Buying cars on the Internet - How it should be
February 1, 2000
By Scott Lewis
I have spent time in the past surfing the web with the curiosity of buying a car online. I firmly believe that the Internet is first and foremost a means of disseminating information. Applied to the auto industry I think the Internet has a great potential to enhance the car buying process.
Unfortunately, I find the Internet sorely lacking in the kind of information that could really help consumers get a good price for a car they want. For example, how much does a dealer really pay for a car? I am shocked that no ex-car salesmen have created web sites to tell the truth behind car pricing.
J.P. Morgan & Co. estimates that Ford makes approximately $8,000 profit (before taxes) on every Expedition. This profit has nothing to do with the price a customer pays. It is based on the amount the dealer pays Ford. The profit the dealer makes is all his own.
When will the Internet provide this kind of information? If a car was bought directly from the manufacturer could the consumer save all, or most, of the profit the dealer gets?
But the real topic of this column is when will buying cars on the Internet really happen? Follow me for a moment. Only one manufacturer will actually sell you a new vehicle over the Internet. Fiat started a program to sell a limited edition Barchetta Web. This version of the Barchetta is ordered online and Fiat, not a dealer, delivers the car to you.
None of the manufactures will sell new vehicles over the Internet. In fact, there are laws preventing such practices (more on this later).
Currently, auto web sites that "seem" to sell cars online are doing one of two things. They buy the car from a dealer and sell it to you. This adds a layer rather than removes one. The other situation is that the online service just acts as a referral service. They hand you off to a traditional car dealer to close the transaction.
This prevents the Internet site from saving much, if any, money. To make this matter worse, car dealers are using their clout in the political arena to make sure that manufacturers can only sell cars through franchise dealerships. In fact many states have laws that prevent manufacturers from even owning dealerships.
I firmly believe car dealers are a huge rip off. All they do is think up ways to get you to pay more. Look around your town/city. How many car dealers have the same name (i.e., Red McCombs Pontiac/GMC, Red McCombs Ford, Red McCombs Toyota, Red McCombs Mazda, Red McCombs Chrysler-Plymouth-Jeep, Red McCombs Hyundia, Red McCombs Nissan, etc.)? Does Red McCombs care if you get a quality car? No. If he did, he would not sell so many different makes. He would stand his ground and sell a brand he believes is better than the competition. Instead he sells every side of the competition.
Imagine walking into a Red McCombs Mazda dealership interested in getting a Millennium. How can he tell you that a Mazda Millennium is better than a Toyota Camry or Avalon when the Red McColms Toyota dealer just told you that Toyota is much better than Mazda?
This seems like a huge conflict of interest to me. In San Antonio, Red McColms owns a number of car dealerships spanning a number of manufactures (most of them listed above). If you are a sports fan you may know his name. Red owns the Minnesota Vikings football team. He used to own the San Antonio Spurs. A man does not get rich enough to pay $200 Million for a professional football team by selling people cars at a fair price that he believes is a good car. He gets rich by coming up with as many inventive ways to get you to pay too much for cars he doesn’t care about.
So what should be done? I think we should look at the computer industry for a possible answer. Gateway introduced a concept a few years ago. They established their "Country Store." At first this seemed a mistake. After all Gateway had a strong following as a great price bargain for a quality computer through mail order. How could they possibly build stores? It seemed likely they were going to fail like CompuAdd out of Austin did when it tried to have both stores and a mail order business.
But Gateway did not fail. They succeeded quite well. And part of that is what they brought to the table. If you go to a Gateway Country Store you cannot buy a computer. That’s right, you cannot actually buy the computer and take it home. The Country Store only acts as a facilitator for you to mail order a computer. This did a number of things for Gateway.
So how do we apply this to the automotive industry? Simple, eliminate the ability to buy a car at a dealership. I know that is a stretch to imagine, but image it you should. If you were going to buy a car over the Internet you would not need a showroom. In effect you would be mail ordering the car. So car dealerships would become "Country Stores" in the Gateway sense. They would help facilitate you ordering a car. Test-drives and selecting options and color. That’s it!
Their inventory would be extremely low. All they need to account for is the major trim levels, reasonable selection of the major options, and enough colors to give people a good idea what the car they order will have and look like. This would allow people to kick the tires and see what they would be getting. The cars at the dealer would all be demos, and would be recycled every few months as necessary. The manufacturer could sell these demos as specials on their web site.
This system would have a number of benefits.
I see the last one as a serious item for manufacturers to compete on. Luxury "brands" like Toyota’s Lexus division could deliver a car to your house with a big fat ribbon wrapped around it. They could have it waiting for you one day when you come home from work, with special coupons for a dinner out to a fancy restaurant complete with valet parking. That would be cool.
How would you like to show up at a fancy restaurant in a brand new Lexus? It’s likely it would be an incentive to buy again. This would not cost the manufacturer much, but the return in building brand loyalty would be huge.
And for prices... the Internet car manufacturer would work like mail order places. Prices are on the web site, and the manufacturer could easily offer all kinds of specials on anything they want. Negotiating the price would be done by "web bots" as people get these "bots" to compare the prices of different manufacturer’s cars with the same options.
Since the dealership is not actually involved in selling the car, there is no middleman to jack up the price. The manufacturer could get a huge chuck of the [old] dealer’s profit while at the same time having the customer pay much less for the vehicle. That would be the major incentive to get the program off the ground. Every customer saves a couple, or few, thousand dollars while the manufacturer rakes in more money. All we lose are the fat cat owners of the dealers that spend our money buying sports teams.
It’s a Win-Win situation! If we could just get the politicians to make laws that protect the consumer, not the millionaire dealers. What do you think?