Traffic Jam - franchise laws restrict online car sales in many states

Reason, July, 2000 by Diane Katz, Henry Payne

"The Internet has changed everything," says Federation spokesman Jack Gillis. He sees the enormous consumer benefits that online booksellers have brought to the traditionally bricks-and-mortar book trade and believes that the Amazon.com model would liberate the car shopper as well. "Anyone who can sell a car should be able to," he adds. "It would put a lot of price competition in the marketplace because you would eliminate the immediate problem, which is the inability of the manufacturer to sell directly to the consumer."

Smart dealers are embracing the Internet, either by hosting their own Web sites or by cooperating with online brokers who act as intermediaries between buyer and dealer. But they remain a minority. In a recent test of online auto brokers, Consumer Reports found that only 35 percent of shoppers received a quote within 48 hours, and 22 percent were told they would have to visit the dealership to get a firm price.

Their worst fears notwithstanding, dealers wouldn't just disappear in the absence of franchise law. There are plenty of people who would prefer to actually sit behind the wheel rather than take a virtual test drive. And the demand for service--for which dealers earn their biggest return--would undoubtedly continue.

But consumers clearly want an online option. A recent survey by consumer-research firm J.D. Power and Associates found nearly half of respondents would prefer to buy factory-direct even if there were no cost advantage. And when surveyed about potential savings through direct purchase, nearly 70 percent indicated they would buy from the manufacturer. Aside from cost savings, most respondents said they simply want more freedom to customize a vehicle and to avoid the often laborious haggling over price.

"Dealers need to take a long, hard look at the frustration causing consumers to vocalize their desire for factory-direct sales," said Chris Denove, director of automotive retail/distribution analysis for J.D. Power. "Although dealers are likely to stay, the franchise system as we know it is ripe for fundamental restructuring."

Automakers are fully aware of customer frustration, but still shy from publicly advocating repeal of franchise laws in the face of fierce dealer opposition. No manufacturer wants to antagonize the customer's most direct link to the company. And this is particularly true of dealers who sell more than one vehicle brand, and who therefore could play favorites. An experiment in manufacturer-owned dealerships initiated two years ago was quickly abandoned in the face of bitter opposition from the National Automobile Dealers Association (NADA). Ford instead is testing factory-direct sales in Belgium. And GM has formed an advisory council to incorporate the Internet into the franchise model.

Online brokers, too, are reluctant to challenge franchise law for fear of vexing the source of their product--the dealers. Yet as long as companies like CarsDirect.com are forced to buy vehicles through the franchise monopoly--effectively guaranteeing a double mark-up--savings to consumers will be slim.