Death of the (Car) Salesman

Death of the (Car) Salesman

New Leaders

AutoNation (AN)

According to a Gallup poll of last December, the most respected professionals in the U.S., by a substantial margin, are nurses. Can’t argue with that.

At the other end of the spectrum—down in the basement, as it were—we find lobbyists, followed closely by members of Congress and car salespeople.

There’s been a lot of talk in recent years about curtailing the power of lobbyists, but little real change. Money is power in this country, and with last week’s Supreme Court decision, money will have even more power.

Members of Congress? Here, too, the prospects for change are dim, particularly because of the increasingly polarization of society that digital communications has enabled.

And car salespeople? I’m actually quite optimistic that there’s real change coming, change that will not only save us money, but also make us happier.

The change won’t kill them, literally—my headline exaggerated. But if all goes well it will introduce more competition into the marketplace, which will put the worst offenders out of business and, hopefully, allow car salespeople to even rise above state officeholders in the rankings!

For starters, consider that the average car dealership adds 2-5% to the price of a car right away, and that’s before they try to sell you a long list of extras, including rustproofing, alarms, extended warrantees and financing.

When all is said and done, the average dealer adds between 5% and 10% to the cost of a new car.

Yes, the Internet has helped a bit; in fact, people now spend more time researching cars online than they do at dealerships. As a result, they know where to find the lowest-priced car in town, and they know the dealer’s cost.

But when they eventually do visit that dealership, they’re still subjected to the same old tricks dealers have been using for decades to squeeze more dollars from the customers’ pockets.

And it’s not a fair fight! The dealers do this every day, while the average buyer does it maybe 20 times in his life. Plus, the dealer has the ultimate weapon, time. He’s in the dealership for the whole day, while you’re trying not to spend the whole day there. He knows that the more of your time he wastes, the more likely you are to succumb.

To me, this practice of stealing my time has always galled the most.

The rise of the mega dealers, AutoNation (AN) and CarMax (KMX), has helped a bit. With huge selections and fixed prices, these companies are better at pleasing consumers, though their prices are seldom the lowest.

But the big force in the market these days is Tesla Motors (TSLA), the first successful new American car manufacturer in more than a century.

One reason Tesla is successful, of course, is that it makes an awesome—and expensive—electric car.

But another reason is that Tesla bypasses the existing auto dealership structure and sells directly to the consumer, for a fixed price—which at least avoids the 2%-5% additional cost dealer would tack on.

More than that, there’s absolutely no pressure at all in the sales process. Most Tesla buyers rate the experience very highly.

Which raises the questions, “Why do we have car dealers anyway? Why can’t all manufacturers do this?”

Partially, it’s because when a manufacturer gets to producing large volumes, selling wholesale to middlemen can make sense, especially if the carmaker sees itself first as a manufacturer.

That’s how dealerships started in this country.

But then, as the dealership model evolved, individual states put in place laws that actually prohibited manufacturers from competing with the dealerships by selling direct to customers. And today, that’s a problem (in my book).

In Europe, there are no laws preventing manufacturers from selling direct to customers, and some do this very well.

In fact, the biggest dealership in Europe these days is Porsche, with 334 points of sale, 260 of which also sell Volkswagens.

The majority of cars in Europe are still sold by independent dealers, but the rise of digital marketing—combined with automobiles’ decreasing need for service—means that more and more manufacturers are seeing the value (and the profitability) of selling direct to the customer.

Sort of like Apple (AAPL), which makes a ton of money by selling direct to customers, and makes them happy at the same time!

But in the U.S., the well-entrenched dealership model means we have the well-entrenched National Automobile Dealers Association (NADA), founded way back in 1917.

And that means we also have lobbyists for those dealers. You remember where lobbyists were in the graph. At the bottom.

Here’s a chart of the National Automobile Dealers Association’s lobbying expenditures in recent years, revealing that the group spent $3.1 million in 2013.

The optimist in me says this chart might be topping out. If I’m right, a major reason will be the fact that Tesla Motors is now working to break through the armor that protects the dealers’ interests, by getting permission to sell its cars direct to consumers in every state in the U.S.

The battle has been fiercest most recently in New Jersey, New York, Ohio and Washington.

But it’s also getting interesting in Arizona and Texas, two states that gave Tesla the cold shoulder until the company started looking for a place to build its million-square-foot battery plant, a gigafactory that would employ more than 6,000 people.

Suddenly, politicians in Arizona and Texas are very interested in making nice with Tesla!

If the status quo wins in these battles, and the auto dealers quash efforts to allow direct sales, it will be a shame. Buying my Tesla Model S was a great experience and I think more consumers should have that experience, not just by buying Teslas but by buying any car they want!

Yes, I understand that auto dealers want to protect their jobs, and I think there will be plenty of room for both sales models for decades to come. But the world is ripe for alternative sales models. The consumer wants this alternative now. And the only reason we’re struggling to move in that direction is the lobbying efforts of the National Automobile Dealers Association and its members.

Note: if you’re an auto dealer, feel free to write with your dissenting opinion. I can take it.

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Moving on to the stock market, we are definitely in a transition phase now. The indexes remain strong, especially the Dow and S&P, but the Nasdaq is suffering, and worst-hit of all have been the hot growth stock that led the way over the past nine months and more.

The best explanation for this shift is the simplest; those stocks got overvalued and now it’s time for them to rest.

But the psychological argument is important, too. Those stocks became too popular (AWAY, NFLX and TSLA are prime examples) and they now need time to cool off, to get out of the limelight.

So now it’s time for some new leaders, and one of them might be AutoNation (AN).

AutoNation is the largest automobile dealer in the U.S., and its roots are interesting.

Its founder, H. Wayne Huizenga, first built Waste Management into the largest trash-hauler in the U.S.

He then grew Blockbuster Video into the largest movie rental chain in the U.S.

And then he built AutoNation, which is now the largest car dealer in the U.S. With 267 dealerships selling cars in 15 states, the company sold its nine millionth vehicle last year. (Note: Wayne stepped down from management a decade ago.)

Today, AutoNation gets 55% of its revenues from new cars, 24% from used cars, and the remainder from parts, service, financing and insurance.

And growth trends are good!

In 2013, revenues hit $17.5 billion, up 12% from the year before, while earnings hit $2.98 per share, up 17%. For 2014, analysts are expecting earnings growth of 14%, but I think that’s conservative.

Lastly, here’s the chart.

While AN has been in a gentle uptrend for years, it’s actually been underperforming the broad market since August 2011, nearly three years, even though growth has consistently been over 10%. This has made the stock a better value.

And now the stock has broken out to new highs, sparked by the news that auto sales in March were superb. After the long cold winter, people are itching to buy—and they’re feeling a little more prosperous, too.

To me, this strength (combined with the market’s change of focus) is a signal that AN might be one of the market’s new leaders.

So, you could jump on board here, using proven risk management tools to get out with minimal loss if I’m wrong.

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Yours in pursuit of wisdom and wealth,

Timothy Lutts
Chief Analysts, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory

Timothy Lutts

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