Death of the new car dealer
Death of a Dealership
Most people don’t think of auto dealerships unless they need a vehicle.
That’s understandable; I don’t think about most retailers unless I need a
product they sell. But sometimes it’s important to remind people of the
impact auto dealerships have on their neighbors and community.
A franchised new car dealership in a metropolitan market can employee
upwards of 200 people plus they are a source of business to the
independent vendors that provide support services to that dealership.
That means employment for many of your neighbors and friends. Most
dealerships are active in their communities, supporting non-profit and
charitable events along with providing jobs and training through local High School apprenticeship
Buying a car is a unique process and most people really don’t understand how to negotiate a deal
because unless they manage a business, they don’t have a need to negotiate any other product or
service they purchase. But I’ll leave the car buying process for another time.
Dealers are their own worst enemy!
Franchise new car dealers are pricing and negotiating themselves out of business and the
manufacturers are happy to let them do that. In fact, it’s my opinion (and all of this is my opinion)
that the manufacturers would love to get rid of their dealership networks and sell cars directly to the
consumer. However there are franchise laws that prevent manufacturers from eliminating dealers
outright so they will either let the dealers starve
themselves out of business or find another way to
I have mentioned to people many times that car
dealers make little or no money on the sale of a
new car. But because the consumer is spending
thousands of dollars on a car, they assume the
dealer is making thousands of dollars. That just
isn’t the case. Dealers have let the consumer take
over their business by allowing them to play one
against the other; knowing that if the dealer down
the street will beat their deal by $25.00 the
customer will buy there. And it’s true that this has
always been pretty much the case but there was a time when dealers drew the line at the invoice
price. Dealer hold back was sacred and the discounts stopped there.
Profit isn’t a dirty word!
A dealership, like any other business needs to make a profit to survive. Knowing that dealers run
scared and jump on whatever bandwagon the guy down the street is on, manufacturers started
promoting extreme discounts on new vehicles by offering the dealers “stair step” or quota rewards
for monthly sales. What this means is that if a dealer hits a predetermined sales number or quota
for the month, the manufacturer will give them a certain amount of money for each vehicle sold.
This can range from a couple hundred dollars per car to sometimes one thousand dollars. The
dollar amount can vary by vehicle type as well.
With this brass ring in front of them, dealers started giving away portions of their hold back money,
and eventually all of it to make deals in the hope of reaching the manufacturers sales goals. It was
a gamble. Some months you can hit your number and receive your money, sometimes you didn’t
and you took a loss for the month. Keep in mind that whether they made money or not, the dealer is
paying interest on his new car inventory every month.
The manufacturers would then take this quota system a step further. They came along and said if
your quota was 75 new cars for a specific month, let’s say January, then they would increase your
quota by a percentage for the same month the following year. For example if your number was 75
cars in January of 2014, they could increase that number by 10% so your goal for January 2015
would be 82.5 cars rounded up to 83 cars. This may promote sales in the manufacturer’s eyes but
has the dealer scrambling from the first day of the month to hit that number.
If plan A didn’t work; selling cars and making a profit, then dealers thought it’s time to move onto
plan B. If we can’t make money selling cars, perhaps we can make it up on the backend in the
finance office. They brought in aftermarket service contract companies that promised maximum
penetration and increased profits, but there are a number of issues with this process as well.
Dealers also push their sales people to sell aftermarket protection products to help make up for
some of the bleeding. This is problematic because the sales person has just spent hours building
rapport and trust with the customer and now has to pull out a bottle of snake-oil and try to convince
his new friend that this stuff is worth the ridiculous price.
In addition, some of the banks the dealers do business with are now paying flat fees for the loans
they generate for them. I predict that all dealer financial sources are going to implement this same
policy shortly, reserve will be history. I won’t go into Plan B any further right now; I’ll save it for a
In the meantime…
As a history buff, I look back at the beginning of the American Automobile Dealership. Why did
people that owned hardware stores and blacksmith shops become franchise new car dealers?
Because these business were repairing vehicles along with selling gasoline and oil to keep early
motorists on the road. They needed a way to keep a steady stream of service business coming into
their shops so they started selling new cars which would eventually need service work done. This
also gave them an opportunity to take in used cars which they could run through their repair shops,
fix up and resell.
I started in the car business back in the 1990’s and even then it was said that a dealer had his new
car “shingle” to support his service department because the service department supports the
dealership. Today’s dealers need to take a look at their service business and learn how to promote
and grow that end of the dealership because soon, that maybe all they have left.
As I said, franchise dealers will starve themselves out of business to the delight of the
manufacturers. The manufacturers will start selling new cars directly to the consumer, most likely
via the Internet and they will be shipped directly to the consumer. Used cars will be given a
predetermined trade-in amount based upon year, make and model minus any reconditioning costs.
The trade-in will be picked up by the same truck that delivers the new vehicle and delivered directly
to auction. All of the paperwork and title transfer will happen electronically via the web.
The manufacturer will have a company run “warranty repair facility” much the same as appliance
manufacturers have. If you have a warranty issue, you will contact the manufacturer who will direct
you to their nearest warranty facility for repair. All maintenance will also be covered by the
manufacturer for the term of the warranty.
With this business model in place, what is left of the current franchise dealer will be a used car lot,
body shop and service center. With no ‘brand’ affiliation, dealers will need to focus on building their
own brand and reputation.
Are there options?
Are there options? I would hope there are, however I don’t know what that might be. As an
advocate for the auto dealer, I struggle with this almost daily and would love to say I have the
answer. Just as there are currently franchise laws in place which caused the manufacturers to find a
different way to eliminate the dealers, there are consumer protection laws (and rightfully so) that will
stop dealers from getting together and determine where they draw the line with discounts. That’s
known as price fixing which is illegal, at least in Wisconsin and I would assume most if not all States.
However there are dealer associations that could teach their members how to sell value instead of
selling price. Get them back to selling their products features and benefits instead of selling the
Dealers also need to take back control of their industry. The online auto listing sites have taken over
the dealer’s world. There are a few larger auto groups nationally that have started to say no to
some of these listing sites (one site in particular). But again, dealers run scared and think they have
to do everything the guy down the street does.
The future of the car business will be on the Internet, in fact that future in now! Weather you have a
new car franchise or not, your online visibility and reputation will be what grows your business and
you don’t need third party listing sites to do that.
Am I right about the auto manufactures? I don’t know, this is all my opinion and I truly hope I’m
wrong. What I do know, and have a very good understanding of is how to market your business
online and it doesn’t include third party sites.
Dave Immel Automotive Consultant