Dealership Franchise System Works Best

Maryann Keller hit my radar screen when she spoke at a National Automobile Dealers Assn. convention in 1987.

The room was packed for her breakout session. People lined up in the hall to hear what the noted Wall Street analyst and auto industry consultant had to say.

She is still at it today. She gave a remarkable address to an attentive audience at a recent J. D. Power event in New York City. 

She has offered apt analysis on industry matters throughout the years. She was an advisor on two of the most important books ever written on the auto industry, “The Future of the Automobile Industry” and “The Machine that Changed the World.” 

She has authored two books on her own, “Rude Awakening, The Rise, Fall, and Struggle to Recover at General Motors,” and “Collision: GM, Toyota, and Volkswagen and the Race to Own the Twenty-First Century.”  Both books are great reading and contain much prophecy that turned out to be true. 

A hiccup along the way was Keller taking over an ill-fated name-your-price automotive division of Priceline.com in 1999.

After that venture crashed and burned, Keller said, “Consumers are just not ready to purchase cars over the Internet.”  If nothing else, it was a learning experience. More on that in a moment.

At the conference, she speaks more optimistically about the conventional system of selling cars in the U.S. “Over four decades, I’ve heard many arguments made against the franchise dealer system.” They are claims “dealers never fail to disprove time and time again.” 

One myth promulgated in the 1990s, and now resurfacing with Tesla’s effort to run its own sales outlets, is that factory stores save money by reducing distribution expenses, wrongly estimated at 30% of the total cost of a car. 

Put aside for a moment that the percentage itself is way off, Keller says. Ford’s ill-fated Auto Collection experiment in certain markets during the late 1990s proved that auto companies are good at a lot of things. Running dealerships isn’t among them. Dealers with entrepreneurial spirit are good at doing that.   

Ford ended its bad-science experiment after a couple of years of market share losses and mounting evidence that factory stores do not deliver a better customer experience nor reduce costs.

Franchise dealers’ cumulative investment in land, equipment and facilities easily exceeds $100 billion, Keller says. “Dealers fund 60 days of inventory and another month of inventory in transit that would otherwise fall to the auto maker.” 

The inventory buffer allows auto makers to adjust future production levels. For a company like Ford, U.S. inventory funding equals about $15 billion at any point. 

“While we are talking about myths, how about the still-repeated one that people hate dealers so, if given the chance, they will buy a car online,” Keller says.

“I almost don’t know where to start in taking this one apart.”

Not all that long ago, Silicon Valley funded and lost hundreds of millions, maybe even a billion dollars, on ill-fated ventures that promised to sell cars online.

“CarOrder.com, Greenlight.com, and CarsDirect.com (in its original configuration), among others, all promised to avoid the dealership experience,” Keller says. “A few actually did that by buying cars from dealers, and then reselling them at lower prices to customers until they blew through their capital.”

She recalls the defunct Build to Order.com. It proposed that customers would place orders for fully customized cars while lounging in a company-owned showroom/entertainment center. 

“Build-to-order.com never built anything for anyone,” Keller says.

Priceline.com’s experiment of trying to sell cars online was in some respects replicated later by TrueCar.com, which ran afoul of franchise laws for the same reasons Priceline did. 

“What I learned then, and this is still true today, is that we could connect buyers with dealers and that the price of a vehicle was the easiest part of a deal,” Keller says.

“The other elements are harder to control and often the cause of frustration for the customer and the dealer. People don’t like to hear that their trade isn’t worth the value they saw online or that their poor credit doesn’t qualify them for the no-down-payment, 0% loan.”

Buying a car is as complex as buying a house, Keller says. “Why should we think it should be as easy as buying a pair of shoes from Zappos with a return receipt in the box in case they don’t fit?”

While much auto advertising has shifted from newspapers to the Internet, that transition “has not reduced advertising expense per vehicle or made buying a car as easy as buying a book,” she says.

Here’s another good point she makes:

“Add up all the monthly traffic to all automotive sites, including auto makers, dealers and independent sites, and you’d get more than 100 million, possibly close to 200 million, unique visitors using the Web to get information about buying or selling a new or used car. 

“Except there’s one problem, if this traffic is somehow supposed to represent potential sales.” Dealers retail about two million new and used cars a month. That’s a fraction of all those automotive website visitors.

“So just like newspaper, radio or TV advertising, dealer spend on the Internet is likely no better targeted, once again dispelling the notion that the Internet would solve the age-old problem of knowing which 50% of a dealer’s advertising works.”

Technology is wonderful. Dealers have adapted to it. Sophisticated software helps them manage every aspect of their business. But it will not fundamentally change auto retailing, Keller says.

“The system of franchised dealers – using their own risk capital to fund their businesses and guarantee millions of dollars of inventory, promote their own brand and that of their OEM, provide the expensive tools needed in their service departments, and manage the endless headache of a workforce – will not be superseded by technology or factory owned mall stores.”

Keller predicts startups such as Tesla, which currently runs factory-owned mall stores, ultimately will conclude “the dealer network is the best way.”

I would only add this. As long as auto makers understand dealers are their customers and the end user is the dealer’s customer, things will be fine.

David Ruggles is an auto consultant and former dealership general manager. He can be reached at [email protected].