In the late ’90s, Ford and GM tried to cross the Great Divide between auto building and auto retailing. Surely it wasn’t the first such attempt, but it was the most recent — and it has left dealer groups with a severe anxiety disorder. Could it happen again? Of course, if automakers thought they could pull it off. Enter this Musk guy, who makes it look awfully easy. What if Tesla’s factory-direct business model becomes contagious and ushers a repeat of the late ’90s?
WHY IT HAPPENED
- The Saturn experiment. GM’s new-think Saturn brand was a largely successful gamble new-school retailing, even if the product itself was starting to go stale. Surveys showed the fixed-price strategy and coffee house atmosphere really did make people happy. Also, Saturn dealers were purposely sparse: only one franchisee per market. With such big territories, Saturn dealers didn’t really compete with each other. Rather, Saturn competed with other brands. In short, Saturn invited further tinkering with auto retailing.
- Publicly-held company threats. Dealerships were “clustering” under new macro dealers like AutoNation, U.S. AutoGroup and Lithia Motors. AutoNation had bought over 400 dealerships in just a few years. These macro dealers were sapping power from automakers and screwing up the old dynamic between franchisor and franchisee. More tinkering was in order. Tinkering? No, automakers had to take control of the retail battlefield pronto.
- E-Commerce. It was stoking everyone’s imagination. How would it affect car-buying? Nobody knew exactly, but everyone did know the cost of retailing a car added about 24% to its price. Could automakers kinda skip dealerships and work the Internet directly to get that number down? Hmm . . .
FORD DREW FIRST BLOOD
According to a Harvard Business School case study, Ford CEO Jacques Nasser wasn’t the first to ponder all of this, but he was the first to do something about it. He crossed the line into retail with a new concept called Ford Auto Collections. He drew circles around geographic clusters of Ford franchises and tried to combine them into unified “limited liability” companies with Ford in command. They weren’t buyouts per se, but the effect was the same. Nasser drew first blood in 1997 by trying to woo 21 dealerships in Indianapolis as the first Collection. No dice. But in 1998, ten dealers in Tulsa, OK went for it. They comprised six Ford dealers, two Lincoln Mercury, a Mazda and a Jag dealer. By the following March, Ford Auto Collections had popped up in San Diego, Rochester, Salt Lake City and Oklahoma City. In Australia, where Nasser grew up, six dealers in Perth signed up.
What was life like in a Collection? Click the graphic.
An old Ford Auto Collection advertisement
Salespeople were paid salary plus bonus, which was good for the lackluster salesmen but bad for the go-getters. Dealers had greater access to inventory thanks to the Collection. And each Collection had a body shop, rare for a non-Collection dealer. Former dealership owners were paid a fixed salary too. For some, it was a pay cut, but having an Auto Collection store was better than losing your customers to the scary new Internet phenom, or to a fierce AutoNation store across town.
Other automakers watched these developments like crows on a wire. GM was next to swoop in, but unlike Ford, GM gave no warning. A new GM arm called General Motors Retail Holdings sent dealers this terrifying administrative message about buying five to 10 percent of the 7,770 GM dealers in the country and running them. The company wanted street-level experience, to “better understand the changes occurring in the marketplace.” There. See? Nothing to fear.
SO HOW DID THE WHOLE THING UNRAVEL?
Ford: Customers didn’t trust transparent Collection pricing and traveled out of their market areas to negotiate a better deal with good ol’ opaque pricing. Seasoned salesmen started leaving because fixed pricing represented a pay cut, but Ford suddenly needed those salesmen to corral their clientele during the Ford/Firestone fiasco. And then there was Jacques Nasser’s self-inflicted problem. He embraced affirmative action a little too openly. At a videotaped meeting with execs, he said he was tired of Ford’s “sea of white faces.” Several lawsuits later, he was out of a job. Within three years of their birth, his Collections were sold back to private entities, and the Earth returned to its normal axis.
GM: Unlike Ford, GM essentially blindsided its dealer body. Outraged, scrambling dealers called their longtime chums in public office. “Some dealers went to school with that guy or worked on his campaign,” said James A. Willingham, president of the National Automobile Dealers Association, at a 1999 luncheon with reporters. “So we have grass-roots clout, and we’re going to use it.” It took only a year for 22 states to fortify their dealer franchise protections, smothering General Motors Retail Holdings before it could ignite. A side project, an Internet-linked used car store in Houston called GM DriveSite, abruptly vanished. The whole GMRH concept was “the wrong idea, and the way we executed the idea was wrong,” former GM Executive Director Frank Dunne told Automotive News in 2008, looking back. “We didn’t consult the dealers. The day we disclosed it, the dealers were just jolted.”
RETURNING TO THE PRESENT
Hear that clacking sound? It’s the kneecaps of dealer principals around the country. They’re jolted again now that “this Musk guy” has found a way around their century-old Middleman Toll Booth and its 24% toll. He simply had the gall to build a new toll-free highway overpass directly to the customer. What if other automakers decide to use this new Tesla overpass? It would mark the end of an era. The Federal Trade Commission, the quintessential consumer watchdog group, thinks factory-direct sales should not be verboten in ANY industry. Here’s the FTC blog post to that effect. Strike one.
Fearing the hand of doom, the National Automobile Dealers Association (NADA) just launched a PR campaign to tout the benefits of franchised dealers. Will it sway consumer opinion? Heck, will it sway the automakers? They’re inching toward the Tesla overpass. The Alliance of Automobile Manufacturers, which comprises 12 automakers, has lobbied for the right of car makers to sell directly if they want to, leaning on lawmakers in Arizona and Pennsylvania to keep the Tesla overpass open for all. The Alliance says dealer protectionism is going too far. “At the request of local dealer groups, states set up a labyrinth of protectionist laws that make the car-buying experience difficult and costly for our customers. It’s understandable why Tesla or future competitors would want a simpler sales process. When we look at the big picture, we may be at a tipping point. If dealer groups continue their push for more onerous franchise laws, we will be forced to keep an open mind about how best to serve new-car buyers in the future.” That’s a rather ominous warning from Alliance spokeswoman Gloria Bergquist. Strike two.
A posse of 70 economists and professors wrote an open letter that dismantles each of the dealers’ supposed benefits to society. Strike three.
Three strikes isn’t enough, however. The middleman will die only when a dagger is driven through its heart. That will come when a major automaker decides to have another go at factory-direct selling. GM is the one to watch. It’s paying a lot of attention to Tesla. It was the first individual automaker to complain about special legislation that lets Tesla bypass dealers, essentially crying “No Fair!” Last year, GM assigned a special team last year to study Tesla and then promptly expanded the Shop-Click-Drive program, which lets online shoppers buy without visiting dealerships. But even through that program, dealerships end up selling and delivering the car. Surely not what GM really wants, but compromises abound when you’re stuck with an entrenched franchise system made all the stronger thanks to your own 1999 “administrative message.” D’oh! The dagger might still be some years away.