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How Do Car Dealerships Make Money Pt. II: Why is the Auto Industry Protected from Being Pushed Online?

How Do Car Dealerships Make Money Pt. II: Why is the Auto Industry Protected from Being Pushed Online?

Readers note: This post is the second installment of a four-part series exploring investments in the automotive industry. Read our first post, “How do car dealerships make money?” by clicking here.

The auto industry has experienced unprecedented changes over the past few years with the introduction of the internet and the rise of social media. Millennials are taking over the industry as consumers, and with constant access to the internet at the palm of their hands, they are making most of their purchases through online retailers. Despite some consumers moving online to do the bulk of their car-buying research, it’s safe to say that in-person sales at physical retail locations remain the preferred way to actually purchase a vehicle for most buyers. 

No matter how consumers want to do their car shopping, the franchise law only allows for the sale of used vehicles online. This law bars automakers in all 50 states from directly competing with any of their franchisees, which in turn prohibits the online sale of new cars. Although it might seem like an inconvenience in today’s increasingly digital world, franchise law was passed with the interests of the consumer and their local communities in mind. 

Not only does franchise law ensure that the money being spent on cars in a given community is making its way back into the local economy, but it also provides consumers with extra marketplace protections. Cars are highly regulated through almost every step of the manufacturing, buying, operating, service, and repair processes. Moving car sales online opens consumers to the potential to purchase a vehicle that has not undergone the meticulous quality-assurance process afforded to cars sold via traditional methods. 

Although franchise laws prevent consumers from buying cars en masse on the internet, the importance of car dealership websites for the expansion of brand awareness and market reach cannot be ignored. New customer-service standards established by industry giants in the eCommerce sector may introduce car dealerships to substantial challenges. Consumers have come to expect same-day delivery, one-click purchasing, and simple, no-questions-asked returns. The processes associated with car manufacturing, however, can’t accommodate such changes, and manufacturers and consumers have to find ways to adapt in the near future. 

Trade-ins and Auctions

When customers buy a car from a dealership, they often trade in their older model as part of the buying process. Dealerships select the trades they will keep in their lot by assessing the condition, mileage, and age of the vehicle, as well as considering its market demand. The vehicles the dealership decides to keep are then reconditioned and marketed to retail customers as pre-owned vehicles. 

In most cases, if a vehicle at the dealership is not sold within 60 days, it will be sent to auction for wholesale purchase by a licensed new- or used-car dealer. Vehicles that the dealership does not consider suitable for retail sale are sent to auction for wholesale immediately upon trade-in. These methods allow dealers to turn a profit on the sale of the new vehicle as well as the sale of the trade-in vehicle. Some dealers even allow space in their inventories to quickly purchase fast-selling models to generate additional profits.

This is the second post in a series of blog posts dissecting investments in the automotive industry. Be sure to read our first post from last week to learn about how automotive dealerships make money. Next week, we’ll look into the valuation and acquisition targets for dealerships.

Azhar Hirani blog author
Azhar Hirani

Azhar Hirani manages the private equity sales team, which involves relationship management, advising and educating retail clients on new private investments, analyzing private equity portfolios, and oversight of clients’ invested capital in internal private projects. Passionate about business, marketing, and sales, Mr. Hirani maintains deep expertise in high ticket sales and has a record of success in sourcing capital and acquiring new customers.

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