You’re Stuck with the Middleman, Like it or Not

Screen-Shot-2014-06-02-at-4.54.06-PMI own five cars, which feels like too many. They aren’t the fun ones, like sports cars and “mudders,” but they do run the gamut from a zippy little sedan to a 4×4 SuperCrew pickup.

While it’s true that I technically own them, I only drive one. Each vehicle in my fleet is dedicated to a certain driver in the family, including my wife and our three young-adult children. Maintaining all of that rolling steel means paying attention to oil changes and tires, and of course cringing when my insurance is up for renewal.

In the process of buying the cars, I gained a lot of knowledge, and soon came to an interesting realization.

I don’t need car salesmen.

By the time I get to the lot, I know more about the vehicle I’m interested in than they do. In their defense, the deck was stacked against them. I have the power of the Internet, and time.

I start my car search by estimating our needs and wants, and then developing a list of potential vehicles. Then I go through countless online reviews by professional sites, such as Edmunds.com, as well as scrolling through consumer feedback. The process gives me incredibly detailed information on what’s available on different models, as well as common problems.

Once I’ve zeroed in on a particular vehicle, then the game turns to pricing and availability. I’ve bought cars locally in Florida, but also from California, Minnesota, and Michigan. Each time I brought to bear many hours of research and evaluation on the purchase as I weighed all the options, availability, prices, and shipping costs when determining the right mix for me.

Contrast that with the salesman’s approach.

He goes to work and finds hundreds of cars on his lot. Typically, the dealership will specialize in one or two brands, but there are many different models available. To get paid, the salesman spends his time with different clients, estimating their needs and financial ability, trying to match them with appropriate vehicles, and then guiding them through the purchase process. Beyond a cursory understanding of each vehicle, it would make no sense for him to learn all the features of every car.

At this point, we have a problem.

The salesman wants to be needed, but I’ve replaced him with the Internet. I have more information at my fingertips than he could possibly possess. As time goes on and more consumers become comfortable shopping for cars online, the role of the salesman will diminish more, which is where the fight starts.

Just about every state requires carmakers to work through local salesmen. More specifically, it’s the law that they have a network of independent dealerships ‑ franchises ‑ to sell cars in those states, which of course means salesmen. Even if consumers don’t want them, or nearly as many of them, they are required.

The history of dealership protection comes from the mid-twentieth century, when carmakers had considerable bargaining power over small dealers. The laws regulate the existence of independent franchises to the point of outlining how, and when, they can be terminated.

But the carmakers aren’t pushing to get rid of their franchises. In fact, they’re fighting to keep them, and the laws, fully in force. This isn’t for the good of the companies and consumers, it’s all about killing one firm – Tesla.

The electric vehicle maker doesn’t have independent dealers. In fact, it has few dealerships at all. Instead, the company sells online, or through small storefronts. Carmakers and dealerships of all kinds are crying foul to their legislators, who are protecting the existing industry.

Old line car companies and their dealers claim that car owners deserve the ability to bring their vehicle to a physical dealership for maintenance and repairs, and to correct any warranty issues. If Tesla is allowed to bypass this regulation, then untold numbers of Tesla owners will be unfairly penalized when it comes time to have work performed on their cars.

It might just be me, but I’m having a hard time sympathizing with anyone buying an $80,000 vehicle who doesn’t think ahead of time about where it will be serviced. In fact, no one should care what kind of cars people choose and what sort of service arrangements they have, as long as the buyers weren’t coerced into the transactions.

But obviously that’s not the concern here. It’s all about sales and market share. No one wants Tesla in their backyard.

Recently the state of Michigan denied Tesla’s request for a dealership permit, noting that the carmaker didn’t have independent franchises. Dealership owners summed up the problem nicely. They noted that the auto maker would “unfairly” cut out the middleman with a business model that involves selling directly to customers.

Hello!? Isn’t that part of the beauty of the Internet?

By using online resources, we can cut out middlemen of all stripes, allowing customers to buy directly from manufacturers, thereby eliminating unnecessary steps and cost.

The Department of Justice estimates that the independent dealer network for cars adds between 5% and 10% to the cost of every new vehicle. That’s $1,000 to $2,000 for a $20,000 car, and $2,000 to $4,000 on a $40,000 car.

Is it worth it?

Before you answer, consider how much goes into new cars…

Many people want to see them and experience them before buying, and might be wavering between a couple of choices. Some people might need a lot of hand-holding to get through the process.

But then again, none of that matters. Because you don’t get to answer that question. The states have made the regulatory decision for you.

Independent franchises stay, and you’ll pay for them, whether you want to use them or not. Middlemen must be protected, as long as they’re from the right industry, with the right lobbyists.

It’s time that our governments join the 21st century. Let consumers decide how to spend their money.

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Rodney

Follow me on Twitter @RJHSDent

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.