Joe Driver Takes a New Turn

NEW YORK Joe Driver from Toledo has decided it’s finally time for a new car: that all-wheel drive Pontiac Torrent he’s been eyeing for months. Fortunately, he’s got his down-payment and, like many car buyers, he’s dreaming his way through a list of factory options that’ll make his new Torrent, well, his. So, Driver logs onto the Web site for Pontiac and clicks the “Build Your Torrent” button.

(Today, most every auto manufacturer has a similar online feature.) Eyes popping and fingers flying, Driver chooses a blue-streak metallic paint job and a sand-colored cloth interior. He picks out the sun roof, too, and luggage-rack center rails. After a few more minutes, he’s all set.

Or so he thinks. While Joe Driver has just built his virtual dream car, the manufacturer’s Web site can’t deliver that car to his driveway any more than it could deliver him a pizza. No: If Driver wants to buy his set of wheels in real life, he’s got to head off to his local Pontiac dealer.

Just like everybody else. Numbering some 22,000 from coast to coast, auto dealerships remain the only place that Americans can go to buy a new car. It’s a time-honored monopoly that worked by force of habit for decades—so much so, it’s safe to say most consumers probably don’t even think about alternatives. After all, there aren’t any.

But, as Asian nameplates continue to snarf up market share and Detroit’s Big Three grapple with a surfeit of dealers who can barely move 100 units a year, the golden days for dealerships are fading into the rear view mirror (8-inch or 12-inch, your option). Or at least, say some, those days ought to be fading.

Today’s dealer/factory model is “a supremely inefficient system, with a minimum of 60 days worth of cars-and sometimes 100 sitting on lots,” said Gerald Meyers, the former chairman of American Motors and now a business lecturer. Those cars sit, hundreds deep in some cases, for a simple reason: Dealers want to offer as many options as possible, and allow customers to drive off in their new wheels minutes after purchase. “Those dealers are accustomed to having many vehicles around,” Meyers continued. “And dealers don’t kowtow to a factory. They are independent businessmen.”

Which is one of myriad factors that keep the dealer system locked in place. Another element is the marketing relationships that dealerships have cemented with local media outlets and ad agencies. And then there’s public opinion. While car salesmen might not be most American’s idea of a best friend, a majority of consumers say they like using auto dealerships for a variety of good reasons.

At the same time, however, a long list of drawbacks (from needlessly overlapping ads to outright market saturation) are leading some to wonder how long the current setup can last and what sort of arrangement, both on the marketing and the selling side, might replace it.

“It’s a complicated system and a complicated business,” observed Todd Turner, president of Car Concepts in Thousand Oaks, Calif. “There have been a lot of ideas on how to get out of the franchise distribution system. But you always end up coming back to the idea that it is the most efficient system.”

“For now,” he added.

The Dinosaur Dealership

It doesn’t take long to see some of the redundancies and nonsensical aspects of the dealer system that its many critics complain about. Indeed, they emerge before the buyer even sets foot in the air-conditioned showroom. Chances are Joe Driver will have seen the Pontiac Torrent he wants in three different types of ads.

There’s the national effort (often called the Tier 1 spots) packed with sexy angles and feel-good motifs. Next up is Tier 2, the regional dealership council spot, which often tags the national presentation with a “deal” price or incentive. Finally, there’s the local ad—Tier 3—which likely will be a low-budget, 30-second shouter featuring a carnie-type promising fistfuls of cash back the moment Joe Driver signs on the dotted line.

The ads will, naturally enough, nudge him to the nearest dealer, but all those layers of extra marketing have been adding to the cost of the very car he thinks he’s about to save money on.

“There is massive ineffectiveness on the marketing side,” said one operator of a dealer-marketing firm who, like a number of others queried for this story, declined to speak on the record. “Manufacturers, if they could get hold of things, could save money on sales commissions and on marketing,” the operator continued. “No more Tier 2 marketing would be needed. Tier 1 advertising would change as well. And the brand would look much better.”

For better or worse, Joe Driver’s new Torrent awaits him on the lot. Then more problems begin.

Even though the customer already knows what he wants, a car salesman stands between him and his chariot—a middleman, in other words, and not a very popular one at that. In the purchasing public’s esteem, only telemarketers are held in lower regard than car salesmen in terms of honesty and ethics, according to a January Gallup Poll. In fact, car salesmen have been down at the bottom of the heap in every Gallup survey on ethics since the first was undertaken over three decades ago.

Given that reality, and presuming the local dealership was even convenient for the buyer to reach in the first place. would it not be more efficient if customers could simply order a car with all the options on the Web, then pick it up at a centralized distribution outlet? Great idea, maybe, but it’ll never happen soon.

What about instituting the “Wal-Mart Model,” where customers would be free to browse in a lot featuring factory-fresh Toyotas, Nissans, BMWs and Chevrolets? Not quite; most dealers in the U.S. stock only one or two brands, while the megadealers (the ones that seem to carry a laundry list of makes) compartmentalize different nameplates, making comparison-shopping no mean feat.

At the state level, powerful franchise laws protect the interests of dealers, who in turn remunerate those states with significant sales-tax revenues. Meanwhile, that great equalizer, the Internet, has had the ironic effect of retrenching the players in the current system. As the Web’s influence grew during the past decade, dealers—worried that customers having access to actual dealer-cost data would threaten profit margins—persuaded legislators to strengthen the laws protecting them. To be sure, the Web is a tremendous research tool for car shoppers (65 percent of whom will visit an auto site at some stage of the buying process, according to comScore Networks)—but the most it can deliver them is information, not an actual car. “There is no way you can bypass dealers,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

If that’s bad news for customers, it’s not necessarily good news for the dealers, either.

“The older dealers that had their highly urbanized dealer bodies have expanded into the suburbs,” Cole continued. “[That has] created more dealerships that are not profitable. You can’t have two Ford dealers sitting across from each other and expect both to make money.”

Ford, GM and Chrysler are all attempting to remedy the cannibalization problem created by over-franchising by pruning the ranks of dealers, which is something like trying to take down a tree using a pair of scissors. Ford said its 4,277 dealers are too many and require too much money to service, but the automaker’s plan, launched in August, will take at least two years to show results. There aren’t many options. Attrition will thin the ranks somewhat, but buyouts can cost millions or more.

Ad Spend Reform: A Demolition Derby?

For those who want to see the dealership system go the way of the Edsel, no stronger argument exists for that point of view than automotive marketing practices. But the issue is delicate. True, the current setup often squanders money on duplicative messages—some of which, say critics, can inadvertently tamper with a brand’s image and positioning. At the same time, the tradition of local/regional advertising has forged lucrative business relationships among dealers, agencies and local media outlets that nobody’s in a hurry to give up.

Last year the nation’s dealers and dealer associations combined to spend $8.3 billion on ads, close to half the auto industry total of $16.1 billion, according to TNS Media Intelligence. Getting rid of that spending would put some ad shops in a heap of trouble, not to mention the business it would remove from local media affiliates. At the same time, a reduction in ad spend also would likely drop the price of a car.

Ad agency R/West, Portland, Ore., is an example of how, even when a local ad is successful, a shop still can’t totally justify the unwieldy system that supports it. In late 2003, the nearby Ford and Chevy group tapped R/West to do a campaign to run in local markets. The agency came up with “Trunk Monkey,” a chimpanzee who rides in the trunk of cars and acts as his driver’s advocate. In the spots, the primate attempts to bribe a traffic cop with cash and donuts, and bash a threatening thug with a tire iron. The first spot was produced for less than $50,000, but the humorous ads were such a hit that eight of the chimp spots are now showing in 50 markets, here and aboard.

Even though spots have raised the fortunes of his firm, R/West president Sean Blixseth believes it would have been much easier had GM commissioned the ads centrally, thereby saving money for both factory and consumer. Wouldn’t that rob him of business? Perhaps, but the dealership system has spread ad dollars so thin, business is already difficult.

“The proliferation of dealerships has gotten crazy on the marketing side,” Blixseth said. “There used to be one dealership in each town, now there are many, and [also] many brands.” Dealers, he said, have to be ultracompetitive while also stretching their marketing budgets to create more ads for the additional brands they carry. “It’s gotten out of control,” he continued. “This is a situation where the model is just not very good.”

Blixseth also contends that removing the dealership layer of advertising would not lead to scenes of local ad agency execs standing on bread lines. “Even if we eliminated dealerships and went to direct sales, a Web site [would still have] to be promoted,” he observed. That’s a task that many dealerships would no doubt farm out to a local agency. “Eliminating the dealer model would mean a big change,” Blixseth conceded, “but you would still have to direct people someplace to get something. It doesn’t matter to us as an agency, but it would cut costs for the consumer.”

Not all local media players are as sanguine as Blixseth. Removing local-tier advertising, said Detroit Radio Advertising Group president Bill Burton, “would destroy some agencies. At the same time, we would see a rush on the accounts of suppliers and other groups that supplement the auto industry. But for some of these smaller shops, it would close the doors.”

Others predict that ridding Tier 3 ads would change the nature of the advertising itself. With local ad shops out of the picture, said Howard Bomstein of the Bomstein Agency in Washington, the big agencies hired at the corporate level would suddenly have to focus on the local sale, not just the beautiful big-picture themes they produce now. “Advertising would be retail-styled, with more screaming radio spots,” he said. “The creative would be forced down to a retail level [yet to be] done by top agencies. And that would put a lot of smaller agencies out of business.”

Regardless of what the new advertising would look like, many brand managers would jump at the chance to fix what a lot of what it looks like right now. Local-level ads, many executed with low budgets to match, don’t always send a brand-consistent message, and sometimes not a quality one, either. The familiar 30-second radio spots featuring an abrasive homer barking “If we make a buck, it’s sheer luck!” are cheapening the images of many cars, said Cheril Hendry, CEO of HLF Brandtailers in Irvine, Calif., which coordinates local advertising for 27 dealer groups in Southern California.

For example, Hendry points out that some Toyota dealers are still using the threadbare ’80s tagline, “Oh what a feeling!” even though “Moving forward” has long been its replacement.

“It’s disgusting, it’s sad, and you’d think such things would be gone by now,” she said.

In response to branding demerits like that, some makes have, over the past three years, developed restrictions on what can be said in local spots. Honda, for example, mandates no advertising of cars under invoice price, and only specific times when the word “clearance” can be mentioned in ad copy.

But efforts like these aren’t enough for critics like Hendry. “It is ironic that, as the consumer gets more sophisticated, with advance research on the Internet and bigger expectations for this large purchase, dealerships are going the other way,” she said. “The best dealers are getting out of the business, leaving many of the worst left running the programs. And they are still doing things like making these ads that are so bad for the brand.”

Added Matt May, a longtime Toyota business partner who held a prominent advisory role with the company’s University of Toyota for more than eight years: “Eliminating the franchise system would save millions in ads, which you now have at three levels. Sometimes these ads are product focused, sometimes they’re brand focused and you’ve got regional pitted against local, and they all compete against each other. And what happens is the consumer is confused.”

Would You Buy a Car From This Man?

Confused as that customer may be, he knows damn well what he wants from a shopping experience—and right now, dealerships give him a good number of those things, according to a new poll undertaken exclusively for Brandweek (see chart, page 24). At the same time, this is no love affair; the study also suggests that the dealership system will face problems if it fails to change and adapt.

Using a participant pool that ranged between 515 and 641 U.S. consumers, researchers working for Outsell, a Minneapolis-based Internet auto sales and marketing company, discovered that 72 percent of Americans are actually pretty happy with the current dealership-based model. This seems to owe itself largely to customers’ desire to physically see retail goods before buying them: 63 percent cited as “very important” the ability to go to a showroom to look at the vehicle.

At the same time, other results suggested that changes to the status quo would not be a bad thing. Even though 64 percent of respondents said they would not want to purchase a car online with no physical visit to a dealership, 34 percent would prefer to buy a car directly from the manufacturer, citing as reasons for their choice dishonest salesmen, better pricing going through the factory and a chance to “weed out the middleman.”

Further malcontent with the dealership system emerged when participants were asked if they would prefer fixed, no-haggle pricing on new cars; 60 percent said “yes.” Finally, 67 percent of respondents felt it was either very important or somewhat important to be able to see and compare vehicles from different manufacturers at the same physical location, an undertaking that today is essentially impossible as the vast majority of dealers carry only one or two major brands.

Outsell CEO Mike Wethington observed that the survey data shows mixed feelings that the public has about going to the dealership when it’s time for a new car. “Consumers are fine with the current distribution model,” he said. “But [the data] also show that the franchise laws come in when it comes to pricing out cars at dealerships.”

Meaning, for a public that’s accustomed to single-site comparison shopping, the dealership system is an oddity: “I can go and buy a $39 DVD player at Wal-Mart and ask questions about different models,” Wethington said, “but I can’t do that for a $35,000 car.”

Don’t Ask, Don’t SEll

It’s not that many people in the automotive industry haven’t done the same kind of head-scratching. But with Detroit’s Big Three in the throes of a desperate retooling amid drooping sales and ebbing market share, those on the dealership end stand anxiously behind a mafia-like veil of silence. “I could lose millions of dollars by speaking out about this,” said one ad agency executive, who asked that he not be identified.

But, said the agency exec, the current system is one that that can easily be remedied. “Look at the factory-owned stores in Germany,” he said. “It’s a dealership delivery point service center owned and operated by the factory.”

Were U.S. dealerships done away with and a similar system implemented, the result (theoretically) would be lower-priced cars and a bump in sales, which have hovered just under 17 million annually for the past five years. Not surprisingly, the cost of the dealer network on the average price of a vehicle varies depending on the source of the data. Dealer groups say the added cost is minimal—5 percent tops—and cite a 2001 study that says franchise law adds just 1.7 percent on the cost of a new car.

Yet, J.D. Power III, in a 2003 op-ed for the Wall Street Journal that was widely disparaged by the dealer network, pegged the cost at around 30 percent, inclusive of franchise laws, multiple level marketing and transport costs.

“If the model were reformed, the price of cars would go down,” said Gary Wolfrom, an economist at Hillsdale College in Hillsdale, Mich. “You would restrict the supply of cars, and what it takes in terms of overhead to buy a car. The consumer would benefit, and so would the manufacturer, who would sell more new cars. And this also tells you that the dealers are not economically efficient. If dealerships were efficient, GM and Ford would not be trying to consolidate their dealerships.”

Wolfrom added that there have been moves at the state level to get rid of the franchise laws that protect dealerships and forbid manufacturers from opening a shop and selling new cars on the Internet. But so far, nothing. “It seems odd that you can buy used cars on the Internet, but not new cars, doesn’t it?” Wolfram said. “What that tells you is that the used car dealers aren’t organized as the new car dealers are.”

Car dealers are organized all right. The National Automobile Dealers Assn. reported revenue of $39 million in 2004 on its 990 tax form, the last year records are available. This money is used for lobbying, among other things, to ensure the dealer model is not altered. Public scrutiny has led to dealers being more attentive to customers, said James Ziegler, a consultant for auto dealers. “Auto dealers have always been an easy target and the public would love to believe anything they have heard about dealers,” he said. “But the dealerships have really gone out of their way and cleaned up their act. They have increased customer satisfaction.”

Even so, some dealers are ready to admit that their lock on power if far from absolute. “I can see using the German model here,” said Cam Stewart, general manger at Honda Cars of Rock Hill in South Carolina. Stewart’s shop, which is part of the Hendrick Automotive Group, is an example of a dealership that’s adapted itself toward the convenience-driven ideal where the customer has control. Stewart will allow customers to buy a car off of his dealership’s site, which lists a complete inventory. The buyer can then come to pick up his new car or have the car delivered to the buyer’s home—with Stewart in tow—to do the paperwork.

What about that new dealer model, the one featuring a lot full of new cars of all brands? “Unfortunately, in this country, it’s not the American way,” Stewart said. “Or maybe I should say fortunately.”

Back to the Future

But . . . what if? What would car-selling, buying—and marketing—be like in a dealerless world? Two recent mutations of the dealership system might offer some clues.

Feeling the heat of foreign competition in the late 1980s, GM took some changes and created Saturn, “A different kind of car company.” With its super-friendly, no-pressure dealerships and fixed-priced cars, Saturn set out to reform the dealership model and, to a great degree, it did. Saturn became the first non-luxury nameplate to rank No. 1 in customer satisfaction, according to J.D. Power & Associates.

Unfortunately for Saturn, once the SUV boon promised fatter margins, GM let the nameplate drift, even though a slow resurgence began last year. “It was very brave to do the no-haggle policy, and it was very popular and effective,” observed Tim Maleeny, strategy director at Publicis & Hal Riney, San Francisco, who was part of Saturn’s early branding efforts. But Maleeny also pointed out that the price comparisons enabled by the internet now prompt customers to march in with a “beat-this” price, rendering the fixed-price policy less popular.

No haggle has since found its home at CarMax. The Richmond, Va.-based chain opened its first store in 1993, offering used cars with set pricing. Since then CarMax has sold 1.5 million cars, using a model based on Circuit City: thousands of cars of all brands, side-by-side, where consumers can do fender-to-fender comparison shopping. CarMax then decided to move its model over to the factory-fresh arena, opening its first new-car shop in Duluth, Ga., in 1996. That store at one point was the top seller of the Jeep brand, though restrictive franchise laws have limited CarMax’s endeavors. Still, the no-haggle, low-pressure model has served it well. With 77 new and used stores in 22 states, CarMax sales have grown from $2.2 billion in 2000 to $6.2 billion last year.

“Our concept is just as appealing in new cars as it is in used,” said Joe Kunkel, CarMax svp-marketing and strategy. “We don’t add as much value in new as used, and get lower margins, so new is not as attractive as used. But we get buyers of all of our cars saying they wish they could always buy cars this way.”

Here’s the Deal

Industry watchers say that for the current dealership system to go away, it’ll require several big changes on both sides of the cash register. First, people will have to be willing to pay the sticker price. Saturn proved buyers are willing to do this, but the odds would improve if dealerships were set up like a Best Buy: aisles of selection and choice across all brands, the very essence of a market-driven economy.

Next come the pesky and persistent legalities that protect existing dealers; legal reform would be a must.

Finally, there’s the unavoidable truth that changes of this magnitude will never happen overnight. “If we did take away the dealer network, it would take a generation to set up a new system,” said former AMC chief Meyers. “It would be risky. In a perfect world, the dealer would exist without inventory and you could order the car from the factory, and it would be delivered in 72 hours. Some of the Japanese makers approach that now. But that’s a billion-dollar idea and the people that really need it don’t have a billion dollars to spare.”

Joe Driver, the buyer of the Pontiac Torrent, didn’t have much cash to spare, either, which is unfortunate because the new car he’s taking home might have cost him a lot less—if only he could have bought it somewhere other than the dealer.

Steve Miller covers the auto industry for Brandweek magazine.