New Car Dealerships Are Starting To Write Their Own History

The iconic American car dealership, with its glistening lots of new cars and flashy showroom halls on expensive real estate, is one of the few remaining relics of a pre-information era. The idea of a dealership originally came about as a way for unknowledgeable consumers to feel comfortable about purchasing such an expensive item – one they knew little about and relied on the reputation of the dealer to deliver a quality product. 

Dealers have made their living through being able to charge consumers a price without the buyer knowing if he was paying more than someone in another town; in other words, relying on information asymmetry. They also relied on their reputation as a dealer of quality products to retain customer loyalty and expand market share. TrueCar, AutoTrader, and the Internet in general has done a decent job at slashing nationwide pricing information asymmetry, leaving margins for dealers shrinking to a measly 2% in 2014 (NADA DATA 2014 Report). What’s more, consumers don’t associate reliability of a new car to a specific dealer, but rather to the manufacturer (used cars are a slightly different story, so I’ll stick to new cars for now.)

So what value do new car dealerships add to the automotive buyer’s purchasing process and overall product satisfaction? I’m not sure. And if the latest investments by CarMax and AutoNation, the nation’s two biggest dealer networks, are any indication, the dealers themselves can’t come up with an answer either. Which is why AutoNation specifically has invested over $300 million in a new online selling platform that boasts the fact that your time at the dealership will be limited to 30 minutes. Mike Jackson, AutoNation’s president, almost brags at the fact that this platform will solve the one part of the automotive customer life cycle that everyone collectively hates – the dealership experience. 

If the president of AutoNation sees that the best long-term solution to customers hating dealerships is to reduce the time customers spend at dealerships, then the obvious winner of this strategic plan is the dealer who eventually gets rid of the dealership experience altogether. Not a particularly phenomenal long-term plan.

If you think it a bit premature to call for the death of dealerships, that people still value “kicking the tires” and “looking the dealer straight in the eye and shaking his hand” and test driving 10 different cars before finding the perfect one, you either haven’t bought a car in the last 3-5 years and/or your generation’s letter comes before Y. Customers purchasing cars today do most of the research online before they show up to the dealership, and once there, they test drive an average of 1.6 cars before purchasing. Often, the car that customers test drive is not the eventual one they purchase, especially for special factory and pre-ordered cars, and manufacturers are including more all-inclusive maintenance warranties on new cars that ensure the car is quality.

To bring this seemingly far-fetched downfall of American dealerships a bit closer to home, consider Johan de Nysschen’s (head of Cadillac) latest move to convert 400 of the smallest Caddy dealerships into purely virtual showrooms that provide home test drives and delivery services while drawing inventory from existing regional distribution hubs. Customers will be able to conduct almost the entire purchase process online, from selection to purchase and financing, and then have their new car delivered to their home without leaving it.

Does the dealership of today potentially have any role in the car-buying process of tomorrow? Probably, and for the next 5-10 years, the dealership of today will probably remain unscathed. But as more selling moves online and the value that dealers used to provide to customers no longer is appreciated, there will eventually be many fewer dealers operating more as distribution centers than salesmen. The biggest players, like AutoNation and CarMax, will probably be the ones tapped to run these distribution centers, leaving the thousands of smaller dealers to pack up and head elsewhere. But at the margins that dealers are getting today, would being bought out be such a bad thing?

This article comes on the heels of the following article appearing in Automotive News: http://www.autonews.com/article/20160222/OEM/302229958/cadillacs-de-nysschen-pitches-virtual-stores.

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