Franchised Dealers Will Outperform Direct Sales to Consumers

VRYALT3R3D

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Despite a public image that often disparages dealers, the traditional franchise model will trump the direct-to-consumer model. The direct model has worked well in other industries. But we’re talking cars here, not laptops or tablets that can be delivered to your doorstep.
John McElroy | Jun 28, 2021

All the EV startups are saying “Phooey!” to franchised dealers. They’re pulling an end run around dealers and selling direct to consumers.

There are some notable advantages to doing this, but there are even bigger drawbacks. I believe that in just a few years, franchised dealers will come out far ahead.

The startups have logical reasons why they don’t want to use dealers. First and foremost, they believe dealers are a cost burden. Dealers buy cars from the factory, mark them up and sell them. The startups believe there’s more profit by selling those cars themselves, rather than letting dealers take a cut of the action.

Also, the startups don’t like the fact that dealers have acres of vehicles parked on giant lots waiting for customers to come buy them. Until they do sell, dealers have to floorplan those vehicles, which adds more cost. The startups believe they can simply make cars to order and avoid the cost of carrying all that inventory.

Most importantly, the startups want to control the entire sales process. With their own stores, they believe they can deliver a more consistent sales experience than having thousands of dealers who operate independently. I think that’s the one area where the startups got it right.

But here’s what the startups are overlooking: Franchised dealers are everywhere. They’re in every community from New York to California and Montana to Texas.

If you’re a low-volume startup that’s content to sell one or two thousand cars a month, maybe you don’t need that kind of reach. But if you want to sell hundreds of thousands of cars a year, or over a million, you have to have lots of stores located where all your customers are.

The startups also need lots of local service departments to keep those cars up and running. Not everything can be fixed with an over-the-air update. And roaming service vans can only do simple repairs and maintenance. If it’s pouring rain, snowing hard, or if a car has to go up on a hoist, service vans will not get the job done.

And God forbid, when these startups have a recall – and they will – they’ll need to fix a flood of cars very quickly. So, they’re going to need lots of stores with lots of service bays. Does anyone believe that building all those stores and service centers will be much cheaper than building dealerships?


Traditional automakers like to point out that their dealerships are built with OPM – other people’s money. Car companies don’t pay to build dealerships, dealers do. They have to borrow the money, often from the automaker itself. When the startups build their own stores and service centers, all that money comes out of their own pocket.

While it’s true that dealers buy cars from the factory and mark them up, they have very slim profit margins, the kind of margins you find with grocery stores. Even the biggest, publicly traded dealer groups like AutoNation and Penske Automotive have 3% profit margins or less. And most of that profit comes from selling F&I and service, not from selling cars.

Far from driving up the cost of cars, dealers are caught in a cutthroat competition that keeps a lid on prices. The average Ford dealer doesn’t compete with the local Chevy dealer. He competes with all the other local Ford dealers.

He has to offer customers a better deal so they don’t drive down the road and buy the same car from another Ford dealer at a cheaper price. With factory-owned stores, you don’t get that kind of competition. The factory price is the factory price. Take it or leave it.

People wonder why Tesla is constantly changing its prices. There’s your answer. It doesn’t have independent dealers who are competing against each other and who are constantly juggling prices to close a sale. (Tesla CEO Elon Musk pictured above).

Demand always varies by season and by region, and dealers have the flexibility to react to that reality. A startup that wants to raise or lower prices has to do it across the board. There is no regional flexibility.

Tesla has done a decent job of selling directly to customers. But almost half its U.S. sales have been in California, and it’s going to struggle to boost sales significantly in the rest of the country. There are 18 states that either ban direct sales, or limit Tesla to a couple of stores.

All the other startups will face the same ugly reality. The courts really should overturn this. It’s a blatant restraint of interstate trade. But while Tesla has spent a small fortune in legal fees trying to get this overturned, not much has changed.


There are over 16,000 dealerships in the U.S. and they’re no longer the mom-and-pop shops of yesterday. More and more of them are getting bought out by large, publicly traded corporations. And those companies are instilling a higher level of professionalism in their operations. They have massive scale and marketing clout. They are formidable competitors who will deliver a consistent sales experience throughout all their stores.

And that’s why, despite a public image that often disparages dealers, the traditional franchise model will trump the direct-to-consumer model. Yes, I know the direct model has worked wonderfully well in other industries. But we’re talking cars here, not laptops or tablets. You can’t put a car in a box so UPS can deliver it to your doorstep

Franchised Dealers Will Outperform Direct Sales to Consumers
 

Weather Man

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The direct order companies don't care about fly over country and there are a lot of us living here.
 

thomas91169

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Yeah, I don't think so. This argument sounds similar to those that thought the people want their brick n mortar and how that model isn't going anywhere. Look at that.... Brick n mortar is dead save for Walmart, target and best buy.

The only benefit of franchise dealers is repair centers, and the EV is likely going to murk those too with them requiring less maintenance or drive train repair.
 

Klaus

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The two can co exist. There is a lot of power in a national foot print in which inventory can be re deployed on a local level.
 

Russo

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dealers paid legislators to write laws preventing direct selling to consumers.. it's no different than teacher unions crying about home schooling or private schools.. competition breeds innovation
 

IronSnake

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Yea, no

The inconsistency of experience from one dealer to the next is an absolute shit stain on the entire model. If I'm driving to another state and my car breaks down, I have to hope there's a decent dealership in the area. Otherwise I'm dealing with an outdated service department and a good ol' boy service manager that sees I didn't buy it from them, and immediately puts me to the back of the line. This is more specific to US automakers. Toyota tends to have a more consistent dealer model. Luxury car manu's are very consistent as well. BMW comes to mind as the best experience I've ever had.

It's a shame because some Chevy and Ford dealers are great. But if I buy a new Mustang and then move, there's absolutely no guarantee that my new location has a dealership even half as good.
 

SHOdown220

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Yea, no

The inconsistency of experience from one dealer to the next is an absolute shit stain on the entire model. If I'm driving to another state and my car breaks down, I have to hope there's a decent dealership in the area. Otherwise I'm dealing with an outdated service department and a good ol' boy service manager that sees I didn't buy it from them, and immediately puts me to the back of the line. This is more specific to US automakers. Toyota tends to have a more consistent dealer model. Luxury car manu's are very consistent as well. BMW comes to mind as the best experience I've ever had.

It's a shame because some Chevy and Ford dealers are great. But if I buy a new Mustang and then move, there's absolutely no guarantee that my new location has a dealership even half as good.

This is a good point, and yes it's more specific to US makes unfortunately. I have dealt with probably 5 different ford dealers and got a completely different experience each time. I even went to work for one and found out the hard way they didn't have their shit together at all. As a customer if I knew what went on there no chance I'd let them even do a recall on my car. I've spent 10 years working for Honda at 3 different dealers and although there are differences in how things work the general operations and results are similar. As much as I want to continue to buy ford products I don't have a dealer near me that I trust to complete work in a timely and satisfactory manner.

On a side note the ford dealer I worked at was split and had ford and toyota. Same service center, different technicians and completely different time frames, work quality etc, under the same roof! Why? Because toyota cares what their dealers are doing and ford doesn't give a shit.
 

13COBRA

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Because toyota cares what their dealers are doing and ford doesn't give a shit.

That isn't true.

Currently, there are a lot of dealers out there that in reality shouldn't be in business. With domestic franchise laws, it's very hard for the manufacturers to take back the franchise from them. Toyota has had more time to be restrictive, and had less dealerships pass down generationally through families or groups.

The 'good' ones will continue to grow, while the 'bad' ones will continue to lose business and once they hit the point of it not being worth it, they'll get out of the business.
 

Rb0891

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I must be the luckiest person on the planet. I have set foot in a dealership maybe 3 times at most over the last 15 years other than when purchasing. I guess I have been lucky with the quality of the vehicles, I purchased, but I have just never had any type of relationship with a dealer, or really cared.

My FIL loves his Ford dealership and only buys Ford. I guess that's great, but I am like, why are you always there...?

I am probably screwed now... lol
 

13COBRA

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I must be the luckiest person on the planet. I have set foot in a dealership maybe 3 times at most over the last 15 years other than when purchasing. I guess I have been lucky with the quality of the vehicles, I purchased, but I have just never had any type of relationship with a dealer, or really cared.

My FIL loves his Ford dealership and only buys Ford. I guess that's great, but I am like, why are you always there...?

I am probably screwed now... lol

Nah, just give me a holler next time ;)
 

TAF

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Traditional dealers are dinosaurs and will vanish sooner than you think...
 

Weather Man

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Traditional dealers are dinosaurs and will vanish sooner than you think...

Nah, the majority of people won't spend that much money without test driving and comparing color and trim options. And contrary to the few negative Nancie's on here, most people enjoy buying a spanking new vehicle in person.

My area is the perfect example: want to buy a Tesla? drive over an hour away to the Twin Cites. Tesla conked out? flat bed that ****er down to the Twin Cities. 95% of buyers will decline that opportunity and drive 5-10 minutes to their local traditional dealership. In a couple of years, they will have all the EV's anyone would want to buy.
 

13COBRA

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All of the surveys have taken a 180 in the last 5 years compared to the early 2000s. Back then, the vast majority of people said they would rather purchased online, but in recent years that trend is going away.

Much like the thought of ride-sharing and how personal car ownership was going away.
 

My94GT

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I doubt brick and mortar dealers will go away any time soon but they have to continue to evolve to hang around. However good ones are and it’s nice to have them around.

I will say brand does seem to make a difference though. Ice bought from Ford, Toyota, Volvo, Ram, and now finishing a deal on a Benz and by far the Benz experience has been the best.
 

Bullitt1448

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I think there is room in the market for both. Some Dealerships will change they way they approach customers and that isn't a bad thing. Competition is good for the market and usually good for the consumer. Good dealerships will survive just fine and the bad ones may get shuffled out of the game completely, that's not a bad thing either.
 

5.0 Hatch

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I've learned over time just to set expectations when walking into a dealer. The low ball offer on the trade and the price of the vehicle you want will come back more than what they advertised as the "internet price" and the back and forth between the salesman and the sales manager. Then you're left with dealing with the finance manager trying to sell you add on's that you never knew existed.

I've owned many brands over the years and the absolute worst experience from a dealership perspective was with Ford service departments at more than one dealer. Best was Toyota and Nissan.
 

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