The auto industry, for both new and used cars, is one of the most rigid hold outs in the transition to digital sales. While you can book travel or open a bank account with a few clicks, you generally need to go to a dealership to purchase your next car. 

Some iconoclast brands are successfully testing digital-first hybrid sales models, and the effects could be permanent.

Carvana and Tesla offer a digital-first experience, and GM and Ford are updating their models to include online buying experiences for used cars, but the franchised car dealership model that has been around for 120 years is still finding its place amid new sales models and consumer expectations. 

The Traditional Dealership Model

Dealerships came about in an era when having a distributed sales model allowed for greater geographic product reach and increased profit for manufacturers, who were smaller operations and needed a specialized sales team. As cars became more mainstream, dealership associations lobbied to have this separation of sales and manufacturing codified: laws exist to prevent car manufacturers from directly selling cars to customers and from breaking off relationships with existing dealers. The justification for this was that independent dealerships offered price competition and protection for consumers. Moreover, local dealerships were embedded in their communities. But, times have arguably changed. Similar to a neighborhood bank or grocery store, these are companies with corporate interests. 

The traditional dealerships model may also be struggling to serve dealers or manufacturers. Independent dealers have to pay for physical locations with cars on the lot, ready to be sold. “Dealers have to cover the cost of financing all those cars sitting around, waiting for a buyer. And automakers usually wind up producing more cars than they need to, in hopes of satisfying every shopper's desire. That means more parts, more labor and more cost. Inevitably, though, they end up spending more on advertising and incentives to clear out the slow sellers.” This model has led to periodic and predictable clearance sales (e.g. “Toyotathon”) to purge remaining cars on the lot and make room for new models. 

A confluence of recent events has caused a major disruption in the familiar dealership model. The first trend is common across all industries: there has been a major contraction of local and independent dealers as they are bought and centralized by larger, national chains. This leaves customers with less room to haggle, as prices, sales quotas, and incentives are often set at a higher level. This also reduces the price competition that dealerships were designed to protect and removes the community connection that so many dealerships once had. 

Sales and Research Moves Online

Online car shopping is another major trend that changes how consumers interact with a brick and mortar dealership. This trend predated the pandemic, but was accelerated by shutdowns and health concerns about going into public spaces. As the availability of online car sales grew, so did the realization that many of the stresses and headaches of in-person shopping could be avoided online, particularly with used cars. A newer demographic of shoppers, including women and minority customers, found that having a set price and purchasing anonymity gave them a lower pressure, more pleasant experience. As the New York Times reports, “Consumer satisfaction with car shopping has reached an all-time high in recent years, as the pandemic shifted more of the experience away from dealerships, digitally or elsewhere.” 

However, Michelle Krebs, executive analyst at Cox Automotive, says that the data indicates that those dealerships who have been able to make the transition to online sales benefit. “It turns out that dealers are more profitable than ever since shifting to online sales… The deal happens faster because the consumer knows exactly what they want, and there's not a lot of haggling on the price" she said. “Consumers really like it. Surveys show they want more of it." 

It’s not just online shopping that threatens the traditional dealership model. The ability for customers to do research, price comparisons, and secure financing online reduces the need for dealers to provide these services. “Third-party digital channels for research…are increasing vehicle pricing transparency and enabling consumers to make product comparisons easier, thus limiting the ability of dealers to capture margin on the vehicle and to influence customers’ buying behavior.” 

This effect is felt most acutely in the used car market, which traditionally has more negotiable pricing and a more geographically limited stock of available vehicles. Shifting the model online gives customers more options: a greater geographic pool of cars and greatly increased transparency.

Recent production delays due to the semiconductor shortage have shifted a lot of focus on to the used car market in the past year and dealers with a robust online presence have been rewarded. CarMax saw a record number of customers buying online at the end of 2021, and they shifted to more digital appraisals for the vehicles they were buying.

Ford released an online buying platform last year to recapture used vehicle sales for dealerships. It "allows customers to transition directly from the research phase into the purchase phase, making for easier buying experiences and offering advantages over third-party sites.” GM is catching up by offering its own digital platforms for used vehicle sales that integrates used inventory across franchises, and offers buyers perks such as OnStar and SiriusXM. 

The above trends have combined to force dealerships to shift models. Many now have fewer cars on the lot and have shifted focus to being service centers. Despite pressure from dealership organizations, more and more states are reconsidering their direct sales bans. In the used car market, it seems that a shift to online search and sales is all but inevitable - customers will not go back after having tasted what online offers them. 

Where do EVs Fit In?

So, where do electric cars fit into this? Study after study has shown that unless a dealership has dedicated time and resources to EV education, sales teams are often undereducated in explaining and selling electric vehicles. Moreover, since electric cars require far less maintenance, selling one will net the dealership less revenue in service and repairs. Even if there is no ill intent, most sales people will talk more about and encourage shoppers to go with an internal combustion car. 

Tesla was very aware of the knowledge gap about electric cars. When it came on the scene, the company insisted on selling cars directly to consumers through online sales and company-owned physical stores. It set itself apart from the typical car buying experience by offering fixed pricing consistent across the company. While the company has struggled with direct sales bans and still has sales caps or restrictions in many states, it has worked hard to lobby against dealership protections. 

Traditional car manufacturers, especially those shifting to electric, are taking notice of Tesla’s success. Thanks to supply chain issues restricting car supply in the past few years, many OEMs have shifted to a pre-order system for new (and electric) cars. Ford CEO Jim Farley explains, "You cannot imagine ... how much money we waste by not -- by guessing what our launch mix is for a new product." Ford used a pre-order and reservation system for their highly anticipated electric Mustang Mach-E in 2021.

However, because of direct sales bans and laws that don’t allow OEMs to dissolve relationships with dealers, the pre-ordered Mustangs still had to go through a dealership for sales and hand-off. That’s where complaints were created. Many dealerships, aware of the high demand for the new electric Mustangs, demanded “market adjustments” from customers before delivery of the vehicle. Ford has strongly denounced these practices, which generated ill will towards dealerships in the EV community. To be fair, though, it’s debatable how market adjustments differ from Tesla’s frequent and covert price increases over 2021.

The used EV market is still in its early stages, but with online retailers leading the sales, the trend toward online research and shopping is strong. 

Pre-Ordering: The New Model?

European shoppers have pre-ordered their cars with all the options and specifications since WWII. While American shoppers are not quite ready to order a new car sight unseen, many manufacturers are shifting to a pre-order model. This generally involves putting down a deposit on a car with the color, trim, and specifications that you want, then going to take delivery at a local dealership. The final sales price is usually determined by the dealer, but purchasing can happen directly from the manufacturer. Especially with supply shortages, pre-orders help manufacturers and dealers understand market demand and how to prioritize a limited parts supply. It saves labor by not making cars that no one wants, and reduces storage and lease costs that dealers incur by holding cars on a lot. 

It remains to be seen whether or not the shift to pre-ordering is temporary or a harbinger of things to come. However, pre-orders for upcoming electric vehicles suggest that the consumer appetite is skyrocketing. 

This presents a tremendous opportunity. I can’t think of any other business where hundreds of thousands of consumers are making $1,000 pre-payments online only to pay dealerships another $70,000 after a year (or more!) of waiting. In order to stay competitive in a market that is increasingly moving online, and capture new revenue opportunities, franchise dealers must adapt with these eager EV pioneers.

We can concede that 2021 was the year when EVs became inevitable. Dealers can lean into this shift by educating themselves and their sales teams about electric ownership. Since they are embedded in communities, dealerships are a crucial tool to bridge the knowledge and enthusiasm gaps for customers, especially in places where adoption has been slower or may feel forced. New technology needs ambassadors, and there is no better place to look.