'Massive Shift' Ahead for Car Dealers as AI Gains Traction

Rumors of car dealerships' death may be premature. Some automakers are walking back direct-to-consumer sales plans while others are moving forward full throttle.

The auto industry is going to undergo a "massive shift" in the next decade, Dev Patnaik, CEO of Jump Associates, a strategy and innovation firm, told Newsweek. "Retail is going crazy in the next five to seven years.…It's not stopping. It's only accelerating." Much of that change is due to artificial intelligence (AI), he said.

Direct-to-consumer sales negate the traditional dealer middle-man process between an automaker and customer. Sales are transacted online, and customers arrive at a boutique, storefront, experience center or brand hub to take delivery of their new vehicle.

Despite opposition from dealer groups and related advocacy organizations, the untraditional way of selling cars to in-market buyers gained popularity during the COVID-19 pandemic when many storefronts were closed due to social distancing regulations.

Instead of customers cross-shopping vehicles by visiting multiple dealers for test drives, they were able to schedule appointments online to have test drives happen to/from their homes, finance a vehicle using an all-digital process and take ownership in their own driveway.

As COVID-related restrictions eased and new vehicle inventories increased, dealers welcomed customers back to a more traditional way of doing business. Many opted to keep some level of the digital advancements and customer care options that were created during the pandemic.

Startup automakers took advantage of the digital-first trend, rolling out their sales models, which required less overhead. Rivian opened brick-and-mortar spaces across the U.S. where customers could experience the brand without the pressure of a dealership-style sales model. Lucid Motors' studios blend untraditional car shopping with the ability to test drive a model.

There are other benefits of direct-to-consumer sales models too, like a company's ability to better control their brand presence in the marketplace.

As the world has shifted back to in-person experiences following the pandemic, American and European consumers have returned to more traditional approaches to car shopping. Manufacturers who sell cars in Europe are not bound by dealership-friendly laws that U.S. car companies must comply with.

In May 2023, Ford Europe announced that it was beginning a direct-to-consumer sales program aimed at "a new generation of car buyers." The digital-first approach was designed to lead battery-electric vehicle curious in-market consumers through the car-buying journey without them having to set foot in a dealership, utilizing online showrooms, virtual test drives and transparent pricing.

In that model, Ford owned the vehicle until it was sold to the consumer. Traditionally, Ford sells the vehicle to a dealer who in turn sells it to a customer. The dealership representative has the final word on what the model sells for, and the dealer directly controls their profit stream. Ford simply recommends a price, known as the manufacturer's suggested retail price (MSRP).

Last March, Autocar reported that Ford had discontinued its agency model after a trial run in the Netherlands, reverting to a traditional franchise-focused sales model.

Other automakers have had similar luck with fixed-price offerings in Europe. Plans by Stellantis (the parent company of several brands globally including Peugeot and Jeep), BMW, Audi and JLR all met the same fate.

Mercedes-Benz is in the midst of a multiyear legal battle with its Australian dealership franchises over its plan to switch to a fixed-price agency model. In this case, customers purchase vehicles online from the automaker, and the dealer storefront serves as a delivery point and service site. Honda made a similar switch in the Australian market in 2021.

Tesla continues to offer fixed-price online selling globally. Its storefronts serve as customer touchpoints for pickup, but most services are handled at separate repair sites. Though the company makes and sells vehicles in the U.S., it is not able to sell its cars in all 50 states.

Each U.S. state has laws regarding the sale of autos. Franchise, vehicle business licensing, registration and dealer licensing regulations are handled differently state to state.

Scout Motors, a recently revived American vehicle company, is squaring off with Volkswagen Group dealer groups in court. The company, financed largely by the Group, plans to take a digital-first approach to sales when its first vehicles go on sale toward the end of the decade.

Plaintiffs in the suit, filed in Miami-Dade County Circuit Court, include some of the nation's largest dealers: Morgan Auto Group, Braman Automotive and Rick Case Automotive Group. They want to block Scout from selling directly to customers, claiming that it is violating Florida's Motor Vehicle Dealer Act, which prohibits common entities from selling directly to customers, and challenging the brand's independence from Volkswagen Group.

"I would say we've really studied and paid attention to what customers actually want in the marketplace.…What they want is actually a very expeditious sales process that should be digital first. They don't necessarily need to be spending 13 hours negotiating. They want transparent pricing, quick online transactions. Yes, they do want to test drive and kick the proverbial tires, so you have to be able to accommodate it for a brick-and-mortar environment. But the selling process is not like it was 50 to 100 years ago. The selling process should be digitally enabled," Ryan Decker, head of strategy at Scout Motors, told Newsweek in January.

"Where customers really want a human experience is on the service side. And I think this has sort of been a lesson learned for some of the other manufacturers, right? For various reasons, they've prioritized selling. They've prioritized brand presence.…Fast forward a few years and then the service experience leaves a little bit to be desired. So that's a clear lesson learned. I would say for Scout Motors…we want to make sure that we solve for that problem. Our brick-and-mortar facilities will be designed to be service first," he said.

Dealerships need to be aware that AI is coming for their jobs, Patnaik said. "Look at these distant early warning signals," he said, "In December, Perplexity launched an AI agent that's gonna buy stuff for you.…I'm gonna have an [AI] agent that's gonna tell me, 'Buy a car at this price from this place.'"

Dealer relations will be especially important during the shift, Patnaik said. "If you want to maintain a dealer network, it's kind of tricky. I mean, I've met some [dealers]. They're cantankerous people. But to their credit...they're far more future-focused than shareholders are."

As generational business owners, many dealers "actually care about the long term," but "they're so stuck in the past model," he said.

Patnaik sums up the future of the car dealer business by saying that there are three things automakers and dealers must consider: what they want their customer experience to be, what the revenue model is and how they run their business. All of these are subject to change as AI evolves. Whether or not dealers successfully evolve remains to be seen.