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Researching and
Buying Cars Online
Volume 1, Issue 8
June 2001

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Researching and
Buying Cars Online

Consumers are getting short changed when it comes to buying cars online. This is because of existing franchise laws that prevent consumers buying directly from automakers.

"Unlike other areas of e-tailing, the online auto industry faces heavy state-level government regulation. About 33 states bar anyone, including independent Web sites, from clinching the final sale. And most of those states also require the new owner to pick up the car at a dealership, Sandeep Junnarkar and Melanie Austria Farmer reported in November for CNET News.

As a result of the laws, online consumers are forced to pay for a middleman that shouldn't have to be a part of the online equation.

These laws have turned online vehicle sales sites into nothing more than referral services for dealerships. Auto sites have been forced to make the most of a business model that is not only bad for consumers but also restrictive to the future of the online vehicle sales industry.

In a March BBC article by David Schepp, Thilo Koswolski, automotive analyst at the Gartner Group, was reported as saying that current online car-buying Web sites were at the mercy of the dealers. He said that getting rid of dealers, as part of the transaction would not be bad for consumers because many of the costs for automobiles were imposed by the dealerships, including advertising, inventory costs and personnel.

According to Cecily Fraser, in a May article of CBS MarketWatch an estimated 1.5 percent of Internet users have bought dealer vehicles through Web sites, but another 3.6 percent tried but never completed the transaction. She identified an online sale as occurring when a consumer submits a purchase order or a credit card number for a down payment.

Citing a survey by Consumer Reports, Fraser reported that a lack of coordinated efforts among sites, dealers and manufacturers to establish reliable pricing and inventory systems has turned consumers off to buying cars online. More than a quarter of Internet users said they didn't think Internet buying was the way to get the best deal.

Unfortunately that seems to be a reality. Troy Wolverton of CNET reported in January that CNW Marketing/Research found that car and truck prices posted on the Internet are hundreds to thousands of dollars more than the manufacturers' suggested retail prices. He used the example, of's price for a new Lexus LS400 luxury Sedan, which was $2,696 higher than the suggested retail price for offline dealers.

Chris Denove, who covers online car sales for J.D. Power and Associates was quoted as saying that, "It is very difficult for an online seller to offer a lower price than a shrewd consumer could obtain if they have the time to negotiate with a dealer face to face."

Since it's not to their advantage to buy cars online consumers tend to do their car research and then use it to negotiate a better deal in the showroom.

According to Junnarkar and Farmer a study published in October by the market research company Greenfield Online, 63 percent of those surveyed researched their cars online but bought them through a traditional car dealership. Forrester Research found that nearly 40 percent of new car buyers browsed and researched cars online in 1999.

Bloomberg News reported in May that a study by J.D. Power & Associates discovered that about 54 percent of new-vehicle buyers use the Internet to help research and buy cars and that figure was expected to grow to 73 percent by 2003.

The Internet was supposed to have revolutionized car buying by allowing consumers to dictate what manufacturers would make. The days of not being able to find the make and model you wanted were supposed to have been over. Franchise laws have prevented this from happening.

What is even more unsettling is that US consumers are prevented from going into Canada to find a make they can't get in the US. Dealership control prevents Canadian dealers from selling to Americans even though Americans may find the selection better and the vehicle they want at a cheaper price because of the exchange rate.

In May 1999 Carol Teegardin of the Detroit Free Press wrote an article about the frustration that Americans faced in trying to purchase cars in Canada. Quite often a particular color or type wouldn't be available in the US, so they would go into Canada and find what they were looking for there. With the favorable exchange rate Americans had also hoped to get a bargain. What Americans discovered was that Canadian subsidiaries of U.S. domestic automakers had franchise agreements with their dealers that wouldn't allow them to sell to Americans.

In other countries where dealership laws haven't been as stifling price seems to be the biggest factor motivating consumers to buy their cars online.

In the UK, for instance, Internet car buyers are able to buy from dealers in mainland Europe where car prices are much cheaper.

In February the BBC reported that while some consumers had frustrating experiences others had saved as much as 4500 pounds or 7,337.83 US on their car purchase by going through the Internet to dealers in Holland and Belgium. They had waited anywhere from eight weeks to six months for delivery. One consumer reported that he was prepared to wait it out because of the big savings.

According to a March BBC article, there was a rush on in the UK to launch new Internet companies to offer car buyers cheaper prices from the Continent. The Consumers Association and Sir Richard Branson's Virgin Group had both planned to get in on the act by launching Websites devoted to cheap car buying.

The BBC further reported in August that the British Independent Motor Trade Association revealed that 16% of new British cars would be purchased from mainland Europe.

"And the number of purchases being made outside Britain is expected to rise even further as people become more confident about buying over the Internet, says the report."

Brazilians have also been purchasing new vehicles online at cheaper prices. Rachel Konrad of CNET reported in December that General Motor's Brazilian unit, GM do Brasil, had sold 56 percent of its new Chevrolet Celta small car model through the Internet.

She reported that customers who ordered cars through a special Web site from their home computers or at dealer kiosks received big price breaks and faster delivery. Customers could go to dealerships to test drive the vehicles, but they were then able to do all of their ordering and financing with GM directly through the Internet.

GM had been able to keep the price lower online because the company had received a special tax break from the Brazilian government. The break was based on the lower inventory and the reduction in real estate that was associated with online purchases. She reported that GM had passed a portion of the tax savings on to consumers.

North American franchise restrictions have taken their toll on US online car sites. Jeff Bennett of the Detroit Free Press reported in December that had announced on Nov.17 that it was cutting its workforce by 25 per cent. The company's chief executive officer Sam Hedgpeth resigned in early November and the company's stock price dropped from $33.06 in April 1999 to below 50 cents.

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According to USA Today Autobytel bought out Autoweb in April just as it was about to be delisted from the Nasdaq because its share price had been continuously trading below $1.

Melanie Farmer reported in April that, which filed to go public in May, withdrew its planned initial public offering in December.

Konrad reported in February that Austin, Texas-based CarOrder had closed down in August and backed Greenlight had laid off about 25 percent of its staff in December to slash costs.

Melanie Farmer reported in January that CarsDirect acquired Greenlight due to setbacks at both companies. The acquisition allowed CarsDirect to gain access to Greenlight's tie to Amazon.

It was able to connect with its network of affiliated auto dealers including Asbury Automotive, the third largest dealership network in the United States and an investor in Greenlight.

The list goes on. According to Bennett, AutoNation had seen its stock price drop from $42.13 on Jan. 24, 1997 to below $7.

Bennett further reported that Inc.'s automotive services president, Maryann Keller, resigned after the publicly traded company racked up third quarter net losses of $2 million and laid off 16 percent of its workforce.

She was quoted as saying, "For car buying, the Internet is an idea whose time has not yet come and may never."

Priceline had only made a maximum of $250 on each transaction despite putting together thousand dollar deals. In about 20 states the company made no money at all because franchise laws prevented third parties from collecting fees for brokering sales, she said in the article.

Selling used cars online may prove to have a brighter future than selling new cars. Unfortunately the demise of sites selling new cars has discouraged investors from investing in used car sites as well.

Eric Young, of the Industry Standard reported in April that the online used car seller IMotors went out of business after two years of letting customers build to order the used car of their dreams.

IMotors blamed its problems on "lack of sufficient capital" to keep it going, Young reported.

Not all used car sites are struggling however. With the downturn in the US economy consumers are buying used instead of new. recorded its most successful quarter ever, making it the first time the company had achieved more than 5 million unique monthly site visitors. Revenues had increased from $5 million to $28 million during 2000.

Jennifer Couzin of the Industry Standard reported last March that eBay had forged a partnership with AutoTrader to create a classified ad Web site where individuals and car dealers listed used cars for sale. It allowed customers to bid on used cars, motorcycles, trucks and auto parts.

In April also formed new strategic alliances with America Online to become the exclusive provider of used car classified listings and with the search engine iWon.

In April PRNewswire reported the findings of a recent study conducted for Autobytel. The study done by Princeton, New Jersey based Opinion Research revealed that 39 percent of American adults felt the current state of the economy would influence them to purchase a used vehicle rather than purchasing or leasing a new vehicle. Seventy percent of adults surveyed also agreed that purchasing online could enable them to buy a better vehicle for less money.

Autobytel president and CEO Mark Lorimer said, "We have instituted new processes in our used car program to meet this increasing demand for used cars and trucks. ... we have added a function that allows consumers to search for cars by monthly payment."

In Canada the connections between dealerships and car selling sites are similar. One of the top new and used Canadian car sites is with over a 100 dealers, and 200,000 visitors a month. The site provides more than 4,000 leads a month for its dealer members.

The Globe and Mail reported in May that Cars4U, which launched in September, owns both new car dealerships and a long standing Toronto based leasing company. Its orders represented more than $4.5 million in revenue to alliance dealers putting it on track to exceed the annual volume of the average Canadian new car dealership. The site had only targeted Southern Ontario with its marketing efforts, and had received more than 2.5 million page views to date, it said.

More recently the automakers have been getting into selling cars online in deals worked out with their dealerships. Autobytel made an agreement in May with GM to test a virtual 70 acre car lot based on the inventory of 22 Chevrolet dealers in the Washington DC area. The companies are running a 90-day test for individuals with a zip code in Washington, D.C., Northern Virginia and Southern Maryland.

Chevy buyers from those areas have been able to log on to the site and view photos, specific vehicle information and an e-price of actual cars and trucks on dealer lots. After selecting a vehicle, consumers are able to choose any of the area's 22 Chevrolet dealers to finalize the purchase.

Bloomberg News reported in May that Ford Motor Co. was also testing an Internet sales site in cooperation with their dealers and that Toyota Motor Corp. had expanded its Internet system for choosing a vehicle and picking a dealer to Baltimore, Philadelphia, Pittsburgh and Washington. Toyota developed the system with dealers and tested it in Washington state before expanding to Kansas City and St. Louis in April.

Online car loan companies are also setting up their sites to connect with dealers. According to Michael Meehan in a Feb. IDG article, J.P. Morgan Chase & Co., AmeriCredit Corp. and Wells Fargo & Co. launched a Web site called Inc.

The site, which runs as an independent business, boasts 4,000 auto dealerships as members of its network. Auto dealers submit online credit applications to multiple lenders and quickly come back with a loan for their customers. Dealerships are able to log onto the Web site for free and the Website make its money by charging a transaction fee to the lending institutions that offered the loans, Meehan reported.

According to Schepp some dealers are still reluctant to participate in programs such as the one offered by GM because they fear it will lead to manufacturers selling cars directly to consumers, eliminating dealers from the transaction.

This doesn't appear likely to happen. Franchise laws have given dealers an edge when it comes to the Internet, an edge that other industries are wishing they'd had. Unfortunately it is the consumer who is the loser. Not only because they will be paying more for their vehicles but because the ability to configure their vehicle from the manufactuer is something they will only be able to dream about.


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