Direct Sales: A Perfect Storm May Have Come For Auto Dealers
I took the dogs on a long, long walk the other night. Along our meandering, unplanned route was a Ford dealer, something I’d usually drive past at 40 MPH and not pay a lot of attention to. Going by on foot was a very different experience. Where there were once dozens and dozens of vehicles for sale, now there’s a scene that looks like it came out of a post-apocalyptic movie: a few cars in the front (half of which appeared to be used) and nothing but empty space behind.
While it would be entertaining to blame this all on dealers, the truth is far more interesting. As much as many Americans hate buying from dealers, it’s still fun to get behind the wheel of new cars and drive away with one of them. But buying a car in 2022 isn’t like that due to production shortages. You either put in an order online, or go to the dealer to order the vehicle in person. It doesn’t always work out like it should, but you can usually get a car for something close to MSRP if you’re willing to wait for the factory to build you one.
While all of this is going on, another trend has been creeping in wherever it could: direct sales. In a number of states, electric vehicle manufacturers like Tesla convinced state legislators to give them an exception to dealer franchise laws. This means that instead of going to a dealer, you buy your vehicle directly from a manufacturer. Like buying almost anywhere in 2022, the buying experience is basically the same: put your order in and get the EV when it’s built, and for “MSRP” (when you buy from the manufacturer, the Manufacturer Suggested Retail Price doesn’t really have to be a suggestion).
In other words, the experience of buying a Ford or a Toyota isn’t that different from buying a Tesla now, even if you want something powered by gas.
Ford’s CEO Talked About This Recently
A flurry of recent articles in the media (like this one) told readers that Jim Farley, the CEO of Ford, had the guts to discuss this situation recently at the Bernstein 38th Annual Strategic Decisions Conference.
“We’ve got to go to non-negotiated price. We’ve got to go to 100 percent online,” Farley said. “There’s no inventory (at dealerships), it goes directly to the customer. And 100% remote pickup and delivery.”
With the exception of a few very crooked dealers, he wasn’t describing what he’d like to see. He’s describing what we’re already mostly seeing. Vehicle shortages means nobody is getting the below MSRP prices that they used to get from dealers (if they were willing to stubbornly haggle and threaten to walk). Dealerships have very little inventory. People are putting in their orders without going to the dealer or taking a test drive.
What once seemed like something you could never get dealers to agree to do is now just how it’s done. For Ford, it’s working well, so it’s something that it would understandably want to keep doing.
States Are Already Budging
The piece at The Drive I linked in the last section (and will link again here) does what most pieces about this last week did: gets into the challenges such permanent changes would face from the Dealer Lobby. People like to complain about the Gun Lobby, or defense lobbying, but anybody familiar with the business knows that auto dealers are about as powerful as those other lobbies, and even more powerful in some states. They’ve kept a number of states from letting Tesla do direct sales, for example.
But, another piece from a couple days ago at Automotive News shows us that states are already budging on the issue. While they aren’t completely repealing dealer franchise laws that prevent direct sales and service from the manufacturer, they’re bringing such laws into the 21st century. Instead of requiring all service, including updates, to happen at dealers, they’re opening up exceptions for things like over-the-air updates so that everyone can compete with Tesla. They’re also looking at allowing more direct sales, or at least allowing the manufacturer to set prices for online sales.
So, this is an issue that can and will change, especially if these production shortages keep things operating in a quasi-direct manner for longer.
A Big Storm Doesn’t Necessarily Mean You’re Dead
While the 2000 film The Perfect Storm shows us a storm that leaves no survivors behind (the ship sinks with all but one aboard, and the guy floating in the brutal waves doesn’t make it), we also have to keep Forrest Gump in mind.
In that film, the storm does wreck most of the shrimp boats, but the seemingly foolish decision to stay out at sea during a hurricane pays off big when Forrest and Lieutenant Dan end up with the only surviving shrimp boat. This leads not only to a great season, but great fortune for the titular character in following years as he invests the windfall wisely and keeps the Bubba Gump Shrimp Company successful.
A transition to direct sales will leave the less scrupulous and innovative dealers on the bottom of the ocean, but the dealers with the strategic foresight to seize on opportunities and deal squarely with customers will probably come out on top.
For one, selling every vehicle at MSRP seemed unthinkable a few years ago, but it would have been a dealer’s dream. With every vehicle bringing in profits, even if they’re not wild profits, there’s still plenty of room to make the whole sales side profitable with fixed pricing.
Another great thing for dealers is that service (excluding things like OTA updates) can stay in the service department just like it does today. There will still be plenty of work to do on EVs, even if they don’t have a combustion engine and transmission with legions of moving parts. Once again, profits won’t be wild, but they’ll be achievable.
On top of this, there are plenty of non-automotive profits to be made on the dealer side. If someone is buying an EV, it shouldn’t be terribly hard to get them to also look at getting solar on their roof with battery storage because that keeps the future price of fuel low. You might as well also sell heat pumps and efficient air conditioning systems, charging station installations, and many other related services either directly or through local partners.
While some dealers will only see lemons here, the dealers who open up a lemonade stand will probably be sitting pretty in ten years.
Featured image by Zachary Shahan, CleanTechnica.
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