- In 2014, automotive marketplace website, Edmunds,
published a study that found
1 in 5 Americans would give up sex for a month
in order to avoid the process of haggling when buying a car.
And that 1 in 3 would rather do their taxes.
A Gallup poll found that car salespeople
were ranked dead last
in a list of professions and their perceived commitment
to honesty and ethics.
Landing below lawyers, insurance salespeople,
and even members of Congress.
Safe to say,
the public does not like car dealerships very much.
But how did that happen?
Believe it or not,
consumers used to have a lot of options
when it came to buying a car.
But now, in an age when you can buy anything online,
you still can't buy a new car from your phone.
Today on Wheelhouse,
we're gonna find out why it's illegal
to buy a car directly from the manufacturer.
It's a little more complicated than you might think.
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Now, back to the show.
- Say you're a Tesla fan that lives in Texas,
and you're finally ready to get the EV of your dreams.
The Model S Plaid.
You saddle up and mosey on down
to one of 13 Tesla galleries operating in the state.
That's gallery, not dealership.
And take a look at what they have to offer.
You talk to the helpful staff about models,
performance, options, et cetera.
And then you inquire about the price.
Well, you just made your first mistake.
Why is it that you're not allowed to talk about money
when it comes to Teslas in Texas?
A lot of people don't know this,
but you can't just buy a car directly from a manufacturer.
Like, you can't walk up to GM's headquarters
and buy a Corvette.
That's why those companies have dealerships,
but Tesla is the exception here
because, in most states, they have galleries
where you can view the cars and talk to experts about them.
Even discuss the options like I mentioned,
but they don't have any traditional dealerships
where you can purchase the cars.
So how do you actually buy one?
Well, first, you're gonna have to hop online
and order your preferred Tesla
through the company's website.
Just make sure you're not standing on the property
of a Tesla facility while you do that.
You place your order and get your paperwork sent to you
from a Tesla store, anywhere outside of the state of Texas.
Then you can go ahead and pay for the vehicle.
Again, as long as you're not
on Tesla owned or rented property, while you do it.
And Tesla can then ship the car
to one of eight service centers
they have around the state of Texas.
At that point, you can go pick up your car
and Texas will be more than obliged
to register it for you,
and collect the appropriate taxes due.
Congratulations.
You can now chew through electrons to your heart's content,
or until the batteries run out across The Lone Star State.
So why the run-around?
Well, the very thing that's preventing Texans
from buying Teslas directly from the manufacturer
is the same thing that prevents you
from buying a Chevy, or a Ford, or a BMW,
anywhere but a dealership.
State franchise laws.
These laws were passed way back before Tesla
was even an inkling in the minds
of Martin Eberhard and Marc Tarpenning,
back before World War II, in fact.
And the reasons they came about are varied,
complicated, and on some levels, antiquated.
Before state franchise laws,
manufacturers sold their products
through many different distribution methods.
You had dealer franchises,
factory owned stores, wholesalers,
retail department stores, consignment arrangements,
even traveling salesman. I'm not joking.
It was the Wild West of selling cars,
and it was time for the law to come to town.
Now, the optimistic story behind state franchise laws
is that they were intended to protect the consumer
and local communities.
The reasoning given back then
was that people opening up dealerships
were independent entrepreneurs
spending their own money to buy or lease land and equipment,
build facilities, and hire local people.
And if the major auto manufacturers could just come in
with their nearly limitless resources at their disposal
to set up their own distribution,
no one on the local level could possibly compete.
A local dealership could spend years,
and hundreds of thousands of dollars
establishing a presence in a particular territory,
and a manufacturer could just swoop in,
run them out of business by undercutting them on price.
That's not good.
Even if they didn't drive independent dealerships
out of business completely,
without laws in place to protect local entrepreneurs,
manufacturers could just bully anyone they wanted,
doing things like forcing dealerships
to buy unsold vehicles
from the current model year, under the threat,
of not sending any of the upcoming models
when they came out.
The more cynical take is that the state franchise law model
saved the auto manufacturers
the money, time, and hassle
of opening up their own stores
in cities across the country,
allowing them to pass that cost onto dealerships,
and as a result, the buyers,
and to quickly establish a presence
in multiple markets, all at once.
So instead of buying your iPhone from the Apple store,
it'd be like, if you could only buy
from a licensed independent dealer
who first bought the phones directly from Apple,
marked up the product, and then turned around
to sell it to you at a higher price.
It doesn't sound like a very good deal, does it?
Regardless of their reasons,
dealerships went around lobbying state legislatures
to pass these laws.
Their arguments when something like:
"Mandating the franchise model
will keep the dealerships and their owners
as upstanding members of the local community.
More likely to hire locally,
support local businesses,
and take pride in their products, and repairs,
throughout the life of the vehicle.
More than that,
in markets large enough to support
more than one dealership of any particular manufacturer,
the franchise model will foster competition,
driving down prices, and giving an incentive for dealerships
to go the extra mile in pleasing the customer,
whether that's better financing options,
or better sales and service experience."
For example, if every Chrysler dealership
is owned by Chrysler,
the price of a 1952 Imperial is the same,
no matter what showroom you happen to wander into,
giving no incentive for competitive pricing.
And when it comes time for a recall, or a repair,
it's a lot harder for a franchise owner to live down
shoddy warranty work when your kids both play
on the same Little League team.
Unfortunately, though, these predictions
haven't exactly come to pass in reality,
or even by dealer's own admissions.
Manufacturers already set their market price
at the highest point they can get away with,
whether that's at a wholesale or retail low,
and any attempt to increase over that price point
would just drive down the demand in an elastic market,
offering an advantage to the competition.
And with the franchise model requiring dealerships
to maintain huge inventories of cars,
the cost of that maintenance will always be passed
on to the consumer.
In fact, as I said earlier,
that's the very reason why dealerships
initially started lobbying for these laws
in the first place.
The worry, that they put in the effort
to establish a foothold in a certain market,
only to have the manufacturers come in
and take over by offering the product
at a lower price.
The dealers already admitted that they simply can't compete
with manufacturers when it comes to price.
A fact that should be obvious to anyone.
These arguments were very successful,
at least at the state level.
And today, every US state has some version
of franchise laws on the books.
And federally,
with the "automobile dealers day in court act" of 1956,
say that three times fast,
dealers are allowed to bring a federal suit
against any manufacturer who fails to comply
with the terms of a franchise agreement, or terminates,
cancels, or refuses, to renew a franchise.
Sounds good, right?
So where did we go wrong?
Well, today your local dealership
probably isn't very local,
or at least the numbers are trending that way.
Today, there are around 17,000 dealers, nationwide,
compared to more than 22,000, just 10 years ago.
That's a drop of around 20%. And the trend is continuing.
Your average dealer is far from
the mom and pop shop of yesteryear
who struggled to just barely make a living.
Massive, publicly traded dealership groups, like AutoNation,
and Lithia Motors, are buying up and consolidating
independent dealerships as quickly as they can.
And the result is higher cost for you
and higher profits for them.
In the last decade,
Lithia saw their sales revenue
jump from 2 billion to 12.7 billion,
and AutoNation saw an increase
from 12.5 billion to 21.3 billion.
And that's not just because of inflation.
According to the National Auto Dealer Association,
the 16,623 franchise light vehicle dealers, in the US,
sold 14.5 million light duty vehicles in 2020,
a drop of about 15% from the 17.1 million sold in 2019.
And yet, with total sales topping $980 billion in 2020,
that represents an increase of almost 50%.
And that's not even counting the money
they make off repairs.
Including that, and you can add
another 100 million to the cat foot.
So how does that math work out?
Well, it's mostly COVID's fault.
Long story short, the bottom fell out of the car market
in the spring of last year.
Factories were shut down and supply lines were disrupted.
No one knew what was going to happen in the world,
let alone the auto industry.
Then people started shopping again.
And the problem was, there weren't any cars to be had.
Demand returned, but supply hadn't rebounded yet.
That's a recipe for disaster for the average consumer,
and dealers had an appetite for destruction
that ended up putting a squeeze
on the car-buying public.
We're actually gonna go way more in depth
on COVID's effect on the car market,
in the aftermarket in a few weeks.
So make sure you subscribe, so you don't miss that.
But, surprisingly, there's good news on the horizon.
A major portion of the cost of vehicles we buy
comes in transportation,
moving all those vehicles around
to the various dealer lots
and in unsold dealer inventory.
A 2009 analysis by the US Department of Justice
found that, in 2008,
there were $100 billion worth of vehicles,
just sitting on dealer lots,
incurring a cost of around $900 million, annually.
Keeping cars on hand costs money.
Dealers have to pay for huge lots,
employees to move, wash, and maintain them, and more.
That same study found
that if our national dealer system
moved to a build-to-order model,
like they use in other markets around the world,
costs could be reduced by 8.6%.
I know that doesn't sound like much,
but with the average car price tag
eclipsing $40,000 this year,
an extra 3,500 bucks in your pocket
doesn't sound too bad, does it?
Costs aside, who wants to be beholden
to whatever the dealer has on the lot.
Even with the average dealer,
having nearly 600 new and used vehicles in their inventory,
it seems like you never manage to find
exactly what you want.
Not to mention the cost to the environment
and the wasted space.
It seems to benefit no one.
It's extra cost for the dealers
and less choice for the buyer.
And in a world where anyone with a smartphone
can find out exactly what dealers are paying for cars,
what cars are actually available in their area,
and what everyone else has already paid to buy them,
the benefits of the dealerships are dwindling.
The COVID-19 pandemic has meant that customers,
and dealers alike, have had to shift
expectations and deliverables.
With more shopping happening online,
people being more willing to wait
for the exact car they want, contactless interactions,
and benefits that would have been unheard of
just two years ago,
like return policies up to seven days
if you don't like your purchase,
this is already happening.
And it doesn't have to end here.
Even small steps,
like taking care of the majority of paperwork at home,
and online, would have a massive effect
on the overall satisfaction customers
have with the dealership buying experience,
something that has been historically and notoriously low.
Look, I know a fair amount of people
that have worked at dealerships.
I know some of watching might also work at dealerships.
We've worked with car dealerships,
and they've always been great places,
but something has to change in this process
if we want consumers to be happy
with their buying experience again.
A car is the most expensive consumer product
most of us will ever buy.
And I know I'd prefer to get exactly what I want,
with the exact color, the exact options I choose,
rather than having to settle
from the limited selection at a local dealership.
Getting all that at a cheaper price,
without having to haggle for hours
and drudge through mounds of boring paperwork
sounds pretty great.
But for all the talk about franchise laws
protecting the consumer,
we've really gotten the raw end of the deal.
It's taken a company, like Tesla,
with a disruptive new technology and piles of cash
to finally make some headway in breaking the momentum
that the franchise model has built up.
The timing is right, too.
The auto industry is experiencing a historic wave
of upheaval right now,
with manufacturers closing plants,
canceling models, and revamping production,
figuring new stuff out, new technologies.
Let's extend that to the franchise model
and build a new system that benefits dealers,
buyers, and even the environment,
preferably before I go to buy my next car.
Alright, thank you very much for watching Wheelhouse.
Let me know what you think of car dealerships
down in the comments.
What have your experiences been like?
If you have a good story, a bad story, let me know.
What could they have done better?
What did they do right?
I want to hear about it.
I think some car dealers
are probably going to be looking at these.
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