Americans love their cars, but one thing
Americans don't seem to be crazy
about is the process
of acquiring them.
The American car dealership experience is one
many seem to regard as a
necessary evil.
Buying cars often feels like an
anxiety inducing ordeal that can last
hours. Some surveys suggest Americans don't
have a terribly high opinion
of automotive salespeople either.
Yet in the years since the American
economy began recovering in the wake
of the financial crisis, new car
sales have repeatedly reached record
levels. And industry analysts say Americans
overall seem to be relatively
satisfied with their purchases once
they drive away with them.
There certainly are things they would like
to change about it, and some
already are using tools
now available online.
Meanwhile, dealers face their own
challenges, including a consolidating
landscape, tight competition and threats
from new business models
promoting contactless virtual transactions which
have thrived during the
age of covid-19 outbreaks.
To survive, dealers will have to keep
up and find ways to accommodate
buyers less willing to go through the
rigamarole they have endured in the
past. There are parts of America you
can only scout if you come in
here for International Harvester dealer showroom,
a rugged scout to 476
has great off road handling and
snows a lot of gear.
You can choose a four cylinder
engine and selective four wheel drive.
Come in for a test drive.
Scotty and the others pass.
In the U.S., the vast majority of
automakers don't sell their cars directly
to consumers, they sell them to
dealers, which are basically separately
owned franchises that fly the banner for
a particular brand of cars, often
several, and have a close, if
sometimes contentious, relationship with the
companies that produce
those vehicles.
Cars made by any automaker
operating in the U.S.
are considered sold to a certain dealer
as soon as they roll off the
assembly line. Dealers are then tasked
with turning those cars over to
buyers, preferably as
fast as possible.
The franchise model saved automakers the
expense and trouble of opening and
operating their own stores, allowing them
to rapidly expand their reach
across the United States
without footing the bill.
Every U.S. state, in turn, has
dealer franchise laws designed to protect
dealers who have invested in building
a brand's presence in a territory.
These were created to assuage the
fear that manufacturers might move into
an area a dealer had already established
and run them out of business.
These laws have become a point
of controversy in the 21st century,
primarily because of one
very disruptive company, Tesla.
The electric carmaker has long insisted
on selling its cars directly to
customers over the Internet.
Tesla has been involved in legal battles
in several states to set up its
own kiosks without
creating franchised dealerships.
But when Tesla was still a
fledgling electric carmaker, churning out a
tiny number of high end electric
cars, other larger trends were already
shaking up the dealership landscape.
The industry has gone through a
tremendous degree of consolidation over
the last few decades, and now
there are massive publicly traded dealership
groups such as AutoNation and Lithium
Motors, which have steadily bought
up many of the once independently
owned dealerships that dotted the
country. The way Americans buy cars is
also often quite different from the
way they are bought
in other countries.
In Japan, for example, cars are typically
custom ordered at a showroom and
then delivered to the buyer.
Later, while Americans can special order
vehicles at dealerships, most car
shoppers in the U.S.
choose their cars from whatever is
already available on the lot.
Of course, the dread that many consumers
feel prior to a trip to the
dealership has long
been widely known.
I think what's really interesting about car
buying is that a number of
years ago, John Kravchuk, who
was the head of U.S.
Hyundai Hyundai Automobiles and he was
ahead of the group, said something
to the effect of it's almost a
situation where people would rather go to
the dentist than go and buy a new
car because of just how the consumer is
almost beaten down into submission just to
then give their money over to
take home a product that they're then going
to have to bring back to the
dealer on a regular basis for
service and repairs and such.
And it's gotten better over the
years because there's more information out
there. But it's almost a double edged
sword because at the same time,
there's so much information out
there, it's almost more confusing.
A 2014 study from industry research
firm Edmunds found that people have
such low levels of
enthusiasm for car buying.
Many shoppers said they would rather give up
sex or do their taxes than go
through it. A Harris poll found that
52 percent of car shoppers said a
trip to the dealership
makes them anxious.
One Gallup poll evaluating public
perceptions of professions found that
car salespeople were rated the lowest
in terms of their perceived
commitment to honesty and ethics.
They came in below
chiropractors, insurance salespeople, advertisers,
lawyers and members of Congress.
About 65 percent of
Americans think U.S.
car dealership practices are unethical, according
to data cited in a 2008
paper from consulting firm KPMG.
But also, of course, there are plenty
of buyers who are happy with their
purchases once they have them.
Most customers, they like their sales, so
they might not like the process
of getting a price or the salesperson
has to talk to the manager.
But in general, they like the
sales consultants, probably why they buy
that specific dealer.
And I think they also believe that in
most cases, the dealer does a pretty
good job of explaining the technical
issues with the vehicle and products
and features of the vehicle.
A vehicle certainly got more complex over
the years and I think for most
consumers, they feel that dealership does a
good job in that the most
frequently cited pain points tend to be
when customers are sitting in the
finance and insurance office, often for up
to an hour or more, filling out
paperwork, applying for credit and
negotiating terms of the deal.
Many customers feel they are deeply
unprepared for this part of the
process and do not enjoy the
hours long, complex discussion with sales
representatives. A car is among the
few purchases shoppers have to haggle
for, and it also happens to be one
of the biggest purchases a person will
make in their lifetime.
Many buyers don't have the experience
negotiating they might like to have,
especially with
professional salespeople.
And we don't negotiate for much besides
houses and cars in the United
States, so it's not something that people
are very used to a very
comfortable with. A lot of times they
just want to get out of there.
During this time, customers are offered
extended warranties and a whole
suite of add ons many of them
don't expect to encounter and don't know
what to make sense of.
Like my pointed to dealers as well
as lenders is is pull that information
up front because consumers
can educate themselves.
What is the value of
an extended service contract?
What is the value
of an extended warranty?
Why do I need gap insurance and
I might choose those products before I
even come to the dealership? Hey,
this makes sense to me.
I'd like to buy
this particular service contract.
And I know going to keep
the car for this many years.
I like like the warranty.
I like the maintenance agreement.
By the way, I think Gap Insurance
makes good sense for me because I'm
going to keep this car for a while
and maybe it's a good product so that
education process can happen up
front versus in dealership.
That said, fewer than five percent of
shoppers have walked away from a sale
due to high pressure sales tactics.
According to J.D.
Power's sales satisfaction survey.
The most common reason for turning away
from a purchase which 30 percent
of customers cited, is that a dealership
didn't have the right model in
stock. And a lot of cases, it's just a
model I shot grand in model way and
end up buying Model B because there
were features or priced around that
model that they didn't like.
But for some customers, there's
areas within the negotiation process.
They feel some of the back and forth.
The pricing can be
a reason for rejection.
There are a few brands that
do seem to stand out.
According to J.D. Power, among luxury
consumers, Porsche owners seem to be
exceptionally happy with their
car buying experience.
The brand ranked first in
the luxury segment on J.D.
Power S.I.
three times between 2015 and 2019.
Mercedes came in second in 2019
among more mainstream brands, Buick and
GMC, which are both owned by General
Motors, came in first and second in
2019, and the quirky small car
brand Mini came in third.
Like Porsche and luxury, Buick has topped
the mainstream list three out of
four years between 2015 and 2019.
Despite the angst, Americans continue to
buy cars during the economic
recovery. New sales in the United
States reached record levels in some
years and even surpassed
expectations in 2019.
Dealership giant lithium motors saw sales
grow from about two billion in
2010 to twelve point seven billion in
2019 as of August 18th, 2020.
Shares of Lithia had climbed nearly 24
percent since the company's 1996 IPO
and nearly 86 percent since
the beginning of the year.
Likewise, sales at another dealer,
giant AutoNation, grew from about
twelve point five dollars billion in 2010
to about twenty one point three
dollars billion in 2019.
Its shares rose about 20 percent from
the beginning of twenty twenty to
August 18th and have risen more than
12000 percent over the course of its
entire history. Of course, sales levels
like these are not expected to
last forever. The automotive industry is
a cyclical business and there
have been concerns that younger buyers
are not as interested in car
ownership as their elders.
But some economists have argued that
the millennials killed the car.
Narrative has been overblown.
A 2013 analysis from MIT found
that millennials are actually buying cars
at about the same
rates as older generations.
However, there are some shifts taking
place in the automotive market that
carmakers and dealers are watching.
Ride hailing apps such as Uber and
Lyft have become popular around the
country. Companies continue to research
and develop self-driving cars in
myriad other industries.
Businesses have increasingly looked for
ways to reach customers through
their smartphones, where a growing
share of shopping is done.
The Internet has also contributed considerably
to the rise of membership
and service models of selling, and
consumers have grown more interested in
the idea of paying monthly or annual fees
for access to a product that is
periodically updated or replaced.
Even smartphone makers such as
Apple have programs like this.
Carmakers and others in the automotive
industry have rolled out their own
attempts to lure customers with models
such as these online marketplaces
for cars and subscription services that
are similar to Lease's but include
service plans, insurance
and registration fees.
However, these new business models have
so far attracted small portions of
the market, and strong new car sales
over the last several years have
given dealers little incentive to
invest heavily in them.
But online sales have seen a
boost since the coronavirus pandemic began,
dealers have responded to retail shutdowns
and crowd weary shoppers by
putting inventories on shopping sites,
offering contactless test drives
and home delivery.
Automakers are also offering services
for their dealer networks.
General Motors, for example, set up a
program called Shop Click and Drive
that allows customers to configure
vehicles online, get estimates for
their trade in, sort out their
financing options, and either take delivery
at home or at a showroom.
Over the last several years, a number
of companies have sprung up that
exclusively sell cars online.
One such firm called Vroom held its
initial public offering in June right
in the middle of the coronavirus
pandemic as of August 18th.
Shares of room were up more than
twenty four percent in twenty nineteen
more than half of rooms.
Sales had come
from traditional dealerships.
It offers contact, free transactions
and seven day returns.
Highly unusual for car sales.
Perhaps the best known name among
online only car sellers is Caravana,
which went public in late April 2017.
As of August 18th, shares had
risen by more than 17 percent.
The stock was up more than 120
percent just since the beginning of 2020.
Some industry analysts do expect that some
of the jump in online sales seen
during the pandemic may remain the piece
of the process customers do seem
increasingly prefer doing online is
the paperwork that they would
otherwise do at the dealership.
Surveys show customers want to have
as much information about the financing
side of the transaction as possible
before they step onto the lot
contents. I talked to dealers about the
same thing is you need to build
your process around the idea that consumers
no longer want to go sit in
the finance insurance office.
They don't want to be tied up
for an hour signing documentation, nor are
they willing to sit through the sales
pitch that your money manager, he or
she might provide because there's a
number of products that they sell.
Do you think it's
about transacts today?
Most dealerships make more money on
their FANNI transaction than they do
on the sale. So dealers are changing how
they sell cars, even if they are
doing it a bit more slowly than
customers or other industry insiders would
like. But if these shifts take
root, dealers may begin rethinking their
entire business models.
If customers keep moving
online, for example.
It is plausible, say analysts, that
dealers may ditch their centrally
located showrooms aside large lots lined
with cars, SUVs and pickups.
They may opt instead for
a smaller showroom space.
Coupled with an
offsite distribution center.
Customers may in turn get used to the
idea of having a car delivered to
their homes the way they would
receive a package or a pizza.
