Dealers stay in driver's seat

Last month, Trisha McGuire bought her second car online.

"I put in my order for exactly what I wanted, and the next day we were picking the car up from the dealer. I have kids and I work full time, so for things to be so convenient was great," she says.

Buyers like Ms. McGuire are boosting the number of cars bought online – from a mere 0.01 percent of the market in 1999 to an estimated 6 or 7 percent in 2001.

But those numbers don't tell the whole story. While more people are buying online, they're buying from fewer outlets, and they're conducting more of each actual purchase in traditional dealer showrooms. The earlier number reflects only sales completed online. Now industry experts count all sales for which the initial request occurred online, even at dealer websites.

The difference is significant.

The first time McGuire bought from CarsDirect, she wrapped up the deal online, and the company drove the car 270 miles from Santa Barbara, Calif., to her home in Santa Cruz. They pulled the vehicle into her driveway and washed it.

"I guess they don't do that anymore," she says.

This time she spent two minutes confirming her order on the phone with CarsDirect – and 40 minutes at the dealership. In the end, she still feels like she got a very good deal for very little effort.

"Two or three years ago ... a retail revolution was under way," says Jeremy Anwyl, president of Edmunds.com, a long-time consumer auto-pricing service in Santa Monica, Calif.

Back then, automakers were eager to streamline distribution, and Internet technology promised to link specific customer orders with speedy manufacturing and delivery.

"But today the dealers have proved resilient, not only legally, but in improving customer service as well."

CarsDirect, which sells the most cars online, still sells cars directly in the states where it can. But in more restrictive states, the company acts as a referral service called CarsDirect Connect. Its direct online prices are guaranteed, while CarsDirect Connect's are not.

That's the model the few remaining new-auto-sales websites have embraced since groups of franchised dealers successfully lobbied state legislatures to block online competitors.

In three states – Texas, Arizona, and Florida – direct sales over the Internet (or anyplace but a dealer) are banned. In every other state, lawmakers have decreed that a traditional dealer has to have a part in every sale, whether it's delivery, financing, registration, or an initial safety inspection.

"These laws are anticompetitive," says Jack Gillis, spokesman for the Consumer Federation of America (CFA). They restrict consumers' choices of where to buy cars, he says, estimating the cost to consumers of that lack of competition at $1,500 per car.

Among Internet auto brokers, "it's become a nonissue, because everybody's got a version of the referral model now," says Bob Brisco, CEO of CarsDirect in Santa Monica, Calif.

He cites the computer industry as an example of one that encourages retail competition, where consumers can buy machines directly from manufacturers, dealers, discount retailers, or catalogs, for example.

"I don't see online sales as eliminating dealers, although there will be some consolidation," says CFA research director Mark Cooper.

Dealers, of course, say the current system works for consumers.

"New-car dealerships are required to service the cars they sell. Millions of cars and trucks are recalled each year, and the independent new-car dealer must perform [recall and] warranty work," says Robert Maguire, chairman of the National Automobile Dealers Association.

Dealers, who pay $2 million to $10 million for their franchises, felt threatened in the late 1990s, when giant automakers such as Ford and General Motors started buying dealerships to sell cars directly to consumers.

So they went to the mat with state lawmakers, carrying the biggest stick they had: sales-tax revenue. Car dealers contribute as much as 20 percent of state sales-tax revenue, as well as providing local jobs, says Mr. Cooper.

Dealers have another advantage: They have the cars. "Consumers will always want to kick the tires, sit in the leather, and look at the paint before they buy the car," says David Champion, director of auto testing at Consumer Reports.

So while the Internet has so far failed to revolutionize car sales, Edmunds's Mr. Anwyl credits online dealer-referral services for improving customer service. Many traditional auto dealers have backed away from high-pressure sales tactics. And 90 percent of dealers are online.

How major auto websites evolved

Over the past few years, many of the movers and shakers in the online auto industry have had to adjust to survive in today's marketplace. Here's what some key players are up to now:

Auto-by-Tel – The original online dealer-referral service, it takes orders from consumers and routes them to a local dealer. The company now has a successful back-end business in training dealers to be more consumer-friendly.

AutoWeb – An Auto-by-Tel imitator, AutoWeb was bought last year by America Online and is becoming the online giant's in-house automotive portal. In the meantime, it still provides dealer referrals.

CarPoint – Began life as Microsoft's automotive portal on MSN.com. It now also provides dealer referrals as well as other information.

AutoNation – The brainchild of Blockbuster Video founder Wayne Huizenga, AutoNation was supposed to be the Wal-Mart of car lots, with fixed up-front pricing and a comprehensive selection. While Mr. Huizenga gave up on the business, AutoNation succeeded in becoming the largest chain of traditional new-car dealerships in the country.

CarMax – Once planned as an all-encompassing, no-haggle nationwide new- and used-car super-store, CarMax is now the second-biggest chain of publicly owned auto dealerships in the country.

Drivers' Mart – A consortium of new-car dealers that aimed to pool their resources and open joint superstores that would cover almost all brands, it was bought by rival AutoNation in 1998, a year after Drivers' Mart was started.

Greenlight – It was once the West Coast's largest online auto broker, buying new cars from dealers and reselling them online. Shortly after signing a marketing agreement with Amazon.com in 2000, the company was swallowed up by CarsDirect.

CarsDirect – The original online auto broker, it lost the legal battle to buy cars from manufacturers and sell them directly to consumers. It originally operated in 43 states with few restrictions, but its business practices have now been invalidated in many. CarsDirect formed a partnership with AutoNation to supply it with cars. The company also acts as a referral service in states that don't allow auto brokers.

CarOrder – Built on the brokerage model of CarsDirect, CarOrder threw in the towel last year when its native Texas banned it from selling or brokering car sales.

AutoVantage – Another early referral service, it now exclusively refers you to AutoNation stores.

kbb.com – The site of the Kelley Blue Book is the most visited spot on the Web for automotive information, including pricing and dealer referrals.

Edmund's – One of the first automotive information sites, it's among the bigger players still alive on the Internet. Also provides some dealer referrals.

NADA – The official site of the National Automobile Dealers Association, which has long published guides competing with the Kelley Blue Book. Nada.org will be happy to direct you to one of its members to buy a car.

AutoSite – An automotive information site, it was bought by AutoWeb, and, now is part of AOL.

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