Buy a New Car From Your Couch? Almost.

In General by The Ghost Shield TeamLeave a Comment

The auto dealer looked like a ripe target for disruption when retailing moved online. Now that startups have tried and failed to beat the car salesman, many are taking a different route: catering to them.

After watching predecessors like TrueCar Inc. and Ford Motor Co. stumble in their attempts to bring more Amazon-like e-commerce to car shopping, a new wave of auto finance upstarts has emerged. Rather than fight a dispersed and politically-connected dealer industry, they’re bringing the country’s 17,000 new-car dealers into the digital age, meaning consumers aren’t going to be bypassing the dealership to buy new rides anytime soon.

Almost 20 years after the internet brought price transparency to the U.S.’s almost $1 trillion-a-year new car sales market, several steps of the shopping process have migrated online. But as buyers turn to Kelley Blue Book and for price comparisons and Consumer Reports for model reviews, they remain unable to finish the car-buying process without a visit to the dealer. The average consumer visited about 2.8 dealerships before buying a car in 2016, compared to 3.5 in 2012.

Cracking Financing

The portion of the buying process that’s yet to be cracked — solidifying financing and insurance — remains a profit center for dealers and has become a target for startups, though most are now taking aim with dealers’ blessings. The new apps replace tedious paperwork with a few taps and swipes on a smartphone, but the underlying economics are little.

In most of these digital-age car-financing apps, the same banks quote the same rates they would in a dealership, and the so-called “dealer reserve” — the fee the dealer gets for being an intermediary between lender and borrower — remains baked into the monthly car payment.

AutoGravity makes a “white label” version of its app that dealers can roll out with their own branding. It allows shoppers to pick a car, find a dealer and apply for credit approval all from their couch.

The startups have good reason to tread lightly on traditional dealer turf. There are also practical reasons for dealers to stick around. Most consumers want to test drive a big-ticket purchase like a car, and dealers need to do in-person inspections to assess the value of a trade-in. They also do repairs and maintenance work, and with cars growing more complex and software-laden, that work becomes more specialized.

Franchising Laws

Regulations also work in dealers’ favor. Franchise laws that have been on the books for decades were put in place to prevent manufacturers from opening stores that would compete directly with mom-and-pop dealers. Tesla Inc. has been challenging the direct-sales ban on a state-by-state basis, with mixed results.

Car dealers will continue to play a vital role as the point of sale and delivery. They need to embrace and adopt new technologies and alternative ownership models to stay in the game.

Used Cars

To be sure, there are startups in the U.S. that have already put the entire car buying process online — including those final steps dealers are gripping tight. But they’re confined to the used-car market due to franchise laws and manufacturers’ reliance on dealer networks. Used-car startups raised $1.1 billion globally last year, down from a peak of $1.2 billion in 2015.

Vroom is a three-year-old startup that buys, refurbishes and delivers used cars to shoppers’ doorsteps without making them visit a dealership. The company sold 50,000 units last year and had $1.1 billion in revenue, according to CEO Paul Hennessy.

By comparison, AutoNation, the largest dealership group in the U.S., sold 225,713 used cars in 2016 — plus 337,622 new ones, according to its annual report. Hennessy says he has enough scale to avoid charging customers a dealer reserve fee on financing, a win for customers who also get to skip the dealership.

Neither Vroom, nor used-car online marketplace Shift, which offers online credit approvals and doorstep delivery, seems too intent on eating dealers’ lunch. They say the market is big enough to accommodate everyone, and they aren’t planning to push their dealer-free used-car strategy into the new-car market.

Dealers themselves are embracing technological change because they realize they have no choice but to accept the dominance of e-commerce.

New web tools are starting to be used that allow shoppers to negotiate a whole purchase online and just come into the dealership to sign the paperwork.

Leave a Comment