Today’s auto dealership-driven model for purchasing new vehicles traces its roots back to the Great Depression of the 1920s. The dealership franchise laws enacted thereafter have solidified and protected substantial market power for dealers, often to the detriment of consumers. These dynamics remained in place for much of the last century but have begun to fundamentally shift because of disruptive direct-to-consumer distribution models by new original equipment manufacturer (OEM) entrants like Tesla, the subsequent reactions from legacy vehicle OEMs, and new startup entrants into the space. These changing vehicle purchasing approaches have unlocked new opportunities for others within the broader ecosystem, including insurers. Partnerships with emerging players have the potential to provide insurers with new opportunities to offer insurance at the point of vehicle sale, as well as broader leveraged distribution channels with more attractive unit economics.
How we got here
For much of the last century, the way we purchased new vehicles remained unchanged – consumers walked into a dealership, took a test drive, negotiated price, and secured financing. The reason car purchases still flow through a dealer channel, in contrast to how most other consumer products are purchased, is rooted in dealership franchise laws. In the early days of the automobile (circa the 1890s), large manufacturers created the franchise dealership model to focus on their core manufacturing competencies while pushing local advertising and distribution to a dealer network. Additionally, OEMs held significant sway over their dealership network, with some like Ford forcing dealers to purchase inventory during the Great Depression that they would be unable to sell. The backlash to these practices, driven by strong regulatory lobbying from dealer groups, would lead to a series of laws enacted across state and federal levels from the 1930s – 1950s that would not only bar OEMs from forcing unwanted cars onto dealers, but also prevent them from competing with their dealers by selling directly to the consumer. These laws, in turn, created the foundation of the vehicle purchase experience to this day.
“The times they are a-changing….”
While initially designed to protect dealerships from unscrupulous actions by OEMs, these regulations also served to solidify the market power of car dealerships, often to the detriment of consumers. In fact, a 2016 survey found that nearly 90% of consumers disliked the overall dealership purchase experience, with a recent Superbowl ad comparing it to a root canal. Despite these longstanding restrictions, the consumer vehicle purchase and ownership experience has begun to experience real change over the past decade, driven by Tesla, other OEMs, and new startups reshaping core business models.
Perhaps the most prominent force in automotive innovation over the past several decades, Tesla has not only pioneered the U.S. electric vehicle (EV) market but has also altered the buying experience since launching the Model S in 2012 when it decided to sell direct to consumers instead of independent dealer networks. Unsurprisingly, this decision drew the ire of dealer networks and their lobbyists, with the industry entangled in legal and regulatory battles with the company for the last 10 years. While the dealer groups won battles in certain geographies, Tesla has been largely successful in continuing its sales across large swaths of states through a combination of a superior consumer experience, legal loopholes, and clever operations. In Texas, for example, Tesla has been able to skirt the state’s total direct sales ban by offering internet-only sales, which it fulfills in a regulatorily friendly state nearby before shipping the vehicle to Texas. Seeing Tesla’s success, traditional OEMs are also beginning to follow suit. Ford CEO Jim Farley recently announced plans to downsize its dealer network and set the goal of selling only direct to consumers in the future.
Taking advantage of dealer disintermediation, startups have arisen to not only drive efficiency into each step of the purchase experience but also are beginning to reinvent vehicle ownership through novel business models. Within the existing purchase experience, companies like CarPutty, FUSE, and AutoFi provide consumers with an improved financing and loan experience, while companies like Roadster and Tekion offer dealers a modern backend system to facilitate more efficient buying processes. Still, others are aiming to reinvent the entire purchasing and ownership experience through new leasing and subscription models. While traditional a-la-carte membership models such as ZipCar, Turo, and GIG provide access to used vehicles on demand, recent entrants such as Autonomy and GO leverage various mechanisms to offer new vehicles to members on a recurring basis. GO, for example, operates as a fleet and takes ownership of all vehicles, thus allowing it to capture fleet purchasing discounts from OEMs (upwards of 20%). By passing on savings to consumers, GO can offer consumers new vehicles, often at a lower rate than traditional leases, while working with its dealer partners to comply with local franchise laws.
What does this mean for the future of insurance and mobility?
While dealerships and franchise laws are unlikely to disappear any time soon, how new vehicles are purchased is experiencing fundamental disruption because of OEMs and startups. These changes represent a significant opportunity for other stakeholders within the ecosystem, including insurers. As startups such as CarPutty disaggregate financing from the dealership’s finance office, a new point of sale opportunity is emerging for insurance distribution for carriers. Partnering with such companies to offer insurance would enable a consumer to walk into a dealership with both financing and insurance in hand, ultimately facilitating a smoother purchase experience. Other fleet-centric businesses like Autonomy and GO could similarly offer intriguing partnership opportunities for insurers as they represent a unique, leveraged distribution channel that could see higher conversion rates and lower customer acquisition costs. Ultimately, how new vehicles are purchased is fundamentally shifting and, in turn, unlocking new partnership opportunities for insurers to redefine how and when insurance can be offered to customers.