When will car dealers get with the web?August 14, 2013: 5:00 AM ET
Online car shopping has been perpetually around the corner.
By Doron Levin, contributor
FORTUNE -- For a century or so, the shopping ritual at dealer showrooms for new and used vehicles hasn't changed much, apart from more comfortable chairs and the addition of latte machines.
But the Internet is unraveling the essence of new-car retailing, arming shoppers with more information than ever about features and prices, as well as expert reviews. Will shoppers soon be able to take the next step and order new cars online, like books, laptops and shoes?
The debate over Internet vehicle sales rages, since automakers see it as a way to slash distribution costs by hundreds, and perhaps a few thousand dollars per vehicle. Dealers are aghast: They have shielded their franchises in every state with legislation. Many view Internet sales as a means of undermining them. Dealers assert that "cars aren't books or shoes" and are best sold in person by their sales staff, a process that allows the shopper to test the vehicle, as well as explore financing and trade-ins.
Tesla Motors (TSLA), the groundbreaking electric-vehicle manufacturer founded by Elon Musk, takes orders for its Model S sedan, which starts at $70,000, on its website. The cars are delivered either at one of its 30 company-owned stores or can be drop-shipped to a buyer's home. Tesla, clearly, is bucking law and tradition. "In Texas, where the law precludes delivering directly to customers, we do so through third-parties," said Shanna Hendriks, a Tesla spokesperson. "We're not saying we'll never have dealers; but that model doesn't make sense for us now."
Seth Berkowitz, president and chief operating officer of Edmunds.com, said "the current franchise system makes it difficult to imagine a time when consumers can order new cars online completely separate from a specific showroom experience." Berkowitz said Edmunds is offering a feature that would allow shoppers to know exactly what a specific car will cost before they come to the dealership.
Because the market for used cars isn't protected by new-car franchise laws, it may provide a more promising opportunity for online vehicle sales. eBay Motors, a division of eBay (EBAY), offers thousands of vehicles online for sales between private parties. Many used-car dealers also use the digital platform and pay a listing fee.
Carvana, a venture sponsored by DriveTime, one the nation's largest used-car operations, has begun selling late-model used premium and luxury models on its own website. Carvana operates for the time being only in Atlanta and its environs but hopes to expand nationwide. "What we've learned from our early experience is that shoppers like our on-line tools and money-back guarantee," said Ernie Garcia Jr., Carvana's chief executive officer. Barely in business for eight months, Carvana declines to specify how many vehicles it has sold, except to say that the rate is accelerating.
Garcia did say that the first hundred vehicles sold by Carvana reflect what he called a "promising" trend of high satisfaction among buyers. Four buyers of the first hundred weren't satisfied with their purchase and exercised their right to trade the vehicles they bought for another. Only one of the hundred demanded a refund.
Garcia said that sales of new and used vehicles at dealerships, in the conventional manner, reflect about "$2,000 a car" in sales, general and administrative cost. He regards that amount as margin that can and will eventually shrink as online attracts more vehicle shoppers.
Jeff Jones, Internet director for Al Serra Auto Plaza, a new-car dealer in Grand Blanc, Michigan, said his company is cooperating in an on-line pilot program with General Motors (GM). Visitors to GM websites can "build" a vehicle and equipment online -- the last step, the transaction, takes place at the dealership. "It still takes a human element to make sure the customer is eligible for financing and to see if the customer is choosing the right vehicle for him or her," said Jones.
New-vehicle sales online haven't arrived, and perhaps may never. Yet that day feels as though it's drawing closer, especially for consumers who will choose anything and everything -- including a spouse -- using keypad or mouse.