Dealers vs. TrueCar: The saga continues

Editor’s note: This version clarifies three lines from the story published in our June 1 print edition.

LOS ANGELES -- TrueCar's promise to consumers is "Never overpay." For critics of the company, the rejoinder seems to be "Never forget."

Three years after a nearly fatal dealer revolt and regulatory crackdown prompted it to change its ways, TrueCar continues to be haunted by suspicion among dealers and broader questions about its business model.

Three recent lawsuits against the company -- the latest coming last week -- illustrate the challenge TrueCar faces in rehabilitating its standing with dealers, even as it enjoys growing popularity among consumers seeking a simpler way to buy a car.

Earlier this year, a group of dealers outside the TrueCar network sued the company in New York, claiming that its no-haggle pricing promise amounted to false advertising; an amended complaint filed May 22 lists dealers representing 174 franchises as plaintiffs.

The California New Car Dealers Association filed a lawsuit May 20 alleging that by arranging transactions at specific prices, TrueCar was operating as a dealer and broker, without the proper licenses.

And the shareholder lawsuit filed last week cites the claims in both those cases -- and the resulting damage to TrueCar's stock price -- in accusing TrueCar of misleading investors about its business practices. The suit, filed in federal court in Los Angeles, seeks class-action status on behalf of shareholders whose stock declined in value.

TrueCar is adamant that it has done nothing wrong and promises to fight each lawsuit vigorously. TrueCar's chief risk officer, Johnny Stephenson, noted that the suits weren't filed by disgruntled consumers, government regulators or manufacturers. "We've invested tremendous resources in our compliance" with laws governing vehicle sales, Stephenson said.

But the game of legal whack-a-mole shows that the reinvented TrueCar is still paying in some ways for its past sins, and remains vulnerable to legal challenges over its basic business practices. It also threatens to undermine the company's carefully crafted image as an agent of trust and transparency in the shadowy world of car buying.

"TrueCar before was focused on the emotion of [consumer] greed," conceded John Krafcik, who became TrueCar's president in May 2014, just ahead of its initial stock offering. "We have complete awareness that many dealers still have a 2012 point of view about our service, so we spend a lot of time helping them understand that we've changed."

TrueCar's strength in the marketplace today represents an improbable comeback. The decade-old company -- which started out offering to show customers what the dealer paid for a vehicle -- nearly collapsed in 2012 after regulators in numerous states accused it of violating advertising and brokering laws. Dealers who eagerly joined the network for the sales leads began to bristle at TrueCar's pricing promise, which they saw as triggering profit-killing bidding wars between stores.

TrueCar's certified dealers dropped the service in droves, with just 3,734 franchised dealerships remaining in 2012. (TrueCar's tally counts each brand at a dealer location separately.)

"It was a gut-check moment for us," TrueCar founder and CEO Scott Painter recalled in a 2012 interview, acknowledging that the company "almost died."

TrueCar responded by seeking to rebuild its relationship with dealers. It formed a dealer council to listen to their concerns, and replaced its lowest-price pitch with a dealer-set price for a specific vehicle, using a range determined by other transactions in the market. That price appears on a voucher that consumers can take into a TrueCar-certified dealership.

Tensions remain with dealers, both inside and outside the TrueCar network, but the changes have helped revive the business. TrueCar now counts 10,680 new- and used-car dealers in its network. In the first quarter of 2015, TrueCar says, 168,559 new vehicles were sold through its online and mobile channels -- including the sites it runs for affinity partners such as USAA -- a jump of 34 percent over the first quarter of 2014. It expects total 2015 sales to grow at the same pace, which would mean about 820,000 new and used vehicles sold using TrueCar in 2015.

But for all its outreach and reinvention, some dealers aren't convinced that TrueCar has really changed.

Take Wes McClelland, general manager of Community Chevrolet in Burbank, Calif. When he took over the position last fall, his first move was to ax the dealership's subscription to TrueCar.

"If I see TrueCar in there, that's the first call I'm making to cancel," said McClelland, who has been managing stores since 2002.

He said he has seen stores that use TrueCar lose lots of money at a time when margins on new cars are already slipping. He said he has also had too many shoppers come into his stores with unrealistic expectations, based on TrueCar's promises.

"TrueCar puts dealers in a position that really is unfair," McClelland said. "There's a lot of information that they claim to be telling people about how dealers conduct their business that's just not true."

TrueCar has no plans to change any of its practices, according to both Krafcik and Stephenson, regardless of the lawsuits and their potential impact on consumers' impression of the company.

"It's just a true fact that when you have a disruptive technology like ours, like Uber or Airbnb, you get challenged on many legal fronts," Stephenson said. "We understand that. That's what the courts are for. It's just an unfortunate side effect of innovation."

Some large dealers, in turn, are working on their own forms of disruption to counter TrueCar.

Last week, Larry H. Miller Automotive, which owns dealerships across the Western U.S., launched an online purchasing system that it calls Fast Pass. By the end of the summer, customers at all 54 of LHM's stores will be able to handle the bulk of their research and purchase -- excluding finance and insurance -- online.

AutoNation, the nation's largest dealership group, is cutting its spending on third-party leads and marketing in favor of an in-house $100 million system that by the end of the year will allow customers to complete nearly the entire purchase online, including F&I and final signatures.

AutoNation CEO Mike Jackson has said the new system could cut the time a buyer spends inside his stores to as little as 30 minutes, a direct hit at TrueCar, which prides itself on delivering a more educated buyer to a dealership for a quicker transaction.

Such innovations are just what dealers need to do to fight back against TrueCar, said Brendan Harrington, president of the massive Longo Toyota store in El Monte, Calif.

Though he has many complaints about TrueCar and no intention of working with the site, he said dealers must accept that they helped create the consumer demand for transparency that fed TrueCar's rise.

"TrueCar only exists because of our past sins," Harrington said. "So we as an industry have to get better."