While working on other things last night I realized how tentative my argument about Autotrader was. I started with a basic concept: rising advertising costs are hurting small dealers and then seemingly leapt to the conclusion that Autotrader is forcing independent dealers out of business. As one astute commenter pointed out already, it is an easy and convenient explanation, and, as she said, the answer is more complex than I gave. I should also point out that I think Autotrader is a great company. Dealers are just coming to grips with a changing market. What I would like to do is delve deeper into the argument and flesh out some of the more interesting parts.
Nominally, independent dealers add value in a few ways (I am staying away from franchised dealers for this post) – in no particular order:
- Making it easy for consumers to find cars in a given area
- Take a risk position in a car by accepting it on trade
- “Advising” consumers on the type of car to buy and how to finance it
- Providing access to cars that only dealers can buy
- Taking advantage of legislation that prevents non-dealers from selling more than five cars a year
Autotrader specifically, and car sites in general, have reduces the value added by dealers in three of those activities, and potentially a fourth. “Advising” consumers is a tentative value as few consumers put faith in car sales people, even if the advice is valid. Instead, many consumers look to other places to help determine what car to buy and how to pay for it. While this has likely reduced some profit that dealers used to make, it is the other activities where I think dealers have been the most affected.
Autotrader makes it easy to find a car and it the first place many go when searching for a car – I know I do. The issues for Independent dealers it that while Autotrader has made it easier for dealers to sell cars, they have also made it easier for consumers to sell cars to each other. Consumers can get the same amount of visibility for their car as a dealer for a cheap price. Consequently, private party transactions now account for a greater percentage of sales than independent dealerships. A consumer can sell a car for less than a dealer and make more than if he had traded the car into the dealer. This also increases the supply of cars consumers can access obviating the need, to an extent, to go to a dealer.
Another unfortunate aspect for small dealers is that at the same time consumers are gaining greater bargaining power and have less need to go through a dealer, dealers are seeing their costs rise. Advertising costs, in particular, have gone up significantly in the past three years while their market share has decreased. The end result is fewer dealers.
Autotrader as a company is not forcing small dealers out of business, but a changing market landscape is forcing companies that are unable to adapt out of business. In the future, we will likely see more companies like eCarlink and Auto2Auto. Companies that have changed their operating structure and know how to use the new environment to their benefit.