When you head southeast out of Phoenix, Arizona, what you'll see is mostly empty space. You're driving through just miles and miles of essentially desert. There's like cactuses and just a clear sky and it's very remote. Our colleague Chris Ott made that trip recently to the small town of Casa Grande. Chris covers the auto industry and he was on his way to a sleepy car dealership out in the desert that had caught his interest. It's pretty small. There's a few people inside. There's a few people waiting on their cars to be serviced. There's a few mechanics out back. For years, this dealership sold maybe a few dozen cars a month. But now? This particular store is now doing about 350 sales a month. Those skyrocketing sales have taken place over the last year, ever since the store was taken over by a new owner, Carvana, a company most known for selling used cars online. But Carvana is now bringing its modern approach to car sales into the new car business and the dealership in Casa Grande is early proof of success. Chris says this new kind of dealership might be a sign of big changes coming to the car sales industry, which has stayed pretty much the same for decades. And right now we're seeing a number of different challenges to that model, companies that are trying to offer a different experience. I just see the car dealership model generally as a really well built fortress. And now there's an incursion on the outside of the fortress walls, you know, trying to get in. Basically, like the forces of digital and e-commerce keep trying to breach these gates. Welcome to The Journal, our show about money, business and power. I'm Jessica Mendoza. It's Thursday, May 28th. Coming up on the show, will traditional car dealerships become obsolete? Pretty much anyone who's bought a new car knows how joyless the process can be. You may have a look at the products with the salesperson, you may have a test drive, you may sit down to agree on a price. There may be a situation where the salesperson says, let me talk to my manager and then they come back. You know, lots of people have been through this experience. Yeah, I remember I've only ever bought a new car once. And I remember just spending the entire day, it felt like at the dealership. I was drinking a lot of coffee from the machines that they had there and other people were sitting around waiting. It wasn't my favorite day, I would say. Even though I went home with a car, you know what I mean? Yeah, like there are many, many people who really don't like this experience. Why is going to the dealership to get a car literally the most painful and nauseating experience ever? So much of my time going in and car shopping and then the price being way higher. But car dealerships didn't always have such a bad rap among consumers. Back in the mid 1900s, when this dealership sales model got started, they were primarily mom and pop businesses. And over time, they were seen as a fixture of American communities. Before you buy any new car, see your dealer and drive one of the newest new cars. Dealerships would work with a single big automaker, like Ford, General Motors, or Chrysler. Ford and the Ford dealers of your community who invite you to come in and action test the new kind of Ford. And they operated as a franchise, with salespeople earning commissions and dealers turning profits with each car sold. Why not stop in at your Chrysler dealers tomorrow? Take the keys and see what driving pleasure really is. Dealerships began to grow and influence. They sponsored baseball games and fundraisers in their communities and also lobbied for laws that cemented their role in the car buying process. Eventually, state lawmakers around the country codified the system, that consumers have to buy their new cars from a dealer, not from the manufacturer directly. Those laws were born in a time when the thought was dealers are small mom and pop businesses. Manufacturers are big, voracious corporations and the lawmakers were thinking we need to protect the small mom and pop businesses from being taken advantage of. This system has been in place for generations and it became a thriving industry. It led to a lot of family businesses and generational wealth. Decades who started with not very much, many decades ago and then their sons and daughters inherited and then their sons and daughters inherited an empire and suddenly you have these big corporate dealer groups and then there are regionally owned dealer groups where it's not so much a mom and pop. To be clear, there are still small mom and pop dealerships. And dealers say theirs is a system that protects consumers. Instead of manufacturers setting a nationwide price, dealers can decide what to charge and they can undercut each other, which they say leads to better prices. Dealers also say they can give customers the best value for their trade in cars. And with the average new car in the US costing about $50,000, a lot of people still want to see the car they're going to buy before they go for it. The National Car Dealer Trade Group said that data shows consumers are largely satisfied with their experience. The group also said that dealers are focused on making the process easier for customers. So what happened? Why does it seem like so many people now don't like dealerships? Well, the car companies compete with each other to offer the best products, but that's kind of where the competition is limited. Divers, for the most part, have been the only source for new vehicles. And even though it's so incredibly common to hear people complain about not liking the experience, if you want a new car, there really isn't much alternative. At least not until the mid-2000s, when a new company brought its EVs to market, Tesla. Instead of creating its own dealership network, Tesla decided to sell directly to consumers. Even though that was illegal in many states, the company forged ahead anyway. So they had battles, state by state, to win the ability to sell directly to consumers. Lots of lawsuits, lots of administrative proceedings before state commissions and such. Tesla and other EV makers asked for the right to sell directly to customers. And by and large, they've won that fight. Unlike other auto companies that use franchise dealers, Tesla sells its cars directly to consumers. The company will be allowed to continue direct sales from its Cincinnati, Columbus, and Cleveland showrooms. In the end, Tesla was able to get carve-outs in many states that allowed it to sell directly to consumers. But in some states, Tesla is allowed to do this because it only sells EVs. And in some places, it has to follow other constraints too, like not having salespeople. Tesla proved that a car company could sell direct to consumer. Now, the only place you can buy a new Tesla is from Tesla. And this approach has started to catch on. So there are other new EV players who have come on the scene, Rivian, Lucid, they are also going direct to consumer, making the same choice that Tesla did. Those other companies have followed in Tesla's footsteps, fighting for their own carve-outs state by state. But for legacy automakers, who all have dealership franchises across the country, it's not so simple. Laws in most states say they have to keep selling through those dealerships. There's one established automaker, though, that's trying to find a way around the system. Now we are seeing a very interesting experiment with the most legacy of legacy car companies, Volkswagen, who's decided to start an all-new brand called Scout Motors that's going to sell SUVs and pickup trucks. And they've made the extremely controversial decision to make Scout a direct-to-consumer brand, cutting out the dealers. And Volkswagen dealers are incensed by this. They're exhausting every legal avenue they can to stop Scout Motors from selling directly to consumers. Scout Motors is also fighting dealership laws on a state-by-state basis. And it's facing blowback, including legal challenges from some of the 600 VW dealerships in the U.S. One, in New York, is seeking class-action status against Volkswagen and Scout. In that case, the established dealers say that Scout is a Volkswagen company, so it must sell cars through independent franchise dealerships. Volkswagen of America says it's deeply committed to the dealer franchise sales model. Scout declined to comment. And why do dealerships see something like Scout as such a big threat? They see Scout as a threat because if Volkswagen gets away with this, if they're able to stand up a new brand and sell products directly to consumers, there's nothing that stops any other existing legacy automaker from following the same path. Scout's CEO, who used to run Volkswagen in the United States, has said that the dealer system is just inefficient for this day and age, and they think that they can do it better at the corporate level. And so just to be clear, is the idea that if you have a new company, you then maybe won't be subject to the laws that require automakers to sell cars only through dealerships? Yes. Legacy auto companies have the existing relationships with their dealer network that can't easily be severed. And the whole question in the Scout Volkswagen thing is, is Scout truly a new company, a new brand that doesn't have any existing dealer relationships, or is Scout Volkswagen by another name? But even as legacy car companies try to figure out a way to sell directly to consumers, there's another experiment going on that's also chipping away at the traditional dealership model. After the break, we head back to Carvana's Arizona dealership. Carvana bought its dealership in Casa Grande just over a year ago. And since then, sales have been through the roof, though you wouldn't know it from hanging out on the sales floor. And that's because of the non-traditional way Carvana sells cars. So if you looked at this store and everything that's around it and its location and took it all in context, you realize that there's no way that these sales figures are coming from the traditional way a dealership operates. There are not 350 people a month coming into this store and buying a Jeep Wrangler or a Ram 1500. There must be a lot of activity that we're never seeing. It's happening online. Somebody's shopping on their couch, arranging everything. And then the vehicle is either delivered to a local place where they can go pick it up or right to their driveway. It's like the introvert's dream or the online shopper's dream. I never have to interact with anybody. I also really think there's a generational aspect to this as well. I think across generations, most people do not like the dealership experience. But I think younger people especially are less used to in-person interactions and potentially awkward interactions. Carvana's approach has always minimized in-person interactions in the car buying process. The company started out as an online marketplace for used cars. And if you clicks, you can pick the car you want, create a financing plan and close the deal. Carvana has always been basically wanting to be the Amazon of cars. They have focused on light touch, fixed price, digital, efficient from the beginning. Carvana does a lot of things differently than typical dealers. They don't have any salespeople. They have what they call advocates. But they're very clear that there's nobody who's making a commission for selling you something. And lots of people like that. It turns out way, way more people than dealers might have imagined were willing to buy a car to spend tens of thousands of dollars on a car site unseen. It's really remarkable, actually. Yeah. One thing that makes it easier to understand, though, is that they have this seven-day window where you can just send it back if you don't want it. Part of Carvana's sales pitch, the price that's listed is what you pay, which does away with a lot of fees and can speed up the process. You can buy online and have your new car delivered. Carvana's model worked so well that the company's market cap is now at $82 billion, higher than some of the major automakers. Now, Carvana is applying that rubric to new cars. The company partnered with Stellantis, the automaker behind brands like Chrysler, Jeep and Dodge. Today, Carvana has seven Stellantis dealerships across the country, and they've all applied Carvana's light-touch approach to car shopping. Why is Carvana doing this, and why now? OK, so the question you just asked has been asked by many industry observers and analysts. I think it's been asked on the last three or four earnings calls, and every time they say, we're just trying something out and we're not talking about it. So they've been extremely coy and mysterious about what their intentions are with new cars. So far, all they've communicated is that we are just testing these waters. We're trying to see if we can take our model and apply it to new cars. What do other Stellantis dealerships think about what Carvana is doing? Stellantis dealers and dealers more generally are watching this extremely closely because of the potential disruption that it could cause for their businesses. Many Stellantis dealers are anxious about this. Some are blasé about it. I do want to be clear that not every dealer claims that this is some big existential threat to their business. Some are like, bring it on. Not everybody has their hazard lights on yet? No, and it was really hard doing this story. I talked to maybe a dozen Stellantis dealers. A lot of them didn't want to even go on the record about this subject because it's very touchy. They have concerns about Carvana sort of playing a different game on their turf, but they also very much don't want to look like they have sour grapes or are just upset about new competition. So it's a really tricky balance. Stellantis hasn't talked publicly about Carvana, but the company says it wants to maintain, quote, a healthy competitive dealer network that provides exceptional service for our customers. Carvana isn't the only company trying to bring the new car market online. Amazon launched its own marketplace for cars about a year and a half ago. It sells in partnership with a range of dealerships, including those that sell Stellantis, GM, and Subaru. So lots of people are trying to bring a more modern digital e-commerce type experience to buying a new car. When you think about the story, what does this all tell you about sort of the situation for car dealerships right now? Is it the beginning of the end? Are they running out of gas? Is the check engine light on? Is there a better car metaphor that we could use here? I think in a lot of ways, changes is here. Basically, the forces of digital and e-commerce keep trying to breach these gates. But yeah, I do think it's way too early to ring the bell on the traditional car dealerships. And they will tell you that they think that a lot of people still do want to touch and feel the car in person. And that they're working on ways to make it a less intimidating experience. Some have different sales models. Some don't have commissioned salespeople. There are experiments out there. But the degree to which this system can be breached is really the question. That's all for today, Thursday, May 28th. The Journal is a co-production of Spotify and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.
