Changes in the Automotive Marketplace
In this column I'd like to depart from my usual discussion of Rover technology to discuss some far-reaching changes that are taking place in the buying and selling of cars — including our beloved Land Rovers. If you plan to buy or sell a Land Rover or any other car anytime soon — read on, this is for you.
We think of the car business as being separated into two tiers — new cars and used cars. But there are really four tiers in today's marketplace. At the top we have sale of new cars. Below that we have a fairly new tier that has evolved with the growth of leasing and fleet sales — the remarketing of late model lease returns, fleet vehicles, and buybacks. Next we have the traditional sale of older used cars. And at the bottom we have "buy here pay here" lots selling to people of limited means.
Right now, the top tier consists of carmakers selling their vehicles to the public through the new car dealer network. That network has existed for many years. And new car dealers have a powerful lobby that wants to keep that distribution system unchanged. But why shouldn't a carmaker apply the Dell computer model to selling cars? If you know what you want why shouldn't you be able to go to Ford.com and buy it? Wouldn't it stand to reason that the carmaker could sell direct for less?
Let me just answer that question before we continue… the main reason you can't go to Ford.com and buy a Ford is that independent auto dealers banded together and got laws passed that make it illegal for car makers to sell direct to the public in most states…
An established carmaker would have a hard time changing a distribution system that's been in place for almost 100 years. But what about a brand new car company? What about the carmakers that are developing in places like China? Are they the Hondas and Toyotas of the next century? And if they are, will they start out by selling direct? Time will tell, but my vote on that question is yes.
State franchise laws prevent that today but I think those laws will be challenged in coming years and I'd wager than within 10 years new car will be sold online in exactly that manner. Right now you can buy cars online from franchised dealers and I think that will continue, too. Overall, the Internet is going to continue to drive down prices and markups across the auto industry.
That will mean that successful dealers will need to find ways to shave the overhead costs of selling cars down to almost nothing if they are to prosper. That need is going to collide head-on with the desire of carmakers to have their dealers build multi-million-dollar showplaces in which to sell their wares. How will this be resolved? I don't know, but I see it coming.
One place costs can be eliminated is in staff. A dealer that uses computer technology to quote prices, take and approve credit applications, and handle the entire sales process is going to have a cost advantage over dealers who rely on people for those steps. Dell Computer and others have certainly shown that this can work and I think you'll see it more and more in the sale of new cars.
Perhaps the dealer of the future will be a service department, a delivery and preparation area, and a technology center. Where will you go for a test drive? Perhaps the dealer will have one of each model for test drives, just as appliances are sold today. After all, you don't test drive your stove before you buy it. It's good enough to look at the sample in the model kitchen in the store. I think car sales will head the same way. They'll have to if costs are to be cut to the bone.
Internet technology is also improving the ordering and manufacturing process. This reduces the wait between ordering a car from the manufacturer and actually receiving it. As technology cuts this time from a few months to a few weeks the idea of looking at the model in the store, ordering, and having it arrive at your home is going to make more sense.
So you can see that big changes are on the horizon for car retailing.
The next tier in the car business is the sale of late-model used vehicles. The growth in leasing and fleet sales has created a huge pool of 2-3 year old vehicles flowing back into the market. We're talking millions of cars here — every year. These cars are owned by the big finance companies who wrote the leases — people like GMAC, Daimler Chrysler Credit, Toyota Credit, Ford Credit, GE Capital, and others.
Today, big remarketing companies like Manheim Auctions and ADESA gather those cars up when their leases end. They check and grade them, recondition them, and sell them to dealers at special dealer-only auctions. The first change to occur in this system was in introduction of widespread online bidding last year. Now, for example, Land Rover dealers all over the United States can participate in a Land Rover auction no matter where it is using the Internet. But why should these sales be restricted to dealers only? After all, these are clean late model cars, many of which are still in warranty. I suspect that you will see these vehicles sold directly to the public over the Internet soon.
If these auctions are opened to the public, dealers and individuals will bid against each other for used cars. How will dealers resell those cars for a profit? Certainly profits will diminish in this scenario, to the consumer's benefit. Will public auctions happen? Dealers hope not. But those used cars are owned by big financial institutions, whose overriding goal is increased profit. If the bank thinks you will pay $1,000 more for a car than some dealer don't you think they will sell it to you? The only thing holding them back is technology. And new technologies will make this possible in the next few years.
The next tier down — sale of older used cars — is changing too. Many of those older cars are now being sold on sites like eBay. An unexpected result is that they are moving from wherever they are offered to distant locations where they are wanted and valued. For example, in my area (New England) labor costs are high. So an older car that needs a lot of fixing-up will not have much value here. But the same car may be very desirable in a place like Mexico where labor costs are low. That rusty New England car, transported to Mexico, can be fixed up for a few hundred dollars. The Internet has made it possible for distant buyers and sellers to connect to their mutual benefit. And the local dealer loses another sale.
Even the bottom tier — buy here, pay here — is changing. These car lots — which make up the majority of used car businesses in many cities — cater to less affluent people who can't borrow from regular banks or even finance companies like Household Finance. These dealers sell cars on a weekly payment plan — $500 down, $50 per week, for example. Clearly those customers are not in a position to use the Internet to search for cars but online outfits like J. D. Byrider are consolidating and cleaning up such dealerships in the South and other areas.
The Internet has really revolutionized the process of searching for a car. Before, when you wanted a new car you went to the local dealer and looked at their inventory. If you wanted red and they didn't have red you asked them to call other dealers and look for one. Sometimes they found one, sometimes not. You chose between taking what local dealers had in stock, or waiting one to three months for the factory to build you a car. With used cars your selection was limited to local car lots, and you had to drive to each one to check their stock.
In those days the dealers really had all the power. You — the consumer — had one or at best a few dealers to choose from. But those days are gone. Now, from your computer, any time of day or night, you can search dealer inventories in your area or even all over the country. You can search for a particular color or equipment combination, and you can do this for both new and used cars. This is possible with a number of web sites — Cars.com, Vehix.com, Autotrader.com, Edmunds.com, and others. All are free for consumers.
Those sites will show you cars being sold in the traditional manner — with an offering price. You can email an offer and negotiate the purchase online without ever visiting the dealer. It's common for people to email 20 dealers asking for their best quote for a certain vehicle and making a decision entirely on that basis. And if you'd rather take your chances bidding you can look on eBay and other auction sites.
And if you wonder how much your dream car is worth? You can search completed sales on eBay for price data from actual sales, and you can read the electronic price guides on Edmunds, NADA, and other sites.
Internet technology has made all of this possible, and it represents a fundamental shift in the balance of power between consumer and dealer that will have far-reaching implications that we are only just beginning to see.
As recently as two years ago it was possible to watch a Range Rover sell for $25,000 at a dealer auction. That same Rover might be then sold on eBay for $27,000. It might end up at a used car lot for $29,000 or it might end up at Land Rover dealer for $31,000. Today, that wholesale to retail price spread has vanished.
Today a Rover that sells for $25,000 at a dealer auction will sell for $25,000 on eBay. And the Land Rover dealer will be lucky to get $27,500 for it, which barely covers the cost of the certified warranty he sells it with. The availability of online price and inventory information has made it easy for anyone to search out a car anywhere, and it has caused a collapse of pricing to the point where the wholesale and retail markets are merging.
Where does this leave the traditional used car lot? That's a good question. I believe most of the used car lots are going to vanish in coming years as a result of the Internet and technological change. The only sellers to survive will be those who can add value in this new environment. More and more, sites like eBay are going to "set the pace" for pricing cars. Anyone wanting to sell their car for materially more is going to have to offer something unique.
Here are some examples of how value might be added by a dealer:
- Your more upscale dealers are able to offer cars with certified warranty programs;
- Dealers with reputable service departments will always have an advantage because customers maintain a relationship with them for service;
- Some dealers have become known for selling a superior product. However, as overall quality of cars improves this is increasingly difficult to demonstrate with late-model used cars;
- Some dealers offer unique services — such as expedition outfitting. Those services command a price premium but they only appeal to a small segment of the market.
So we've seen how prices are being driven downward on the retail selling side. How about the wholesale buying side — trade ins? Well, today a person with a trade-in has access to as much information as his dealer to judge its value. And eBay is the driving force here. If cars like yours are selling for $5,000 on eBay why would you trade it in for $2,000? You wouldn't. More and more, that's what happens. The dealer has to pay more or the customer sells it himself. The result of that is that dealers are squeezed — they have to pay more to get trade-ins, and the retail buyers pay less. The result — lower costs for consumers and lower profits for car dealers.
So where will that lead us? I think we are going to see more and more online selling. I think the number of dealers is going to continue dropping — a trend that we've seen for a few years now. You will see fewer dealers in total, but those that survive will be bigger. Many or even most independent used cars lots are going to vanish. More and more, car buyers are going to be in the driver's seat for these transactions, now and for the foreseeable future. The Internet is bringing a previously unimaginable selection of vehicles to car buyers everywhere.
Meanwhile, I'll be at New England Land Rover events again this summer and I hope to see you there.