Caught in the Web

Automotive Industries,  March, 2001  by Maryann Keller

• E-mail
• Print
• Link

The Internet has yet to deliver on its promise of a better car buying experience. But the building blocks are there and traditional dealers are starting to see the light.

Just two years ago the Internet was seen as the technology that would finally revolutionize car retailing. Among the most ambitious notions was nothing less than the total transformation of the distribution system. Consumers would abandon dealers and, instead, point, click and purchase the exact car of their dreams through an Internet intermediary or directly from the auto company. The price they would pay would reflect the savings possible in a system that wanted to eliminate much of the dealership sales infrastructure and inventory carrying costs. The Internet was supposed to reach customers more efficiently than a 30-second, $2.5 million ad during the Super Bowl. Auto companies postulated that they would reap higher margins if they could shift to a build-to-order model that reduced incentives and other costs by exactly satisfying a customer's vehicle specifications.

If it seemed too good to be true, it was. Now the players in this experiment -- the car companies, dealers and Internet-based vehicle information and services businesses -- are trying to sort out the role the technology will play and what it means for them.

Car buyers have already reaped huge benefits from the Internet. The information they can access in a matter of minutes about dealer costs, incentives, car reviews, dealer inventory and information about the value of their trade-ins was not readily available just a few years ago. It has empowered car buyers in every element of the transaction, from vehicle selection to financing and even disposing of their used cars.

The percentage of car buyers seeking information online is rising steadily. Because the demographics of Internet users and car buyers are neatly overlaid, the industry is quickly moving to the point where nearly all car buyers will accumulate information online prior to making a purchase.

Information gathering is essentially a self-service function and much more easily performed in an electronic environment than in the real world. The purchase of a car, however, is not. Shoppers want to see the car and test drive it before they make a final commitment. They want to know that a convenient dealer will perform warranty and routine service. And they often need financing assistance in putting the pieces of the multi-part transaction together.

Looking, But Not Buying

Third party Internet companies that specialize in providing shoppers with information are thriving, whereas those that insert themselves in the transaction process are closing, combining with each other or rethinking their business models. The survivors look increasingly like extensions of large car dealer groups. CarsDirect, once the best-funded and most ambitious of these companies in its goal of remaking car retailing, is now effectively an extension of several mega-dealer groups. CarOrder is trying to acquire dealerships. And several lead referral companies have disappeared while others are developing closer ties to dealers and car companies.

The failure of these business models reflects the unique nature of the auto industry and the wildly underestimated costs of running an Internet car business. Although the auto industry is large in dollars, $400 billion or so at retail, the number of non-fleet transactions is actually quite small, numbering about 33,000 or 34,000 each day. This is a very small number compared to the volume of airline tickets sold online, the number of transactions done on eBay or the millions of books and videos bought through Amazon. Most Internet intermediaries have found that they cannot generate enough money from each referral or transaction to cover costs as well as the expenses associated with staff information systems and call centers. Simply put, the Internet intermediary appears to be adding costs to a low-margin business, and that isn't a viable business proposition.

This should not be taken to mean that the Internet has only a limited and passive role in car buying. Quite the contrary. And it in going to be dominated by auto companies and dealers rather than interlopers aiming to transform an industry. Car dealers are breathing a collective sigh of relief that they have withstood yet another assault, not unlike the hype surrounding used car superstores, auto company-sponsored consolidation and attempts to sell cars at fixed prices. Auto companies were slow to understand the internet, and early strategies seemed more like attempts at direct sales rather than truly trying to harnessing the power of this amazing technology. It's now time for automakers and their dealers to use the Internet to reduce system costs, build closer customer ties and, ultimately, cars that hit their target audience more effectively.

My own experience running priceline.com's Auto Services division provided me with a unique look at who was online, what they wanted to buy and what they actually bought.