Shopping for furniture or appliances or other consumer durables is pretty straightforward. You look up what items are for sale and what they cost, you decide what you’re interested in, and then you can pay. Sometimes the item you’re looking for isn’t in stock locally…so you’re told you’ll have to wait a few weeks for delivery.
With cars, though, everything is nuts. You need to go from dealer to dealer, each of whom has his own inventory. One guy only has blue paint. The other guy doesn’t have the blue paint, and also only has dark gray seats. And each has his own fake sticker prices and complicated cash-back offers. It’s no wonder 83 percent consumers say they would rather skip the haggling, and a third of people say doing taxes is less annoying than working with a car dealer.
But it’s not just the hassle. State bans on direct sales turn out to cost consumers an enormous amount of cash. It’s an enormous problem, and it warrants a federal solution.
Cars are the most expensive consumer product that the typical consumer buys. And while it may seem obvious that cars are expensive due to the material and labor required to build them, the logistics of distributing cars is actually a very expensive part of the process. Research by Eric Marti, Garth Saloner, and Michael Spence has concluded that as much as 30 percent of the cost of a car is the cost of distribution…
And yet there is little innovation in the distribution process, largely because distribution needs to be run through a dispersed network of dealerships. What’s visible about this to consumers is the limited choice and anachronistic haggling involved in the dealership model. The more economically savvy will note that for the dealerships to be profitable, consumers must be paying an extra, unnecessary markup.
…The most expensive part of the whole process is hiding in plain sight — it’s the stockpiles of unsold vehicles sitting around on dealers’ lots. He observes that in late 2008, there was a staggering $100 billion worth of unsold dealer inventory, with an annual carrying cost of $890 million.
In other words, it’s a huge pile of waste. At any given time there is a vast quantity of newly built cars sitting around unsold, and the price of the cars that are sold needs to be high enough to cover the costs of building and storing the unsold ones. Bodish cites a Goldman Sachs analysis indicating that replacing the current inventory-heavy method with a more efficient build-to-order method could reduce costs by 8.6 percent. Real-world experience from Brazil, where Chevrolet sells Celtas direct to consumers, shows a somewhat more modest savings of 6 percent relative to what’s paid at traditional dealerships. Either way, for a product that costs tens of thousands of dollars it’s a meaningful saving — over and above the large increase in convenience.
The issue of direct auto sales is frequently in the public eye these days because of Tesla. Tesla does not work with car dealerships. Instead, the company owns its own showrooms and sells cars directly to consumers. Every once in a while a state acts to ban these direct sales…and stories get written about it. But the real story here is much more general than Tesla. As Federal Trade Commission economists have written, protectionist laws that defend the interests of car dealerships over the broader public exist all across America.
The only reason Tesla is able to sell directly at all is these laws are frequently written so as to protect existing dealership networks. Since Tesla is brand new, it has no existing dealer networks to circumvent, and it is able to operate legally in many states until new laws are passed to block it…
At the national level, a coalition for reform could be built on legislators from car-manufacturing regions, principled free marketeers, and reform-oriented liberals. The fact that the Obama administration’s economic team has already weighed in against direct sale bans gestures toward the possibility of bipartisan cooperation.
Matthew Yglesias gave us a useful article. One that provides ammo for any group prepared to go to bat for consumers. Don’t count on anyone with that word in their corporate trademark; but, there may very well be one or another progressive group ready to pick up on this as a single-issue campaign.
Matt has one thing wrong – I believe. So-called local dealerships are about as local as local TV stations. That’s why you’ll see new Fords and Volvos on the lot of a Chevy or Jeep dealer. Just more shiny brought in from other dealerships in the group to fill-in price points and demographics on display.
I bought my Dodge pickup 21 years ago from a family-owned operation with 2 dealerships in the state. He’s gone. That same store is now one of 129 dealerships in 14 states – which is only the 7th largest retail car chain in the country.