· Car dealers abandon online sales due to supply problems
· Lack of transparency makes it difficult to expand sales
· Automakers to Boost Online Sales Initiatives
· Third parties are likely to be the norm for end-to-end online car sales
· Amazon’s access starts with Hyundai, plus
Many industry insiders, me included, predicted that the COVID pandemic would be the impetus to force car dealers to embrace online retailing. Investors also bought this theory, dumping billions into various startups to expedite this digital transformation — but the opposite occurred. Post-COVID inventory shortages forced dealers to abandon online sales and resort to outdated and high-pressure offline selling techniques. As a result, tech companies like Cars.com and potentially Amazon are poised to dominate the online vehicle retailing space as industry realities prevent car dealers from doing it themselves.
Post-COVID Source Shortage Is Forcing Distributors to Return to Sales Techniques
At the onset of the COVID pandemic in March/April 2020, car dealerships struggled to find ways to overcome lockdowns. They tracked prices upfront and without haggling on their websites, held Zoom calls, and offered full price transparency to customers. Their efforts have been supported through state governments that have legislation in place to make online sales more feasible.
The pandemic has shown dealers that virtual-only promotion is faster and more effective than offline promotion. These efficiencies have translated into fewer salespeople on payroll, which has encouraged dealership managers to expand their virtual offerings, even as social distancing needs have eased. But their ambitions came to an end when post-COVID shortages hit, causing their stock of new and used vehicles to become scarce.
With very limited stocks, most car dealerships have resorted to tactics that car buyers despise, such as plaid jackets. Sellers were not transparent about pricing and availability and only presented shares to buyers willing to pay the highest price. Some dealers encouraged bidding wars, choosing to increase bids from multiple buyers to see what effect desperation would have on their bids. A Mercedes-Benz dealership founded in northern New Jersey has advertised a “price per call” on its online page for a G550 SUV in stock. When my brother, an attorney and dealer visitor, called, the salesman haughtily told him that the offer started at $100,000 above MSRP.
Some car dealerships didn’t post their stock online because they didn’t need to display their exorbitant values to consumers, fearing it would backfire. One dealership, who decided to do so, severely shattered his reputation after his value premiums went viral on Reddit. A friend of mine, who runs an organization of progressive car dealers in Long Island, New York, explained that he had to shut down his online projects due to stock shortages. He said: “It doesn’t make sense for us to adopt online selling as we would only lose profits. “
During the post-COVID source drought, most dealerships didn’t have a price cap, causing consumers to pay the most inflated car values in decades (inflation decided us as a percentage of MSRP). But with the improvement in stock conditions, many are wondering: Why do distributors continue to avoid online sales?
[Author’s Note: While some car dealerships exploited car buyers post-COVID, most only increased costs to counter falling sales volume. Their purpose is simply to stay in business. ]
Improving Inventory Doesn’t Mean Resuming E-Commerce Initiatives
In 2019, I wrote that car dealerships’ revenues depended on the incentives presented to them by automakers to sell cars, even at a loss. In the decade leading up to COVID, this monetary truth encouraged many dealerships to look for more effective tactics for transacting, such as as online promotion.
From 2010 to 2020, a small number of dealerships identified that promoting cars online was more effective than compensating salespeople and that it also led to happier customers. They opted for no-haggling online pricing from 2015 to 2019, and the area developed over 2000% in that time. But after COVID, the expansion reversed, and today there is no indication that distributors are in a position to adopt end-to-end online advertising.
While the stock situation has improved significantly, they remain well below pre-pandemic levels. Factors such as pent-up demand due to past shortages and union action continue to constrain inventories. A Hyundai racer explains: “Things are far from normal. ” On some overstocked models, we find buyers happy to pay MSRP because they think stock is still tight, while smarter ones foot the bill. But for other models, we don’t have enough and they sell above MSRP. will eventually ease, the challenge may not go away.
On a long-term basis, manufacturers made cutbacks in new-vehicle production to reduce the level of inventory stored on dealers’ lots. Manufacturers like Ford claimed that “supply discipline” is more profitable for both parties and told its investors the practice is here to stay.
So, with stocks still restricted, and likely to remain so to some extent, few dealerships are interested in offering car buyers transparent, no-haggle prices online. Instead, they still have no option to continue with opaque sales techniques, or else they will restrict their stocks. your earnings.
The Six Profit Centers That Limit Online Car Sales
Lack of transparency hinders online car sales.
In order for online car sales to be successful among the general public, online shoppers will need to gain advantages of an upfront value to the six car dealership advantage centers during a sales transaction. The value of the vehicle, or the value displayed on the dealership screen or the manufacturer’s website, is a facet of a transaction. But there are several others, such as interest rate, trade-in value, and extended collateral coverages. Dealers manipulate those advantage centers in a typical auto retail transaction to close a deal or outmaneuver a competitor.
Six Profit Centers for Car Dealerships
1. Vehicle Price: Defined as the difference between the vehicle bill and the promotional price, this is the maximum figure commonly negotiated by consumers when purchasing a vehicle, but represents a minority of the dealership’s total transaction benefit.
2. Incentives & Rebates – While scarcer than pre-pandemic levels, manufacturer rebates and incentives are provided to certain buyers based on model or other criteria (e.g., first responder discount). Some dealers will pass these discounts directly to consumers, but others will use them to boost their profit in a transaction.
3. Lease Return/Trade-In: It’s not unusual to see really big differences in vehicle trade-in values, which can inflate the dealership’s profitability. Post-COVID, lease returns have a vital component, with some dealerships paying consumers to return their same-brand cars, so they can be sold on their used car lots.
4. Fees: Fees typically bring a few hundred dollars of profit to a sales transaction and are presented to car buyers as a sales tax. While some state governments limit them, some abusive concessionaires circumvent or forget about that legislation and use fees as an approach to increase their profits.
5. Interest Rate Margin: When a brokerage submits a credit application for a car customer, banks will respond with an approved interest rate. If the broker charges the client an interest rate higher than the approved rate, they get a commission from the bank.
6. Warranty, Policy, and Add-ons: Prices and warranty coverages vary widely among car dealerships. The same goes for policies similar to parts like lost keys or flat tires and accessories like floor mats. Buyers are unaware of the main points of warranties and relevant products
Almost half of these profit centers are not discussed with car buyers until they agree to a deposit. But for online selling to affect the majority of new car buyers, all six must be disclosed to car buyers during the price discovery process. Without disclosure, consumers will not be comfortable making a purchase online, as other dealers will claim to offer a better deal by manipulating the non-disclosed ones.
Manufacturer’s failed sales attempts.
Recognizing the desire to offer car buyers a better shopping experience, nearly every automaker has experimented with online sales ideas since the late 1990s. Efforts like GM’s Shop. Click. Drive. or Ford’s Ready. Juntos. Ir. They all had wonderful titles and wonderful ambitions, but they failed to produce significant results.
Automakers have tried everything from marketplace-like concepts to buying cars online, but the costs of online vehicles have been outpaced through offline brokers who have been able to turn a profit elsewhere. Other efforts were poorly executed, as runners either did not actively participate or resisted altogether. , leaving consumers perplexed. And in some cases, automakers have been sued through auto brokers’ associations because their systems were perceived to violate franchise legislation or the legislation that auto brokers do.
Dealers are unlikely to reveal their six profit centers as part of an initiative controlled by the automaker. For one thing, any efforts made through the automaker will be presented to all buyers of a brand, not just those who avoid the dealership or shop online. the difference is important.
Dealers currently view online sites as an additional sales channel that can be adjusted so as not to conflict with their other sales channels. But once an automaker sends the brand’s customers to an automaker-controlled online shopping site, online shopping has the potential to become the main way its dealers sell to customers. This brings problems.
Car buyers who flock to a showroom or dealership would gain advantages from less successful and ultra-competitive online pricing, squandering a portion of the dealership’s profits. Dealers would also be required to list their shares online, even for high-demand ones. models that can be sold offline at a premium price.
But more importantly, competing dealers who opt out of the automaker’s program or constitute another pass will use the price transparency of the automaker’s efforts to siphon off customers. And as some economists explain, if all the dealerships were in their six profit centers, many of them would go bankrupt.
The economists found that if the more than 18,000 franchised brokerages provided an “apples-to-apples” comparison of their costs online, through a uniform site, a perfectly competitive market would be created. According to this principle, the profitability of brokers would stabilize and contract, threatening the monetary viability of many. While this would be a boon to consumers in the short term, in the long term it may simply lead to less festival among brokers for their business and therefore higher costs.
Percentage of auto dealer profit centers disclosed before purchase (online)
Now, some automakers, basically in an effort to look more like Tesla in the eyes of investors, have introduced online grocery shopping sites for electric vehicle models. These efforts do not constitute an end-to-end online sale, but rather Internet sites that allow consumers to make a deposit to secure a “location” to buy a car later. If developed, those efforts could gain traction among dealers and consumers, but would require fixed prices upfront for consumers. In this scenario, dealers would give up their profits, automakers would have to pay them significant incentives. As I mentioned last year, automakers recognize the desire to adopt a greater sales process, but cash flow issues and uncertainty around electric cars are hindering this basic shift. in their business models.
Third Parties Fill the Sales Gap
In October, there was an overlooked press release by Cars.com, stating its intent to rebrand as CARS Commerce in an effort to meet the needs of car dealers and consumers. The company explained that combining its retail, e-commerce, finance, and trade solutions with its marketplace would allow car dealers to sell online in a manner that would appeal to consumers. Many saw this as just another press release, but those that understood online car shopping felt that Cars.com was bridging the gap between dealers and end-to-end online car sales.
Investors feel that Cars.com, and some of its competitors, can allow dealers to sell online while minimizing the risk of conflict with their offline customers. By using a third-party to facilitate online car sales, and providing transparency into the Six Profit Centers, car dealers can choose the models and pricing they want to sell online solely to the online shopper that seeks it. They don’t need to change the ways they currently do business — whether on their own website or in their physical showrooms.
For example, if dealers have high stock levels for a model, they may be willing to offer it to a third party at a low price while keeping the most in-demand models offline. For example, if distributors are falling short of their sales targets, they may simply be pursuing online sales more aggressively to temporarily compensate for the handover, or they may simply be offering other values to third-party online consumers compared to those that touch them directly.
These methods are those of major retailers, such as Staples or Home Depot, which not only offer other prices online and offline, but also other prices on third-party internet sites such as Amazon or eBay. This allows the store to maximize its profits based on channel, visitor type, and stock status.
Companies like Cars.com are positioning themselves as the “opt-in” dealer solution to sell online without the disruption caused by automaker efforts. But despite how palatable their solutions may be, they’ll still need to convince thousands of dealers to embrace transparency, which many will resist.
Amazon’s “Soft Opening” in Online Car Sales
Earlier this month, Amazon made headlines in the auto industry by entering into a strategic partnership with Hyundai to, among other things, sell cars through Amazon. com. Their partnership came five years after the automaker created an online showroom on Amazon’s site in 2018. , which advertised key styling facts but directed consumers to dealerships to make a purchase. Many industry observers believe that the latest news means that Amazon will soon dominate online car sales.
From conversations with former executives, I learned that Amazon researched entry into the U.S. automotive retail space for the past decade. When companies like Vroom and Carvana hit the industry’s radar, Amazon considered selling used cars but dropped the idea over fears of profitability. Amazon also looked at selling new cars with dealers but felt that since the transaction was controlled by the dealer, the concept conflicted with its mission statement of being customer obsessed. But given the recent announcement, it’s clear that Amazon is now shifting into higher gear.
Amazon’s partnership with Hyundai means it doesn’t have a direct relationship with dealers. This means that Hyundai dealers had no say when the automaker would sell the cars through Amazon, even though dealers are the only ones allowed to sell legally. Dealer coverage laws, known as franchise laws, allow dealers to challenge the Amazon/Hyundai initiative and obstruct its success.
Hyundai can no longer face demanding legal situations from racers. It lost many millions of dollars and delayed the launch of its Genesis logo after disrupting its network of brokers. Therefore, we can expect that the vital safety barriers in the Amazon/Hyundai initiative will possibly disappear. not to disturb Hyundai racers, nor give one of them an advantage over the others.
These barriers mean that transparency across the six profit centers, which is mandatory for online car sales to succeed at a critical mass, is unlikely to be built into the Amazon experience. Other barriers will prevent Amazon from excluding underperforming resellers from the program. , the good fortune of the program will be limited to the extent that offline resellers promote that it reduces costs and some consumers will not be able to verify that Amazon’s costs are fair or competitive.
The outcome of the Amazon/Hyundai initiative, at least initially, is unlikely to provide the major outcome that some expect. However, it does mark Amazon’s foray into the U.S. automotive market, and we can be assured that the learnings from this experiment will be used to expand Amazon’s future automotive offerings. [Note: Amazon has tried similar experiments in other countries.]
If Amazon goes directly to dealers like Cars. com, it will remove the limitations of partnering with a manufacturer and create the possibility of becoming the number one third-party platform for buying a car online, but it will require a strong presence and a diversion of resources from most successful Amazon-owned companies. At the end of the day, Amazon has the power, influence, and cash to succeed at anything it wants, so we’ll have to keep an eye out for clues about its long term. intentions.
Pack
Without a change in automakers’ incentives, the majority of online car sales won’t come from car manufacturers or dealerships, but from third parties. Car dealerships will use third-party sites like Cars. com that will connect them with online shoppers, but they may not possibly cannibalize their other sales channels. As for Amazon, it’s unlikely to make significant progress in online sales through its partnership with Hyundai, but what it learns from its experience will influence what it ultimately decides to do in the U. S. U. S. automobile market.
About The Author:
Jeremy Alicandri is a partner in Alicandri LLP, a boutique automotive consulting and research firm, which primarily serves investors and law firms. Jeremy is a former strategy consultant with Deloitte, PricewaterhouseCoopers, and Maryann Keller & Associates. He is a former advisory board member of the National Automobile Dealers Association and TrueCar. He also spent seven years overseeing a franchise car dealership group.