Online Sales Threaten Car Dealer Profitability

At this week’s annual convention of auto dealers in Orlando, Florida, Autobytel.com announced that it will now act as a broker to sell vehicles directly to consumers via the Internet.

It was no accident that the announcement came only days after giant e-tailer Amazon.com leapt into the online car business by taking a five percent stake in Greenlight.com.

By all accounts, the move comes at a time when the whole auto industry is scrambling to understand the potential ramifications that e-commerce will have on its dealership structure.

Sites Drove Consumers to Showroom

Until now, car dealers have utilized Web sites such as Autobytel.com, Microsoft’s CarPoint, and several other online auto stores to essentially drive consumers to their showrooms.

The dealer makes the sale, and the online auto store gets paid a commission from the dealer. Currently, Autobytel.com claims to sell about 45,000 cars a month for its dealers.

Cutting Dealers Out

While today’s system is working, Mark W. Lorimer, Autobytel.com’s chief executive, says that there is a “large group of consumers out there that want a dealer-less transaction.”

As a result, Autobytel.com has introduced a direct sales model nationwide, AutobytelDirect, that is going head-to-head with such direct Internet auto sellers as CarsDirect.com.

Under Autobytel.com’s new program, consumers will be able to go to its Web site and view a list of offerings from various dealers, with each having a set price. After a consumer chooses a car, he or she can finance it online and have the new vehicle dropped off at the front door without having to haggle over price or set foot in an auto showroom.

The buyer can purchase any car from an inventory of thousands of models nationwide. If the car is within 50 miles of where the buyer lives, delivery is free. If not, Autobytel.com says the buyer will pay $130 (US$) extra for delivery.

Meanwhile, the local dealer, which is still credited with a sale by the manufacturer, pays Autobytel.com a fee ranging from $100 to $300 to handle closing the transaction.

Direct Buyers Still Small Percentage

While it is certainly premature to pronounce the current auto dealership system dead because of the small percentage of consumers who currently buy directly online, it is not too soon to analyze the potential impact of direct buying.

The most likely outcome is that dealers will receive lower margins on the cars that they sell and also lose valuable revenues from service and after-market sales. After all, as more and more consumers begin to shop online before going to a showroom, dealers will no longer be able to hide the cost of any vehicle. In addition, they will be forced to bid against each other for the car buyer’s business. This dynamic will likely lower the price that they can charge for their cars and further diminish today’s tight margins.

Financing, After-Market Sales and Service Revenues

Lower prices for new cars are just the beginning, since auto dealers do more than sell cars. As part of closing a sale, they also provide financing, and sell after-market products like security systems and extended warranties. Finally, they handle the buyer’s trade-in and make a strong pitch to customers to have their cars serviced at the dealership.

When an online car sales company makes the sale, however, the dealership will likely lose its highly-profitable financing and after-market sales. It will also lose its ability to make a profitable deal with the trade-in. Finally, it also may lose the service business as well.

Nationwide auto service companies like Firestone and Sears, for example, would undoubtedly love to make a deal with Autobytel.com or CarsDirect.com to become the service company of choice for their new car sales, while companies that provide financing or sell extended warranties and alarm systems would like to offer their services to the new car buyers as well.

Dealers Face Difficult Futures

The bottom line here is that while dealers have often worried about being cut out of the sales process by manufacturers, the real threat is having their profit margins eroded by online car sales companies that grab control of the extras.

If online car sales companies take these items away, dealers that do not find other ways to generate new profits may find their numbers dwindling, while online car brokers rapidly multiply.

Will Dealers Cooperate?

If Autobytel.com’s new service threatens to erode dealer profitability, why will the dealers cooperate? The answer is competition. If some refuse to cooperate, other dealers will.

In short, many auto dealers are caught in what could well turn out to be a long-term death trap that causes a major restructuring of the industry.

What do you think? Let’s talk about it.