The dealership business model.

One of the predictions I made back in Januaryish time is coming true this week: Chrysler is allegedly going to file for Chapter 11 bankruptcy this coming week. Depending on how the public reacts and whether the bankruptcy goes well, I'd go so far as to say that Chrysler the company will permanently disappear. Personally, I'm not the least bit surprised. Between GM, Ford, and Chrysler, Chrysler without a doubt had the least appealing lineup. In bankruptcy, GM and Chrysler will certainly close dealerships which got me to thinking about how utterly ridiculous the dealership business model is for cars.

As I understand it, dealers (a) buy or lease a huge piece of land and put a building on it, (b) borrow several million dollars to buy a bunch of new cars in the hope that (c) some customer will walk in and be enamored enough with the options, color, etc to want to buy from the dealer's stock right then and there. This model works for ordinary retail where your turnover is high and the cost of each individual item in your stock is small. However, when you're talking about cars worth $15,000 to $35,000, it doesn't work for three big reasons. I'm sure there are more, but this is what comes to mind off hand.

• First, you tie up a bunch of borrowed money in inventory that you don't know when you can sell.
  
• Second, you have to maintain a huge piece of land to park all the cars and trucks you've bought with borrowed money. Huge pieces of land costs money as well. Even now.
  
• Third, the dealer must also take a guess at what options future customers will likely want. Every passing day a vehicle sits on a dealer's lot costs money.
• Fourth, as cars sit on lots too long, the vehicle gets discounted to simply get it off the lot. This benefits the consumer, but hurts margin and possibly ultimate resale value.

A much better solution, I think, is to have consumers go into a dealership to place an order for a car and wait for the factory to build it. I did that with my car and it took about 6 weeks, one of which was for it to be driven from the East Coast to California.
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The only reason I can think (again, off hand -- I'm sure there are more) to buy new vehicles with borrowed money in the hope that it can be sold someday is test drives. People will buy houses and hamburgers that haven't been made yet, but somehow won't buy a car. This sounds even more weird when you consider that in many parts of the US, a basic house is only ~$150,000, or roughly 7 times the average cost of a new car ($25,000).

But here's the solution for that: have a limited selection of models that exhibit all the options that are available. For example, if a vehicle comes with an optional leather interior, have a tester that has that. If a vehicle comes with a choice of 2 engines, have testers for each. If you work out all the combinations, I guarantee dealers will have to stock far fewer new vehicles than they do now. The number of combinations will be actually less than what the math says since some options can be displayed independently of one another. For example, leather seats and a V8 engine can be displayed on the same tester instead of 2 separate ones.

I have no problem buying cars this way and, if it leads to lower prices, I imagine many more consumers wouldn't either.