Is This the Beginning of the End for Car Dealerships?

January 19, 2022

When my dad and I founded CarEdge in 2019 we knew that the way people bought cars was inevitably going to change. Our best guess was that the hassle of negotiating a car deal would stick around for another 20, maybe 30 years. We hoped that by then the price of a car would simply be the price of a car, and the “grind it out” nature of trying to buy an auto at a fair price would be long forgotten.

Well, I think we may have been wrong.

Over the past week, two memos have been leaked from major domestic automakers. One from Ford, and another from GM (screenshots below). Both of the letters are directed towards their dealer bodies, and they each make it clear: stop screwing around with customers and tarnishing our brand.

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Could the beginning of the end of car dealerships be happening right before our eyes? I think the answer is a resounding “yes”.

Why car dealerships exist

Before we unpack the memos from Ford and GM, let’s take a trip down memory lane. Why do car dealerships even exist?

Reports vary, but the first car dealership was opened in either 1897 or 1898. Automakers of this era leveraged a variety of sales channels to sell their initial vehicles, dealer partners being one of them. These partners were exactly that; partners. Dealers were not owned and operated by the automaker, instead they were independent third party businesses that agreed to abide by rules and regulations put in place by the automaker.

Automakers loved this model. It was (and still is) highly profitable for them. They loved it so much that they lobbied state-by-state to pass “franchise dealer” laws that make it illegal for a vehicle manufacturer to sell directly to a consumer, instead they have to sell through a franchised dealer.

Traditional automakers are great at designing, manufacturing, and distributing their product. They are not interested in day-to-day customer engagement, setting up service appointments, or doing anything beyond building and selling cars to their dealers.

Automakers get paid when they wholesale a vehicle to their dealer partner. Then the dealer has to (no pun intended), deal with the end user. In this way, legacy automakers have been able to separate themselves from the expensive practices of customer engagement and instead pass that along to their dealer partners.

Why do car dealerships exist? Because automakers have been able to generate massive profits from this system. However, after 100+ years, it appears another model may potentially be even more valuable for them.

Sell directly to customers

Tesla notoriously refused to sell their cars through dealer partners. Instead, the upstart EV automaker insisted on having their customers purchase directly from them. This is illegal in many states, however after lobbying for many years, most states now have “carve out” laws that allow EV manufacturers to sell directly to consumers.

Here’s example of that “carve out” language in Connecticut:

Would allow a manufacturer to receive a dealer’s license if it does not have a franchise agreement with a new-car dealer in the state, if it builds only electric vehicles and only sells the vehicles it builds, and if it does not have a controlling ownership link to a manufacturer licensed as a dealer in the state.

Nowadays EV automakers can sell direct to consumer in many states via the internet, and they are just starting to prove how lucrative this business model can be. Tesla, Rivian, and Lucid are shining examples of how valuable direct to consumer sales models can be. Tesla is a $1T+ company, and Rivian, even though they’ve only sold a few hundred vehicles is valued at north of $100B. Ford, GM, and other legacy automakers want to catch up. For perspective, Toyota, the highest valued traditional automaker, is “only” worth $330B.

market cap per car sold

The Ford and GM memos

Within the past week both Ford and GM have sent memos to their dealers that say the exact same thing: don’t tarnish our brand, treat customers well, or lose allocation of inventory from us. These leaked memos represent the first attempt Ford and GM are taking to “stand up” to their dealers.

GM letter to dealers
The memo from GM President Steve Carlisle
ford f-150 lightning memo to dealers
The memo from Ford to their dealers

Both memos reference the dealership’s franchise agreement, and both make it clear that if the dealership does not treat customers in a way that enhances their brand, they will take away allocation of inventory.

Sure, these memos represent the first time we’ve seen automakers stand up to their dealers, and for that reason, we’re excited to see them, however the issue is, if GM or Ford actually tries to enforce their own rules they’ll certainly get taken to court. Why? Because nearly every Ford and GM dealership in the United States breaks their rules, so if they begin to selectively enforce the rules, you can be certain some dealer groups will fight back.

What happens next

While the franchise dealership model has served automakers well for 100+ years, it’s clear as day that a transition away from that model is upon us. This transition won’t happen overnight, and we shouldn’t expect dealerships to simply vanish. Dealerships play a vital role in society, especially when it comes to vehicle repairs and maintenance, however it appears clear that Ford, GM, and many other automakers want to catch up to Tesla’s valuation, and one of the ways they’ll do that is by taking more control of the sales process.

Dealerships aren’t going anywhere anytime soon, but the shift away from the dealer model is happening 20 years earlier than we had imagined. It will be interesting to see how this market evolves, especially as Tesla and other EV startups continue to get praise.

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1 Comment

  1. Hal Hoadley

    I don’t understand why anyone would pay more than MSRP. It may be a suggested price but not necessarily the set price. My suggested selling price is much lower, right around the dealer invoice.
    A car is a depreciating asset, so why buy the car? If you need to have a new car you may want to consider leasing the car.
    The retail automotive dealership has always made money. Some made millions of dollars, the selling price of the car is not the only way the dealer makes money.
    But I digress. the retail automotive dealership of today (2022) is ripping off the public.

    What goes around comes around – wait and see, mark my words…

    Reply

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