August 25, 2015 — The latest media argument for a revamping of the current automotive retail system — even to the point of getting rid of dealerships — continues this time with an article in the Economist titled Death of a car salesman.
While the article is better than most, it misses key points. One problem — of many — with the article is that it fails to mention that over the last 15-20 years every instance in which manufacturers with an existing dealer base tried to sell cars directly to the customer has failed to be profitable. Furthermore, all of the attempts to create an online system that circumvents dealers has failed.
A white paper written last year by analyst Maryann Keller and Kenneth Elias outlines many of the attempts the last several years and why they failed. To be fair, the paper, The Consumer Benefits of the Dealer Franchise System, was commissioned by the National Automobile Dealers Association, so the perspective is slanted heavily in favor of dealers. However, the facts are the facts and historically, automakers nor online initiatives have been able to make money selling cars.
- From 2000 to 2006, General Motors attempted to sell the Chevrolet Celta in Brazil to customers directly over the Internet. Shockingly, “experts” still point to the model as being successful for GM. The problem is, GM abandoned the experiment in 2006 due the high costs of maintaining distribution centers and the online infrastructure required to sell the vehicle. All the program did was to shift the costs of retail from the dealer to GM.
- Ford Motor Co. experienced a similar result in the late 90’s when it attempted to sell cars through factory-owned stores in an initiative it called Ford Retail Network, later renamed the Ford Auto Collection. The pilot, which lasted only two years, ran in five cities: Oklahoma City; Tulsa; Rochester (NY); Salt Lake City; and San Diego. Ford lost money and lost market share in all five markets. It ended up selling the stores to established dealers.
- Meanwhile, Daimler, which had purchased several stores in Germany and France following the recent recession there, is selling the stores back to its dealers, citing the low margins it has generated retailing vehicles.
- In the mid to late 90’s, numerous online entities popped up thinking they would replace the dealer in the car sales process. Every single either failed or transitioned to becoming a lead generator selling leads to dealers. Not one model succeeded.
- While many would point to Tesla as being an automaker succeeding without dealers, it is different in that it does not have a current dealer base that it competes with to sell Teslas. However, even founder and Chairman Elon Musk has admitted the company likely will sell its vehicles through dealers as it adds more models and growth.
That’s not to say the automotive retail industry isn’t changing and becoming more consumer friendly. Check out an in-depth report from The Banks Report last year on The Coming Changes to Automotive Retail.