Why dealerships exist for vehicles?

[bpreynolds]

It’s the information age, I’m a librarian and 46 years old (so a little tiny bit of my own worldliness), and I’m sure I can find this info with little effort but it’s always nice getting it from experienced and worldly folks here.  And too, I’m not even close to being an economist, historian, or businessman so this is likely why I’m missing the answer here.  And let me first say right up front, I have no beefs remotely with dealers.  I like the ones I deal with just fine. 

So among the many things I often ridiculously ponder  I wonder how the idea of “dealerships” got started for motor vehicles.  And, I guess, primarily how buying a car, motorcycle, etc. ever became different than say buying an item with so called standardized pricing. Like, why doesn’t Toyota just have Toyota “shops” instead of dealerships with all autos sold at a given and fairly even across board price?  Quite obviously, the dealership and salesmen profit from this current setup but does the manufacturer really profit greatly from a dealership so to speak?  Why this over and above say a standard markup on the item sold at a shop setup.  Okay, as I type this out it starts to sound kinda ridiculous a little but I’d still love to learn some history and such on it. 

[Kev m]

I'll be curious to hear the answers from those who know more...

...if I had to take a SWAG I'd say it was a combination of the following:

1. Vehicles were (and certainly are now) too expensive for the average consumer to walk in and plunk down cash and drive away.

2. Vehicles often needed dealer set-up/prep.

3. Vehicles needed a lot more service (and warranty work).

and over time dealer franchise agreements and dealer associations made it the only practical or legal way to do business in most areas, though it seems that's currently being challenged (and sometimes successfully) by Tesla in a direct-to-customer business model.

[Orange Guzzi]

Actually your question started out a little ridiculous and end up being quite logical.  I have ask the same question.  The health care business model is the same.  I have ask why I can go into a McDonald or other business, tell them what I want, how much, color and other descriptor's and pay walk out the door after a minimum wage 16 year old figured the price.  I have walked into a medical facility and ask to have an injection of medicine.  Ask the price only to be told they have know idea and were unable to give me an  answer for weeks. 

It would be nice to make such purchases without the hours of debating and disagreeing and emotions.  I have seen a 1/2 hour transaction take 5 hours to several days. 

[Kev m]

I see I didn't explain my how my answer relates to the business model of standardized pricing.

1. Vehicles were (and certainly are now) too expensive for the average consumer to walk in and plunk down cash and drive away.

Big purchases like vehicles or homes or anything where there is a likelihood of loans due to the size of the transaction means that even tiny changes to the margin can mean for large profits. It opens up a large field for negotiation and attracts business from multiple sides:

*Competition for your business, as the one who can truly be most efficient can offer the best deals while still making the most money.
*Other parts of the deal to make profit from - anything from offering loans to service etc.

But it all comes back to most people can't just go into the dealership and plop down the cash or even in modern times a credit card for the purchase. Which means direct to consumer is potentially quite complicated, though even that is becoming less so in the age of internet banking.

[TwoEds]

Kevin's three points are accurate!

OEMs are in the business of building vehicles to sell, for a profit. Their pricing is determined by supply and demand plus competition. They do not want the added costs/debt of retailing )brick and mortar), direct financing, maintenance and repairs.  They do bear the cost of dealership support which doesn't come close to the retailing/financing/maintenance costs borne by the dealerships. (Warranty costs are built into the pricing and include controlled parts markup and labor pricing at the dealer level).

On another note, the OEM/Dealership relationship can be adversarial in nature. They publish a Suggested Manufactures Retail Price but also allow the dealer's cost to be published. They, at times, favor one dealer over another in the same geographical sales area, They have been known to "dump" less desirable vehicles on an unfavorable dealer. Warranty reimbursement pricing is always a point of contention. Most States have Franchise laws that were legislated in part to protect Dealers from the OEMs. I could go on but you get the point.

These are my observations and opinion having spent of my adult life in the business.

[Aaron D.]

The reason they still exist is state laws covering the dealership structure. Dealers want protection from competition.

[Sheepdog]

Dealers are a convenience enterprise. They display a selection of products that is representative of their marque, they can assemble and maintain your vehicle, and they offer financing and licensing services. However, one can also approach an auto broker who can save you a bit of coin if you’re willing to put a bit more work in...

[unclepete]

Dealerships exist to promote brand loyalty .

[Kev m]

Dealers are a convenience enterprise. They display a selection of products that is representative of their marque, they can assemble and maintain your vehicle, and they offer financing and licensing services. However, one can also approach an auto broker who can save you a bit of coin if you�re willing to put a bit more work in...

But in most cases the broker cannot purchase directly from the manufacturer and must also purchase through a dealer, no?

[EldoMike]

I've heard the haggling over price came from horse trading which proceeded the automobile...

Edit: No I wasn't there...I'm old but not that old

[Sheepdog]

But in most cases the broker cannot purchase directly from the manufacturer and must also purchase through a dealer, no?

Yes, but his/her overhead is a great deal lower and her/he is privy to the markup.

[Sasquatch Jim]

 Dealerships exist to fix prices.

[Kev m]

Yes, but his/her overhead is a great deal lower and her/he is privy to the markup.

I'm not arguing the merits per se, but the fact remains that in THEORY any individual with the right knowledge/technique SHOULD be able to get the same deal a broker can, no? Unless they are so large they have developed relationships with specific dealers who are willing to eat further into their own margins for the ease/volume of the broker's business.

Either way it's still at LEAST 2-stepping the retail process through a distributor.

[Curtis Harper]

I will enter this. Has anyone here ever attempted to contact Piaggio to deal with an issue of any type? Did you get an answer from them?

[PJPR01]

It's a very interesting question, and one which I think does point to a future where one could eventually buy Direct from Manufacturer.

Many businesses use dealers/resellers/channel partners for Sales coverage reasons, it's impossible to have a Direct sales force that covers geographically enough of the population, so dealers/resellers/channel partners help to divide up the sales coverage.

Many companies have a hybrid model...30% direct sales, 70% indirect sales from Channel to reseller to SMB and then to final customer...it would be interesting if one could eventually order a car or motorcycle direct from factory and by pass the dealer setup process.

In the future of futures, you'd be able to do this on Amazon...  :)

[Kent in Upstate NY]

Tesla is trying to sell its cars directly to the public but is running afoul of state laws requiring sales through a dealer only.

[Kev m]

It's a very interesting question, and one which I think does point to a future where one could eventually buy Direct from Manufacturer.

Many businesses use dealers/resellers/channel partners for Sales coverage reasons, it's impossible to have a Direct sales force that covers geographically enough of the population, so dealers/resellers/channel partners help to divide up the sales coverage.

Many companies have a hybrid model...30% direct sales, 70% indirect sales from Channel to reseller to SMB and then to final customer...it would be interesting if one could eventually order a car or motorcycle direct from factory and by pass the dealer setup process.

In the future of futures, you'd be able to do this on Amazon...  :)

Good point and it's much broader than new vehicles, there are hundreds or thousands of manufacturers that do not sell direct to the public for those and other reasons. From vehicle parts or accessories to electronics to clothing... but the numbers that sell direct are growing.

[Lannis]

The reason they still exist is state laws covering the dealership structure. Dealers want protection from competition.

This is and (from the 1930s through today) is the answer.   State laws require that autos and motorcycles be sold through the dealership structure we see today, to protect some elements of the huge (or formerly huge) auto industry from competition.

NOBODY enjoys buying a vehicle the way we've had to buy them for 80 years.   But it's the law.   Check the one in your state.

And like every sort of forced perturbation of the marketplace, it .... well, fill it in yourself!

Lannis

[John Ulrich]

Distribution runs in cycles. Right now "direct" seems to be the favorite flavor.  A few years from now people will not want the large factory direct quantities and a shift back to a local source for small quantities and service.

[Wayne Orwig]

The answer will vary a lot from high volume dealers, to something like a low volume Moto Guzzi dealer.

But often for major brand cars, it is state laws. Good ole boys helping good ole boys. Research why Tesla is not sold in some states.

[Dilliw]

This is and (from the 1930s through today) is the answer.   State laws require that autos and motorcycles be sold through the dealership structure we see today, to protect some elements of the huge (or formerly huge) auto industry from competition.

NOBODY enjoys buying a vehicle the way we've had to buy them for 80 years.   But it's the law.   Check the one in your state.

And like every sort of forced perturbation of the marketplace, it .... well, fill it in yourself!

Lannis

And what's funny is the FTC is urging States to change.  It's usually the other way around!

https://www.ftc.gov/news-events/blogs/competition-matters/2015/05/direct-consumer-auto-sales-its-not-just-about-tesla

[Tusayan]

I think on a practical level dealers remain in existence today mainly because 2017 motorcycles have defects from the factory, break occasionally and require periodic dealer service.  Dealers for brands that break more and have designed-in dealer service (think BMW) have a stronger base among owners in their area.  Also, when the bike is being repaired the buyer sees the bikes grouped on the showroom floor, gets excited and is talked into buying a new one when he otherwise wouldn't.  I think BMW designs their products and distribution chain with this in mind - because it promotes sales and makes them money.

Ducati tried to initiate a slow phase out of retail dealer profit in around 2000, initially by making some models available on the internet -  I believe the first was the MH900e.  Like a lot of Italian initiatives it was innovative but badly thought out.  The bikes would need to be near perfect before dealer service is unnecessary for most new bike buyers, and then the buyer wouldn't see a showroom and wouldn't decide he can't live without a new bike.

[Mr Pootle]

I ordered a new car last week. Even after the test drive and agreement as to the base price it took two and a half hours to choose the colour, go through the possible extras and complete the deal. Cars and car dealerships have become so complicated.

[Tusayan]

Cars and car dealerships have become so complicated.

For my last two new car purchases, I've selected the car using the manufacturers website, and closed the deal on line with the dealer.  I've then visited the dealer only to pick up the car and never returned.  That's possible because Japanese cars don't break and don't often require dealer service.

For motorcycles, I've instead returned to my roots in buying used bikes that I can service myself, and for which today I can buy parts on-line very easily.  To me, the internet has incentivized owning a bike you can service yourself by making parts readily available, and that has in turn reduced my interest in new bikes, especially new bikes requiring dealer service.

[guzzisteve]

I think to begin with starting w/the 1st motorized manufacturing companies it was a logistics thing, for their vehicles to reach the public on the other side of the country. Then the regulations started. 

[pete roper]

I have to say I sometimes wonder.

I had to drag a broken Stelvio down to one of the biggest dealers in Sydney on Monday because it needs major work and it's still under warranty from the shop. Michael came with me and we went into their impressive, shiny showroom and talked to the DP. I explained what the problems were and that it needed an engine rebuild and was told they didn't have the facilities to rebuild an engine !!!

Anyway, we dragged it away again and have an undertaking that they'll provide parts and pay us for the work.

Why do I get the feeling I'm going to end up getting the rough end of the pineapple here? S'gotta be done though otherwise the owner is going to be out a motorbike! It's a nice bike apart from the fact it's Donald Ducked!

Pete

[pyoungbl]

With all of the above said, I am impressed with the approach CSC has taken to selling their Chinese bikes.  You (the customer) deal directly with the importer (CSC) who assembles the bike and ships it to your door.  No dealer.  No inflated costs (shipping, assembly, setup, etc.).  That's why they can sell an ADV bike with luggage for under $4K.  They have eliminated a couple layers of overhead.  At the same time you do not get the warm and fuzzy feel of going to a showroom to touch the produce.  You also do not have the dealer and service manager holding your hand in the event of a problem. 

Peter Y.

[John Ulrich]

we went into their impressive, shiny showroom and talked to the DP. I explained what the problems were and that it needed an engine rebuild and was told they didn't have the facilities to rebuild an engine !!!

Sad.  Owners like JB have rebuilt Guzzi's along side the road.....once using a railroad spike and here's a shiny bike emporium and they don't have a work bench that will withstand some grease and oil or they are too cheap to employ a tech with the knowledge.

[bpreynolds]

Lots of super interesting responses here and I've already learned a good deal more than I knew before.  As per the folks who say dealerships exist because vehicles need service/fixing, well okay, but then the "shops" who distribute the cars would just have a garage like a standard dealership.  I think my initial question revolves mainly around 2 parts perhaps.  First, why not just distribution centers with set prices?  The service/fix/garage end of things certainly seems to go a good way to answering this one.  Vehicles break and someone has to fix them and/or honor warranties.  But also second, how then did it come to be that buying one would become a kind of negotiation? 

[Kev m]

With all of the above said, I am impressed with the approach CSC has taken to selling their Chinese bikes.  You (the customer) deal directly with the importer (CSC) who assembles the bike and ships it to your door.  No dealer.  No inflated costs (shipping, assembly, setup, etc.).  That's why they can sell an ADV bike with luggage for under $4K.  They have eliminated a couple layers of overhead.  At the same time you do not get the warm and fuzzy feel of going to a showroom to touch the produce.  You also do not have the dealer and service manager holding your hand in the event of a problem. 

Peter Y.

Perhaps the fact that they're shipping it from a country where people probably get paid pennies on the hour, don't have health care insurance, and don't give two craps about our product safety standards also are factors that come into play with that price?