Why you can't cut out the middleman

For car buyers, the Internet brought promises of haggle-free shopping. But traditional dealers still rule the road.

The Internet's rise in the late 1990s was filled with promise for consumers. The Web would cut out the middleman, level the playing field between buyers and sellers, lower prices, increase choice, and add convenience. Today, shoppers can often gain an edge by going online.

Yet across the retail landscape, the middleman is winning, especially when it comes to the second-biggest purchase most people ever make - automobiles.

Most Internet-only auto websites are either out of business or struggling. Direct online sales brokers, who buy cars from dealers and then resell them to consumers, haven't been able to recoup their expenses. One such broker, CarOrder, closed shop Feb. 26. And CarsDirect, with $350 million in venture capital from technology incubator Idealab in 1998 is now worth barely $100 million.

In addition, 47 states now have laws that prohibit anyone but franchised dealers from selling cars to consumers. Only two states had such laws in 1970. (State lawmakers listen to dealers, because cars are a main source of sales-tax revenues.)

Dealers say online car-sales sites hurt consumers because they don't offer service down the road. "It's in the public interest to have stable sales-and-service networks," says David Hyatt, executive director of the National Automobile Dealers Association.

Even manufacturer websites have failed to sidestep the middleman. They had hoped to lop off the 31 percent of a new car's price that covers distribution and marketing, passing some of that savings on to the consumer. But most state franchise laws already prohibit manufacturers from bypassing local dealerships, to protect the dealers' investment.

The Consumer Federation of America estimates that such limits cost car buyers $20 billion a year, or an average of $1,500 per car. "They severely limit the ability of the auto industry to realize Internet-driven efficiency gains in the future," says CFA research director Mark Cooper in a report.

But other studies insist that local dealers serve consumers better than online brokers. A CNW marketing research study concluded last month that new-car buyers pay an average of $1,400 less per car from a dealer than they do online - at least for buyers who negotiate-because online brokers represent yet another layer of middlemen.

"It's four little words," says Art Spinella, president of CNW: "Can you beat this?"

With manufacturers and online brokers held in check, all that's left on the Web for online car buyers are dealer-referral services, and dealership websites.

Many consumer advocates are skeptical about dealer-referral services, since buyers still end up buying from local dealerships who may provide the traditional dealer experience. (Surveys consistently show consumers are dissatisfied with the process. Walk into most dealerships, and it's still hard to get a straight answer from anybody.)

But many customers are satisfied. Cristina Kuizon-Teves, of Los Angeles, turned to the referral service Auto- by-Tel.com after getting fed up with trekking to four different dealers in search of a Chevrolet Tahoe. "They just give you the runaround and try to get you tired. All they want to talk about is how much you can spend a month," she says.

So Ms. Kuizon-Teves filled out an online application on the Auto-by-Tel website. A day later, a salesman from Camino Real Chevrolet called and offered to sell her the truck for $3,000 less than any other dealer had quoted.

Auto-by-Tel helped sell 200,000 vehicles last year, almost twice as many as all other websites combined, according to a report by J.D. Power and Associates.

As for websites run by car dealers, the jury's still out. But Mr. Hyatt claims customer treatment has never been better. Dealers who don't offer friendly service and straight answers are going straight out of business, he says. More than 750 dealers have closed their doors since Auto-by-Tel was launched in 1995. "Where the Internet is helping is it's changing the business from dealer-centric to customer-centric," he says.

Other dealers dislike the Web because they don't want to face skinny profits from buyers armed with accurate invoice pricing from the Internet.

In the end, information sites are making the biggest difference for consumers. While less than 1 percent of customers buy their cars on the Internet, nearly 70 percent shop for them online. Just about any specification, fact, or cost figure is available on the Web at the manufacturer's site, sales sites like Autoweb.com, or pricing sites like Edmunds.com. (See story, top right.)

"Dealers have to respect informed consumers," says Pat Morrissey, spokesman for eGM, which runs GM's Buypower website (www.gmbuypower.com).

In the next five years, Mr. Morrisey says, GM hopes to let consumers see all the cars in their region on the manufacturer's webpage. Once they've picked a car in regional inventory, they can pick which dealer they want to buy it from.

There will always be car dealers, he says, but people's experience with them is likely to get a lot more cordial.

(c) Copyright 2001. The Christian Science Monitor

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