The Car Dealership Racket

Written By Brian Hicks

Posted March 19, 2014

Car Dealership

Do any of us like to walk into a car dealership? One of my best friends is a car salesman, and I still can’t stand the stink of walking up onto the lot…and that’s usually just to meet for lunch!

Sure, there’s something to be said about the whole car buying experience; it’s one of the largest purchases the American consumer will make in their lifetime. When our sons and daughters turn sweet sixteen, we get to make unforgettable memories by going to buy that first car. That’s just the way it is – the way it’s always been – there’s that certain sense of nostalgia that comes along with it. But c’mon, wouldn’t you rather eliminate the middle man, if you could?

That’s exactly what dealerships around the country are afraid of. Dealers of today are just like the ones that were here 50 years ago. While the world around us continues to evolve, the car dealership has remained relatively the same.

State laws prohibit anyone but a licensed franchisee from selling new cars. If direct sales were permitted it would save the consumer more than $2,000 per new car, assuming the average price tag was $26,000.

This almost became a reality when web-based retail sales started taking off around the new millennium, when the Internet really started to boom. That’s when auto dealers forged together and lobbied for a ban on Internet sales by anyone except existing licensed dealers.

And it stuck. It was back to business as usual.

But that doesn’t mean the dealership is free and clear just yet.

Dealership Accountability

Just look at GM (NYSE: GM). Detroit has not been off to a good start this year with its flurry of recalls. Last month it was faulty ignition switches, and now, after last Tuesday, they’re asking for another 1.55 million vehicles to be taken off the road for faulty brakes, seat belts and air bags.

Things got so bad that it prompted an unprecedented public admission by GM CEO Mary Barra that GM had in fact fallen short of catching the problematic ignition switches before models were rolled out. These same switches have been linked to 12 deaths and forced a recall of 1.6 million vehicles.

The silver lining in all this is found with the dealership. They stand to make millions of dollars in reimbursable repair work, but it also means that they have a lot to lose if the customer isn’t satisfied. While GM has forced its hand, it is the dealership that will have to be accountable and make GM owners feel at ease.

GM has announced that focus moving forward will be put on the safety and peace of mind of their customers. Now it is up to the dealer who will greet these drivers face to face. If they can handle the recalls and do good repair work, this could be a great customer-building opportunity. If not, GM could have bigger problems on its hands.

The company is expected to take a $300 million hit in Q1, primarily for the cost of these repairs. If managed right, GM dealers could parlay this opportunity into future sales and lasting relationships. Time will tell.


And then there is Tesla Motors (NASDAQ: TSLA). Car dealerships everywhere are terrified, sickened, outraged by Tesla’s forward thinking.

The electric car manufacturer from California has dealer associations across the nation lobbying to keep its cars and its direct sales model out. Just last Tuesday, New Jersey banned Tesla stores from its state. The same has happened in Texas and Arizona. And in Virginia last year, a plan for a Tesla outlet in Tyson’s Corner was rebuked.
It’s not so much the Tesla car that these dealers are afraid of, although it is highly touted, but it’s the model in which Tesla is marketing their vehicles.

The company’s business plan calls for selling vehicles directly to consumers, going around the dealership and challenging the entrenched interest they have on new-car sales in the U.S.

In the world of Tesla, you would never have to bring your car into the shop for repair again. That’s one aspect they’re selling you on. Software is the essence of what makes Tesla different. They can self-diagnose their problems and can download software fixes or updates. Because the technology is so new, most mechanics can’t even fix it in the first place.

Furthermore, because the car is electric, there are far fewer moving parts – no spark plugs, air filters, fuel pumps, timing belts – the things that require regular maintenance and are a cash cow for dealerships.

Oil changes? Fuhgeddaboudit.

The company still recommends a yearly inspection or every 12,500 miles, but compared to what we’re all used to, no wonder dealers hate these guys.

And adding insult to injury, Consumer Reports’ named Tesla’s Model S the country’s best overall car.

Dealer Beware

Once you get consumers thinking, that’s when you start getting questions, and dealerships don’t like too many questions.

With dealer financing and dealership maintenance, they can profit from our cars every time we make a payment and every time we need repairs.

Dealerships have to fight to make a profit on a new car sale, so approximately 37 percent of a dealership’s gross profit comes from finance and insurance, and 55 percent comes from service, according to the National Automobile Dealers Association.

You tell me, if 92% of their profit comes from stuff other than selling cars…is selling cars even really their job?

Or is it convincing us to buy other stuff their job?

A recent WIRED article talked about an annual shareholder meeting at Tesla, where one shareholder asked whether traditional dealership franchises presented a challenge to the company moving forward. Tesla’s CEO Elon

Musk said he believed the new model would win because it gives people what they need and want.

“Our philosophy with respect to service is not to make a profit on service,” Musk said. “I think it’s terrible to make a profit on service.”

Yet the laws are set up to keep Tesla out.

American dealerships don’t want to play ball and they never will. They like their racket and they’re going to do everything in their power to keep it that way and continue taking our well-earned cash.

But Tesla is strong, and they won’t be pushed around. And did you know that there is even a new service called Carvoyant that provides test-driving of new vehicles without a salesperson? It’s true.

On one hand we do have manufacturers like GM and dealerships taking more responsibility, but that’s only because we’ve wised to their game. We’re not the same consumer we used to be. We demand more. We demand better.

I’m sure there will always be a place for the traditional American car dealership, but we the people are going to expect some changes around here.

I say it’s about damn time.

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