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Online Everything and the End of the New Car Dealership as We Know It

Covid and supply chain disruptions have accelerated the trend of buying cars online. Electric cars and demographics add nails to the coffin.
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New Cars Everything Must Go

The American Car Dealership Is for Sale

The Wall Street Journal has an article on the new model for dealerships, less inventory and more online shopping. 

Nora Naughton, WSJ writer says Everything Must Go! The American Car Dealership Is for Sale

The way people buy and sell cars is changing. More of it is happening online as buyers get comfortable with completing transactions remotely. It is a shift that started before the pandemic but accelerated over the last 18 months as Covid-19 spurred people to do more of their shopping from home and demand for cars unexpectedly surged.

The auto dealership, as a result, could soon look like other parts of the business world upended by e-commerce. National chains, instead of local small businesses, will set prices and give salespeople less room to haggle. Dealers will hold fewer cars on the lot and operate more like service-and-delivery centers, using their dealerships as hubs where customers can pick up vehicles ordered online and get them serviced.

Tesla’s no-dealership model now is being adopted by other electric-vehicle startups such as Rivian Automotive and Lucid Group Inc. These fledgling firms, backed by heavyweights such as Inc., are lobbying to change dealer-franchise laws in many states so they also can sell vehicles directly to shoppers.

Another blow to the traditional dealership model came from the surge of online-only used car sellers, which don’t have the same state franchise restrictions as new car sellers. One such upstart was Carvana Co. , an Arizona firm founded in 2012. While still small—less than 1% of the used-car market—Carvana sold 244,111 vehicles last year, up 37% from in 2019, and its stock popped in recent months. As of Friday, it was worth nearly $57 billion, more than that of Ford.

Some dealers say the only way to survive long term is to get bigger. One company doing that is Lithia Motors Inc., a large publicly traded dealership chain based in Oregon. In recent years, CEO Bryan DeBoer began scooping up dealerships large and small with the aim of creating a bigger chain with a store within 100 miles of every U.S. vehicle shopper. In 2020 Lithia also launched Driveway, a website where car shoppers can perform many of the functions they would in a physical car dealership from home, such as getting an estimate on a vehicle trade and arranging for financing to purchase a new vehicle.

AutoNation, the nation’s largest car-dealership chain by sales, plans to open 130 used car stores nationwide by 2026. CEO Mike Jackson said those dealerships will operate more like delivery centers, where customers pick up vehicles that were purchased through its website. He also expects this approach will eventually be applied to new vehicles, as well.

Franchise Laws

Some states, including Texas, have franchise laws to prevent online sales. But Tesla's Settlement with the State of Michigan in 2020 was nearly a complete victory for Tesla.

There are two important terms to the settlement: (1) the state will not contest Tesla’s right to operate service centers in Michigan through a subsidiary; and (2) the state will not contest Tesla’s right to market cars to consumers in Michigan through a “gallery” model. This settlement allows Tesla to sell and service cars in Michigan as it wants, and thus represents a total victory for Tesla in Michigan. It could also be a tipping point in Tesla’s ongoing battle for the right to engage in direct distribution in other states.

The customer will then have to complete the actual sales transaction over the Internet or telephone with Tesla in California (or wherever Tesla houses its sales function). The car will then be delivered to the customer in Michigan, which will increase the convenience of the buyer experience. 

The car dealer’s lobby, which has fought tooth-and-nail to stop Tesla from distributing directing on a state-by-state basis, is clearly a big loser. Michigan, the state with the most pro-dealer law on direct distribution, has now opened the doors for new EV companies to bypass the traditional dealer model entirely.

Just as there is no good basis in public policy to limit Tesla’s right to engage in direct distribution, there is also no reasonable basis to prohibit it to traditional car manufacturers either. As I have previously detailed at length, there is simply no consumer protection reason that any car company shouldn’t be able to choose how it sells cars to consumers.

Maker-Dealer Relationship

Since there is no good reason for franchise laws, I salute Tesla for its victory. 

Dealerships will not go away for a while because many people still want the look and feel. But Covid forced inventory shrinkage and that will stick. 

With inventory down, available color and feature selections are down. To get the precise mix of color and features, one will need to order online anyway. 

Demographics and Attitudes In Play

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Two points the WSJ article missed are demographics and attitudes.

Unlike their boomer parents who had a huge love affair with cars their entire life, millennials and zoomers don't. And they are very prone to buying stuff online. 

What will M's and Z's do if they can find a car hundreds of dollars cheaper online? 

They may go to the dealer to see a car but if ordering online saves money, that's what's going to happen.

What About Service?

The future car is electric and electric vehicles have fewer moving parts. They will require less service. 

How fast this happens is debatable but GM believes all electric by 2035.

Online Everything

"Everything Must Go!" is a bit too much, but that is surely the general direction. 

Covid and supply chain disruptions accelerated trends towards "online everything" already in place due to demographics, changing attitudes of M's and Z's, and the push towards electric.

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