Old Carmakers Learn New Tricks

Detroit counters upstart retailers with its own innovations--and customers win big

Ani Dominguez of Oklahoma City and her husband drove their battered Nissan Sentra an extra year simply because they dreaded the thought of haggling for a new car. "It's incredibly painful and such a waste of time," Dominguez says. After they finally forced themselves into the market, they spent weeks sparring with auto salesmen. Then they decided to try something new. Dominguez zapped an E-mail one evening with their preferred model and target price to Autobytel.com, an Internet shopping service. Thirty minutes later, they had a response from a local dealer. By 5 p.m. the next day, they had a shiny '99 Ford Explorer XLT in their driveway. "If we had known we could have done it that way, we would have done it from the beginning," Dominguez says.

Consumers have never had so many choices when it comes to car shopping. After decades of business as usual, car retailing has seen wave after wave of new formats hit the market in the past ten years, from car superstores to online referral services to factory-owned showrooms. Catering to customers like Dominguez, who are sick of high-pressure tactics and inscrutable pricing, these new players have gained a toehold against the entrenched dealer networks.

Now, these formats are battling it out for customer loyalty. On one side are investors and retailers bent on bringing new techniques to the car business. On the other side, carmakers and dealers, who are increasingly adopting the strategies of the newcomers in their bid to keep control of the market. Unthinkable just a few years ago, Detroit auto makers are experimenting with everything from the Internet to company-owned megadealerships. The only sure winners so far are consumers, who have more information and are cutting better deals, no matter where they shop. "The power has really shifted to the consumer," says Jeremy P. Anwyl, president of Marketec Systems Inc., of Santa Ana, Calif. "It's almost like it's get-even time."

Nowhere is that more apparent than on the Internet, where companies such as Autobytel.com and AutoWeb.com have added to the erosion of both the average transaction prices and the profit for dealerships. The sites, which act as referral services, provide detailed information about prices, models, and extras. They make their money by collecting fees from their member dealers who do the actual selling. By playing matchmaker they have helped to shave the price that consumers pay. "The Web has democratized car buying," says Watts Wacker, chairman of consulting firm FirstMatter LLC in Westport, Conn.

Even so, the online referral services have only captured a sliver of the market. Last year, 25% of all new car purchases were researched using the Internet, reports J.D. Power & Associates. But fewer than 2% of all new cars sold last year were purchased using an online referral service. Still, the Web's growing popularity as an information resource is expected to morph into more E-commerce in the near future. Forrester Research Inc. of Cambridge, Mass., predicts 470,000 cars will be sold--with no dealer involvement--via the Internet by 2003.

Despite the projections for fast growth, the online referral services are still struggling to refine their tactics and generate reliable profits. None has figured out how to make money on lucrative add-ons such as financing or warranties. And they're having trouble instilling loyalty in their dealers. "Nothing is settled when you are coping with 30% to 40% dealer turnover every year," says Mary Tolan, global managing partner for retailing at Andersen Consulting.

"SNEAK PREVIEW." The Internet players aren't the only new-wave car retailers that have hit a few potholes. One of the most revolutionary concepts, the car superstore, seems to be stuck in neutral. There was a great deal of hoopla when they appeared earlier in the decade. But the concept, which gathered brands from multiple carmakers under one roof, now commands less than 1% of the total car market. Circuit City Stores Inc. had the early lead, opening its first CarMax Auto Superstore in Richmond, Va., in 1993. But the 29-store chain still hasn't turned a profit. Now, it's putting its expansion plans on hold. The company will maintain superstores in smaller cities, but in bigger markets will add small stores. CarMax is also adding new-car franchises. "We know the concept works, we just have to tweak it," says President W. Austin Ligon, who predicts CarMax will be near breakeven this year.

Republic Industries Inc.'s AutoNation USA is also hustling to find the right formula. Thanks to an aggressive acquisition spree, it's added more than 400 new car franchises to its original used-car superstores. It's also experimenting with a concept in Denver, where 17 stores have been combined under the John Elway AutoNation name, hoping to build on the football star's fame. There, new and used vehicles carry no-haggle prices. And coming soon: a nationwide marketing program designed to establish the AutoNation brand. John H. Costello, a marketing exec recruited from Sears, Roebuck & Co., where he helped craft the successful "Softer Side of Sears" campaign, will lead the branding charge. Of the new strategy, Michael Maroone, head of Republic's automotive business boasts: "We think this is a sneak preview of auto retailing."

Traditional dealers and carmakers aren't waiting for the feature presentation to make their moves. To battle the Web-based competition, carmakers are jumping into the online game. General Motors Corp. has a new nationwide online buying service called GM BuyPower, which gives consumers access to every vehicle on participating dealers' lots as well as independent data about competing models. With such a comprehensive service, says Ann Blakney, national director of BuyPower, consumers don't need a middleman. Sniffs Blakney: "We're in the car business. They're in the information business."

Whatever it's called, carmakers are clearly trying to maintain control over the flow of cars to the public. J.D. Power researcher Chris Denove predicts the Internet will become a "war zone" as auto makers race to launch Web sites with the same features as those offered by the independent services. "The manufacturers don't want third parties to control the consumer," he says.

Carmakers have an answer to superstores, too: General Motors and Ford Motor Co. are rolling out factory-owned stores. Ford has invested in dealers or groups in five markets and plans to open four or five more this year. The idea is to head off publicly owned chains like Republic, says Group Vice-President Robert L. Rewey: "With the rapid expansion of public ownership, we got involved with [the Ford Auto Collection] to give protection to our brands." GM, meanwhile, has opened its own dealerships in several markets, and its Saturn division has formed a subsidiary that is investing in dealerships to keep superstore chains from buying them.

So how will cars be sold in the new millennium? So far, traditional dealers still control the vast majority of car sales. But many have been forced to find new ways of doing business. Fred Hall, CEO of Fred Jones Auto Collection in Oklahoma City, says his stores now use no-haggle prices because consumers can obtain wholesale prices over the Internet anyway. Profits come from the higher volume and loyalty the tactic generates, as well as repair and other services, he says. "I think the customer will be within $100 of knowing what the price is going to be, so I might as well set it there," he says.

One thing's for certain: Given a taste of variety--and power--consumers are becoming adept at working the field. Take Barry Farner of Summerville, S.C., and his search for a hard-to-find pewter Chevrolet Silverado. He tried dealers. He surfed the online-broker sites. And he finally hit pay dirt with GM BuyPower: The vehicle he wanted was waiting for him at a dealership 50 miles from his home for just $98 over invoice. Plus, the dealer offered him $2,500 more on a trade-in than any other dealer he had talked to. "I thought, `This is fun. This is easy. This is the way to do it,"' he says. Now, the pressure is on the growing array of car retailers to keep the rest of the buying public happy.

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