AS NEW AS SELLING CARS OVER THE INTERNET IS, we are already seeing a second generation of on-line services.
The subtle, but critical evolution in the sale model of the new automotive e-tailers could transform the industry.
The goal of these new on-line players is to carve out a new distribution channel. The entrenched players are starting to take notice. How they strike back may determine the future of automotive retailing. It's going to be a wild west shootout, with six-shooters replaced by keyboards.
Buyers versus sellers The original on-line e-commerce model -the buying or referral service -was quite simple: sign up dealers, offer them protected territories and provide them with qualified leads. In exchange the on-line buying service received a fee and created income producing marketing alliances with other vendors such as insurance companies.
The dealers - who had inventory and a sales infrastructure - were the key to success. The on-line services real clients were dealers, not consumers. They posed little threat to the franchise retail dealer configuration.
Now a whole new generation of on-line selling services are populating the cyber landscape: Priceline, CarsDirect Uautobid and CarOrder to name a few. Their goal in the short term is to make the dealer invisible. But in the long-term it is to either compete against or replace them.
Direct on-line sellers are really brokers whose clients are not dealers, but consumers. Their value proposition is to provide consumers a convenient, hassle-free sale with a competitive transaction price.
They post actual prices that consumers will pay and make a small fee for handling the sale. They also clearly meet a need by aggregating products that make vehicle and price comparisons easy. That is why they take the marketing position of being "trusted intermediaries."
The direct sellers real income comes from financing and aftersale products. Their basic interaction with the consumer revolves around getting the consumer financially approved before securing the vehicle. This gives them first shot at getting the finance contract - an integral profit center for almost every dealer.
For these services, the dealer is simply a supplier. Their proposition to dealers is this: we will offer you a low gross profit on your more desirable products in exchange for you giving up your finance and service-contract dollars. Huh?
Biting the hand that feeds them State franchise laws currently prohibit automobile manufacturers from selling directly to consumers.
If franchise laws are eliminated, the direct on-line sellers hope to partner with the manufacturers to create a new distribution channel. If franchise laws remain as they are, they'll buy dealerships to fulfill a significant portion of their inventory needs.
If they become a legitimate retailing force, manufacturers will then face the challenge of how to work with this new channel. Either way, they will significantly alter the sales equation as we currently know it.
Automotive retailers don't like either option - but neither do the manufacturers. And that's the problem that direct sellers will have to solve: it's hard to survive when both your potential partners want you just to go away.
The death knell for all but the most resourceful direct sellers could be when the 800-pound gorilla climbs in the ring.
General Motors advertising/marketing budget is somewhere north of $2,000,000,000. Yeah, that's a lot of zeroes. They can create an awful lot of noise in the Internet space drowning out the messages of even their best-financed competitors.
Will they allow direct sellers to "own" the cyber buyer? Or will they succeed in protecting and enhancing their brands by establishing a relationship with the consumer?
Where's the beef? I'm not sure where the legs are in the direct-selling model in the long run. They can't take cost out of the system because they don't control inventory. For now, they actually add a layer of cost to an already bloated retail distribution system. They do, however, have three attributes that may earn them time to create a foothold.
On-line services are banking on the "bad will" that has been built up over years by retail franchise dealers. The vast majority of on-line purchasers are not bargain hunters, but people who dislike dealerships and their bump-and-grind negotiations. Time, convenience and the perception of fairness are the drivers. There would be far less demand for the "trusted intermediaries," if all vehicles were sold like Saturns. They're not.
A prerequisite for survival in the Internet space is nimbleness. Most of the new entrants have that advantage over manufacturers and dealers. Some direct sellers will fold under the pressure, others may well use their speed to keep changing the rules and remain a competitive threat.
Direct sellers have a huge advantage in that they don't know the rules of the game - so they don't play by them. They don't suffer from the mental and institutional constraints of the established players. So they make up their own rules and challenge the status quo.
How and when will these on-line models shake out? Who knows? But by the time we do know, they will have changed our industry.
They may inadvertently bring closer together two parties that have often mistrusted each other: automotive retailers and manufacturers.
Mark Rikess is president of The Rikess Group, an automotive training and consulting firm. To read his previous Ward's Dealer Business articles on-line go to www.rikessgroup.com
