Downloading Their Dream Cars

Car buyers are using the Internet to snag great deals

When Rhona Pearl wanted to buy a new car in December, she did what a growing number of savvy shoppers are doing--she turned to the Internet. Looking to bargain up from the dealers' invoice instead of bargaining down from the sticker price, Pearl, a Manhattan Beach, Calif., marketing specialist for Nestle, used the World Wide Web to pin down dealers' wholesale costs. Then she asked for bids from online car-buying services Microsoft CarPoint and Auto-By-Tel. Their dealers got back to her the following day, and Pearl drove off in the car of her dreams, a sporty jet-black 1998 Honda Prelude that was only $500 above the invoice price. "It was very, very simple, a pleasurable experience," she says. "It took all the game-playing out of buying a car."

Whether it's to look up information, get a dealer referral, or actually make a purchase, more consumers are using the Net to take the shock out of sticker prices. Market researcher J.D. Power & Associates Inc. says 16% of new-car buyers used the Web for shopping last year, up from 10% the year before, and 4% went so far as to try out an online buying service. Industry experts figure that 2% of the 15 million new cars sold last year were a direct result of purchase requests funneled to dealers by such services as Auto-By-Tel,, and CarPoint. That's roughly $6 billion in business.

And that's just a smidge compared to what's ahead. A January survey by dealer consultant Dohring Co. in Glendale, Calif., found that 10% of consumers said they would be willing to buy a car online, and without a test drive, up from 4% a year earlier. "Realistically, we think two years from now half of all new-car buyers will use the Internet in the shopping process," says Thomas G. Libby, a director at J.D. Power in Agoura Hills, Calif.

That could have a profound impact on car dealerships and auto makers. Armed with information from the Web, buyers are already beginning to exercise more bargaining power than ever before. That's bound to force selling prices down, slicing into the dealers' already thin margins. New cars, for example, gross dealers an average of $1,440, or 6.4%. With cybershoppers saving a couple hundred bucks each purchase, that could shave the margin by nearly a point. The result: Further consolidation among dealers that don't have enough volume to weather lower margins.

Secretly, carmakers couldn't be happier. With distribution costs making up nearly a third of a car's costs, many auto makers have been trying for years to reduce the number of dealers to make the system more cost-effective. Four or five large dealerships in a metropolitan area could cover the territory at a lower cost and higher profit than a dozen or more do now. "The Internet is helping accelerate the trend toward consolidation," says Matthew J. Ericksen, vice-president of Boston Consulting Group's Chicago office.

CUSTOMER CONTROL. It's also helping carmakers get Net-savvy. Today, Chrysler Corp. and General Motors Corp. are taking a Web page from online upstarts. Both are experimenting with their own Net sites that link online shoppers to dealers in a handful of regions. Now Chrysler is hatching a plan to go nationwide. "For the first time, the customer is going to control the retail system," Chrysler Chairman Robert J. Eaton told dealers at the National Automobile Dealers Assn. meeting in late January.

Chrysler's Web site has a "Get a Quote" feature that allows buyers in Maryland and California to specify the car they want, search out a dealer, and get a price. That's led to 600 car sales in its first six months. GM offers something similar in the West. More than 400 of its 700 dealers in four Western states have gone online with GM's BuyPower site, which lets shoppers search dealers' inventories for cars. GM BuyPower has had 240,000 visitors since its September launch. The company is considering taking the system national.

Other carmakers, including Ford and the Japanese outfits, are less aggressive with their Web sites. They offer little more than electronic brochures with prices, specs, and local dealers. "For most manufacturers, the Internet is still something of a blind spot," says Jeremy P. Anwyl, a Santa Ana, Calif., auto-retailing consultant.

Indeed, the carmakers are in a bind. As much as they'd like to use the Net to direct sales to high-volume dealers and get rid of the weaker ones, they don't want a dealer backlash caused by telling consumers where to get the best price. And, because of state franchise laws, carmakers find it difficult to deny dealers access to their sites. "They're looking for ways around the laws, like letting only dealers with the highest customer-service ratings get at their Internet customers," Ericksen says.

AMMUNITION. So how does it work? Typically, shoppers log on to the buying services or information sites like Edmunds and Kelley Blue Books to learn the invoice price of a car, options, and to figure out how much their trade-in is worth. Some stop there. "It looks like 60% to 70% of people coming to our site never want a referral," says Alex Simons, product manager for Microsoft Corp.'s CarPoint. "Basically, they're arming themselves for a trip to the dealer."

That's how Pearl started, by taking her newfound ammunition to a local Honda salesman. "I came in with everything on a spreadsheet. It kinda blew him away," she says. "He kept leaving to `check with his manager,' but every offer he came back with had some kind of spin on it." So Pearl went back to her computer and submitted purchase requests to CarPoint and Auto-By-Tel.

Those services sign up dealers who pay a fee to receive online referrals. Auto-By-Tel, for example, charges dealers from $500 to $2,500 per month, depending on the brand or franchise, location, and territory size. In return, they get the right to all the referrals from a group of ZIP codes. Others, including CarPoint and, aren't as exclusive. They'll sign up competing dealers and let the shopper pick from them. The dealers agree to contact the shopper by phone with a best-price deal.

Still, the electronic car-buying services are far from perfect. For one, there's no guarantee that the service will send the request to a dealer. can't deliver fully half the requests it gets simply because it doesn't have a dealer close enough to the buyer, admits co-founder Payam Zamani.

Some dealers even welch on the deal. Ask Alison Ross, who runs a small business in Atherton, Calif. Ross put in a bid to Auto-By-Tel last summer, but after they didn't respond, she called them. They gave her the number of a dealer in her area, who didn't call her back. So Ross calculated the price from information on Auto-By-Tel's site. But she was able to find the car cheaper in a local dealer's showroom.

The services are beginning to crack down. "Some dealers bought in to secure the territory, but then they don't service it," says Peter R. Ellis, a former car dealer who founded Auto-By-Tel Corp. in Irvine, Calif. Auto-By-Tel replaced 150 of its 2,700 locations last year, he says, "and we'll drop 400 or 500 more over the next couple of years."

For dealers who get it, the system works. Don-A-Vee Auto Group in Placentia, Calif., the state's largest Jeep dealer, now does nearly 25% of its new-car business through the Web, up from less than 5% a year ago. It converts about 50% of its referrals into sales, well above the 18% to 20% closing ratio that the buying services say is usual. "It didn't work until I set up a separate sales force to handle the Internet," says Clive Skilton, the company's owner.

The difference: Inquiries now get an immediate E-mail response, and the sales team works on salaries instead of commissions. Skilton can offer deeper discounts to consumers because he eliminated commissions, and Web referrals cost less than advertising, which can run as much as $450 per car.

For those that have computers, that's good news. They'll get the best prices, and without having to fight with a salesman until they're red in the face. For the others--well, all you have to do is outmaneuver that guy in the goofy tie.

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