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Direct-to-Consumer Automotive Sales are a Huge Opportunity

Steve Berry
25 Jul, 2019

Amidst the sweeping retail transition from brick-and-mortar to online delivery services, one of the last bastions of physical retail is the automotive industry. The problem is it's by law, and that law is making less sense by the day.

Some genuinely enjoy the experience of walking into a showroom, taking the shiny new muscle cars out for a test drive, negotiating like they're on an episode of Shark Tank, and driving away with a brand new Prius.

For others, the experience isn't so much a joy ride as an anxiety attack; they'd rather be in, out, and back home enjoying literally anything else.
Better still if they don't have to leave the house at all. 

breakfast in bed tablet

But laws against direct sales restrict everyone involved:

  1. Tech savvy consumers lose a highly appealing purchase option
  2. Direct sellers are unfairly locked out of large markets
  3. Franchise dealers can't take full advantage of the lucrative online market, or the overhead savings that come with it

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Protective laws aren't good for consumers - or the economy

All US states have some form of restrictions for direct-to-consumer sales in the auto industry, and several ban direct sales altogether. They're ostensibly meant to protect consumer interests by ensuring contact with a licensed dealer, but in practice they do more to protect the interests of entrenched franchise dealers. 

It makes some sense when you consider that cars are the primary mode of transportation in the US, and that there are more car owners per capita than any other country in the world. The institution is critical to daily working life, ergo the economy. But the downside is that it squashes innovators, and better methods of production and distribution that could benefit the entire industry. 

Speaking of which, Tesla Motors is the only manufacturer attempting to operate exclusively via direct sales (Carvana is the other biggest online brand, but sells only used vehicles). Most states limit the number of stores direct sellers can operate, and in states where they're banned outright, Tesla has lobbied aggressively to change those laws. 

supreme court

Elon Musk doesn't seem worried about the prospect. He's quoted saying "I'm sure the franchise dealers will try to...oppose us in some way but this would be a fundamental restraint of interstate commerce and violate [the] Constitution. So good luck with that."

States that currently ban direct auto sales and/or servicing of vehicles (the rest allow either limited or relatively restriction-free sales):
  1. Michigan
  2. New Mexico
  3. Alabama
  4. South Carolina
  5. Louisiana 
  6. Texas
  7. Connecticut
  8. West Virginia
  9. Nebraska
  10. Oklahoma

Tesla has actually been able to exploit legal loopholes in several of these states by having 'showrooms' instead of dealers. They can "sell" you on the car, but they can't actually sell you the car, or discuss pricing in any way. Some of the holdouts tightened their restrictions further to close such loopholes. 

Why are direct sales so controversial?

Franchised dealers are burdened with fixed real estate costs and large, unsold inventories that can sit on their lots for extended periods. They manufacture and ship their models long before the customer makes their selection. 

parked cars lot

They essentially make an educated guess as to what models will be a hit with consumers, and they don't always get it right. These days, there are AI-assisted analytics to smooth out the process, but there's still plenty of room for error in the mix, especially if the data quality is lacking.

Direct sellers on the other hand can wait until after their customer has made the order to even start manufacturing it, known as the Made to Order (MTO) strategy. Two key advantages:

  1. There is almost no surplus inventory, barring returns. 
  2. The costs of production, physical locations, and man hours are drastically reduced. 

Traditional dealers try to reduce as many wasted efforts as possible, but the MTO approach leaves less to chance. It also cuts out the middle man, skipping the dealer leg of the trip by going straight from manufacturer to consumer, saving about 30% of traditional distribution costs.

Change benefits Companies and Customers alike

It may not make sense for most to pivot completely to direct sales; consumers have mixed feelings about going in store versus buying completely online, and they have since the phenomenon started. But direct sales still serve a large market demographic. 

car salesman 

"A 2016 survey of U.S. consumers by Capgemini bears this out.
60% said they were willing to buy a new car online, and 60% said they want to avoid sales pressure at a dealership. However, 88% said they want to see the vehicle or test-drive it, and 55% said they want to be able to negotiate the price..."
- Rick Popely, Chicago Tribune

The challenge would be integrating vehicle testing and negotiation into the online service model, but Tesla has a couple ideas. For starters, they guarantee a full refund within 7 days of delivery, which means ample time to get a feel for the car. 

Negotiating can't be easily replicated in an online shopping environment, but it's a work in progress. 

Another major challenge is servicing vehicles, as Tesla's service centers are also banned in many states. One possible solution is same-day service via mobile service vehicles, though it remains to be seen how effective they are in practice. 

The Bottom Line

From a CX perspective, it makes sense for dealers to integrate and innovate around the increasingly popular MTO model to reap its benefits, rather than relying on protectionist laws to block disruptors, especially when those laws are liable to get thrown out by the SCOTUS anyway.

Over-regulating - and more importantly, stifling competition - is almost universally bad for the free market, and passing up direct auto sales is leaving a lot of money on the table, money that innovators are more than happy to grab for themselves. When the consumer prospers, so do companies, so why not give them the choices they're clamoring for? 

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