The US car market has a well-established lead in alternative methods of selling both new and used vehicles, but a new study from the Economist Intelligence Unit (EIU) “Automotive retailing in the new millennium” reveals that internet-based suppliers are now struggling:
- to grow fast enough to survive and
- to find the best formula for linking cars and customers that does not simply add an additional layer of complexity onto the current system
The US leads the way…or does it?
The lessons learned in the US give a valuable insight into what may be in store for other markets such as Europe, where internet selling of vehicles is at an earlier stage of development. According to the report, however, although Europe lags behind the US in overall Internet penetration, it may outstrip the American market in offering innovative new ways to buy cars either online or in the physical world.
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More money is wasted in retailing cars than in any other part of the automotive business system.
The EIU points out that there remain “huge inefficiencies” in traditional car retailing, where up to 30% of the value of a car is expended on sales and marketing and other retail costs. It must also be noted, however, that amounts equalling 100% or more of the total sales of many Internet start-ups are being spent on sales and marketing alone so the expected lower-cost world is still some way off in the future.
It remains to be proved whether a single extra vehicle has yet been sold because of the Internet.
While the potential for the Internet ultimately to help transform auto retailing is becoming more real with each passing day, the prudent manager will have to do his or her own homework in assessing some of the claims being made by web participants. So far the emphasis has been on meeting current demand better, not on growing demand. Likewise, the savings to dealers from Internet leads can be ephemeral, since they depend on different conduct (the dealer has to actually cut back on real-world marketing and advertising expenditures for each vehicle sold through a referral service, to realise the Internet’s theoretically lower customer-acquisition costs). Similarly, the savings to customers from buying cars on the Internet may not be as great in some cases as promised.
In 1999 there was a marked acceleration in acquisitions, joint ventures and strategic alliances among Internet players in the US that is blurring categories and changing value propositions.
Formerly “clean” dealer referral services are adding online auction capabilities and other twists to their basic service menus. OEMs are linking with information services (GM and Kelley Blue Book), with dealer referral services (Ford and CarPoint), and with other OEMs (the recently announced Ford/GM/DaimlerChrysler trade exchanges). Retailers are linking with online auctions (CarMax and eBay), and online players are buying up competitors (Autobytel buys CarSmart).
The EIU contends that the continued and continual tinkering with formats, partners and strategies clearly indicates that Internet auto retailing is both immature and unstable at this point.
While this is certainly to be expected, it also highlights the high levels of risk involved with many such enterprises, and warns of what may be expected in Europe. What is clear is that experimentation will continue; what is not yet clear is which models will win.
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By GlobalData In the longer term, warns the EIU, perhaps five or ten years from now, if car manufacturers can profitably achieve true rapid build-to-order processes they could regain the upper hand.
Dealerships would become showroom order takers with little inventory on-hand beyond representative test drive vehicles. The multi-billion dollar field inventories would diminish, and consumers could expect to receive part of the value created, perhaps in lower prices overall or in more individualised service (such as home delivery and service pickup).
Many of the dot.com companies will be cut out of at least part of the equation.
Although some, such as information providers and finance and insurance companies, will almost certainly continue to provide and derive value from participating online. After all, there is little room for a middleman when the customer has ordered a tailor-made item direct from the manufacturer!
Vehicle manufacturers with strong brands have little to fear from Internet retailing, as their products are already extremely desirable and often command price premiums.
Such companies can use their web sites to provide information to, and learn about, visitors, and ultimately to funnel interested buyers to their dealers. Creating as many joint ventures and alliances as possible will help build brand awareness and ultimately translate into sales.
Dot.com companies.
In some market, at some point, a format and strategy will emerge that, rather than encumbering the current car retail process with additional complexity, will instead create genuine value, not only for consumers, but also for the retail business system as well. It is unclear whether this format already exists (eg, an entity buys dealerships then pours its web volume through them) or is as yet to be acted upon (for example, a web-based company leverages increasing supplier capabilities to design and supply its own unique vehicles). In any event, given the degree of experimentation taking place online today, there is little doubt that the Internet car retailing code will be broken, and probably in the near future. The biggest question is what share a new concept will take: ten years from now there are growing doubts that Internet-based car retailing will have become dominant (the way chains of video-rental stores wiped out the local rental shop) but rather will be just another channel in the mix (the way mail-order clothing retailing became a supplement to store-based sales).
The landscape ahead differs for strong and weak dealers.
Strong dealers are likely to use the Internet to defend their positions, increase their local market reach and ultimately drive out weaker competitors. Internet-driven transparency will at some point make it much easier for consumers to readily identify those dealers with the strong value propositions, leaving weaker dealers to die on the vine.
The consumer will be the winner
Clearly, at this point, no one can confidently predict the long-term structure of Internet auto retailing. However, it seems clear that in the near to mid term, the Internet will help to transform auto retailing into a multi-channel world. At this stage, the big winner will be the consumer, who will be presented with a menu of new ways to research, shop for, negotiate and buy a new or used car and related products and services. We must keep in mind, however, that there is certainly a danger of totally confusing the average new car buyer, who may retreat to the more familiar confines of traditional auto retailing. Such a backlash is already visible in some forms of online retailing, where merchants have added clickable buttons that link the consumer to a “live” person, either on line or over the phone, thus retaining those would-be buyers that become perplexed by multiple layers of web pages.
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