Pub. 58 2017-2018 Issue 2

31 WINTER 2017 job she captures all of the economic upside (via store profits), whereas the manager of a company store would typically only get a bonus and a pro- motion. (And conversely, if the store starts to fail, the franchisee’s personal wealth suffers, whereas the company manager just moves on.) And a dealer, who has his own long-term capital in the game, will run the store for long-term value creation, whereas a manager would be incentivized to boost profits by any means neces- sary, and then get promoted away before things go south. Or take recall repairs: for an OEM this is a cost center (which hardly motivates the company to do anything more than minimally comply), whereas for a dealer this is a profit center (which motivates the dealer to get noncompliant cars off the road as fast as possible). Further, when a factory owns a store there is no dealer in place pushing back against bad behavior: thus ICDP sees in Europe factory stores tending to be placed in uneconomic (expensive) locations, or stuffed with unwanted inventory, or underperforming on both the revenue (used car) and cost (labor) dimensions. There is plenty of good economic research available backing up these points, whereas I have not seen any published work demonstrat- ing how or why company stores are economically superior to independent dealerships, in a real-world (as opposed to theoretical) setting. 30 • Third, for anyone other than a new entrant, the burden of moving from a dealership system to a factory-direct network would be massive and crip- pling. The tab for buying up thousands of acres of real estate, millions of square feet of buildings, and billions of dollars of inventory would be massive for any OEM. 31 Then there would be outcry from customers, as they found they could no longer negotiate price among independent dealers, but had to ac- cept “take it or leave it” company store prices. (Those readers who believe that Americans overwhelmingly prefer not to negotiate price are directed to recent Cox research on this point. 32 ) • Fourth, despite media coverage to the contrary, customers seempretty content with the dealership system. Numerous surveys back this assertion up: › Back in 2007 Consumer Reports (not a publication that could be considered biased in favor of dealers) revealed in its survey of car buyers that almost 60% were “very satisfied” with their buying experience, and another 30% “somewhat satisfied.” 33 › Similarly, J. D. Power’s 2015 US Sales Satisfaction study, which surveyed tens of thousands of customers, found that 80% rate their overall new-vehicle purchase experience at the dealership as “truly exceptional” or “outstanding,” › And in January 2016, Car & Driver’s survey of thousands of customers found a similar 80%of themas “very satisfied” or “extremely satisfied” with their deal- ership experience. And of course, dealers are constantly up- grading their processes and people. Thus wefind that younger visitors todealerships are among the most satisfied with the dealer system: a recent Deloitte survey found thatmillennialswere twice as likely to have a positive image of dealers as did older generations (and millennials were also more likely to assert that salespeople treated them fairly and with respect. 34 ) Thus it seems probable that some of the loudest critics of the dealership systemare basing their critique on outdated stereo- types, which are not supported by actu- ally speaking with present-day customers about their real experiences. While there is nodoubt that there is room for improvement on this front, there is also in our view no doubt that the reality of the dealer experience is better than its stereotypedperception…which is steadily catching up. (This is an example of the infamous “Senator Effect,” wherein any American can assert that “all politi- cians are crooks,” while simultaneously stating that “my Senator is of course an exception.”) Finally, we have to point out that there is of course no magical law of nature that ensures that service at a company- owned store is inherently better than at a franchise: we would hold out as an example of the contrary result the higher levels of service offered at one’s local hardware store, versus at the big- box home centers (and theMcDonald’s point made earlier). However, the outlook is not entirely against direct sales. Our interviewees did believe that there would be inroads made by factory-direct systems.Therewere two reasons for this: • First, of course, Tesla has shown that, at least for a high-end car with a unique value proposition selling in small volumes, a direct system can seem to work. There was much skepti- cism among our interviewees that the Tesla system will scale well to handle higher volumes of new sales and a 30 See for example various research papers by Benito Arrunada of the Universitat Pompeu Fabra and the Barcelona Graduate School of Economics, at www.arrunada.org 31 As an aside, one dealer commented: “Do you think any OEM in its right mind would want to take on the Takata recall, which is sweeping not only through its own cars at its own dealerships, but through the other-brand used cars they are handling?” 32Forexample,seeCox’s“CarBuyeroftheFuture”presentationattheirvery informativewebsite ,www.dealerlearningcenter.com: over half of surveyed customers expressed a preference for negotiation. This does not mean that all customers want to negotiate, or that all customers do not: as always with real humans, there is a mix of preferences. 33 From the Consumer Reports website, http://bit.ly/2ciVWKd 34 “2014 Global Automotive Consumer Study,” Deloitte Touche Tohmatsu Limited.  DEALERSHIP OF TOMORROW — CONTINUED FROM PAGE 30  DEALERSHIP OF TOMORROW — CONTINUED ON PAGE 33