There’s an interesting piece by Steve Miller in Brandweek about the auto dealership system in the US. I’ve done a fair amount of consulting to auto manufacturers and their brethren (heavy equipment manufacturers and other industrial manufacturers that rely on distribution channels), and I know how fraught those relationships can be. The article takes a marketing-focused view of it, as you might expect, and discusses potential alternatives to the franchise dealership model. It’s amazing to me how long this model has persisted despite the obvious inefficiencies. Miller cites estimates for the cost of the channel at between 5% and 30% of the cost of a new car. The manufacturers know this, of course, but they are loathe to change something that works and to disrupt the very longstanding relationships that they’ve nurtured. And the dealers are entrenched and protected by legislation, so it’s unlikely that any radical change will come any time soon.
In the meantime, though, there’s a lot that can be done to drive efficiencies in the existing structure. Much of the inefficiency is due to inventory, which is really information friction that ought to change. Dealers want to be able to offer every combination of models and options for the buyer who walks in off the street and wants to drive away with their new car, but it comes at a tremendous cost to the manufacturer.
I, myself, don’t understand the behavior; I would like to build out my car online and then test drive a similar model at the dealership but I would be willing to wait a month or six weeks to get my actual car, tailored to my specifications, delivered. This is a tired old song, though, and it’s been promised for decades without ever appearing.
A few years ago, we looked at the distribution process for an auto manufacturer in Brazil who was testing out this process for just-in-time delivery and Internet ordering. But what we found was that it was largely a showpiece; customers were still coming into the dealership and talking to a salesman and all the rest. The only difference was that the salesman was entering the information on the manufacturers website on the customers’ behalf. It was a bit cheaper this way, because of the manufacturer’s incentives, and the dealer still got the same commission.
The customization, which is a holy grail in the auto industry sort of like straight-through processing in the financial industry or a universal patient medical record in the health care industry, still has not happened. But when it does, when I can order the navigation system without the heated seats, I’ll be happy.
Coincidentally, I was in a dealership yesterday getting my family hauler repaired. It was the usual litany of problems. The pricing was opaque. The customer service was incompetent. And there was no online interface; I would have been happy to enter all the information about my service visit (rotate the tires, change the oil, replace the battery, replace the pollen filter, check the serpentine belt…) at the dealer website ahead of time to save the poor guy at the counter from having to hunt and peck his way through “S E R P E N T I N E.” (I would like those ten minutes of my life back.) And it would have been nice to have a menu of service options with prices for me to select from. I understand that some people don’t want to do that, but a lot of others do.
The dealerships have, under manufacturers’ pressure, built out advertising web sites that are generally consistent in look and feel (there are various approaches to getting this done) but with very little functionality. Plus, manufacturers have dragged their traditional dealerships into using more and more sophisticated backend systems. One of the next steps to driving greater efficiency in the existing auto distribution model is to tie those backend systems to the dealership websites. This will start to improve the customers’ experience, both for buying a new car and for servicing an existing one, and start to remove information friction which drives higher costs.
And, hey, at least they washed my car.