Dealers save us from sticker price, eh?

Sticker Shock TeslaMondo“Independent dealers are aggressive in pricing against each other,” said Bruce Anderson, president of the Iowa Automobile Dealers Association, in USA Today a couple days ago. “If you wanted to buy directly from Chevy or Ford, the price on the sticker would be the price.”

So the demise of dealers would cost the consumer money? A scary thought. Luckily, it’s not true. Consumers actually pay a middleman premium. Using dealers would cause the price of a Tesla to “increase significantly,” according to Tesla’s Vice President of Global Sales, Jérome Guillen.

How much does the middleman cost us? About 24 percent of the MSRP, according to a Harvard Business School case study of Ford’s failed retailing attempt in 1999. So the demise of dealers would trigger some combination of more profit for automakers and lower prices for consumers. TeslaMondo thinks market forces would cause transaction prices to settle right about where they are today, with automakers quietly enjoying a fatter margin. And the consumer’s car-buying experience wouldn’t change much. Ford couldn’t suddenly mimic Tesla’s retail model, which lacks inventory, barely dabbles in financing and avoids trade-ins. The big-volume car business would look much the same, even without franchised dealers:

* Competition across brands would continue in force, driving prices down. Even competition among same-brand stores would continue in force. But how, if the new-car price is non-negotiable? Because six out of 10 new car transactions involve a trade-in, and trade-in value is subject to individual judgement. No two managers will reach the same conclusion, so competition would shift from, “Who will knock the most off MSRP” to “Who will give me the best overall price, after trade-in?”

* MSRP would still be just a suggestion. Sure, for Tesla it happens to match what the market will bear. But for most brands, it does not. And so factory rebates — remember those? — would not just continue, but get stronger to bring the transaction price back to the norm for the region. The resulting price to the customer would mimic where it’s always been. If an Accord LX has been selling for an average of $20k in a given area, rest assured a factory-owned Honda store would make sure the price remains at $20k, whether by lowering the MSRP or using rebates to adjust as necessary. There would be no price shocks allowed.

* Interested in leasing? Lease offers already circumvent the dealer and come directly from the manufacturer in many cases. Just look online or watch TV. Sure, some offers are dealer-specific, but many are REGIONAL, which means they’re factory promotions. So automakers already do pitch discounted pricing directly to the public, albeit with leasing instead of buying.

* What about lending? What rate would you get if the factory ran the store? The same factory-sponsored rates you get now. And your chances of approval would remain the same because the factory’s lending arm already determines who gets, say, zero percent and who doesn’t.

* What about buying a used car? Ah, the dirty end of the business. The likely scenario is that factory-run stores would outsource the used car business to an on-site independent operator, rather than dirty its hands. Imagine a Honda-owned store fixing an old Camry and selling it, then servicing it? Seems a conflict of interest, yes? But if the used car wing is an independent enterprise, there’s a crucial partition.

* The dealer doc fee would go away. That’s several hundred dollars in some cases. Would consumers end up paying it under different guise? Maybe.

* What about servicing? Once again, the factory is already very involved. Is your issue under warranty? Is it a defect or a natural idiosyncrasy of the product? Do you deserve a break on the bill? Will the factory pay half? If you get stuck paying a big bill, but a recall is issued later for the same thing, do you get reimbursed? These sticky situations already test the relationship between the factory and the consumer. They would continue.

So how much would really change? Well, you wouldn’t see a cluster of salesmen near the front door, smoking and texting. They’d be forced to do that stuff at the back door.


One thought on “Dealers save us from sticker price, eh?

  1. Richard G says:

    “So how much would really change?”
    Well, just look to Europe where car manufacturers are allowed to own stores if they want to. Some do, while some are happy with privately owned importing companies.

    What is common though, is that the quality of service in a European car dealership is far from what you would meet in the US. People are never afraid of walking into a car dealership and would rarely feel ripped of. The sticker price would be the final price, or very close to it.


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