If there's one aspect that almost always dictates how a customer perceives a brand, that would be through the dealership experience. Unfortunately, the vast majority of dealerships don't always reflect an automaker's brand values and as the pandemic-induced new car shortage has proven, price gouging has become a real problem. This is especially true with cars whose demand far exceeds supply. How did we even get here, and why not have the manufacturers themselves just sell the cars to us directly?
We Need To Talk About State Auto Franchise Laws
First, we need to talk about State Auto Franchise laws. These laws prevent the manufacturers themselves from selling new cars and even provide aftersales services directly to the consumer. Dealers are also protected by these laws by mandating exclusive territories for them, as well as making dealership terminations by the manufacturer difficult. The main motive for these laws by the various states is in order to protect local businesses and supposedly maintain free market competition between dealers. Yeah, basically that free market part is what led us to the huge markups we experience today.
However, the dealership scene today isn't any more just a "local business", because there are three enormous dealership chains in the United States, that have bought smaller, family-owned dealerships in order to reach their massive scale today. Some of 2022's biggest automotive dealers according to MSM include CarMax, Penske Automotive Group, and Lithia Motors.
It's Called A "Suggested" Retail Price For A Reason
In order to understand why dealers are often hated, we have to talk about the Manufacturer's Suggested Retail Price (MSRP). There's nothing inherently wrong with MSRP itself because the MSRP is determined by the actual cost to build that car (which of course includes overhead costs like electricity at the manufacturing plant) whilst taking into account a meaningful profit that the dealer can earn.
There are also a few back-end stuff happening that we won't be able to fully open up since most of these are a secret, but dealerships buy fleets of brand-new vehicles at a wholesale price. This means that these cars are purchased below MSRP since the dealerships are buying in bulk. Edmunds, is able to find out how much is the invoice price of a vehicle, which means you can use that as a starting point on how much a dealer actually paid for that car from the factory and negotiate your pricing from there.
Speaking of negotiations, this is where the "suggested" part of the MSRP comes into play. If the car you're buying is produced in high numbers and demand for it is stable like an entry-level 2023 Toyota Corolla that has an MSRP of $21,700 for the base LE model, then you'll probably end up paying at or below MSRP if a time comes that there's plenty of them sitting in dealership lots. On the other hand, if it’s a supercar that isn't produced in high quantities and yet is highly sought after like the 2023 Chevrolet Corvette Z06, then we pretty much guarantee you’ll be paying way above MSRP.
But paying above MSRP doesn’t always mean actually paying above the suggested price by the manufacturer. This can happen in cars that are produced in high quantities, too. For instance, a dealer may sell you a base 2024 Chevrolet Trax for $20,400, but in return, a sales agent may try to convince you that you need some stupid accessory to make your car look nicer or even insurance for a specific vehicle part or accident scenario. Sooner or later, you finally realize that you paid much more than the MSRP of your small crossover SUV whose repair bills might actually cost less than that insurance that will supposedly protect you from a specific accident that only has a one-in-a-million chance of happening.
What Lies For The Future Of Dealerships?
Unfortunately, while high markups won't last as vehicle inventories stabilize post-COVID, high transaction prices might linger for a little longer. To understand, we must talk about dealership inventories. According to BCG, the effects of the pandemic-induced new car shortage will still linger for the next few years. While as mentioned, inventories are set to be more stable, the amount of cars dealers are holding won't be as many as pre-pandemic levels. As a result, dealers are less compelled to offer discounts on new cars.
At the same time, due to the new car shortage, dealers report that 59 percent of new car purchases in 2022 were made-to-order instead of choosing what's already available in the dealer lot as opposed to just 19 percent in 2019. This is due to the longer wait times that enable customers to have the luxury of time to create a certain specification they want for their car. As a result, customers are paying at least at MSRP since they were able to order a car based on the color, features, and trim they want, but this also gives dealers a chance to raise the price by upselling more optional features.
The Online And EV Age Is Both A Boon And A Bane
With online retail sales now becoming a thing, you might expect that purchasing a new car online would fast become a norm, right? Not quite. The actual buying process is still low at just 0.5 percent in 2020, but the most common online service that dealers have invested in is home vehicle delivery and delivering a test drive to the customer's house. Carvana--an online used car shop, sells cars directly to consumers, and one of its defining characteristics is its "no haggle, no hassle" pricing model. What you see is what you actually pay for, and at a time when markups are high, that can only be a good thing.
The EV age, however, introduces its own opportunities and challenges. Tesla for instance, is the perfect example of an automaker that directly sells to consumers, thus removing the middle man (aka the dealership) from the equation altogether. As a result, their pricing is what you actually pay for, and as expected, this didn't bode well for dealers and with certain U.S. States.
Additionally, dealerships also profit from aftersales services, but EVs don't require as much maintenance as internal combustion engine (ICE) cars. As a result, dealers have fewer aftersales revenue opportunities in the EV age, and it's also exacerbated by the fact that the challenge of changing the tooling of their service centers in order to accommodate EVs is also quiet expensive.
But at the end of the day, you can bet that the dealership model will continue to exist in the decades to come--perhaps not exactly in the way it looks today. Expect digitalization and the EV switch to play a role in this, while negotiating for cars below MSRP could be a thing once again if vehicle demand and inventory levels stabilize in the next few years.
Here's YouTuber Everyman Driver expanding on the subject