Overview
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For
most people, the purchase of an automobile is the second-largest purchase
one will ever make. Maybe that's why it is an anxiety-ridden process for
many, compounded by a tradition of high-pressure and underhanded sales practices
dating back to the beginning of automotive time. Maybe that's also why more
consumers are using the information superhighway to become better prepared
for, and sometimes avoid altogether, negotiation with an automobile dealer.
In fact, a recent survey by J.D. Power & Associates indicates that in the
past year, the number of people using the internet to help them shop for
a new vehicle has increased from 25% to 40%. However, for a variety of reasons
which will be explored further, use of the internet in the retail sale of
automobiles does not reflect disintermediation, nor do we predict disintermediation
in the future. Rather, the automobile example represents a model of increased
intermediation in the transaction process. As we will see, the benefit to
the consumer is lower overall cost, although not necessarily lower price.
The traditional model of vehicle distribution in the United States, as well
as most developed countries, involves the designation by vehicle manufacturers
of hundreds of independent local retailers, who agree to represent the manufacturer's
products, display and promote them for sale, and provide service as required
after the sale. These local businesspeople ("dealers"), also agree to purchase
adequate quantities of the various vehicle models produced by the manufacturer
and hold them until sold to the retail customer, thereby reducing or eliminating
the need for the vehicle manufacturer to hold its own inventory. Consumers,
based upon a combination of the marketing efforts of both the manufacturer
and the local dealership, approach the dealership and negotiate the terms
of the vehicle purchase with the dealer.
Over the years, several
problems have developed along with this model. For instance, while vehicle
manufacturers have a considerable amount of influence over their dealers,
dealers are ultimately responsible for operating their own businesses,
including establishing policies for dealing with customers, setting prices,
maintaining their facilities, and the like. The result has been inconsistency
among dealers of the same brands, and in some cases, a poor reflection
on the manufacturer. Manufacturers are often constrained by statutes which
limit their rights to take action against underperforming dealers, and
protect dealers and their geographic market areas. Prices for vehicles
are "suggested" by the manufacturers, but dealers must determine actual
selling prices, which typically vary from transaction to transaction.
This causes uneasiness among consumers, who fear that they are not buying
at the lowest possible price. Geographic separation between dealers, required
by law, and the complexity of the transaction make it difficult for consumers
to comparison shop.
The introduction of
the internet into the vehicle selling process has alleviated some, but
not all, of these problems. For a detailed analysis of how and why this
is the case, we have considered the following elements of Sarkar's framework
and the impact of the internet on vehicle commerce.
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Intermediation Needs
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Search
and Evaluation
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Previously,
the consumer's choice with respect to searching was limited to the local
dealers' lots or those of additional dealers to whom the consumer could
reasonably commute. Because of the vast number of product choices and complexity
of products, limited dealership facilities, and the limiting size and remote
location of some markets, the consumer was necessarily hampered in terms
of choice. The internet has provided new intermediaries which have expanded
tremendously the information available to the consumer and, in many cases,
perform the search function for the consumer. In fact, most of the "internet
buying services", such as Auto-by-Tel
, Autoweb.com ,
Microsoft's MSN CarPoint and
Cendant Corp.'s AutoVantage, do just that. These intermediaries provide
a host of information on pricing and specifications, comparative data and
reviews, and then provide a contact to a dealer who has the vehicle the
consumer is looking for at a price near the dealer's invoice cost.
As mentioned, these
new intermediaries provide new sources of data to help consumers compare
among vehicle makes and models, although this data has typically also
been available through other media, such as newspapers, magazines, and
television. More importantly, though, the new intermediaries are also
providing a filter for consumers who might otherwise need to choose from
among dealers, as well as vehicles. By using the intermediary, the consumer
is often abdicating to the intermediary the choice as to which dealer
to do business with. The intermediary controls a large number of transactions,
so wields more power over the dealer than the consumer.
Consumers are also
allowing intermediaries to take care of the unpleasant task of negotiation
with dealers. In many arrangements, the dealer participates with the intermediary
by agreeing to sell vehicles for a predetermined profit. This arrangement,
if made with a vehicle manufacturer, would be illegal in the U.S. Consumers
are pleased, however, because they can be confident that the price is
fair and consistent. Intermediaries, then, are filling an unmet consumer
need with respect price negotiation.
One area in which
intermediaries have been neither able to add value nor to supplant dealers
is in physical evaluation of the product. No technology exists yet which
replaces the dealers' ability to physically present and demonstrate the
vehicle to the consumer. For most consumers, because of the magnitude
of the purchase, this aspect of the evaluation is extremely important.
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Needs
Assessment
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The traditional
model of a vehicle transaction calls for consumers to rely on dealers to
recommend vehicles appropriate for the consumers' needs and financial circumstances.
However, dealers have over the years so abused this responsibility as to
have become, in the minds of many consumers, ineffective. Rather, consumers
are performing their own needs analysis with the assistance of a variety
of internet-based and other sources of information. |
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Risk Management
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The predominant reason
for purchasing a new vehicle as opposed to a used vehicle is the reduced
risk of product failure and the product warranty provided by the manufacturer.
The manufacturer relies on the dealership network to administer the product
warranties. Dealers, in turn, agree to provide service for consumers,
no matter where the vehicle was purchased. Because of this contractual
relationship, intermediaries are unable to intercede or provide any substantially
greater level of comfort to the consumer.
There is, however,
some concern that local dealers may not provide the same level of service
to consumers who purchased their vehicles from a different dealer, thereby
attempting to influence the purchase transaction and reinforce their "hold"
on a geographic market. This is not considered to be a large risk to intermediaries,
as most dealers are now much more profitable in their service departments
than they are in their new vehicle sales departments, and therefore likely
willing to provide service to any customer who desires it.
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| Distribution |
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Manufacturers
are bound by contract and, in many cases, statute to distribute vehicles
through their system of independent dealers. Dealers and their associations
have resisted recent attempts to circumvent these barriers. For example,
after announcing in June its plans to open a factory outlet in Houston,
Texas that would sell used cars and trucks via the internet, General Motors
Corporation was dealt a major setback in July when the Texas Department
of Transportation denied GM's application for a license to sell vehicles.
The introduction of
intermediaries has improved the matching of consumers wants and vehicles
in stock at various dealerships around the country, thereby improving
the existing distribution network. In addition, many vehicle manufacturers
have taken it upon themselves to provide these services via the internet
(GM's www.GMBuyPower.com , Ford's
www.BuyerConnection.com).
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| Information
Dissemination Service |
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Vehicle
manufacturers have embraced the internet wholeheartedly as a means for further
disseminating product information. Most, if not all, vehicle manufacturers
have elaborate websites that allow consumers to gather data, build a virtual
vehicle of their choice, and even comparison shop against the competition.
As mentioned previously, intermediaries have also been successful in providing
these services with the added feature of doing so from an independent, third-party
source. |
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| Purchase
Influence |
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As previously
discussed, vehicle manufacturers are constrained in promoting sales outside
of the established dealership network. In most cases, vehicle manufacturers
have taken a "hands-off" approach to the new intermediaries. As one GM official
recently told the Wall Street Journal, "I don't think it's in our interest
to block a natural development in competition and in the market. Our dealers
are getting leads and appropriate leads, and [this will] help them pursue
their businesses." Yet, vehicle manufacturers cannot exercise control over
the intermediaries. "We obviously don't appreciate [the buying services]
because they do not promote our brand," a Ford executive told the Wall Street
Journal. Perhaps that explains why Ford recently invested in online information
provider Carclub.com. |
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| Customer
Information |
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Brand allegiance
aside, another reason that the vehicle manufacturers may take the "if you
can't beat 'em, join 'em" attitude is that the new intermediaries could
be a new source of important consumer information to them. As perceived
to be more trustworthy and allies, rather than adversaries, intermediaries
may have more success than dealers in getting consumers to be candid regarding
their opinions. |
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| Risk
Management for Providers |
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To
the extent that additional intermediation creates more efficient product
distribution, producers have lower risk of over-supply of inventories in
dealers' hand. While not directly at risk for such over-supplies, in extreme
situations they can cause financial distress at the dealer level, which
can ultimately be costly to the manufacturer. |
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| Transactional
Economies of Scale |
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The
new intermediaries are taking advantage of economies of scale not previously
available to most dealers. However, it should be noted that another structural
change taking place in the automotive retailing environment is one of consolidation.
Now, the largest "local" dealer, AutoNation, is really a national chain
with new vehicle dealerships from coast to coast. This relatively new phenomenon
will minimize the advantages of economies of scale enjoyed by the intermediaries,
although it is interesting to also note that AutoNation and on-line buying
service Priceline.com have recently
joined forces, with plans to jointly expand. In addition, Michael Dell of
Dell Computer has launched a new company called Carsdirect.com,
which plans to buy dealerships and turn them into internet-only businesses.
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| Integration
of Consumer and Provider Needs |
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As
has been discussed, the new intermediaries are assisting in this role, filling
the informational gaps in the old manufacturer-dealer-consumer model. Vehicle
manufacturers see the internet as an opportunity to become closer to the
consumer, but legal difficulties and conflicting needs will ultimately cause
these efforts to fall short. Dealers are reasonably ineffective at filling
this role, because they do not have the complete trust of the consumer.
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Trends and Generalizations
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In summary, it appears
that additional intermediation in the new vehicle sale process has been
brought about by an outdated model that is ineffective and inefficient;
a lack of a trusting relationship between dealers and consumers; a need
for more data to better compare products and prices; and to improve the
distribution network. Impeding disintermediation are legal constraints
which support the existing model; a need for physical access to the product
for complete evaluation; and a need for access to local service to the
product after the sale. The increased intermediation has resulted in lower
costs to the consumer, in the form of searching costs and intangible costs,
such as anxiety and fear. However, there is no evidence to suggest that
actual selling prices have declined.
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Reference List
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| Online
e-Commerce Sites |
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