The Great Disruption Comes to Auto Dealers

The Internet is making the dream of low, no-haggle auto pricing come true.

At the turn of the millennium, when I was in business school, the auto dealership business model seemed ripe for disruption. Dell Inc. was already doing a bang-up business building computers to order. It seemed only a matter of time before General Motors Co. did the same, and we could buy our cars easily over the Internet rather than having to haggle with a dealer.

Ah, the optimism of youth! Ten years later, auto dealers are still very much with us. It turns out that building and selling cars is a bit more complicated than doing the same with computers. Oh, and auto dealers are extremely well connected in Congress and especially in state legislatures; they are often among the richest people in a legislator's district, which has translated, over the years, into protective franchise laws that make it very hard for automakers to prune their dealer networks.

And yet, the dream of low, no-haggle pricing seems to be moving closer. The Internet didn't get rid of the dealers, but it forced them to become much more competitive. Pricing is much more transparent, thanks to a wealth of Web-based information, and because dealers are now advertising. Lower your price a bit, and you'll poach customers who in the old days might not have thought to check a dealer an hour and a half away when they had to make inquiries by phone. But they'll happily drive that far to save a few hundred dollars.

The result, reports the Wall Street Journal, is falling profits for dealers, with some moving toward no-haggle pricing:

According to AutoTrader Group, a research and marketing firm, the average car shopper spends more than 11 hours online researching cars and only 3½ hours offline, including trips to the dealership. Two years ago, the average time spent offline was more than six hours.

The economics is forcing some of the changes. Average gross profit on a new-car sale dropped to $1,283 last year from $1,531 in 2002, according to the National Automobile Dealers Association.

Average salary of a sales person rose to $63,800 last year from $45,940 in 2002, but that is only slightly ahead of inflation during the same period, said Ted Kraybill, president of DeltaTrends, a firm that studies workforce trends at car dealership.

Responding to such trends, Spitzer Auto in Ohio got rid of sales commissions three years ago, and now pays all its salespeople a flat rate for each car they sell and a twice-monthly bonus for hitting sales targets.

The chain also instituted a no-haggle policy, setting an advertised price and sticking to it. "The customers like it because they don't feel pressured," said Jeff Deisz, a 30-year-old salesman at Al Spitzer Ford in Cuyahoga Falls, Ohio.

One of the things I learned in business school is that incumbents have more ability to resist disruption than you'd think -- by regulatory and legal means, of course, but also by co-opting the disruption. Incumbents often have the complementary assets, such as marketing and sales teams, to maximize a disruptive technology's commercial value. General Electric Co. did not invent the CAT scan, but the technology has made the company a lot of money.

Still, one of the things I learned after business school is that if the disruptive force is powerful enough, it will eventually breach even the most impressive walls that incumbents can erect. That's a lesson the dealers seem to be learning right now.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.