Car dealerships are starting to consolidate under the control of national companies, and their vision of what buying cars might look like in a few years is radically different from the experience you’re accustomed to.
How did we get here and where are we going?
Little League shirts and ridiculous commercials
Opened by William E. Metzger’s first American auto dealership was established in 1898 in Detroit, Michigan. Over the course of a century or so, the licensed new car dealer system has evolved into a pillar of the American economy.
The local businesses that worked with (but were not owned by) the major automakers spread to nearly every community in the country. In complex financial transactions, they paid manufacturers to buy new cars and took payments from buyers for them, often using a bank partially owned by the manufacturer to help buyers finance the transaction. They make money from sales and service.
Often on local radio and television, they have built political power at the state and local levels. They have woven themselves into local communities as employers and sponsors for local charitable leaders and baseball teams.
It was not unusual to see one family owning multiple agents. They were often clustered together—a result of local zoning laws that merchants had a hand in forming in many communities. But they were local business giants, at best.
The major automakers strengthened these dealer networks. Laws in most states prevented automakers from operating their stores directly. Partnerships spread risk and ensured an effective feedback loop that helped major international companies understand what car shoppers in vastly different places want.
Buying cars is going online
The growth of the Internet disrupted this model. Free informative websites have provided auto shoppers with a wealth of information about their options (we love these shoppers). Manufacturers have developed a faster and more accurate feedback loop to help them know what shoppers want thanks to web traffic.
Buying a car online has always been difficult and rare, but searching for it, qualifying for financing and searching dealer stock for the car you want has become a chore.
Tesla created a new business model
Those laws that prevent an automaker from operating its own dealerships are also beginning to change.
The catalyst for this was, mostly, Tesla. In a few states that do not require third-party sales, the company has operated its own stores and sold cars directly to consumers. The company lobbied and pursued changes to franchise laws in other states. In other cases, it has opened showrooms displaying cars and answering customer questions but sending customers home to place orders for new cars through Tesla’s website.
Using this model, Tesla grew. Last year, 79% of new electric vehicles registered in the United States were Tesla products.
Other electric vehicle startups, such as Lucid and Rivian, are seeking similar sales models.
No known automaker has transitioned to a Tesla-like sales model. But some have tried selling cars online and using dealerships as delivery and service centers.
Volvo, earlier this year, moved to sell its electric vehicles exclusively online, starting with the new C40 Recharge SUV. Buyers still go through merchants to finish the sale, arrange delivery, and schedule service.
The epidemic taught everyone a new lesson
The COVID-19 pandemic may have accelerated new sales models. Last year, Kelley Blue Book research showed that customers proved happy with their new car buying experience when they spent little time at the dealership. With face-to-face interaction restricted due to travel restrictions and the need for physical distancing, merchants have made it easier for consumers to shop online. Customers bought cars faster. Automakers responded with new regulations that made online shopping easier for buyers and dealerships.
Agents don’t struggle
According to the National Automobile Dealers Association, the average sale generated $2.1 million in pre-tax earnings last year. This is a 48% increase over 2019.
In 2021, a global shortage of chips slowed production of new cars. Popular models are in short supply, and prices are skyrocketing — the average deal price for a new car was 10% higher in August than it was just a year ago. Americans broke the record for the highest average purchase price for five consecutive months.
Car dealers are optimistic about the market. A recent survey by parent company Kelley Blue Book Cox Automotive found that most dealers see the future market as strong.
“Traders’ sentiment has fallen from a record high in the spring,” said Jonathan Smoke, chief economist at Cox Automotive. “Dealers remain optimistic about the coming months, but the new car inventory situation is not improving, and sales are suffering.”
Nationwide business takes over
But as car sales moved online, dealerships began to merge. This does not necessarily mean fewer agents. But that could mean fewer companies to run. More national chains may be owned by them.
Kerrigan Advisors, a consulting firm that serves auto dealerships, reports that larger dealer chains are beginning to buy smaller competitors. Last year, Kerrigan reported at least 289 such transactions. In the first half of this year, this rate accelerated.
Brian DeBoyer, CEO of dealer chain The Lythia Group, told the Wall Street Journal last week that his company’s goal is to have a dealership within 100 miles of every American auto shopper.
Lithia is currently the third largest auto retailer in the United States
Growth is still happening in the retail industry, but much of it is not local. AutoNation, the nation’s largest auto retailer, told the newspaper that it plans to open 130 new dealerships across the country by 2026.
Some of the strong companies in the industry sell them for retirement
Some local merchants are happy to sell. Brady Schmidt, President and CEO of National Business Brokers, recently told Auto Dealer Today that “the average lifespan of individual rooftop dealership owners is 72 years.”
Big automakers want fewer cars at many dealerships
Meanwhile, some major automakers have taken a lesson from the current low inventory situation: Fewer cars mean higher sales prices. Last week, financial officials at both BMW and Daimler, the parent company of Mercedes, told reporters that their company intends to keep stocks low indefinitely to keep prices high.
General Motors CEO Mary Barra said in May that America’s largest automaker “will never return to the level of stocks we held in the pre-pandemic period because we knew we could be more efficient.”
Electric vehicle hub is chasing some dealers away
Finally, a shift in the industry toward selling more electric vehicles (EVs) has been behind some of the changes. A statement from Kerrigan Advisors to investors in March explained that “owners of large dealership groups are choosing to sell their business at high valuations today rather than absorbing the changes and investments required in terms of electric vehicles and digital retail.”
Selling electric cars requires the dealer to invest in new training for service technicians and salespeople and can mean upgrading the dealer’s infrastructure to accommodate the many batteries that need to be charged.
Just this week, General Motors reported that 20% of Cadillac dealers had accepted an offer to buy rather than follow the brand in an electric-only sales model.
put everything together
The combination of all these trends leads us to the future of auto shopping.
The number of agents may remain the same, but franchises nationwide will have more of them. Automakers may reduce the total number of cars for sale even when they don’t have to. This can keep prices high. Shoppers will find it difficult to pit agents against each other for the lowest price when a handful of companies have more of those agents.
These dealerships may be selling mostly electric cars, and more transactions will be done online than ever before. Agents will need to earn money as delivery and service centers. And smaller league teams may need to find a new way to pay for equipment.