February 12, 1996

On-Line Auto-Pricing Services Grow, but Dealers Wary


LAS VEGAS -- Even here, at the annual National Automobile Dealers Association convention, most of the talk during the weekend was not about cars but about computers.

On-line computer pricing services are making it easier and faster to buy cars. But by allowing customers to quickly compare the prices and features on dozens of cars, particularly used cars, the services may pose a competitive threat to car dealers.

Yet the pace of technological change in the dealership industry appears to be accelerating. Reynolds and Reynolds Co. exhibited here a new Internet-based system that, starting this spring, will let car buyers compare the prices, features and even accident records of as many as 200,000 used cars across the country.

IBM introduced an Internet service to help banks and dealers approve car loans more quickly and said it would move into the relaying of car insurance next. And Auto-By-Tel, an on-line service that helps car buyers compare cars and trucks and make low-priced bids over the Internet, said it would soon appear on the Microsoft Network, Microsoft Corp.'s on-line service.

The price-shopping services coincide with the other big new threat to traditional dealerships, the spread of huge used-car stores that offer large selections, warranties, fixed prices and salespeople who work on salary, rather than commission.

Moreover, the increasingly ferocious competition in the used-car market spills over into the new-car market because more Americans see late-model used cars that have just come off leases as close substitutes for new cars. Used cars are also much more profitable for dealerships than new car sales, often accounting for half the profits even though providing only a fifth of the sales revenue.

The pace of change is beginning to worry the auto industry. Even automakers, which have welcomed most changes in recent years that pressed dealers to improve their treatment of customers, are nervous about how quickly the new services are increasing the competitive pressures on dealers to accept lower profit margins.

"In the longer term, it's not a good idea for retailers to be selling at $50 over invoice" -- the price that factories charge dealers, said Alexander Trotman, chairman and chief executive of Ford Motor Co.

Yet even top auto executives who have ignored the Internet are now beginning to see it as unavoidable.

"To be honest with you, I have made a commitment to buy a modem," said John F. Smith Jr., the chairman and chief executive of General Motors Corp.

What is conspicuously missing in the lineup of computer services is a way to shop among dealers' new car prices for the best bargain in a state or region. Auto-By-Tel, for example, sends customers an invoice price but then refers them to local dealers to bargain.

The company, based in Corona del Mar, Calif., said that it had received more than 65,000 new-vehicle price requests in its first 10 months of operation and expected to process more than 200,000 queries this year.

But Auto-by-Tel also cancels its referral agreements with five to 10 dealerships a week that produce too many customer complaints or do not strike deals with at least 60 percent of the customers it refers to them. This puts pressure on the dealers to sell at close to invoice prices. The company said that it had agreements with 1,200 of the nation's 22,800 dealerships and added 75 more in the first day and a half of the convention.

Still, few industry experts expect consumers to be ordering cars directly from manufacturers, for at least the next several years. Automakers are leery of antagonizing dealers and the software companies that know the dealership industry best are siding with dealers, not consumers.

"We're not facilitating a way to price-shop among dealers," said Kevin Distelhorst, a general manager of on-line services at Reynolds and Reynolds, a Dayton, Ohio, provider of management systems and other software to most of the nation's car dealerships.

Jeanne Cox, the business manager at Shamrock Ford in Dublin, Calif., said her dealership had quickly signed up to fill car orders placed by customers of the Auto-By-Tel computer service, even though they typically offer to pay only slightly more than the invoice price.

"It's going to be survival -- the first one to sign up gets exclusive rights" to sell vehicles to Auto-By-Tel in the area, she said, even though she conceded that the profit margins were thin.

But John Peterson, a Pontiac and GMC dealer in Bloomington, Minn., said that he was not worried because books providing information on factory invoices have been available for more than a decade.

Frank Ursomarso, a BMW, Jaguar, Honda, Pontiac and GMC dealer in Wilmington, Del., said that while his dealerships had just set up a home page on the Internet to provide information to customers, he doubted that computer-buying services would spread.

"All dealership sales ultimately are local," he said. "It's crazy for you to go to some guy in Portland, Ore., and pay him $200 to refer you back to me."

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