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  • Writer's pictureMike Entner

Is the Automotive Dealer Model Broken? An Exploration of D2C Versus the Traditional Dealer Model

By Michael Entner-Gómez | Digital Transformation Officer | Entner Consulting Group, LLC.

The direct-to-consumer (D2C) model in the automotive industry, championed by trailblazers like Tesla, represents a significant shift in how cars are sold. But is it the ultimate fix for the challenges plaguing the sales side of the automotive world? That's a multifaceted question. Coming from a background where my family has been deeply involved in consulting to maximize dealership profits, I've had a ringside view of this sector. While I don't claim the granular expertise of those who navigate this model daily, I've got more than a cursory understanding — let's say I'm a step above a 'Holiday Inn Express expert.' So, with a dash of humility and a pinch of insight, let's try to unpack this 'bulging suitcase' of a topic together — and on a side note, this will not be exhaustive given the confines of this medium.

Some History

As any diligent student of history (or at least one who didn't snooze through class) knows, understanding our past is key to guessing where we might zoom off to in the future. Back when dinosaurs were the unrivaled kings of the commute, the notion of selling these newfangled contraptions called cars was as groundbreaking as the vehicles themselves. Enter William E. Metzger, stage left, in 1897. In the heart of Detroit, which was just revving up as the automotive world's main engine, Metzger took a leap into history. He opened what was arguably one of the first car dealerships, a place where those horseless carriages could find a stable. Metzger wasn't just selling cars; he was a trailblazer, pioneering a business model to put these mechanical beasts within reach of the masses. His dealership did more than just hand over keys; it was instrumental in kickstarting the dealer-franchise system, laying the chassis for what would evolve into a mainstay of automotive sales.

As the industry grew, so too did the need for a more structured approach to selling these mechanical marvels. Enter Alfred P. Sloan, the influential head of General Motors in the 1920s. Sloan saw the value in creating a network of independent dealerships, each authorized to sell GM vehicles. This strategy was more than just a method of distribution; it was a comprehensive system that encompassed marketing, sales, and service. Sloan's approach ensured that customers had consistent and reliable access to both the vehicles and the necessary after-sales support, a model that would become a benchmark for the industry.

Meanwhile, Henry Ford, with his revolutionary assembly line production of the Model T, inadvertently necessitated the expansion of the dealership model (Henry Ford's Model A: An Economic Blueprint for Scaling Innovation). Ford's vision of an automobile for every American family meant producing vehicles on a scale never seen before, which in turn required a robust network of dealerships to handle the distribution and sales. The Ford Motor Company's sprawling dealership network was instrumental in popularizing the automobile across the United States, further cementing the dealership model in the fabric of American commerce.

These early developments in the automotive dealer model laid the foundation for a system that would endure for over a century. It adapted over the years, reflecting the changing tides of consumer habits, economic conditions, and technological advancements. Yet, the basic premise, set forth by pioneers like Metzger, Sloan, and Ford, remained: a network of dealerships, each serving as a local hub for bringing the marvel of personal transportation to the masses.

Today’s Dealership: A Tale of Two Experiences

The automotive dealer network today is vast and eclectic, offering a smorgasbord of services. From standard sales and service to bespoke offerings like customization, financing, and consignment, plus special experiences for enthusiasts, it's all there. You'd expect a consistently top-notch customer experience with such variety. Yet, reality presents a mixed bag. I've met dealership reps who've become friends, offering service so stellar I'm eager for repeat visits. Conversely, I've encountered those who are the epitome of the sleazy car dealer stereotype, best kept at arm's length.

Consider a recent motorcycle purchase. I was eyeing a Honda CRF250L Rally Edition during the COVID era, a time of scarce supply. Finally locating one, I reached out via the website. The dealership hurdles started immediately: no out-the-door quote without a visit, no pre-arrival financing, and a 30-minute wait despite an appointment. I was passed between three salespeople, navigated a labyrinth of paperwork, upsells, and financing, only to be told my bike needed prepping and couldn't be taken home that day. Three days later, I received my bike with barely any gas and an improperly assembled front wheel. Stranded on the side of the road with a gasless, malfunctioning bike, I regretted paying full price. This experience turned me off from the dealership entirely, making me consider direct shipment for future purchases were it available.

In stark contrast, my experiences with a local VW dealership were entirely different. My go-to salesperson, David, almost telepathically knowing my preferences, would alert me when a new car of interest arrived. At the dealership, everything was streamlined: the car ready and fueled, below-sticker price pre-negotiated, paperwork prepared, financing options clear, and even a gift bag waiting. This efficiency extended to the service department, with immediate scheduling and personal attention (plus my salesperson staying in the loop). This level of service made me a loyal customer, only to be disrupted when my trusted salesperson retired, and VW stopped building enthusiast cars, leading to a subsequent negative experience that halted my patronage.

These tales from the dealership world raise a crucial question: is the challenge with the dealership model about its inherent functionality, or is it more about the execution of this model? At its core, the dealership model aims to offer a customer-centric experience, spanning from vehicle sales to comprehensive after-sales services. Theoretically, this should provide a streamlined, reliable process for consumers.

However, real-world experiences often tell a different story. The stark contrast in dealership experiences I've encountered suggests that execution is key. A dealership that excels in customer service, transparency, and efficiency can turn car buying into a memorable, positive experience. This is where the personal touch and expert knowledge make a significant difference. On the other hand, poor execution — marked by opaque practices, subpar service, or aggressive sales tactics — can significantly mar the dealership experience. This is not a flaw of the dealership model itself but a failure in its implementation. A focus on consistent, quality customer service is essential for the success of this model.

This inconsistency in traditional dealership experiences is nudging customers towards the Direct-to-Consumer (D2C) model, reminiscent of the uniform experience offered by chains like McDonald's — not the best food in the world but you know what you’re getting. The D2C model appeals to many customers for its transparency, simplicity, and predictability. Customers are drawn to this model for a consistent and stress-free buying experience, often lacking in traditional dealership interactions. This shift highlights an urgent need for traditional dealerships to adapt and refine their approach, prioritizing customer satisfaction and service consistency to stay relevant in the evolving automotive market.

A Public Outcry to Cut Out the Dealers: Does it Make Sense?

In examining the automotive dealership model, we must appreciate the unique and enduring connections these establishments forge with customers, particularly through after-sales service. This ecosystem extends beyond mere sales, encompassing maintenance, repairs, and encouraging repeat purchases, thus cultivating deep-rooted brand loyalty. Furthermore, dealerships make significant investments in franchising, sophisticated showroom build-outs, and managing extensive floor plans, reflecting a substantial financial and operational commitment to the automotive market.

Recognizing that purchasing a car is one of the most significant decisions for consumers, distinct from everyday acquisitions, underscores the indispensable role of dealerships. These investments go beyond physical infrastructure, creating a brand presence and customer trust. To exclude dealerships from the automotive sales process would overlook their significant contributions and the comprehensive support they offer, which is challenging to replicate in a purely online model. Their role is integral to the entire automotive ownership experience, emphasizing the need for a balanced approach that values what dealerships bring to the automotive industry ecosystem.

While the push towards a Direct-to-Consumer (D2C) model in automotive sales is gaining traction, it's essential to question whether this shift fully appreciates the industry's complexities. The D2C model, appealing for its streamlined, digital convenience, might not fully address the intricacies of car buying and ownership. A middle ground might exist — a hybrid model that blends the traditional dealership's comprehensive service with the ease of online purchasing. This approach could preserve the substantial capital investments dealerships have made in showrooms and inventory, while providing a more comfortable and familiar online buying experience. Although some dealerships have attempted to integrate technology into their operations, these initiatives often encounter challenges, leading to a fallback on the traditional "When can you come in?" approach. A more nuanced, hybrid model could offer a practical way forward, enhancing the customer experience without negating the value and investment in existing dealership models.

Lastly, from a manufacturer's perspective, the pivotal role of dealerships in product acceptance cannot be overstated. Customers often prefer the tangible experience of vehicles in person, the ability to discuss concerns with knowledgeable staff, and access to a local support system — strengths inherent to the dealership model (and critical in EV purchases I might add). While OEMs may consider establishing their own sales and service centers, it's important to recognize the significant financial and infrastructural investments this entails, a burden traditionally borne by dealership franchises. The exploration of new sales models should not overlook these intrinsic values. For instance, consider the hypothetical scenario where a luxury electric vehicle brand like Tesla leverages dealership networks. This could potentially expand their market reach and accelerate EV adoption, particularly in areas less familiar with such technologies.

The Amazon-Hyundai Deal as a Middle-Path

I recently shared my thoughts on LinkedIn about the Amazon-Hyundai collaboration [Amazon-Hyundai Deal Hype]. This newly announced partnership, often compared to Tesla's direct-to-consumer approach, actually reflects a nuanced shift in car sales. However, Hyundai isn’t sidelining its dealership network; rather, it's integrating them into an online sales model, expanding their reach into the digital sphere where car buying increasingly begins.

Amazon's role as Hyundai's digital storefront marks a notable, though not entirely unprecedented, step in the evolution of car buying. This initiative allows customers to start their car purchase journey online, leveraging Amazon's vast digital reach, but crucially involves local dealerships in the final purchase and delivery process. Additionally, Hyundai's integration with Amazon Web Services (AWS) promises to enhance operational efficiency and customer experience. The potential for deeper technological integration, such as embedding Amazon’s interface within Hyundai’s systems or utilizing Alexa for scheduling automotive services, hints at an emerging era of tech-enhanced automotive retail.

This evolution in car buying, symbolizing the blend of online convenience with the robust dealership model, doesn’t seem to disrupt traditional dealership financing models. The Amazon-Hyundai partnership is more strategic than revolutionary, reflecting the industry's adaptation to digital trends and consumer behaviors. While this collaboration marks a significant step, it's evolutionary rather than revolutionary in the automotive sales landscape, and could represent a middle ground approach to selling vehicles that bridges the gap between traditional and modern retail models. This hybrid approach could be the key to meeting diverse consumer preferences, combining the trust and familiarity of dealerships with the efficiency and reach of digital platforms.

What’s Next for Dealerships?

The automotive dealership model stands at a pivotal juncture. Emerging brands like Rivian, Lucid, and Fisker, following Tesla's lead in bypassing traditional dealerships, must still address the essential needs for test drives and service centers. Given their precarious financial states, these companies might be wary of heavy investments in infrastructure that established dealer partners typically make. Dealerships could be key allies in supporting these struggling newcomers. Yet, with the current market dynamics, this opportunity might be slipping away, barring the emergence of investors willing to back the EV vision of these companies at high risk-to-reward ratios.

For established OEMs like VW, introducing sub-brands such as Scout, the decision to adopt a new sales model or utilize existing dealer networks is complex. These networks provide a significant advantage for market entry. However, introducing innovative sales models could offer a distinct edge in a competitive market. Crucially, VW must also weigh how their established dealers might perceive a new, potentially dealer-less model, especially given that Scout models aren't in direct competition with VW's primary range. This balance between innovation and leveraging existing dealership relationships is crucial in their strategic planning.

The current automotive retail technology landscape, while featuring firms that provide dealership management systems, web-based storefronts, and supply chain/logistics optimizations, still shows a significant technology gap. There is a critical need for transformative solutions that surpass these existing services. The industry requires a paradigm shift, not just in tools but also in its overall approach. An overhaul, perhaps even a completely new model specifically designed for automotive retail, could be revolutionary. This change has the potential to drastically improve dealership operations and customer experiences, aligning them more closely with modern market dynamics and consumer expectations. Additionally, the entry of Amazon and Amazon Web Services (AWS) into this space could discourage new competitors, potentially stunting growth and innovation due to the daunting task of competing with such a dominant player. This aspect is something I delve into further in my article on the impact of AWS’ market dominance [Competing with AWS is Suicide].

Ultimately, dealerships are unlikely to disappear, but must undergo substantial transformation. Working in tandem with OEMs to develop strategies that benefit customers, dealerships can maintain their vital role in the automotive ecosystem while adapting to evolving market demands and technological advancements.

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