Why Detroit is heading to the web

Six years ago when eBay Motors built an online auction where consumers could research, select and bid on pre-owned vehicles using just their personal computer and the Internet, eBay wasn’t simply kicking the tires on a new automotive retailing concept. Through a new automotive subsidiary, eBay had set out to prove that cars, trucks and sport utility vehicles could be sold entirely over the web.

Today, eBay Motors is driving rings around other automotive sites. With more than 10 million monthly visitors and annual vehicle, accessories and parts sales reaching $10 billion, eBay Motors is the most frequently visited automotive site on the web—a destination so popular with used car buyers that a sport utility vehicle is sold every eight minutes and a Corvette every hour.

EBay believed early on that car buyers want more from their web shopping experience than thumbnail images of available inventory and minimal vehicle descriptions displayed on a static dealer web site. In response, eBay gives customers the ability to locate a vehicle, check out its features and availability, and then bid and buy the vehicle completely online.

“We’re living proof that car buyers will use the Internet to purchase the vehicle they want and use e-commerce to pay for it and get it delivered,” says SimonRothman, global vice president of eBay Motors. Adds Rob Chesney, director of autos for eBay Inc.: “More cars are sold on our auction site before 9 a.m. each day than at an average dealership in a year.”

Catering to the web buyer

Since 1998, eBay Motors has sold more than 1 million used cars, trucks and SUVs on the Internet, and arranged loans and down payments on many of them through its online finance center, which eBay launched in May 2003. “We are working with our site users to help them take more control of the transaction,” Rothman says.

Now, looking to emulate eBay’s success—and to sell cars in a way that their competitors haven’t caught onto yet—a small but growing number of dealers are developing their own e-commerce and online payment strategies. “There are shoppers who want an Internet-only way to buy a car, and some dealers are trying to recognize and cater to that buyer,” says Julie Ask, senior automotive analyst with Jupiter Research Inc. “Internet-only shoppers tend to be very motivated buyers. They like the fact that they can use the web for what they perceive as a more hassle-free shopping experience.”

Today, only about 1.5% of all new vehicle sales begin _and end entirely online, says J.D. Power and Associates, an automotive marketing and consumer research firm. Jupiter Research puts the proportion at 1.1%. Either way, it’s small. But by offering customers a complete e-commerce program, which includes paying for or financing the vehicle online and then using options such as e-mail and electronic forms to arrange for delivery or pick-up, more dealers are seeing a market in pursuing web-only buyers.

Part of the value in going after those buyers is the lower cost of acquiring them. A dealer spends about $500 on print or TV and radio advertising to generate one showroom purchase and can take weeks to close the sale, according to Jupiter. In comparison, Internet sales average $20 to $40 per lead and can close in as little as two or three business days. “If the dealer has a complete e-commerce and finance or payment system in place, Internet sales can be generated and closed very cleanly,” Ask says.

Competitive advantage

The faster closing time and lower cost of Internet deals are a competitive advantage in many metropolitan markets where each dealer sells virtually the same new vehicle inventory at similar prices and with thin margins on the price of a new car, observers say. But because the market is so new, dealers sometimes have a hard time identifying would-be Internet buyers. “The big challenge for dealers is finding out who the Internet shoppers are and motivating them to buy,” Ask says.

Once buyers learn about the online process, they are willing to use it for at least part of the purchase of a car. While the actual buying of cars online is still small, Jupiter Research estimates that 22% of all new-car sales will be generated in one way or another by Internet activity this year and that will reach 39% in 2008.

One way to find Internet-only buyers is by offering customers different ways to negotiate online for the price they’re willing to pay, including designing an auction strictly for new car sales. Five years ago, Earnhardt Auto Centers, a large multi-brand automotive group in Gilbert, Ariz., built an e-commerce platform that allowed shoppers to build an interactive version of the car they were shopping for and to post a secure electronic down payment using a major credit card.

But to motivate more Internet buyers, especially repeat and brand-loyal customers, Earnhardt expanded its online buying program with options and marketing efforts that cater to Internet-only shoppers. To differentiate from other Phoenix-area car dealers, Earnhardt’s updated e-commerce program includes a web site where car buyers can search for available make, model and vehicle options; check a vehicle’s availability; or custom-build their own dream car.

They can also use a new interactive auction to submit a bid on a particular car, SUV or pickup truck and then apply for financing over the Internet. To begin the process, Internet buyers select a car, use a pricing database to compare the manufacturer’s suggested retail price against Earnhardt’s advertised Internet price, and then submit a bid. If the new vehicle bid is acceptable to both the customer and Earnhardt’s Internet sales department, the next step is qualifying the buyer through the dealer’s online finance center and filling out a series of electronic credit qualification forms. Once the buyer is pre-qualified, and the transaction is processed by the dealer and the bank, credit union or finance company, the next step is arranging for pickup or delivery, where the customer signs the final paperwork and accepts the keys.

“Some customers want to shop entirely online because they’re busy, know the vehicle they want and prefer an expedient means to finish the transaction,” says Joe Martin, Earnhardt’s group e-commerce manager. “We built an auction component to our web site to handle that type of customer and a bidding process that gives us, as the dealer, and the consumer, as the buyer, room to negotiate a final price.”

As a way to advertise its new online auction and make potential customers aware of its frequent Internet specials, Earnhardt conducts frequent e-mail marketing campaigns to a database of more than 1,000 names, including vehicle owners who have bought in the past from Earnhardt and shoppers who come into the showroom and ask to be placed on the dealer’s e-newsletter lists. The dealer credits constant Internet promotion and an interactive bidding program with generating and closing several sales each month. “For a certain type of car buyer, this process gets them into a new car without having to come into the showroom and generates a new kind of sale for us,” Martin says. “It’s a sales model I think will catch on.”

Unlike Earnhardt, most dealers still stop short of offering customers Internet payment, financing or delivery options. Nearly all of the nation’s nearly 20,000 new car dealers have their own web sites, but only about 60% have updated that site with the advanced navigation and research tools that let web shoppers conduct a vehicle search, build an interactive version of the vehicle, view manufacturers’ suggested retail prices or schedule a service appointment, according to the National Automobile Dealers Association.

Still learning

And while other web-savvy chain retailers, catalogers and Internet pure-plays have spent years building e-commerce sites with deep content or innovative merchandising as well as marketing programs that generate sales, most car dealerships are still wrestling with basic web site management such as responding to e-mail inquires in a timely manner.

In a recent mystery shopping survey of more than 1,600 dealers nationwide, only 58% responded to e-mail inquiries, compared to 42% three years ago, according to The Cobalt Group Inc., an automotive retailing research and applications development company. “Dealers are still learning how the web should and could be used to impact their sales and marketing,” says Kevin Root, vice president and general manager of Cobalt’s dealer advisory services. “Many automobile dealers focus primarily on today and aren’t thinking more long range about what’s happening six or 12 months out.”

The trade-in issue

Many dealers aren’t convinced that customers will buy entirely online because most transactions involve a trade-in or lease expiration that requires a physical inspection and valuation of the vehicle by the dealer. “The Internet is a very cost-effective advertising medium and a great marketing tool if used properly, but we use it to drive traffic to the showroom,” says Wes Lutz, dealer principal of Extreme Dodge/Hyundai Inc. in Jackson, Mich., and a former chairman of the National Automobile Dealers Association’s information technology committee. “Most buyers have a trade-in involved or won’t buy something as important as a car sight unseen, so we use the web to motivate people to visit the lot.”

But not all sales involve a trade-in, and many new car deals can be consummated completely online, a fact not lost on Freehold Ford in Freehold, N.J., which is expanding its e-commerce program for Internet-only buyers.

As a participant in Ford Direct, a joint-venture Internet marketing company that Ford operates with about 3,900 Ford and Lincoln Mercury dealers, Freehold Ford often gets Internet leads or referrals from customers who know precisely what they want, such as a new F-150 pickup truck in a specific color with individualized options.

Such customers are particularly motivated to buy and use the Internet and manufacturer or third-party automotive research sites to locate which dealer has the vehicle in stock and at the right price.

To retain such shoppers, through leads fed directly into the dealer’s information management system from FordDirect.com or through toll-free phone numbers Ford Direct embeds on its dealer locater pages, Freehold Ford has upgraded its e-commerce platform with features offering ways the customer can complete the transaction entirely online.

FreeholdFord.com now includes an improved vehicle locater with sharper graphics, faster navigation and the ability to e-mail the dealer for a specific quote, as well as a link to an online finance center at Ford Finance Co., where customers can use secure electronic forms to seek financing and pre-qualify for loans. The site also features Internet-only specials such as 50% off the MSRP on a Taurus and personalized pages where Ford owners can schedule a maintenance visit, maintain a service expense log, or download an online owner’s manual and warranty information.

Since Freehold Ford implemented online financing and other upgrades about a year ago, the Internet has come to account for about 10% of all sales and closes between three and five purely e-commerce deals per month. “Pure Internet sales are actually easier for us because the negotiations are much more straightforward and don’t involve a trade-in,” says Bill Keith, president of Freehold Ford and chairman of Ford Direct. “We quickly agree on a price, help the Internet customer with finance options and arrange a pickup.”

Repeat buyers

Keith says most Internet-only buyers tend to be repeat shoppers who start their car research on a manufacturer’s site or any one of several third-party research and vehicle locator sites—such as Autobytel.com, AutoNation.com, Cars.com, CarsDirect.com and AutoTrader.com—and then find the dealer closest to them with the car they want. “Internet-only shoppers can be very brand loyal, and they’ve done extensive research on the vehicle they want and the price they are willing to pay,” he says. “They come to us when they’re ready to negotiate, finance and take delivery.”

Five years ago, many dealers and vehicle manufacturers thought that more of the automotive market would adopt a direct sales model. Ford Direct, for instance, was founded on the premise of helping Ford and its participating dealers build a direct Internet sales platform, where customers would use the Internet and e-commerce to purchase a Ford vehicle in the same way they bought books online from Amazon.com and highly customized personal computers from Dell Inc. The parent company, Ford Motor Co., had ambitious plans to sell directly to the public in Canada and contemplated selling cars online in the United States. “We built Ford Direct with technology to handle complete e-commerce, but the model was ahead of the market,” says Ford Direct CEO Steve St. Andre. “The timing and circumstances weren’t right.”

Peak in sales

Other manufacturers and Internet start-ups also followed Ford’s lead and set up direct business-to-consumer e-commerce companies or units, including Daewoo International, a South Korean car maker, with plans to sell entirely online in California.

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But the market didn’t materialize—at least until now. Five years ago, online car buyers didn’t have the research and negotiation tools they have now to complete most of the sales transaction, including price comparison, entirely over the web. And dealers and manufacturers weren’t thinking about innovative ways to cater to Internet-only buyers.

But after a record number of years, driven by a barrage of incentives, the number of new vehicles customers are purchasing is expected to peak at about 17 million units this year, causing dealers—and manufacturers—to implement new ways to find and retain buyers. “Dealers need to think about the future and ways to differentiate. One way to do that is by developing strategies that cater to people who want to shop and buy over the Internet,” says Ask. “The timing and technology weren’t there five years ago, but the Internet is a pervasive force in automotive retailing today. More dealers and manufacturers should be concentrating on how they can close more deals online.”

A big part of finding and retaining Internet-only buyers is building a web retailing platform that makes it easy, convenient and as hassle-free as possible for customers to purchase a vehicle, a strategy that eBay is implementing with very successful results, Ask says.

On eBay Motors, the site’s inventory of approximately 35,000 vehicles is supplied by individual car owners and, at times, several thousand independent and franchise dealers that use eBay to advertise and sell a portion of their used vehicle inventory.

Inspections

Dealers pay $40 per auction to list their vehicles on eBay Motors and an additional $40 when the vehicle is sold. To enhance their listing, dealers can select additional site placement or upgraded graphics for fees ranging from $5 to $100. To give buyers—and themselves—confidence in selling cars over the Internet, dealers can include an e-Bay-certified inspection in their vehicle listing priced at $80 for an exterior, cosmetic inspection or $99 for an exterior and mechanical evaluation.

To assist successful bidders in completing the transaction entirely online, dealers can work with one of eBay’s payment partners,Escrow.com, a third-party funds collection and disbursement company, or its own PayPal Inc., an Internet payments processor that accepts and posts secure electronic down payments.

“Dealers like our auction because each vehicle listing receives an average of eight bids and because we’ve taken the uncertainty out of buying a car sight unseen over the Internet,” Chesney says. “Of all vehicles sold on the site, 80% are interstate transactions”

Despite the fact that a significant portion of eBay’s automotive business is generated by dealers, many major manufacturers such as General Motors Corp. have no immediate plans to develop auction capabilities or complete online payments processing options for their dealers—at least in the United States.

GM, for instance, operates BuyPower, an Internet marketing and online sales program that generates online leads for dealers but stops short of offering online payments processing and national vehicle delivery options. “Most automotive buying begins on the Internet and ends in the showroom because our research shows that nearly all GM buyers still want to smell the leather, take a test drive and conduct negotiations with a dealer face to face,” says Jack Bowen, general director of GM Customer Relationship Management, which oversees GM BuyPower. “Our Internet program in the U.S. is focused on aggregating and helping to facilitate leads for our dealers.”

Treading lightly

GM and other manufacturers stop short of offering their dealers—or themselves—full assistance with complete direct-to-consumer e-commerce processing for a number of reasons. In most instances, manufacturers don’t want to antagonize dealers by bypassing them and selling direct from the factory. Many state laws also protect dealers from what they perceive as unfair competition by stipulating that only licensed dealers can sell new cars to the public. For example, Texas and other states prohibit any party from selling vehicles over the web unless they are an authorized dealer.

But companies such as CarsDirect.com are working with dealers on ways to sell new cars entirely online and they foresee a solid future in offering customers and dealers a complete e-commerce program for selecting, pricing and buying vehicles over the Internet.

CarsDirect, which works with about 3,000 new and used car dealers, offers a program whereby online new car buyers pay one Internet-specific price for a vehicle, use a dealer locater service to find the dealer with the nearest available inventory, and then choose among different finance options through major financial institutions such as J.P Morgan & Co. to pay for the car and complete the transaction online.

While CarsDirect.com, a privately held company whose owners include Amazon.com, Oracle Corp. and about 10 other investment bank and large dealer groups including UnitedAuto Group/Penske Automotive and Asbury Automotive, doesn’t disclose financial information, it notes that business is growing, a sign that more customers and dealers are looking for more completely online auto sales.

Adaptation

Customers can use CarsDirect.com to view vehicle reviews, ratings, safety features and specifications to simultaneously compare competing vehicles, or search for available manufacturer rebates and incentives on the specific new vehicle they’re looking for. CarsDirect and its participating dealers negotiate all vehicle pricing. The company’s business model is built on retaining an undisclosed percentage of the final transaction and other specialized marketing and advertising services. “There is a growing market for complete Internet car buying, and more dealers are looking for ways to consummate that particular type of sale,” says Chuck Hoover, senior vice president of marketing and business development for CarsDirect.

Like CarsDirect, eBay Motors has a sophisticated support system and education program it calls the eBay Dealer Outreach center, which includes both online and offline courses dealers can take to learn best practices that help them close e-commerce sales on eBay. In conjunction with its outreach center, eBay offers a network of sales support specialists who will work with dealers and their Internet sales representatives to begin–and close—auctions using the eBay platform. “We’re teaching dealers how to engage in complete e-commerce,” Chesney says. “We’re helping them adapt to using the Internet as a complete transactional business model and a new way to sell cars.”

Mark Brohan is principal of Milwaukee-based The Brohan Group, providing professional editorial and publishing services.