What's the beauty of franchised system?

The first time I met Maryann Keller, in 1989, I had been assigned to interview her about the publication of her first book, "Rude Awakening: The Decline, Fall and Struggle to Recover at General Motors."

Even back then, besides authoring books and writing magazine articles she was regarded on Wall Street as one of the industry's top automotive analysts.

I knew that Maryann Keller as an analyst had gained a reputation as being one of the first to criticize the poor quality of American cars and praise Japanese manufacturers for setting the new world standard for quality workmanship and vehicle reliability. Safe to say that her expert analysis of the auto industry influenced investors on Wall Street and the boardrooms of the Big 3.

The last time I saw Maryann Keller was at a recent conference on the Internet and its impact on the automotive industry. She was a featured speaker, not only because of her 28 years as an auto industry analyst and advisor but also because she is now an executive for an Internet company.

In June, she was named president of Automotive Services Unit of Priceline.com. It allows consumers on a wide range of products and services to "name their price" and communicate that price to participating sellers.

After her presentation, and a full hour of audience questions (hey, the lady's opinions are sought after) we sat down and talked.

Here's our conversation:

QUESTION: The Internet has made it easy for customers to find the invoice price for every vehicle. Many dealers think this is a negative but you think it is a positive. Why?

ANSWER: Having the invoice price changes the dynamic. If you think about it, the MSRP becomes the starting point of a transaction. The customer expects to go down from it. By not knowing what the invoice price was the customer always had this sense that perhaps the dealer has $10,000 worth of profit in this car.

How far is down? You know, the customer is thinking how far should I go before I feel that I have walked away with a fair deal? In fact most customers over the years have gotten very fair deals but they just didn't have that parameter that gave them the sense of confidence that they had in fact gotten a good deal. Now with the invoice price if the customer pays $1,000 over invoice he or she looks at it and thinks, "This is a fair deal the dealer has the right to make $1.000 on a $25,000 car."

That's not a bad deal. But they understand and actually feel comfortable knowing this is the range. You can't go below that range so the invoice price becomes the starting point from which the customer goes up.

Q: What do you think of the "no haggle - guaranteed price" that some dealers advertise on the Internet?

A: I think it's ridiculous. I know there are a lot of advocates for it. I am not one of them. This is the real world so the minute you put a real price the customer is going to take that price, knowing they can buy the car at that price and go shopping. That's what I would do. So what have you done? You've educated your competition to what your pricing is so they can come in a few bucks under it.

That's what one-price selling has always meant in the dealer community. Despite the fact that there have been many people advocating it for years, including the auto companies from time to time. But it has never worked! And it is not going to work in the Internet space any more than it did in the brick and mortar space.

Q: Do Internet companies really understand how dealerships operate?

A: Many don't. One of the things I've discovered since I moved from the investment community as an auto industry analyst into the Internet space is the number of people who formed Internet companies really didn't understand what the car buying process was. They didn't have much of a notion of the difficulties many families have with credit. Nor did they understand that while you can streamline a transaction to buy a car, it still does not remove what is perhaps the most onerous part of the car buying process - the trade. How do you value it? How do you get rid of it? In 90% of all vehicle purchases you can not eliminate the presence of a dealer.

For most households the trade-in is the weak link in the Internet purchase process. Is the customer going to select and then finance a car over the Internet and then turn around and list their car in the classified? No, of course not. I wouldn't. That is not exactly what I had in mind to simplify my life. Simplifying my life is getting the information; getting the transaction 90% complete and then letting the dealer take care of the rest.

Q: Buying direct, OEM selling direct to the public. Do you see that as a possibility?

A: Selling direct is a very, very different proposition for the manufacturer. Auto companies are very good at what they do, which is take 5,000 pieces and transform them into a vehicle.

Dealers are very, very good at interacting with individuals and solving all of their ownership and operating problems. Whether it's a credit problem, trade-in problem, purchase problem, or a service problem. That's what dealers do. I don't think manufacturers have the mechanism in place to try and replace the dealer. By that I mean if I have something wrong with my car's electrical system I am going to take it back to the local guy, the dealership I bought it from and tell them to fix it.

If the manufacturer is going to sell me that car direct who is going to take care of my problem? The company-owned outlet? I don't think so. The beauty of the franchise system, and the reason why we have so many dealers out there, is because they have the ability to service all these cars and truly understand their local customer's needs.

The other thing I object to selling direct is that not all cars have the same "demand dynamic." All manufacturers have cars that sell for list and cars that sell for less than list. The marketplace is the only location where the real clearing price for each vehicle is going to be found. The manufacturer is always going to be late trying to figure out what that price is.

Q: What do you say to dealers who believe the Internet will cut into their margins?

A: There is no one answer. I can tell you that at Priceline.com this summer our average gross profit, excluding holdback and F&I profits that a dealer would make because we do not offer financing and insurance on our website, was probably comparable to the NADA average - about $1,000 a vehicle. I think what happens over the Internet is that pricing gets tighter. There is a narrower range from top to bottom. But as long as the dealer is able to capture that F&I income, then he will continue to make his gross profit. To date the evidence suggests that the dealer can.

Steve Walker was a television news reporter, anchor and executive producer for 12 years before joining ASTN in 1988. He hosts ASTN's popular series on automotive Internet sales. Contact him at [email protected].