Cliff Banks - The Banks Report

Direct-to-Consumer Model “A Disaster Waiting to Happen” for Automakers

April 17, 2022 — A direct-to-consumer sales model appears to be a non-starter for Toyota as sales chief Bob Carter calls it “a disaster waiting to happen.”

Carter provided his perspective on a wide range of topics during an on-stage interview with Jason Stein, president of Motormindz, at the NADA/J.D. Power Automotive Forum in New York last week.

(See the entire interview Here.)

Calling himself “unique in the industry,” Carter, Toyota North America’s long-time executive vice president of sales, cautioned franchises “contemplating going to direct sales” need to understand that the dealership service department is a “competitive advantage.” He tells the audience to “Give me one reason why you think direct sales is the direction of the future, and I’ll give you 20 reasons why I think it’s a disaster waiting to happen.”

The idea of an automaker selling its vehicles directly to consumers is considered by many dealers to be one of the most dangerous threats to their businesses over the next few years because it would put them in direct competition with their manufacturers.

Although it may be nearing ancient history territory now, Ford Motor Co.’s 1998 Auto Collection initiative in which it acquired stores in five markets for the purpose of selling vehicles via factory-owned stores, still rings loudly in dealers’ memories. The initiative came to an ignominous end twenty years ago when Ford sold its last Collection dealership, Murray Ford in Utah.

General Motors flirted with the idea in the late ’90s but scuttled its plan in 2000 following a backlash from its dealers.

Uncertainty about the retail model has exploded again in recent months as comments from Ford Motor Co.’s CEO Jim Farley and Stellantis’ CEO Carlos Tavares both indicated before the National Automobile Dealers Assn. convention earlier this year that their current distribution models add about $2,000 to the cost of each vehicle when compared to Tesla’s direct-to-consumer model.

Meanwhile, Ford is currently working with its dealers to develop a new franchise agreement that reflects the changes in Ford’s new corporate structure that has separated its electric vehicle, internal combustion vehicle, and commercial vehicle operations into three divisions. The new agreements are a work in progress, but likely will push Ford’s 3,100 dealers to also separate their operations. Dealers likely will have to opt in to sell EVs. Choosing to do so may require new, yet smaller showrooms, carrying less inventory, and selling vehicles at Ford’s established prices — meaning, agreeing to not marking up prices on vehicles in high-demand.

In Europe, and other parts of the world, certain manufacturers are abandoning the dealer model and are replacing it with an agency model. In December, Mercedes Benz cut a deal with the European Association of Mercedes-Benz Dealers, to move to an agency model by 2023.

While details are still being hammered out, the new strategy likely will result in a significant number of dealerships being cut. The model will turn Mercedes dealers into delivery centers.

The manufacturer will own the inventory — not selling it to dealers as it does today. Customers will pay Mercedes directly, but will take delivery of the vehicle at a delivery center. Mercedes will pay dealers a fee for each vehicle delivered along with paying a set fee for service-related work performed.

The model also provides Mercedes with complete control over its retail process. Other manufacturers, such as Volkswagen and Stellantis, are moving to an agency model in Europe in the next few years also. Toyota, however, is sticking with its dealership model.

Automakers do not have the ability to move to an agency-like model here in the US due to strict franchise laws governing the relationship between a manufacturer and its franchisees (dealers).

However, it appears certain manufacturers are looking to get as close to the line as legally possible — meaning, they may not want to assume all the risk and responsibility of selling and servicing vehicles, but they most likely want to control the process.

At least two dynamics are driving the agency model move.

First, Tesla appears to be the benchmark several manufacturers are studying to determine whether moving to either a direct-to-consumer or agency-like model is feasible.

Elon Musk, for the most part, has successfully grown Tesla here in the U.S. without a dealership model. It’s on track to sale approximately 320,000 vehicles in the US this year. And Tesla’s meteoric share price has automakers jealous.

Second, the semiconductor shortage that began nearly 18 months has created an earth-shattering shortage of new vehicles. This has led to an environment in which many consumers are ordering vehicles and waiting months for them to be delivered. Add to that, record new vehicle transaction prices that reached above $47,000 in December (based on Cox Automotive data).

Automakers now believe customers are willing to pay higher prices without negotiating and engage in a true build-to-order model.

Here’s the challenge for dealers. The inventory shortage will not subside till sometime late in 2023 or early 2024 — and that’s assuming no other shocks to the global supply system occurs.

Therefore, gaining clarification on what the industry looks like when inventory levels start to return is a guessing game.

In our opinion, here are the dynamics dealers and the greater auto retail industry should be watching:

  • Tesla’s brand — as long as it is reliant on Musk, the long term success is questionable. He’s a genius, but also a wildcard who has avoided thus far any major blowback on tweets or questionable moves he’s made. We also believe Tesla is close to reaching a volume level in the U.S. where managing the sales and service of its vehicles will need some type of dealer/retailer model.
  • The success or failure of EV manufacturers such as Rivian or Lucid in selling directly to consumers. If those models hit speedbumps, the model will begin to lose its lustre with investors. But, if they take off, dealers here will find their manufacturers pushing harder to change the retail model.
  • Watch what happens in Europe closely. It is a different market than the U.S., but the dealer model was still successful there. If Mercedes and others are successful with their agency plays, that will strengthen their resolve to push harder here in the U.S.

It will take at least three years before the industry knows how these moves will play out.

For now, it’s a roll of the dice.

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