· Car dealers abandon e-commerce sales due to supply issues

· Lack of online transparency hinders online sales from growing

· Automakers unlikely to push online selling initiatives

· Third parties likely to become standard for end-to-end online car sales

· Amazon’s entrance begins with Hyundai, but more ahead

Many industry insiders, me included, predicted that the COVID pandemic would be the impetus to force car dealers to embrace online retailing. Investors also bought this theory, dumping billions into various startups to expedite this digital transformation — but the opposite occurred. Post-COVID inventory shortages forced dealers to abandon online sales and resort to outdated and high-pressure offline selling techniques. As a result, tech companies like Cars.com and potentially Amazon are poised to dominate the online vehicle retailing space as industry realities prevent car dealers from doing it themselves.

Post-COVID Supply Shortages Force Dealers to Return to Outdated Selling Techniques

At the onset of the COVID pandemic in March/April 2020, car dealers scrambled to find ways to overcome lockdowns. They adopted upfront and no-haggle pricing on their websites, provided Zoom calls, and offered full price transparency to customers. Their efforts were supported by state governments that loosened laws to make online sales more feasible.

The pandemic showed dealers that digital-only selling was quicker and more efficient than offline sales. These efficiency gains meant less salespeople on the payroll which encouraged dealership managers to expand their digital offerings, even as social distancing requirements retreated. But their ambitions ended when post-COVID supply shortages arrived, making both their new and used car inventory scarce commodities.

With severely limited inventory, most car salespeople resorted to tactics that car buyers despise — less the plaid jackets. Salespeople were non-transparent on price and availability, and only offered inventory to buyers willing to pay the highest price. Certain dealers encouraged bidding wars, fetching offers from multiple buyers to see how desperation would impact their bidding. One Mercedes-Benz dealer based in northern New Jersey advertised “Call for Price” on its website for an in-stock G550 SUV. When my brother, a lawyer and current customer of the dealership, called, he was haughtily told by the salesperson that the bidding started at $100,000 over MSRP.

Some car dealers wouldn’t post inventory online because they didn’t want to show their exorbitant prices to consumers over fears of blowback. One dealer, who opted to, severely damaged its reputation after its price premiums went viral on Reddit. One of my friends, who runs a progressive car dealership group in Long Island, New York, explained he had to pull the plug on his online initiatives as a result of inventory shortages. He said, “It makes little sense for us to embrace online selling as we would only lose profit.”

During the post-COVID supply drought, most dealers had no cap on pricing, which resulted in consumers paying the most inflated car prices in decades (inflation determined as percent over MSRP). But with inventory conditions improving, many ask why are dealers still avoiding online sales?

[Author’s note: While some car dealers exploited car buyers post COVID, the majority only increased their prices to counter lower sales volume. Their objective was to simply stay in business.]

Improving Inventory Does Not Signal Restart of E-commerce Initiatives

In 2019, I wrote that car dealers’ income was dependent on automakers paying them incentives to sell cars, even at losses. In the decade before COVID, this financial reality encouraged many dealers to look for more efficient ways to transact, like online selling.

From 2010 to 2020, a small number of dealers recognized that online car selling was more efficient than paying salespeople, and it also generated happier clients. They pursued online and no-haggle pricing from 2015 to 2019, with the space growing over 2,000% during this period. But after COVID, growth reversed, and there’s little sign that dealers are willing to embrace end-to-end online sales today.

While inventory conditions improved significantly, they are still well below pre-pandemic levels. Factors like pent-up demand from previous shortages and union strikes are still constraining inventory. One Hyundai dealer explains, “Things are far from normal. For some models with excess inventory, we find buyers happy to pay MSRP because they think inventory is still tight, while savvier ones pay invoice. But for other models, we don’t have enough, and these are sold above MSRP.” While some inventory constraints will ease eventually, the issue isn’t going away.

On a long-term basis, manufacturers made cutbacks in new-vehicle production to reduce the level of inventory stored on dealers’ lots. Manufacturers like Ford claimed that “supply discipline” is more profitable for both parties and told its investors the practice is here to stay.

Thus, with inventory still constrained, and likely to stay that way to some degree, few dealers are interested in providing car shoppers with transparent and no-haggle pricing online. Instead, they have little choice but to continue utilizing opaque selling techniques, otherwise they will limit their profits.

The Six Profit Centers That Are Limiting Online Car Sales

For online car sales to reach the masses, online shoppers must be provided with upfront pricing for all six car dealer profit centers in a sales transaction. The vehicle’s price, or the price posted on the dealer’s or manufacturer’s website, is one aspect of a transaction. But there are several others, like interest rate, trade-in price, and the coverages of extended warranties. Dealers often manipulate these profit centers in a typical retail car transaction to close a deal or beat a competitor.

Six Car Dealer Profit Centers

1. Vehicle Price – Defined as the difference between the vehicle’s invoice and selling price, this is the most commonly negotiated figure that consumers focus on when purchasing a vehicle, yet it represents a minority of the dealer’s total transaction profit.

2. Incentives & Rebates – While scarcer than pre-pandemic levels, manufacturer rebates and incentives are provided to certain buyers based on model or other criteria (e.g., first responder discount). Some dealers will pass these discounts directly to consumers, but others will use them to boost their profit in a transaction.

3. Lease/Trade Return – It’s not uncommon to see substantial differences in trade-in values for vehicles, which can inflate the dealer’s profitability. Post-COVID, lease returns became an item, with some dealers paying consumers to return their same-brand vehicles to them, so the vehicles could be sold on their used-car lots.

4. Fees – Fees generally add a few hundred dollars of profit to a sales transaction and are often presented to car buyers as something akin to sales tax. While there are some state governments that cap them, some abusive dealers bypass or ignore these laws and use fees as a method to increase their profit.

5. Interest Rate Markup – When a dealer submits a car buyer’s credit application, the banks will respond with an approved interest rate. If the dealer charges the buyer a higher interest rate than the approved rate, they are paid a commission from the bank.

6. Warranty, Policy, & Add-ons – The price and coverages of warranties vary significantly amongst car dealers. The same with policies for items like lost keys or flat tires and add-ons like floormats. Buyers are often unaware of the details of warranties and related products

Almost half of these profit centers are not discussed with car buyers until they agree to a deposit. But for online selling to affect the majority of new car buyers, all six must be disclosed to car buyers during the price discovery process. Without disclosure, consumers will not be comfortable making a purchase online, as other dealers will claim to offer a better deal by manipulating the non-disclosed ones.

Failed Manufacturer Attempts at Online Sales

Recognizing the need to provide car buyers with a better shopping experience, nearly every automaker has experimented with online selling concepts since the late 1990s. Efforts like GM’s Shop. Click. Drive. or Ford’s Ready. Set. Go. all had great headlines and ambitions but failed to deliver meaningful results.

Automakers tried everything from marketplace-type concepts to online shopping carts, but the online vehicle prices were beat by offline dealers who were able to make profits elsewhere. Other efforts were poorly executed as dealers didn’t actively participate or flat out resisted, leaving consumers baffled. And in some cases, manufacturers were sued by car dealer associations because their programs were perceived as violating franchise laws or laws that protect car dealers.

Dealers are unlikely to disclose their Six Profit Centers in an initiative controlled by automakers. For one, any automaker-led effort will be presented to all buyers of a brand, not just those looking to skip the dealership or shop online. This is an important distinction.

Dealers currently view online sites as an additional sales channel that can be adjusted so as not to conflict with their other sales channels. But once an automaker sends the brand’s customers to an automaker-controlled online shopping site, online shopping has the potential to become the main way its dealers sell to customers. This brings problems.

Car shoppers who visit a showroom, or might be loyal to a dealership, would receive the less profitable and ultra-competitive online pricing, thus giving away some of the dealer’s profit. Dealers would also be required to list their inventory online, even for models in high demand that could be sold at a premium offline.

But more importantly, competing dealers that opt out of the automaker’s program or represent a different make will use the price transparency of the automaker’s effort to steal customers away. And as some economists explain, if all dealers provide transparency into their Six Profit Centers, then it would put many of them out of business.

Economists found that if all 18,000+ franchise dealers provided “apples-to-apples” comparison of their pricing online, via one uniform site, it would create a perfectly competitive marketplace. Under this principle, the profitability of dealers would flatten and contract, which would threaten the financial viability of many. While this would be a boon for consumers in the short term, in the long term, it could lead to less dealerships competing for their business and, therefore, higher prices.

Today, some automakers, mostly in an effort to appear more Tesla-like to investors, have launched online purchasing sites for EV models. These efforts don’t represent end-to-end online selling, but rather websites for consumers to place a deposit to secure a “spot” to buy a car later. If expanded on, experts feel these efforts could gain traction with both dealers and consumers but would require flat and upfront pricing for consumers. And since dealers would give up their profits in this scenario, automakers would need to pay them significant incentives. As I touched on last year, automakers recognize the need to embrace a better selling process, but cash woes and uncertainty over electric vehicles are hindering this fundamental change to their business models.

Third Parties Fill the Gap for Online Sales

In October, there was an overlooked press release by Cars.com, stating its intent to rebrand as CARS Commerce in an effort to meet the needs of car dealers and consumers. The company explained that combining its retail, e-commerce, finance, and trade solutions with its marketplace would allow car dealers to sell online in a manner that would appeal to consumers. Many saw this as just another press release, but those that understood online car shopping felt that Cars.com was bridging the gap between dealers and end-to-end online car sales.

Investors feel that Cars.com, and some of its competitors, can allow dealers to sell online while minimizing the risk of conflict with their offline customers. By using a third-party to facilitate online car sales, and providing transparency into the Six Profit Centers, car dealers can choose the models and pricing they want to sell online solely to the online shopper that seeks it. They don’t need to change the ways they currently do business — whether on their own website or in their physical showrooms.

For example, if dealers have high levels of inventory for one model, they might be willing to list it with a third party at a low price while keeping high-demand models offline. In another example, if dealers are not meeting their sales goals, they might more aggressively pursue online sales to temporarily pick up the slack, or they simply may have different pricing for third-party online customers versus those who contact them directly.

These strategies are similar to those of large retailers, like Staples or Home Depot, which not only have different online and offline pricing, but also different pricing on third-party websites like Amazon or eBay. This allows the retailer to maximize profit based on the channel, customer type, and their inventory condition.

Companies like Cars.com are positioning themselves as the “opt-in” dealer solution to sell online without the disruption caused by automaker efforts. But despite how palatable their solutions may be, they’ll still need to convince thousands of dealers to embrace transparency, which many will resist.

Amazon’s “Soft Opening” in Online Car Sales

Earlier this month, Amazon made headlines in the automotive industry when it agreed to a strategic partnership with Hyundai to, amongst other things, sell cars via Amazon.com. Its partnership came 5 years after the automaker built an online showroom on Amazon’s site in 2018, which advertised basic model information but directed consumers to dealers to make a purchase. Many industry observers think the latest news means Amazon will soon dominate online car selling.

From conversations with former executives, I learned that Amazon researched entry into the U.S. automotive retail space for the past decade. When companies like Vroom and Carvana hit the industry’s radar, Amazon considered selling used cars but dropped the idea over fears of profitability. Amazon also looked at selling new cars with dealers but felt that since the transaction was controlled by the dealer, the concept conflicted with its mission statement of being customer obsessed. But given the recent announcement, it’s clear that Amazon is now shifting into higher gear.

Amazon’s partnership with Hyundai means it does not have a direct relationship with dealers. This means that Hyundai dealers had little say when the automaker decided that cars will be sold via Amazon — despite dealers being the only parties that can legally do the selling. Dealer protection laws, known as franchise laws, allow dealers to challenge the Amazon/Hyundai initiative and inhibit its success.

Hyundai can’t afford more legal challenges from dealers. It lost hundreds of millions of dollars and delayed the roll out of its Genesis brand after upsetting its dealer network. Thus, we can expect significant guardrails in the Amazon/Hyundai initiative to not upset Hyundai dealers — or give any single one of them an advantage over the others.

These guardrails mean that transparency into the Six Profit Centers, which is necessary for online car selling to reach critical mass, is unlikely to be incorporated into the Amazon experience. Other guardrails will prevent Amazon from removing poorly-performing dealers from the program. Thus, the success of the program will be limited as offline dealers will advertise lower prices, and some consumers will be unable to trust Amazon’s pricing as a fair or competitive.

The outcome of the Amazon/Hyundai initiative, at least initially, is unlikely to provide the major outcome that some expect. However, it does mark Amazon’s foray into the U.S. automotive market, and we can be assured that the learnings from this experiment will be used to expand Amazon’s future automotive offerings. [Note: Amazon has tried similar experiments in other countries.]

If Amazon goes direct to dealers like Cars.com, it will remove the constraints of a manufacturer partnership and create the potential to become the number one third-party platform for buying a car online, but this will require a heavy support footprint and diversion of resources from more profitable Amazon-owned businesses. Ultimately, Amazon has the power, influence, and money to be successful at whatever it chooses, so we’ll need to watch for clues as to its future intent.

Wrapping Up

Without a shift in automaker incentives, the majority of online car sales will not come from automakers or from car dealers, but third parties. Car dealers will use third-party sites like Cars.com that connect them with online shoppers but don’t cannibalize their other sales channels. As for Amazon, it’s unlikely to make significant strides in online sales by partnering with Hyundai, but the learnings from its experiment will fuel whatever it ultimately decides to do in the U.S. automotive market.

About The Author:

Jeremy Alicandri is a partner in Alicandri LLP, a boutique automotive consulting and research firm, which primarily serves investors and law firms. Jeremy is a former strategy consultant with Deloitte, PricewaterhouseCoopers, and Maryann Keller & Associates. He is a former advisory board member of the National Automobile Dealers Association and TrueCar. He also spent seven years overseeing a franchise car dealership group.