How Do Dealers/Retailers Add Value

[amigocabal]

William A. Levinson wrote an interesting article.

• It cuts out the salesman’s commission and salary. The only sales cost is the cost of processing the order.
• It cuts out the expensive showroom (a fixed asset). The service station can warehouse one of each model for test drives. Compare this to a parking lot-full of inventory.
• It avoids ending the model year with inventories of cars with colors and options no one wanted. Every car that leaves the factory has a buyer.
• Customers get exactly what they want, not what the dealer wants to push off his lot.

The truth is, however, that Henry Ford introduced this concept more than 100 years ago. The Ford Motor Co. sold directly to the public during its early days, and in My Life and Work (Doubleday, Page & Co., 1922), Ford points out the problems with inventory:

“We make cars to sell, not to store, and a month’s unsold production would turn into a sum the interest on which alone would be enormous.... We can no more afford to carry large stocks of finished [goods] than we can of raw material. Everything has to move in and move out.”

this does beg the question of how dealers and retailers add value. Clearly, there is a cost as the dealer has to make more than enough money to cover the costs of operating the dealership. Why do not all manufacturers simply sell direct to the end consumer?

Here are a few ideas of how dealers and retailers sometimes add value.

• A dealer is better able to market to build a relationship with a niche of customers.
• (For physical retailers) the customer can obtain possession of the good immediately upon purchase. (It is impractical for most manufacturers to have factories even across a continent, let alone the whole world,. just they that they can have same-day direct sales.)
• Dealers and retailers can offer products from multiple manufacturers, thus being a one-stop to browse and compare, rather than customers having to contact every manufacturer.

[Bedlam]

To an extent the ability to provide impulse purchases. If you're going to go to the extra difficulty as a customer to contact the manufacturer then you might as well put in the effort to shop around but if the shiny whatever if just in front of you, you must buy it now! Maybe the one next door is cheaper or better but it's to late then.

[orbitingpluto]

In the case of the used market, dealerships provide a outlet for sellers to offload cars they don't want anymore, as well as providing buyers a flock of cars in one place to check out. Better dealerships actually check out the used cars, hopefully finding or even better, fixing defects before offering them for sale.

New dealerships on the other hand, really don't add too much to the equation, at least beyond having actual vehicles to look at and examine. It's hard to tell online if a seat is actually comfortable or just how big inside of the car is, or how the feel is. Photos, 360 panoramas, or even VR thingies can't tell you if the steering wheel feels cheap or if there isn't enough leg room, or how easy it would be to fit the random-ass stuff you can see yourself hauling around. Actually getting people inside the car before buying is important for road-triping as well, since you don't want to find out on the day of the trip everyone can get in but they are too uncomfortable or whatever inside.

[Jub]

New dealerships on the other hand, really don't add too much to the equation, at least beyond having actual vehicles to look at and examine. It's hard to tell online if a seat is actually comfortable or just how big inside of the car is, or how the feel is. Photos, 360 panoramas, or even VR thingies can't tell you if the steering wheel feels cheap or if there isn't enough leg room, or how easy it would be to fit the random-ass stuff you can see yourself hauling around. Actually getting people inside the car before buying is important for road-triping as well, since you don't want to find out on the day of the trip everyone can get in but they are too uncomfortable or whatever inside.

"The service station can warehouse one of each model for test drives."

So there's still nothing that the new car dealership is actually offering besides you being able to drive a new car off the lot. Of course, this can be alleviated if the manufacturer can supply the specified vehicle within a quick enough time frame. If a place could offer test drives and the convenience of a current style dealership with lower costs due to less lot space and roaming sales people I would gladly wait for the product. Even better if the sales depot was manufacturer run and could sell for even less without the dealerships slice of the profit.

[orbitingpluto]

New dealerships on the other hand, really don't add too much to the equation, at least beyond having actual vehicles to look at and examine. It's hard to tell online if a seat is actually comfortable or just how big inside of the car is, or how the feel is. Photos, 360 panoramas, or even VR thingies can't tell you if the steering wheel feels cheap or if there isn't enough leg room, or how easy it would be to fit the random-ass stuff you can see yourself hauling around. Actually getting people inside the car before buying is important for road-triping as well, since you don't want to find out on the day of the trip everyone can get in but they are too uncomfortable or whatever inside.

"The service station can warehouse one of each model for test drives."

If the service station is going to pick one example for each model, it's going to be the best version of the one model- the one with the the deluxe interior, the better engine, and all the other desirable options. If I'm looking for a particular set of options their test vehicle doesn't have, I'll have only the reference materials to go by, which brings me back to the original point of not having a real life example to poke at. Say I'm in the market for the diesel-only version, and the service station only has the lucrative electric-diesel version available for testing. Having enough examples of each model to cover most of the range kinda leads to having a large lot though, which is something like the situation on most dealer lots, excepting the fact there is always be more examples on lot with the options the dealer expects to sell rather than the more out-there ones.

[Jub]

If the service station is going to pick one example for each model, it's going to be the best version of the one model- the one with the the deluxe interior, the better engine, and all the other desirable options. If I'm looking for a particular set of options their test vehicle doesn't have, I'll have only the reference materials to go by, which brings me back to the original point of not having a real life example to poke at. Say I'm in the market for the diesel-only version, and the service station only has the lucrative electric-diesel version available for testing. Having enough examples of each model to cover most of the range kinda leads to having a large lot though, which is something like the situation on most dealer lots, excepting the fact there is always be more examples on lot with the options the dealer expects to sell rather than the more out-there ones.

Most dealerships are going to do that too. They'll pick a few models to have ready to go on the lot and if you want a specific package or color you may have to wait. Even if they're trying to sell a base model car they'll want you to drive the one with alloy rims, AC, and that new sat nav so they can sell you the options.

If you really want to test drive your specific car you could probably arrange for them to ship one in from a cheaply operated storage center and have them setup an appointment to test it and possibly even drive it off the lot.

[orbitingpluto]

Most dealerships are going to do that too. They'll pick a few models to have ready to go on the lot and if you want a specific package or color you may have to wait. Even if they're trying to sell a base model car they'll want you to drive the one with alloy rims, AC, and that new sat nav so they can sell you the options.

If you really want to test drive your specific car you could probably arrange for them to ship one in from a cheaply operated storage center and have them setup an appointment to test it and possibly even drive it off the lot.

Part of the benefit of service stations doing the car testing/showing is having less cars produced that aren't sold, avoiding lots full of unsold cars, right? That also means fewer cars made for showing and testing, and since whoever is operating the service stations wants to turn over those cars, they will spec them to appeal to the biggest base. Dealerships face the same problem, but they are somewhat used to keeping large numbers of cars. When you have a stock numbering in the hundreds, you can have a back row for oddballs, but when you have two or three examples of each model, and each one eventually having to move out to make room for the next model year, the need to spec them to sell will be greater.

Having a storage center for service stations to borrow from would alleviate that, but dealerships can do that too. Though it's an open question how much a service station might charge a buyer for bring the car from the storage location verses a dealer obtaining a car through the manufacturer or perhaps another dealer.

[Borgholio]

Most dealerships are going to do that too. They'll pick a few models to have ready to go on the lot and if you want a specific package or color you may have to wait. Even if they're trying to sell a base model car they'll want you to drive the one with alloy rims, AC, and that new sat nav so they can sell you the options.

In this way, the best dealerships are the biggest ones due to the number of cars they can have on the lot ready to go. They'll have a good quantity of both base, mid-range, and high-end models available so they can get you to drive off the lot in one of their cars that very day. I bought my Prius from one of the largest and most well regarded Toyota dealerships in SoCal. I didn't want anything fancy, just a base model in a dark grey color. So the salesman walked to the garage, and returned 10 minutes later with a base model in a dark grey color. I took it for a test drive, discussed available financing deals, then drove away in a shiny new hybrid. First test driver too.

[Terralthra]

"I'd be willing to wait x days or weeks" is ignoring situations where one's car breaks down and you need a new one now for work or whatnot. Every dollar you spend on renting a car in the interim is a dollar that could have gone into the car you're buying.

[Jub]

Part of the benefit of service stations doing the car testing/showing is having less cars produced that aren't sold, avoiding lots full of unsold cars, right? That also means fewer cars made for showing and testing, and since whoever is operating the service stations wants to turn over those cars, they will spec them to appeal to the biggest base. Dealerships face the same problem, but they are somewhat used to keeping large numbers of cars. When you have a stock numbering in the hundreds, you can have a back row for oddballs, but when you have two or three examples of each model, and each one eventually having to move out to make room for the next model year, the need to spec them to sell will be greater.

Having a storage center for service stations to borrow from would alleviate that, but dealerships can do that too. Though it's an open question how much a service station might charge a buyer for bring the car from the storage location verses a dealer obtaining a car through the manufacturer or perhaps another dealer.

Really if you go with a service station model you'll probably keep a top end, mid end, and low end model of your best sellers and then one of your less popular models based on the buying trends for your area. The gaps can mostly be filled in with video demos, detailed literature, and provisions to bring in a test car as needed to close the sale.

If I were running a service station I'd try to make it so bringing in a test car for free would be economical, depending on sales your could bring in such a vehicle with your next shipment of sold cars for basically nothing.

In this way, the best dealerships are the biggest ones due to the number of cars they can have on the lot ready to go. They'll have a good quantity of both base, mid-range, and high-end models available so they can get you to drive off the lot in one of their cars that very day. I bought my Prius from one of the largest and most well regarded Toyota dealerships in SoCal. I didn't want anything fancy, just a base model in a dark grey color. So the salesman walked to the garage, and returned 10 minutes later with a base model in a dark grey color. I took it for a test drive, discussed available financing deals, then drove away in a shiny new hybrid. First test driver too.

That's pretty much what a dealership is there for, but if the smaller service center could offer you a significant discount on the bottom line price of that car would you have waited a week or two and test driven a slightly different model?

"I'd be willing to wait x days or weeks" is ignoring situations where one's car breaks down and you need a new one now for work or whatnot. Every dollar you spend on renting a car in the interim is a dollar that could have gone into the car you're buying.

How often have you or anybody you know bought a NEW car because your car broke down where your options were between renting a car and buying a car outright? It's not as if transit, try to carpool, borrowing a vehicle, or buying a beater for cheap and then selling it when you're done with it aren't other options you could take.

[Simon_Jester]

In my area, there aren't that many dealerships that sell only new cars... and as noted, there is a huge added value for used car dealerships, as demonstrated by the fact that people still overwhelmingly do business through them when you COULD conceivably just trade the cars privately on something like eBay.

[Borgholio]

but if the smaller service center could offer you a significant discount on the bottom line price of that car would you have waited a week or two and test driven a slightly different model?

If by "significant" you mean a few grand off the price of the car I would be willing to wait if I could.

[Terralthra]

"I'd be willing to wait x days or weeks" is ignoring situations where one's car breaks down and you need a new one now for work or whatnot. Every dollar you spend on renting a car in the interim is a dollar that could have gone into the car you're buying.

How often have you or anybody you know bought a NEW car because your car broke down where your options were between renting a car and buying a car outright? It's not as if transit, try to carpool, borrowing a vehicle, or buying a beater for cheap and then selling it when you're done with it aren't other options you could take.

About three months ago, when my car broke down. Public transit added over 1.5 hours to my already 2+ hour daily commute (and cost between $15 and $20 per day). Borrowing a vehicle relies on knowing someone else who has a car they don't need for several weeks (I borrowed my friend's car for a few days; weeks would have been out of the question). Carpooling would not have worked given my work schedule and commute path.

It's cool, though, you clearly know more about my life than I do, there's no way that actually happened.

[Elheru Aran]

Plus the great majority of US people don't have access to public transit. Most jobs are far enough from home that people have to drive if they want to not spend at least a half-hour or more walking; I could get to my job in about a hour or so walking... but I have a little girl that has to go to a babysitter before I go to work. And no 2-year-old is doing *that* kind of a walk. You see?

Frankly, often enough you just have to bite the bullet, suck down the debt, and buy a vehicle. It's that, walking, or using a substandard/unsafe vehicle.

[TheHammer]

It seems like you're viewing dealers strictly as distribution points. While they certainly function that way, in many cases they also provide local service for the products they sell. In addition, the vast majority of them also provide assistance in finding financing for those purchases. And they put together all of the paperwork you'll need to make sure that when you drive off the lot everything is wrapped up in a neat little bow. You could certainly do all of that yourself, but that's the value they add. The same would be true of brick and mortar retailers to an extent.

[Borgholio]

The service dept of a dealership can actually make more profit than the sales dept. My mother-in-law's boyfriend is a retired service manager for a major Ford dealership, and he was responsible for over half of the dealership's income. With that said though, a dealership's service dept functions as little more than a big repairshop that specializes in one make of cars. So the only advantage they offer in that regard is the ability to have your car serviced by people who would tend to know your car better than a general mechanic.

[Sea Skimmer]

Branded car dealerships are required by the franchise agreement to buy a set number of cars from the maker per year. That gets those cars off the books of the maker quickly. If that mechanism didn't exist car companies couldn't churn out large numbers of cars like they do, driving up the cost from lower production numbers. The big manufactures in the west could not exist the way they do without webs of independent dealerships to mitigate and insulate the cost of inventory.