Why does the customer have to buy his car from a dealer? Why the middle person?
I can understand the concept of wholesalers, who are required to stock items in bulk, and the manufacturing company does not have warehouses or the facility to distribute the product to the customer in an efficient manner, especially when the consumer base is spread over a large area. While this is true in the case of auto customers also, what if the customer is willing to travel to the manufacturer’s plant location to make his purchase?
I would think, cutting off the dealer would bring down the price of the car substantially making it more affordable for the consumer, thereby increasing the volume of sales.
I think it’s because the current dealers would throw a fit.
From my limited understanding of the dealership market, there’s a fair back and forth between automotive manufacturers and generally locally owned dealers. These dealers have a particular skill-set for locally marketing and selling vehicles through dealerships in person that is applicable to a fair number of automotive brands. In other words, Jimmy Bob’s Chyrsler is often next door to Jimmy Bob’s Audi and VW dealership. The dealerships are not entirely dependent upon or married to any car company and can and will sell other cars if they can become more profitable by doing so.
Alternatively, they add enough value to car companies in pushing sales and increasing profits that it is necessary for the car companies to utilize some sort of local dealership infrastructure. They can’t do it on their own or don’t want to undertake the investment and distraction of developing a dealership infrastructure.
The local dealers know that this factory-direct sales model would undercut their own sales and won’t tolerate it on the part of the car company. That’s why automotive companies don’t offer factory-direct pricing or dealing.
Come to think of it, a suprising amount of the consumer economy is still via a retail model. Manufacturing and retailing are vastly divergent specialties that it is difficult for a company to effectively span. The reatiler/manufacturer relationship requires that the manufacturer go through some effort to ensure consistency in the way a product is marketed. Hence why companies require that retailers sell at MSRP even if a low-overhead internet firm could still be profitable at a lower price.
Yeah but manufacturer’s don’t provide service: dealers do. My company makes health care and instrumentation products. We also sell through distribution. Most, if not all, electronic component manufacturers sell through distribution now. It lets each focus on their own core competencies: manufacturers make and don’t have sales or service competencies, distributors sell and don’t have the insight into manufacturing capabilities and costs.
The vehicles also don’t really leave the manufacturer in “ready to sell” shape. They are usually covered with various plastic “decals” which protect the vehicle during shipping, with other pieces of plastic and foam stuck here and there to protect from dings. Their wheel covers, spoilers, sunroof wind deflectors and other various parts and pieces which may be lost during shipment, are not attached until they reach the dealership. The dealerships remove everything, put everything where it goes, cleans the car and test drives it and fixes anything they find before putting it on the lot.
That isn’t to say manufacturers couldn’t do it, but if you walked up to a manufacturer today and tried, they’d have to hire people to do all those things before selling the car to you, and then they’re just another dealership.
I’m having trouble googling some answers, but my recollection is that various state laws, and perhaps even the Auto Dealers Day in Court Act, provide protection to independent auto dealers to the point that manufacturers would have to navigate a legal minefield in order to sell directly to consumers.
The best cite I can come up for the moment is here and here.
My company is a manufacturer as well, and we don’t sell to end users.
There’s a number of reasons. Our dealers integrate our products into systems, which we don’t want to do. They get to handle the follow up questions and provide service. If we were to have to provide that, then we’d need to charge more to pay for additional people to answer questions.
They also know and / or can find customers. Most of the business from our dealers is generated by them, and as a courtesy we’ll refer back the few end users capable of dealing directly with us. Also, if we were to cherry pick customers, we’d run the risk that our dealer would start selling products from our rival companies.
There are some manufacturers that do sell directly to customers, such as copy machine manufacturers, but if they also have a dealer network then they need to balance the direct vs. dealer pricing.
Back to cars. Most people still want to see and test drive a car before they purchase it. That takes an investment in having a lot with a bunch of cars there, plus salespeople who can sell them. Someone has got to do that, and just changing the ownership over to the manufacturer wouldn’t save any money, as each business unit needs to generate a profit on its own.
At least in Germany, some of them do. Just recently, BMW opened its BMW World in Munich, right next to the company’s HQ - a combination of a corporate history museum and a place where you can pick up your pre-ordered car directly from the manufacturer; not without, of course, indulging yourself in BMW’s customer lounges.
A few years ago, I visited a similar site of Audi in Ingolstadt (without buying a car, just visiting the factory). Of course it’s not just a way of marketing which cuts out the middleman; it also serves to give some more flavor to the experience of buying your premium car.
It might piss dealers off, but I guess there’s little the dealers can do to prevent that if the manufacturers insist on it.
My father used to work at a car factory in Coventry and at one time employees could buy cars at a discount direct from the factory. This practice was ended because all the local car-dealers objected about loss of trade. So then the employees had to order their car via the dealer, but still got their discount. Presumably the dealer still earned his cut.
The practice of buying your car from the factory was very handy for the employees They could actually follow their car down the assembly track and, if they knew the right people, get a few “extras” added for free.
Working as a dealer myself (not cars, but similar principle) I can say that when one manufacturer pulls away from using dealers another one steps in to work with them.
Given the influence & relationships dealers can have, the new company quickly gains a bunch of customers.
IIRC, GM’s working on doing this, but has been meeting considerable resistance from it’s dealers (there might also be some Federal regulations issues). I wouldn’t really expect to save any money at a GM dealership, as, let’s face it, GM’s not in the best financial shape at the moment, so if the typical dealer profit from a car sale is $500, GM is going to want that $500 for themselves. GM is also going to have to make up for things like license fees that it charges dealers to be able to use “Chevrolet” or “Buick.”
As said, the dealers are strong block, not as strong as the labor unions, but strong and must be pandered to. I worked for a dealer that sold a large number of cars to rental companies. The cars would never even seen to arrive on our lot, yet somehow they counted as sales. Even if a customer wants a specially-built car, he has to go through a dealer. If you want to buy 100 police cars, a dealer has to get his cut for some legal reason.
I would also point out there is (or was) no case of a publicly-traded US car dealership. Supposedly the manufacturers don’t (didn’t) want the public to know how much money dealers make.
There is also the inventory factor. The dealer network allows the factories to run at a steady pace and the dealers absorb the inventory. Assembly lines can be shut down for vacations or model changeovers and nobody even notices. When sales slow, the factory offers rebates and incentives to dealers to keep the assembly lines running. When labor agreements were more contentious, the manufacturers would load the dealers with inventory prior to a strike.
While it is actually much easier these days to custom build a car, very few of them are built to a specific order. The lots are filled with cars so the dealers can make an immediate sale. Auto purchases are much more emotional than anybody likes to admit. If the manufacturer just waited for the orders to come in they would probably lose a significant number of sales. The dealer network maintains an inventory buffer between the buyer and the manufacturer. An important factor that analysts watch is the number of days of inventory that is on the lots.
It’s rare for a manufactured item to be sold directly to the public. A few have been mentioned in this thread but there is always a dealer network in addition to direct sales.
Now that I think about it, I can’t think of a single manufactured item that is always sold directly to the end-user from the manufacturer. (Can anybody think of one?) I guess that tells us something about the importance of some kind of middle man to deal with inventory,servicing, credit, etc.
As has been mentioned there are a lot of reasons manufacturers haven’t put emphasis on direct sales recently. Historically the simple answer is auto manufacturers were in the auto manufacturing business. From executive down to assembly line, these companies core competency was primary related to manufacturing.
Manufacturing and retail are very, very different business functions and it is the rare company that has the competencies to do both well. (Big conglomerates like General Electric stands as one of the few examples of a company that operates successful business units in many different, unrelated industries.)
While many manufacturers have started running small-scale retail operations, it’s not a trivial thing to do.
Running a Ford or a General Motors is already a very, very complex job. It’s a whole layer of complexity in addition to that if you want to run retail operations throughout the country. Even if you didn’t operate dealerships, you would have to have facilities distributed throughout a market, no one wants to drive all the way to Detroit every time they want to buy a new car.
It’s my understanding that both Ford and GM both own a few dealerships for various reasons, but by and large these are not companies interested in getting into the retail business.
It’s also interesting to note many manufacturers who have opened retail stores have contracted them after awhile, often the return on capital employed in retail just wasn’t meeting expectations and wasn’t the most effective use of capital for the manufacturing company.
There are certainly companies which manufacture and then sell direct to customers their own merchandise. Adidas for example manufactures shoes (sort of–they actually outsource a tremendous portion of the shoe construction) and have in the last decade or so started operating Adidas retail stores to sell their products.
However, as you’ve said, this isn’t really a “direct to end user from manufacturer” set up. In effect there is still a middle man, it’s just owned by Adidas, there is still a middle man markup because Adidas has to pay for the costs of business in running those retail outlets (store employees, equipment, utilities, et al.)
Yes, I was trying to think of one that did that as their only sales outlet. (Adidas would qualify if you couldn’t buy their shoes in any other shoe store.) The fact that every manufactured item requires some kind of middle man network for the bulk of their sales indicates how important that is. There is nothing special about automobiles that would allow them to bypass the functions provided by the middle man.
Cars come with warranty contracts. You want to drive to Michigan twice a year to get your warranty work done?
So, the manufacturer would need a network of places where they could exert control over the quality of work being done, and the responsibility and infrastructure to assure continuity over the (in my opinion) brief period of average ownership of warranty contracts that come with sales of new cars. The concept of trade in value for the original manufacturer would require its own network of subsidiary venues.
You know, we could contract with local business to do this. Call them, . . . Authorized Dealers, or something.
It is possible to buy cars directly from German and French manufacturers and save a considerable amount of money, even factoring in the trip to collect the car and an overnight stay in a hotel.
If you order a Volkswagen Phaeton you go to the factory and watch it being built, then test drive it in their track before taking it away.