Maryann Keller: Automakers don't always make great auto sellers. (Brandy Baker / The Detroit News)
At the height of the dot-com bubble, Wall Street analysts, academics and consumer advocates claimed that “factory-direct” new-car sales would reduce costs, lower prices and deliver superior customer experiences. Despite the lack of evidence to support this contention, the debate has resurfaced as state legislatures consider changing franchise laws to allow some factories to sell directly to consumers.
Past experiments by factories to sell directly have rarely, if ever, proven successful, and the results have only reinforced the need and value of having a network of franchised new-car dealerships. In the end, the franchised dealer network benefits consumers and manufacturers alike, providing fierce price competition among dealers and an extremely efficient distribution network that is acutely sensitive to local markets.
In 1997, Ford Motor Co. tried to realign its sales distribution model with the Ford Retail Network. Ford believed fewer stores in a single market would concentrate sales and reduce marketing, employee and inventory expenses with the added benefit of lower facility investments. But fixed prices and salaried employees had little appeal and Ford lost share in each of the five metro areas of the experiment. Ford ended its experiment and sold the stores back to its dealers in 2002 having realized none of the supposed savings.
Another highly publicized factory sales experiment was General Motors’ online direct sales model in Brazil. With the perceived benefits of e-commerce swirling, GM Brazil opened a new assembly plant in 2000 to produce the subcompact Chevrolet Celta, and announced it would build them to order and encourage online shopping with lower prices than those available through their dealers. Belief that the Internet would disrupt brick and mortar businesses was never stronger, so no one doubted GM when it simultaneously claimed it would sell Saturn cars online in the U.S. the following year.
Unfortunately for GM, the experiment was canceled in 2006 because of the high costs of facilitating online transactions and operating distribution centers. Yet the myth lived on. Economist Gerald Bodisch lauded the Celta program in a 2009 report critical of state franchise laws which ban factory-direct sales of new vehicles, and many have cited his “research” — despite that very aspect of GM’s experiment failing three years earlier.
Franchised dealers are often depicted as “middlemen” hiding behind state laws and providing little value to car buyers. But proponents of a factory-direct system fail to identify system-wide savings if manufacturers were to provide the same services that dealers do to satisfy the needs of each customer.
Then there’s the issue of recalls. Nearly 14 million GM vehicles have been recalled in the U.S. through the first five months of the year — which includes GM brands abandoned in bankruptcy. Franchised dealers act as advocates on behalf of the customer when it comes to warranty and recall repairs. Dealers are compensated for these repairs and understand the importance of performing this work to the satisfaction of their customers. Factories, by contrast, would try to contain such post sales expenses.
Proponents of factory-direct sales want to believe the car buying process can be reduced to simply “point and click.” That is not the reality of such a complex transaction for the vast majority of car buyers. Dealers stock inventory ready-for-sale, offer test drives, appraise trades, arrange financing on the new vehicle and payoff existing loan balance on the trade, interact with the DMV to replace lost titles on trade-ins, register cars and obtain license plates, calculate and pay sales taxes, and manage and retain all documents associated with each transaction. Local dealers make a very complex process about as simple as it can possibly be.
The debate about the value of franchised dealers to both auto companies and consumers is likely to continue as more voices weigh in, including those who misunderstand the reality of buying a car, or the responsibilities of dealers. But these voices have failed to explain how a “factory direct” system facilitates competition and performs the services demanded by car buyers with no penalties in cost, time and convenience. For now, the franchise dealer network is the most efficient way to distribute and sell new cars and trucks.
Maryann Keller is managing partner at Maryann Keller & Associates LLC.