The Dealer Sales Model Is Flawed and Dealers Know It Too, They're Freaking Out Already

Car dealers seem engaged in a self-destructive spiral that would render them irrelevant in the years to come. The fact that the world is already moving away from the dealer sales model sure doesn’t help, but abusive practices like insane markups on the most popular vehicles will only accelerate the trend.
The dealer sales model is flawed and dealers know it too 9 photos
Photo: Mercedes-Benz
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The automotive retail community gathered two weeks ago in Las Vegas for the first in-person NADA convention since the pandemic. Electric vehicles were the hottest discussion topic and the dealers’ representatives voiced their concern about the direct sales model that EVs favor. The threat is real, as traditional carmakers already indicated they want to move in this direction, but dealers themselves might accelerate the trend.

The world has changed a lot since the pandemic, and car sales are nothing like they used to be. Where a couple of years ago dealer lots were full to the brim with vehicles, it’s only empty space now. Gone are the incentives the dealers threw at potential buyers. Instead, the dealers across the country have instated a new sales practice: the markups. Hidden behind creative names like “market constraint”, the markups are just a way to rip off customers who want to buy a new vehicle.

To be sure, this practice is not an exception but has become an industry-wide accepted policy. All dealers use it, more or less, as a recent Edmund report showed. But it was only exacerbated once the traditional carmakers have started paper-launching electric vehicles. This essentially raised customers’ expectations without an actual product to sell. Ford F-150 Lightning, Chevrolet Silverado EV, GMC Hummer EV, are all electric vehicles that have orders placed on them but the deliveries have still a long way to catch up.

The dealer sales model is flawed and dealers know it too
Photo: Tesla
This is why dealers afford to slap insane markups on them, sometimes weighing more than 50% of the MSRP. It is immoral, true, but being on a “take it or leave it” basis, they don’t have a hard time finding somebody willing to pay the markup. A $50,000 markup for a $110,000 GMC Hummer EV is nothing, considering somebody paid $286,000 for this electric truck at an auction.

There will always be customers willing to bow to shoddy dealer practices, but this doesn’t mean it is beneficial for the dealers or the carmakers. It’s actually the opposite, as this stains the brand image. This is why carmakers have tried to put an end to it, without much success though. But the tides are turning and the dealer sales model is all but doomed. Carmakers know it and the dealers know it too, and that’s why they are now freaking out, as the talk of NADA showed.

New electric vehicle makers on the market, like Tesla, Lucid or Rivian, have adopted a different sales strategy, selling directly to their customers. Tesla especially has proved a car manufacturer can be successful without having a dealer network to feed. It is not perfect by all means, as the service network is lacking and people are sometimes appalled by the long waiting times for basic components and fixes.

And yes, Tesla and the other all-electric carmakers have raised the prices quite a lot in the past months. But this is totally transparent. The price that you get at the time of order is the price you’ll pay for the car in the end. There’s no hidden fee, no markup that you only find out about at delivery, “take it or leave it.” It works and, most importantly, the traditional carmakers are taking notes and are working toward a direct sale model themselves.

The dealer sales model is flawed and dealers know it too
Photo: Stellantis
Do you think this is impossible? “Not impossible. Inevitable,” as agent Smith told Neo in Matrix Revolutions. It will not be an overnight change though, and we know there will be a transition period, with a so-called “agency sales model” to bridge the gap. Mercedes-Benz has already started trialing such a system where dealers will see a diminished role in selling the vehicles.

Ford has outlined plans to restrict the dealers’ role to delivering and servicing the cars. Customers would order their new vehicles from Ford directly, at a no-haggle price. And General Motors has instructed dealers about a similar move, although this still leaves the dealer with the option to apply a markup at delivery. Stellantis, just like Mercedes-Benz, has started the trial in Europe for a “direct-sale approach” that would still involve dealers. For now.

But Volkswagen is the most advanced of the traditional carmakers toward the direct-sales model. The Germans have been selling their ID.4 electric crossover exclusively online, and they make no secret about where they took the inspiration from. “We looked at the competition that had gone before us, and frankly that’s predominantly Tesla. They created this online-order system,” Volkswagen U.S. sales chief Ray Mikiciuk told New York Times.

The electric revolution is sure to bring a sales revolution too, and this is happening right now. Of course, dealers are scared, and they should be. Their business model is going extinct and this will happen not only for the electric vehicle part of their business. And this cannot be changed by the franchise laws that protect dealerships.
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About the author: Cristian Agatie
Cristian Agatie profile photo

After his childhood dream of becoming a "tractor operator" didn't pan out, Cristian turned to journalism, first in print and later moving to online media. His top interests are electric vehicles and new energy solutions.
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