Internet technology will doom the franchise system and turn the traditional dealer into a dinosaur, according to a report by Gary Lapidus, an analyst for Goldman Sachs Investment Research of New York.
The report, 'Gentlemen, Start Your Search Engines,' concludes that the auto industry can cut $60 billion annually from the manufacturing, distribution and retailing process by using the Internet. But the transformation to a leaner, more consumer-focused industry will produce winners and losers. The winners will be the manufacturers, some suppliers and some online auto brokers.
Suppliers that are less competitive on price are expected to bite the dust when aggressive online trading with manufacturers becomes commonplace. But dealers will be the biggest losers in the Internet revolution, Lapidus predicts. The franchised dealers who are left will be reduced to delivery boys for the manufacturers. They will not sell cars.
Harold Wells, chairman of the National Automobile Dealers Association and owner of Wells Automotive in Whiteville, N.C., counters that auto retailing is far too complex for the Internet upstarts to overtake dealers. Dealerships appraise trade-ins - a stumbling block for online sales - and they have the expertise to help customers make purchase decisions and service vehicles after the sale.
'In the long run, the automobile business is still going to be a people-to-people business,' Wells said.
The demise of the dealer will start as direct online auto brokers such as Carsdirect.com go public and buy dealerships, the report says. Brokers will purchase dealerships to get around state franchise laws that forbid the retailing of new vehicles without a franchise.
'Buying new-car franchises isn't as forbidding as it sounds,' Lapidus says in the report. 'The top 15 states comprise almost 70 percent of total U.S. auto sales. California, Texas and Florida alone account for 27 percent of the total U.S. new-car volume. We estimate that acquiring one franchise for each of the top 40 brands in California, Texas and Florida would cost only about $75 million.'
Lapidus also believes online auto retailers do not have to provide service after the sale. Over time, dot-com companies can develop partnerships with chain service providers such as Jiffy Lube, he says. Eventually, the manufacturers could certify those service partners to do warranty work.
The report acknowledges that certification is not likely anytime soon because the manufacturers do not want to infuriate their dealers.
And direct sales to consumers would give the online brokers an $800-per-vehicle cost advantage over traditional brick-and-mortar dealers, the report asserts. The online auto sales outfits would achieve the savings by reducing inventory to about a 35-day supply, eliminating sales commissions and decreasing overhead.
The report says that direct online sales companies would need fewer facilities and their dealerships would be less costly, no-frills outlets.
As the online auto brokers use the Internet to reduce the cost of marketing vehicles, the manufacturers will want a piece of the action. Manufacturers will develop a direct-to-consumer ordering system in which the car transaction is handled online. And dealers, unable to compete with the Internet companies, will cry 'uncle' and go into partnership with the manufacturers, Lapidus says.
The dealer will receive a fee to receive, prepare and deliver the new car to consumers, he says.