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Having worked in dealerships for nearly a decade, I don't think auto dealers are half as bad as many consumers seem to think they are. Are dealerships perfect? Of course not. Are they paramount examples of ethical business practices? No. But are they any less ethical than most retail businesses? I'd say no.
Myth #1 - Dealers make a lot of money. Of all the myths out there about dealers, I really wish this one was true. But alas, most dealers earn a net margin of something like 1-2% (sometimes more, sometimes less). That works out to about $500 in profit on a $25,000 vehicle (with new cars earning a little less and used cars earning a little more).
To put that 1-2% margin in perspective, Apple, Google, and Microsoft earn about a 20% net margin. Comcast earns about 12%. Exxon-Mobil earned about 8% in 2014. Basically, people pay most of the companies they love (or hate) a multiple of the profits paid to car dealers.
Myth #2 - Dealers are out to screw every customer. This is one of those myths that consumers love to believe, but it's not based in fact. This is because screwing over a customer inevitably leads to a customer service nightmare, with the consumer screaming to the automaker, the Better Business Bureau, the local media, state regulators, and anyone who will listen about why "dealership X" is the worst on the planet.
From the dealership staff's perspective, tricking customers just isn't worth the effort. If it blows up in your face (and it will at some point, guaranteed), you're likely to get demoted or fired.
From the dealership owner's perspective, their businesses are closely regulated, easy targets for civil litigation, and targets for the local press. Acting unscrupulously is a formula for losing a business, and at the very least any gains made from tricking customers is quickly lost if there's a regulatory action, a lawsuit, etc.
Now, can an individual dealership employee act illegally? Yes. But that behavior isn't trained or condoned at the vast majority of dealerships - the risks to the business and the staff are just too great.
Myth #3 - Consumers would be better off if there were no dealerships. A lot of consumers believe that dealers are an anachronism - a holdover from a time when distributing cars was too difficult to do at a national level. Now, with Internet, many people think dealers are no longer necessary.
The problem with this line of thinking is that it completely overlooks the following facts:
- Dealers are independent businesses that savagely compete with one another, which is why they earn a measly 1-2% margin. If dealers were replaced with corporate owned stores, it's hard to imagine the corporate masters settling for the same meager margins.
- Dealers have leverage over automakers that consumers simply can't match. They can refuse to buy slow-selling models, forcing automakers to offer incentives and discounts. They can perform repairs free of charge to the consumer and demand the automaker pay for the repairs under warranty. Dealers can sue automakers - and frequently do - to fight rules and restrictions that limit competition and raise prices. Etc. Automakers listen to dealers much more closely than they listen to individual consumers.
- Dealers facilitate a vibrant secondary market for automobiles. Dealers are a big part of the reason that older cars are in demand. Dealers need to sell cars to make money, so they buy as many cars as they can at auction, via dealer trades, or via consumer trade-in. This strong market for used cars ensures that consumers can quickly and easily sell or trade their old car. If dealers were eliminated, the number of buyers for any given used car would decline dramatically, and that certainly wouldn't help prices, would it?
- Dealers are still a logistical necessity. Many people point to Tesla as proof that dealers are no longer necessary, but Elon Musk himself has said that dealers may be needed at some point if Tesla is going to grow (see for more info ). This is because it's hard to sell and service millions of cars efficiently without thousands of dealerships to help.
Myth #4 - Dealership salespeople are master manipulators. With no offense intended to my friends in the car business, it's a rare salesperson or manager that's a "master closer." A lot of dealership staff think they're amazing, but the truth is that consumers can't be compelled to buy a car they don't want.
A lot of consumers say that a salesperson "tricked" or "convinced" them to do something they didn't want to do, but the reality is that consumers sign on the dotted line of their own free will, usually with a smile on their face.
What's more, the average dealership has a startling amount of employee turnover, which usually leads to poorly trained managers and salespeople. One dealerships' "master closer" is just average at a dealership with less turnover and better staff.
Myth #5 - Dealers hate electric cars. This preposterous notion is peddled by one of the world's greatest marketers, Elon Musk. It's absurd because:
- Dealers are in the business of selling cars to make money. They'll sell anything with four wheels...if they were picky, we probably wouldn't have any Nissan Versa's, Fiat 500s, Smart cars, etc.
- Dealers don't discourage customers from buying anything...ever. If you walk in the dealership with your wallet out, you can have whatever you can afford. No one who works at a dealership is going to say "Hey, don't buy that $50k electric car! Get outta here!!"