Disclosure: I've been working in the car business for over seven years now, though I'm not in sales anymore. I've learned a lot about how the auto business operates during that time. This article isn't intended to glorify car dealerships. It's to explain why today's auto industry can't just up and change to a manufacturer-owned business.
Here's something the Internet loves to complain about: Car dealerships, especially when the topic at hand is either Tesla or "stealerships." Scroll to the comments section of any of these articles and it'll be full of discussion about how horrible all the current dealerships are, how they should all be closed in favor of a Tesla-esque factory direct model, and how all dealership owners should be fed to wolves. And there's some validity to these comments. There are a lot of truly awful dealerships out there and I agree that shady business practices shouldn't be allowed in this day and age. There are also a lot of really good ones though, but complaints travel much faster than accolades so you don't hear as much about them.
By the way, the comments section is down there ↓ if you'd like to stop reading this article and go tell us all how much you hate car dealerships.
Anyway, I digress. The subject of this post is the Internet's demand for franchised dealerships to shut down in favor of a factory direct business plan and why it's not going to happen anytime soon. The reason, of course, is because the auto dealer lobby is comprised of an army of very rich men who are closely intertwined with quite a few politicians. They'll tell you how we all need dealerships because they serve their community, rescuing lost kittens and fighting crime while handing out lukewarm coffee and stale donuts, which is all a load of bullshit of course. The real answer is money- the automakers' money, specifically.
Pictured above: Car dealers at work, according to their lobbyists.
Let's take a look at how cars are sold. The American market is different from many other parts of the world. In other countries, dealerships typically keep a few demo models of their cars for people to test drive as well as some pieces of stock inventory for those who need a car right away. A large portion of car buyers there factory order a car to their exact specifications and wait for it to arrive. That's similar to Tesla's model- visit the showroom, check out the demo car, place an order if you're interested.
Not so for mainstream brands in America. With our booming postwar economy and love affair with the automobile our vehicle market grew BIG. Now, following multiple fuel crises and recessions and automaker bankruptcies, the average car dealership in the USA is a sprawling lot filled to the brim with cars, a huge selection ready to go home with some happy buyer right now. All the manufacturer marketing supports this, too. Dozens in stock at your local dealership. Drive one home today. America is a land of plentiful goods and immediate gratification. Our car shoppers (except for customers of specialty brands… think high-end luxury/sports cars and Tesla) want their cars now, and they want a large selection to choose from to find the perfect one.
There's so many cars at this dealership, she stumbled and fell into one while waiting to get her key fob battery replaced.
"Okay, so our market model requires large inventories. Why not just keep things the same, but change all the dealerships to manufacturer ownership?"
Fair enough point, but here's the problem: all these cars cost money, and lots of it. Each franchised dealership pays for its inventory. An average-sized dealership keeps between five and ten MILLION dollars' worth of inventory on its lot at all times, and some of the really big players can have $50 million or more worth of metal on their lot. The cars are usually financed but that's still a hell of a lot of money. The brand I used to sell has approximately 2500 dealerships in the US, which means in order to keep up the sales network they currently have they'd need to keep between $12 and $25 BILLION worth of inventory on the ground. Even if they cut the amount of stores in half that's still a HUGE amount of spending.
That's a big gamble and a risk the automakers don't want to take. They'd much rather have that money split up among hundreds to thousands of privately-owned businesses- that way if the market takes a dive it's the dealers' problem to move the metal. It's a similar story for cars that are tough to sell. There's an old saying in the car business, "There's an ass for every seat," meaning if the car is for sale long enough and cheap enough someone eventually will buy it. The dealership I'm currently working for has about 20 previous model year cars in stock that haven't sold yet for various reasons, and we'll probably take a loss on them. It's an inconvenience but nothing the business can't overcome… but if these cars were all manufacturer-owned that'd be over $60 million worth of old inventory gathering dust nationwide, and that'd be big problem for one company to bear.
And that's just new car sales. There's also the matter of used cars, service, parts, and body shops. Regardless of which segment of the business you look at, it's much less risky for the automakers to simply oversee it versus getting directly involved in it. That's why the privately-owned franchised dealerships will be here for many years to come.
Tesla's factory-direct model is definitely making waves though, and it's probably going to change the industry. I foresee the automakers becoming more involved in dealer operations and working toward a homogeneous experience at all dealerships. I'd anticipate them doing this with more frequent audits, tighter policies, and more rules laid out in their dealer franchise agreements (I could write a very long, very boring article about rules in franchise agreements- but I won't). They've already taken steps toward this, as many of the old-school dealership shenanigans aren't allowed anymore and the franchise rules for display and marketing are tighter than ever. However, the prevailing attitude is still "We don't care how you do it, just sell cars." As the market evolves I see this philosophy changing. The manufacturers who prioritize good customer experiences at their brands' dealerships are going to be the winners in the coming decades.
Here's how consumers can spur change in the industry: vote with your wallets. If a dealership rubs you the wrong way, don't do business with them. If they treat you well, keep going there and tell your friends and family to shop there as well. Don't say to yourself "Well, they're all crappy; I guess I'll just suck it up and buy from Shady McSleazeball over here." Settling for a bad experience is what keeps the sleazy guys in business. Seek out a good dealership- I assure you they exist.