Even in the most simple purchase situations, where a Dealer states his/her price and the Buyer accepts and makes the purchase, this is still technically a “Negotiation.” The stating of a price is a first pass of Negotiation. Regulation, beginning with the government mandated Monroney label, has forced Dealers to state their price instead of merely entertaining offers on sales. The Monroney law came into being after WW II, when Auto Dealers, who hadn’t had new vehicles to sell for years, were in a short supply, low demand situation. And they took advantage. After all, they had just been through a period of no supply and high demand and had previously experienced high supply and low demand during the Great Depression. Consumers were offended, preferring only to experience a market driven by higher supply than demand.

As a practical matter, it makes no sense for a Dealer to debate “transparency” with Consumers OR with those who have never had the experience of making a livelihood by selling vehicles or with those with a major investment in an Auto Dealership. They have no standing on the issue. In the Auto Business it becomes clear quickly that without substantial gross profit, one doesn’t eat very well. The Sales Person’s welfare or the Dealer making a profit are NOT concerns of most Consumers. Consumers typically have no understanding of what a Dealer’s Cost of Sales might be. They don’t typically care. But for some reason many Consumers think they have the right to know a Dealer’s cost structure. These same Consumers seldom ask cost and margin questions of other retailers. At the least they don’t want to pay more than other Buyers of the same product. That’s no surprise. Neither do I. But if I buy from a “One Price” Dealer there is NO ASSURANCE that others aren’t buying for less than I do. After all, there are always competitive Dealers who are happy to work from their “One Price” competitor’s Best Price.

All car buyers negotiate in some fashion and to some degree. Car buyers typically think they are entitled to be quoted a price to take to competitive Auto Dealers. The first Dealer either accommodates, or doesn’t. If the Buyer doesn’t like a Dealer’s Negotiation Strategy, they are free to find one that gives them what they want. In other words, the market works in the Buyer’s favor. The Car Buyer can find another Dealer more quickly than the Dealer can find another Buyer. Consumers are NOT held to the same laws and ethics that Dealers are obligated to. So the Consumer holds all of the advantages, EXCEPT, in most cases, the Dealer has more experience Negotiating car deals and possesses more accurate information. Providing equal information to a Car Buyer would, in theory, create an efficient market that could commoditize new vehicles. This could theoretically eliminate Dealers. But then who would take the trades? Who would arrange the financing? And who would teach Consumers how to interpret all of the information?

In Business, it is also clear that if a Negotiation takes place, and neither party gets their “feathers ruffled,” someone left money on the table.

So what do Car Buyers really want? They want a guarantee that they will WIN the Negotiation. They want a guarantee that the Dealer will quote them a price that they can validate in their own mind by using what the first Dealer provided to shop other competitive Dealers. This has not changed in my 43 years in the Auto Business. Only the method of delivery of the information has changed, as well as they ease with which a Consumer can shop. If a Dealer doesn’t play along, they are vilified, not only by Consumers, but OFTEN by 3^rd Party Vendors who appeal to Consumers and who also depend on Auto Dealers for revenue. But the Market works. If Consumers are unhappy with one Dealer, they can go to the next. They can also make use of information provided by the Vendors, although these Vendors are at risk if they also depend on Dealers for revenue.

As it involves the varying definitions of “Negotiation,” many Car Buyers would prefer to have the Dealer disclose the triple net cost of their product, and then “Negotiate” the “Margin.”
So how does one sell New Vehicles in this environment? Most Dealers attempt to provide Consumers with a “Perception of Transparency” as a Negotiating strategy, since TRUE Transparency would prevent making a Gross Profit high enough to pay overhead expenses. We currently do not have true Transparency and we are still seeing considerable margin compression.

The Consumer has the ability to shop until they find an Auto Dealer Negotiation strategy they like. Some give up and buy because they were worn down, lost patience, and gave in. Others depend on the Dealer to arrange financing which may be more important to them than the price of the vehicle.
Despite the massive amount of regulation that has been imposed on the Retail Auto Business, the current Market Driven system has sold up to 17 million vehicles in a year. Some might say the system has served us well over the years despite the fact that many Consumers are aggravated by the process. To those Consumers, I say, “Keep shopping until you find the Dealership shopping experience that gives you what you want.” Let the Market work.

Dealers are not typically completely “Transparent” with their own Sales People and Managers. Why should they be? It is human nature for Sellers to give away potential profit in an effort to make a sale. The cost structure of a new vehicle is so complicated that even Dealership management staff has a hard time understanding it. In many cases, the true cost structure is not determined until a Dealer receives a check based on the achievement of objective over a period of months. With all of the possible incentives, including “Conquest Incentives, “Realator Incentives, Plumber Incentives, Glass Company Incentives, First Time Buyer Incentives, Fleet Incentives, Special Bid Incentives, College Grad Incentives, Employee Purchases, various “Private Offers,” Returned Military Incentives, and many more, plus variations of the above. Trying to provide all of this information, including teaching Consumers the elements of the wholesale market would be overwhelming to most. It would be akin to drinking from a fire hose. There is a considerable learning curve when training new Sales People. Consumers aren’t typically going to understand it all when they are only buying a vehicle every few years.

New hires entering the Auto Business as Sales People bring their perceptions as a Consumer to their new job. Like me 43 years ago, most were convinced in the beginning that selling cars would be easy. All one would have to do is to quote the lowest price and make up the loss of margin in additional volume. What a revelation us veterans of the business had when we found out that Consumers had no loyalty. There has never been such a thing as the “best price,” despite the fact that Consumers typically think there is. As an early “price quoter” I was the one who spent the time, gave a detailed product presentation and demo drive, only to find many of my prospects, who had promised to “Be Back,” had bought from a competitor who had beaten my “Best Price” by a small margin. Occasionally, deals are lost because one appraiser might see more value in a trade in than another.
To be clear, some Auto Dealer attempts at negotiation are more “artful” than others, and crude attempts at Negotiation generally fail. The Consumer isn’t harmed, except for some wasted time. They are certainly given “grist for the mill” in their complaints about “Negotiation.” They are free to keep shopping for that Dealer who gives them what they seek. But then some Consumers are never satisfied.

I recall a time when my boss, the Dealer himself, quoted me a price that involved a $1K mistake in my Customer’s favor. I presented this price to my Customer who then railed about us being crooks, cheats, and liars. After shopping our quoted price the Customer later slunk back into our Dealership to take try to take advantage of the mistaken quote. And because we didn’t honor the price from two days earlier, we were crooks, cheats, and robbers all over again. A good deal is as much perception as reality.

Let’s discuss “Transparency” as a practical matter in the modern Internet driven Auto Market. The most demanding Consumers are the ones who have 720 and higher credit scores. They know they have good credit and can buy what they want. They are the ones who are most analytical and the most demanding of information to shop with. They are the ones who feel most entitled to be able to determine the “Best Price” from the convenience of their office chair using the Internet, entertain competitive quotes from Dealers all vying for their business, and to make a purchase decision without spending a lot of time or going through a more traditional process of negotiation. They will typically visit a dealership for a demo drive and to gather additional information, then retreat to their computer to use the Internet to “Negotiate” the price as they try, often successfully, to get Dealers into a bidding war with each other. The fact is, this niche of Buyers make a LOT MORE NOISE than their numbers would indicate. This group makes up LESS THAN 30% of Consumers. And of that 30%, at least 5% of those have a debt payment to income ratio that does NOT guarantee them financing. All other Car Buyers have a legitimate concern that they might not gain credit approval for a Car Loan at optimum terms and interest rates. AND without the help of Dealers and their market power, many of these could NOT gain a car loan on their own. Does anyone with common sense believe that the Retail Auto Industry should turn itself upside down over 25% percent of Consumers who represent less than 15% of total Vehicle Sales Gross Profit?
 
In this current environment Manufacturers are coercing Dealers into ever higher overheads through ridiculous “Image Programs.” What happens if margin compression makes the selling of vehicles unprofitable to Auto Dealers? A quick look at history will give an indication. When I entered the auto business in 1970, the Markup on large vehicles was 22.5 percent, plus a 2 – 2.5% “Hold Back” that was paid to the Dealer every quarter or at year end. Imports typically had no “Hold Back” in those days. Deals were transacted OVER “Invoice,” the amount the Manufacturer drafts the Dealer’s floor plan account when the vehicle leaves the assembly plant, sometimes before. There was little “Trunk Money,” money rebated to the dealer based on “Stair Step” programs and other incentives based on achievement of an assigned objective. In other words, “Invoice” had meaning. Today “Invoice” has little meaning. Consumers routinely take delivery of a new vehicle for LESS than the Dealer has to pay off at his/her lender. The “Markup over invoice today is less than 10%. Manufacturers have raised the MSRP to accommodate both the cost of rebates and subventions, but also the “Trunk Money.” In 1970 F&I revenue represented a relatively small portion of Gross Profit on a per deal basis. Today the per deal F&I gross profit runs from $1K to $1.5K. Labor rates in Dealer Service Departments were reasonable in 1970. Today, $100. plus per flat rate hour isn’t unusual. Are you starting to get it now?

Many Consumers think Manufacturers should cut their Franchise Dealers out of the equation. First, there are laws in place to protect those Dealers, all of whom have made substantial investments in their businesses. Secondly, the OEMs would need Ben Bernanke's printing presses running full time to ever come up with the amount of capital required to replace their Dealers. It ain't gonna happen.

The Bottom Line:

1. Consumers already have the market slanted in their favor
2. Consumers can readily shop
3. If Consumers don’t want to “Haggle,” let them find a Dealer who will give them what they want.
4. Vendors who started their businesses depending on dealers for their initial revenue, and who now turn on those dealers and demonize them in an effort to convince consumers to turn to them for “protection” from the villains, and who provide even more downward pressure on gross profits, can expect push back and a lack of cooperation from auto dealers.

TrueCar, CarFax, Cars.com, and some others have paid a price for pushing Dealers too far by providing Consumers additional tools to help them in the effort to compress margins, often depending on Dealers to support their efforts. These Companies have every right to do what they are doing and/or have done, but they are unrealistic if they expect there to be no push back from Dealers. I suspect there are some others, including Kelly Blue Book and their version of the “Bell Curve, recently abandoned by TrueCar while under fire from Dealers, who will be a target for Dealer push back.

As long as the Franchise Dealer system is in place, trades are taken, and financing not a given, there will be no completely “Transparent” and “Efficient Market” that commoditizes pricing in the Retail New Vehicle Business. Is this a surprise, or just common sense? The current system has served us well and will continue to do so. 
 
At the recent JD Power/NADA conference held in March in New York City, noted Auto Industry analyst Maryann Keller spoke optimistically about the conventional system of selling cars in the U.S. “Over four decades, I’ve heard many arguments made against the Franchise Dealer system.” They are claims Dealers never fail to disprove time and time again.”

One myth promulgated in the 1990s, and now resurfacing with Tesla’s effort to run its own sales outlets, is that factory stores save money by reducing distribution expenses, wrongly estimated at 30% of the total cost of a car.

Put aside for a moment that the percentage itself is way off, Keller says. Ford’s ill-fated Auto Collection experiment in certain markets during the late 1990s proved that Auto Companies are good at a lot of things. Running Dealerships isn’t among them. Dealers with entrepreneurial spirit are good at doing that.

Ford ended its bad-science experiment after a couple of years of market share losses and mounting evidence that Factory Stores do not deliver a better customer experience nor reduce costs.
Franchise dealers’ cumulative investment in land, equipment and facilities easily exceeds $100 million, Keller says. “Dealers fund 60 days of inventory and another month of inventory in transit that would otherwise fall to the Auto Maker.”

The inventory buffer allows auto makers to adjust future production levels. For a company like Ford, U.S. inventory funding equals about $15 billion at any point.

“While we are talking about myths, how about the still-repeated one that people hate Dealers so, if given the chance, they will buy a car online,” Keller says. “I almost don’t know where to start in taking this one apart.”

Not all that long ago, Silicon Valley funded and lost hundreds of millions, maybe even a billion dollars, on ill-fated ventures that promised to sell cars online.

“CarOrder.com, Greenlight.com, and CarsDirect.com (in its original configuration), among others, all promised to avoid the dealership experience,” Keller says. “A few actually did that by buying cars from Dealers, and then reselling them at lower prices to customers until they blew through their capital.”

She recalls the defunct Build to Order.com. It proposed that customers would place orders for fully customized cars while lounging in a company-owned showroom/entertainment center. “Build-to-order.com never built anything for anyone,” Keller says. Priceline.com’s experiment of trying to sell cars online was in some respects replicated later by TrueCar.com, which ran afoul of franchise laws for the same reasons Priceline did.

“What I learned then, and this is still true today, is that we could connect Buyers with Dealers and that the price of a vehicle was the easiest part of a deal,” Keller says. “The other elements are harder to control and often the cause of frustration for the Customer and the Dealer. People don’t like to hear that their trade isn’t worth the value they saw online or that their poor credit doesn’t qualify them for the no-down-payment, 0% loan.”
Buying a car is as complex as buying a house, Keller says. “Why should we think it should be as easy as buying a pair of shoes from Zappos with a return receipt in the box in case they don’t fit?” While much Auto Advertising has shifted from newspapers to the Internet, that transition “has not reduced Advertising expense per vehicle or made buying a car as easy as buying a book,” she says.

Another salient Keller point:

“Add up all the monthly traffic to all automotive sites, including auto makers, dealers and independent sites, and you’d get more than 100 million, possibly close to 200 million, unique visitors using the Web to get information about buying or selling a new or used car.

Except there’s one problem, if this traffic is somehow supposed to represent potential sales.” Dealers retail about two million new and used cars a month. That’s a fraction of all those automotive website visitors.”

“So just like newspaper, radio or TV advertising, Dealer spend on the Internet is likely no better targeted, once again dispelling the notion that the Internet would solve the age-old problem of knowing which 50% of a dealer’s advertising works.”

Technology is wonderful. Dealers have adapted to it. Sophisticated software helps them manage every aspect of their business. But it will not fundamentally change Auto Retailing, Keller says.

“The system of Franchised Dealers – using their own risk capital to fund their businesses and guarantee millions of dollars of inventory, promote their own brand and that of their OEM, provide the expensive tools needed in their service departments, and manage the endless headache of a workforce – will not be superseded by technology or Factory Owned Mall Stores.”

Keller predicts start ups such as Tesla, which currently runs factory-owned mall stores, ultimately will conclude “the dealer network is the best way.”

I would only add this. As long as Auto Makers understand that Dealers are their Customers and the End User is the Dealer’s Customer, things will be fine.