Revolution In The Showroom

Finally, consumers are in the driver's seat-and pushy dealers look like dinosaurs

That sick feeling began as soon as Joan Bondio drove her new Honda Accord off the lot a month ago. Did she pay too much? Did she get enough for her trade-in? Like a lot of other car buyers, Bondio, 47, found the Darwinian car-buying process intimidating and traumatic. "The feeling that you got taken bothers you," says the Parma (Ohio) bank executive assistant. "I'd never bought a car before, and I was afraid."

That's about to change. The dreaded auto showroom, with its gilded illusion and sweaty-palmed reality, is fast becoming an endangered piece of Americana. The tradition of smarmy salesmen, high-pressure tactics, and arbitrary pricing continued unchanged for decades following World War II. But now, the forces that have lately revolutionized the rest of retailing are about to transform the way we buy cars.

Signs of that transformation are everywhere. Car shoppers are logging on to Internet buying services to peruse specifications and check prices. They're dialing up auto brokers who will handle the dirty work of negotiating for them. They're ogling the wheels at warehouse clubs, which have used the buying power of their vast customer bases to build networks of dealers willing to give cut-rate prices. They're visiting giant auto malls carrying several different lines of car, where they can--gasp!--comparison-shop. And they're bargain-shopping at used-car superstores that offer vast selection and no-haggle pricing (table). "There is no longer one way to buy a car," says J. Ferron of Coopers & Lybrand Consulting. "The consumer is making the rules."

These newfangled distribution channels are already enjoying explosive growth. CarMax, the used-car chain that electronics giant Circuit City Stores Inc. is rolling out nationwide, did an estimated $288 million in sales at just four stores last year. In 10 months on the Internet, AutoByTel helped broker more than 25,000 car purchases last year and is bracing for a fivefold increase this year. More than a half-million car shoppers have turned to Sam's Club, Wal-Mart Stores Inc.'s warehouse club, since 1991 for referrals to its dealer network. The numbers are still small in a $605 billion market where 45 million new and used cars change hands annually. But a sea change is under way, says respected automotive trend watcher J.D. Power & Associates Inc. "A powerful new force is being unleashed," says Power's Don Keithley. "People are realizing there are new choices available, and they are not going to want to buy cars the same way again."

STREET GANG. Protected by strong franchise laws, the creaky, antiquated, and inefficient dealership system is where generalmerchandise retailing was 30 years ago. But now, some big and smart money is betting that the auto showroom is finally ripe for change. Circuit City, which grew to a national powerhouse selling TVs and computers, is applying its formula to high-quality used cars. H. Wayne Huizenga, the former Blockbuster Entertainment Corp. chairman, plans to do for cars what he did for videos with a competing chain, AutoNation. Wall Street sees opportunity here, too: Financial heavyweights, including New York financier Marshall S. Cogan, Leon D. Black of Apollo Advisors, and J.P. Morgan Capital, are major investors in United Auto Group, the nation's fourth-largest new-car chain.

No one will be happier to see change than the car-buying public, which finds purchasing an automobile "the most anxiety-provoking and least satisfying of any retail experience," according to a recent survey by Yankelovich Partners Inc. "It's a game," said Rene Rouillard, a 42-year-old carpenter in Westfield, Mass., as he shopped recently for a new van for his business. "They know the rules, but you don't."

But consumers have gotten a taste of something better. The advent of superstores, shopping malls, and upscale department stores has made shopping for just about everything other than cars faster and easier than ever. The rise of giant retail chains has forced manufacturers to bring down the prices of everything from tools to televisions. Now, consumers are demanding the same selection, service, and rock-bottom prices when they buy their wheels.

The new players bring a new kind of retailing savvy to car sales. They see cars as fundamentally the same as shoes or TV sets, products that sell best with the right blend of selection, convenience, service, and price. Their methods foreshadow a time when cars will be sold in automotive supermarkets where competing brands will sit side by side like so many cans of soup.

It's a revolution Detroit views with mixed emotions. Carmakers would like dealers to improve the showroom experience. After all, they spend hundreds of millions of marketing dollars to turn their products into exalted objects of desire. And they spend hundreds of millions more to persuade consumers to step into the showroom--only to have them abused and alienated. Yet the fragmented networks of small, family-run dealers give carmakers a measure of control--control they won't have over giant retailers selling multiple brands at multiple outlets. No longer will Detroit be able to impose its choices on the marketplace, knowing dealers will strong-arm shoppers into buying whatever carmakers send them. "The world is changing," says Chrysler Corp. Chairman Robert Eaton. "We don't know where it's going to go, but we know it's going to change."

HIGH COSTS. Already, the new players are offering relief to beleaguered car buyers. Used-car superstore chains are filled with the customer-friendly amenities such as child-care centers, coffee bars, and touch-screen computers that shoppers have gotten used to in the likes of Nordstrom Inc. department stores, Ikea furniture stores, and Barnes & Noble bookstores. Salespeople on salary instead of commission provide assistance and advice rather than a high-pressure assault. The new gadgets allow shoppers to browse a huge inventory of cars marked with low, no-haggle prices. As Kelly Wilson shopped for a pickup at the new CarChoice used-car hypermarket near Dallas, her daughter played in the store's child-care center, watched by a CarChoice nanny. "Anyone with children will like this," says the 23-year-old graphic artist. "It's difficult to shop with a kid whining to go home."

Vast rows of gleaming cars, banks of computers, and pricey real estate are beyond the means of most family-owned dealerships. Those small operators just won't have the financial horsepower to match CarMax, AutoNation, and the other used-car superstore, CarChoice, backed by shopping-mall developer Waad J. Nadhir. Analysts estimate their massive stores cost $20 million to build, dwarfing the $4 million it takes to set up the average new-car dealership. "It's getting too capital-intensive to remain a private family-owned business," says Michael Lazarus, a Long Island (N.Y.) Saturn dealer whose grandfather got into the trade in 1926 by buying Brown's Auto Auction in Manhattan--then located across from a horse auction. Lazarus is afraid his sons, who will one day take over the business, won't be able to remain independent.

If they decide to cash out, they can turn to a new breed of dealer--Wall Street investors who are amassing portfolios of large dealerships. That's accelerating a long slide in the number of dealerships, which has slipped from 47,500 in 1951 to 22,400 today (chart). And it won't end soon. At the National Automobile Dealers Assn. (NADA) convention under way this month in Las Vegas, legendary adman Carl Spielvogel, CEO of United Auto, is "booked solid" meeting with dealers looking to sell. Spielvogel says his company was founded four years ago on the premise that it can "revolutionize cars the way Wal-Mart and Home Depot did to retail." In an industry that has tended to keep bankers' hours, his stores are open from 8 a.m. to midnight and feature full-service cafeterias, playgrounds, and spiffed-up waiting rooms. United Auto sells 22 brands, from Jeeps to BMWs. Business is booming at the fast-growing 41franchise chain, and Spielvogel says he may take it public.

That possibility, more than anything else, may pose the biggest threat to the status quo. With his limited resources, the independent dealer has been locked in an uneasy standoff with Detroit. A national chain able to sell shares to the public could achieve the kind of clout that has allowed Wal-Mart to dictate terms to its suppliers and to obtain huge advantages over its smaller competitors.

WHAT'S THE DEAL? Not all dealers are heading for the exits. Nine of the largest U.S. dealers fired back at the big-money players on Feb. 7 by launching Driver's Mart, a chain of used-car superstores that plans 100 outlets across the country in five years. "With outside organizations that have access to capital markets invading our industry, we must move to combine our resources," warns Donald E. Flow, a Winston-Salem (N.C.) megadealer and Driver's Mart's chairman. The dealers hired a retailing expert, former Amway Corp. executive Thomas W. Eggleston, to be CEO, and they lured automotive quality guru J.D. Power III to sit on their board. Flow says the dealers are considering taking Driver's Mart public, and industry sources say a major auto company could take an equity position.

The new superstore chains are so far concentrating on used cars, where they don't have to wrestle with restrictive state franchise laws. But that doesn't comfort new-car dealers, who depend on used cars for half of their earnings, with service and parts making up most of the rest (chart). Cutthroat pricing practices and rising overhead have sliced profits on new cars to almost nothing. And with a rich supply of high-quality, late-model used cars--thanks to the growing popularity of two- and three-year leases--and new-car prices that average $20,000, more consumers are opting for used cars.

The looming battle is over shoppers such as Cynthia Chance, 29, who swore off traditional car buying after she discovered CarMax last year. Chance, who once had a new-car salesman shout at her to call her father for help when she balked at signing a deal, says she always hated the process. "To get the best deal, I had to act like somebody I wouldn't have gone to lunch with," says the ethics instructor at Mount St. Mary's College in Emmitsburg, Md. Chance bought a Honda Accord at CarMax last year and closed the deal on a Sunday.

Buyers such as Chance have forced Detroit to take notice. Chrysler stunned its dealers and competitors last month by giving CarMax a new-car franchise in Duluth, Ga. Chrysler calls it a test, but the move has infuriated dealers. "Chrysler has opened a Pandora's box, and they'd better snap the lid back on very quickly," says Jim Muir, a Sterling Heights (Mich.) dealer. General Motors Corp.'s dealers are even more outraged. GM's marketing chief, Ronald L. Zarrella, has launched a $1 billion crusade to eliminate 1,500 of its 8,500 dealers over five years, as GM wrestles to bring its bloated retail network in line with its diminished market share.

Is it any wonder that a new J.D. Power survey finds dealers are pessimistic about their future for the first time since 1989, back when a recession was brewing? "What we're seeing in the auto business is parallel to what's happened in other areas of retailing," says consultant John Bissell of Gunderson Partners in Bloomfield Hills, Mich. "Mass merchandisers are in. The middleman is disappearing."

In the automotive supermarket envisioned by industry futurists, Ford Escorts would share shelf space with Toyota Corollas and Dodge Neons. Customers would browse the aisles, make their selections, and simply pay the price tag.

Not so fast, say dealers, who are protected by some of the strongest franchise laws on the books. Dealers provide 20% of sales taxes in many states--not to mention a hefty share of local TV and newspaper advertising--and they've used their political clout to enact dealer franchise laws that have made it hard for national retailers to enter the new-car business or for Detroit to control the pricing and promotion of its own products.

There's one common denominator in the crazy quilt of widely varying state franchise laws: Newcomers are effectively shut out of the new-car business by laws that prevent auto companies from issuing a new franchise within, say, 15 miles of another dealer. In order to grant or revoke a franchise, carmakers must go before dealer-friendly state motor vehicle boards. The net result: Dealers have more say than manufacturers over who is let in and out of their exclusive club.

"The sea change in retailing has happened all around car dealers because they've been protected by some of the most anticonsumer and anticompetitive laws in the nation," says Thomas Kinnear, professor of marketing at the University of Michigan. But J. D. Power predicts that within 10 years, auto manufacturers will begin circumventing the traditional franchise system by opening factory sales outlets and establishing new channels of distribution through national retailers like Sears, Roebuck & Co. or Wal-Mart.

"ENORMOUS COST." The franchise laws also create inefficiency and unnecessary expense. The traditional dealership system, with different stores for each brand, "adds an enormous cost to the distribution system," says Circuit City Senior Vice-President W. Austin Ligon, who oversees CarMax. "Imagine what it would cost to buy a TV if Circuit City had to have 15 different stores to sell 15 brands of television," says Ligon.

Like the mom-and-pop hardware stores and bookstores before them, the independent dealers claim they bring a level of loyalty and stick-to-itiveness a big corporation can't match. "The manufacturers want somebody with their own money invested in that store," says Frank E. McCarthy, NADA's executive vice-president. "That's the guy who is going to work the long hours to make it profitable."

But there's an eerie sense of deja vu to McCarthy's words. "Wal-Mart had the same image as CarMax when they first came in, and all the local retailers said they wouldn't be wiped out because they knew the market better," says Robert Blattberg, a retailing professor at Northwestern University. "But Wal-Mart ultimately won." Indeed, the national chains already seem to be proving they know more about satisfying the customer. CarMax enjoys an amazing 98% customer satisfaction rating, while NADA says its dealers satisfy 85% of their customers and other surveys put it as low as 65%.

Not that the auto companies are just idling their engines while outsiders redefine their business. The Japanese auto makers' luxury divisions, Lexus and Infiniti, helped establish new levels of customer pampering and showroom style. Chrysler and others distribute product information from computer kiosks in shopping malls and convention centers. Saturn is trying to remain in the forefront with multibrand used-car departments that offer the same no-haggle pricing and 30-day exchange policy as its new-car departments. And Ford Motor Co. and GM continue to experiment with a variety of one-price concepts.

Auto makers can only suggest. It's up to their dealers to implement innovations such as better customer service and low-pressure, no-haggle pricing. Of 1,200 rival dealers who attempted to imitate Saturn's no-dicker stickers, only 400 have stayed with it. The rest found the practice couldn't last in a market oversaturated with dealers who survive by undercutting their neighbor.

COFFEE SHOP? But the carmakers can't allow dealers to stay in old ruts. Chrysler is experimenting with a dealership-of-thefuture concept dubbed Modus after the custom software system it built to go with it. The company is trying the idea at an independently owned Dallas Jeep-Eagle dealership, outfitting it with so much high-tech gadgetry that the computers appear to outnumber the cars in the showroom. Shoppers can check model offerings on touch-screen kiosks or use computers to check out a database of competing models. Free gourmet coffee and play areas for kids help them feel at home.

Chrysler hopes to persuade its dealers to take the concept national. But dealers wonder how they will afford all these fancy features when their overhead costs already eat up most of their new-car profits. "My customers are not going to give me $1,000 more because of a sandbox for the kids and a computer on the floor," scoffs Martin J. "Hoot" McInerney, 67, a Southfield (Mich.) megadealer.

But many shoppers don't want to set foot in a showroom, no matter how good the cappuccino. Tens of thousands are flocking to the Internet or auto-buying clubs. Ken Ross, a software company CEO in San Francisco, recently bought a BMW 530i through Consumers Car Club, an auto broker. Ross, 53, had already gone a few rounds with a "typical car salesman" at a BMW dealership. The broker, whom Ross only spoke to by phone, went to a different BMW dealer and managed to negotiate a price of $37,500, $5,500 off the sticker. All Ross had to do was pick up his car and sign the paperwork. "I hate negotiating," says Ross, who paid a $50 fee to the broker. "You go through all that hassle, and then your buddy tells you he got his car for $100 less." Consumers Car Club, which logs 500 inquiries a day and negotiated $250 million worth of car sales last year, is taking its brokerage onto the Internet on Apr. 1.

It won't be alone. A growing number of dealers and brokers are taking to the Info Highway. AutoByTel has been brokering deals from its site on the World Wide Web since last March. It runs a free referral service with a network of 1,400 dealers, who pay $500 to $3,000 a month and agree to sell at low, prenegotiated prices. CUC International's AutoVantage service, available through online services or by phone, has attracted about 2 million members who pay $49 a year for access to its database of specs and prices. Last year, it negotiated more than 10,000 car sales and expects to almost double that in 1996.

"IT WAS FUN." Not to be outdone, some dealers and manufacturers are taking the wheel themselves on the Internet. On Feb. 5, GM launched the world's largest automotive Web site with links to each of its divisions, encompassing more than 16,000 pages of information. Meanwhile, more than 125 dealers have linked up with DealerNet, a World Wide Web site that offers competitive specs and approximate prices on cars but does not broker transactions. Even software giant Microsoft Corp. has taken a spin at providing auto services on the Web with CarSource, which offers facts and figures about most models on the market.

Car buyers who surf the Net first find they are well-armed when they hit the showroom. Alice Hill, an editor at an online magazine in San Francisco, pulled dealer invoice prices off CompuServe Inc.'s Auto Net before she started shopping for a Honda Del Sol last year. Her salesman wanted to start the bargaining at the car's $24,000 sticker price, but Hill countered by citing the invoice price of under $13,000. The salesman's "face just dropped," says Hill, who eventually bought the car for $14,000. "It was fun. I can't wait to buy another car."

Not all buying services are high-tech. Wal-Mart is dabbling in the car business. Shiny new cars are on display at some of its Sam's Club warehouse clubs. Shoppers can look at the sheet metal, but they must head to the dealer for a test drive and to close the deal. The dealers in Sam's referral network are supposed to offer club members a bargain price. Michael Mullaney went to Sam's to buy a car "because of the reputation Wal-Mart has." Then the 36-year-old Army chemical and biological operations specialist from Copenhagen, N.Y., spent less than an hour at the dealership picking up a Geo Metro. "I felt good about this because I knew Sam's had checked out the dealer in advance," says Mullaney, who says he bought his Metro for $250 over invoice.

Ultimately, retail analysts predict, consumers will force auto dealers--and manufacturers--to transform or die. For shoppers such as Harriet Grant, 34, of McLean, Va., who recently stormed out of a dealership when a salesman tried to browbeat her into a sale, car dealers' antiquated horse-trading methods couldn't disappear fast enough. "I wish dealerships could work in the same way as when I'm buying an article of clothing," says Grant. That simple plea is shared by millions of frustrated car buyers. And it seems as if they're finally being heard.

Before it's here, it's on the Bloomberg Terminal.