Car Deal Canada

Are Car Dealerships Going Away?

Are Car Dealerships Going Away?

For decades, the local car dealership has been the familiar starting point for most people buying a new vehicle. But massive changes in technology, business models, and consumer behaviour have led many to ask: are car dealerships going away?


This question strikes at the identity of a major industry. Dealerships have long served as pillars of communities and the public face of automakers. Yet their traditional model faces pressures today that spark existential questions about their future role.


This article will examine the mounting challenges for dealerships, from economic factors to shifting consumer preferences. It will also look at why many argue dealerships still provide value through service, expertise, and infrastructure investment. We’ll analyze predictions on whether dealerships will manage to adapt or ultimately be eliminated.


While the days of dealerships dominating car sales appear numbered, outright extinction seems less certain. Dealers embracing flexibility, transparency and customer focus may continue serving a vital function in a changing sales landscape. But most agree profound changes are coming that will dramatically impact the car buying experience.

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Brief History of Car Dealerships

The car dealership model as we know it today arose in the early 20th century as a result of the mass production of automobiles. As factories began churning out vehicles on assembly lines, manufacturers needed a way to sell and distribute their products to customers across North America.

Independent dealerships emerged as middlemen between the automakers and consumers. They purchased vehicles wholesale from manufacturers and sold them at retail prices to the public. This allowed car companies to focus on manufacturing while dealers handled interactions with car buyers.

These early dealerships provided a vital link between factories and drivers. They took on tasks like advertising, sales, financing, repairs, and maintenance. While sales started modestly, by the 1950s dealerships had become an established fixture of the car buying process.

For decades, the franchise dealership has been the dominant model for auto sales in North America. But major industry changes now have many questioning if this long-standing system needs to evolve to stay relevant in the 21st century.

 

Declining New Car Sales

The traditional dealership model relies heavily on new vehicle sales to drive profits. But in recent years, new car sales have faced mounting pressures:

The Covid-19 pandemic accelerated shifts that were already occurring in the marketplace. With lockdowns and economic uncertainty, many consumers delayed big ticket purchases like new cars. At the same time, shortages of microchips and other components disrupted vehicle production, leading to low inventory on dealer lots.

Competition from a hot used car market also drew buyers away from new vehicles. With used car prices surging, the value proposition of new cars was diminished. This led more consumers to consider lightly used vehicles as an alternative.

Falling new car volume has a direct impact on dealer profits and viability. Dealers make the bulk of their gross profit from new car sales, especially on finance, insurance and added products like warranties. Less volume going through the showroom squeezes this crucial earnings stream.

While the market has seen some normalization as pandemic effects fade, broader consumer trends and inventory challenges will likely keep new car sales below pre-Covid levels for the foreseeable future. This creates an uncertain outlook for dealers dependent on high new vehicle turnover.

 

Competition from Online Sales

One of the biggest disruptions facing traditional car dealerships is the rise of online sales platforms that provide a dramatically different car buying experience. Companies like Carvana and Vroom have emerged in recent years to enable customers to research vehicles, get financing, and even purchase and have cars delivered completely online.

According to Carvana, online sales made up about 10% of all used vehicle sales in 2020, up from just 1% five years earlier. That figure is expected to continue rising as more customers become comfortable purchasing big ticket items like vehicles through an app or website. For dealers used to customers walking in the door ready to buy, this changing landscape represents a major challenge.

Online sales platforms tout their simplicity, transparency and lack of pressure compared to traditional dealers. Customers can browse inventory at their leisure, get accurate pricing without haggling, and often arrange financing as well. They also never need to set foot in a dealership if they prefer not to.

While most online sites focus on used vehicle sales, some like Vroom have begun offering new vehicles as well. This expands the competitive threat to both new and used car dealers accustomed to controlling local markets. Even customers who still want to test drive locally may use the online prices to negotiate better deals, leaving dealers with much thinner margins.

For dealerships wedded to traditional sales practices, this shift towards online purchasing presents a huge long-term issue. Adapting to this new digital reality will require changing strategies and investing in their own online selling capabilities if they hope to stay relevant.

 

Shift in Consumer Preferences

One of the biggest challenges facing traditional dealerships is a shift in consumer preferences and demographics. Younger buyers in particular are demonstrating a strong preference for handling more of the car shopping and buying process online.

For Millennial and Gen Z buyers who have grown up seamlessly interacting on digital platforms, the idea of physically going to a dealership and haggling over prices seems antiquated. Surveys show that the majority of younger buyers would prefer to do as much research and shopping as possible from the comfort of their laptop or phone.

These digital native buyers crave a flexible, customizable experience where they can explore options on their own time, get trade-in quotes, apply for financing, and communicate with the dealer online. The traditional dealership sales process, which requires lengthy face-to-face interactions, seems rigid and inconvenient in comparison.

Along with flexibility, younger buyers also increasingly expect options like home test drives and vehicle delivery direct to their door. The pandemic accelerated these preferences for minimal in-person contact during the buying journey. For dealerships to appeal to the next generation, adapting to these desires for digital convenience and flexibility will be key.

 

Inventory Shortages

One of the biggest challenges facing traditional dealerships in recent years has been inventory shortages, especially of new vehicles. The global semiconductor chip shortage that started in 2020 significantly reduced production of new cars and trucks. This inventory crunch led to limited selection on dealer lots and record high new vehicle prices.

Whereas dealerships used to stock dozens or hundreds of new cars for buyers to browse, many lots sat nearly empty during the chip crisis. Some estimates indicated dealership inventories fell by around 75% during the shortage.

This inventory squeeze highlighted vulnerabilities in the traditional dealership model of stocking high volumes of vehicles in the hopes of making a sale. With supply limited, buyers were less able to negotiate prices and often had to pre-order vehicles and wait weeks or months for delivery.

The chip shortage spurred more consumers to consider buying directly from manufacturers who allowed custom orders even with low inventories. It also accelerated the move away from the traditional model of fully stocked dealer lots. Even as chip supplies recover, dealers will likely need to operate with fewer vehicles on hand and shift toward built-to-order sales.

 

The Value Dealerships Provide

Despite the pressures facing dealerships, they still bring significant value to car buyers through personalized service, ongoing support, and human interaction. At a time when many purchases are becoming increasingly impersonal and digital, dealerships remain a place where customers can get expert advice, have their questions answered in-person, and establish relationships around one of the biggest purchases consumers make.

Dealerships invest heavily in service departments and training staff to provide maintenance, repairs and support throughout the entire lifecycle of a vehicle. This trained workforce will become even more important as electric vehicles gain market share. Dealers will play a key role in advising customers on EV options, providing test drives, educating on charging needs, and performing maintenance on high-voltage systems.

The transition to EVs will require massive investment in charging infrastructure across the country. Dealerships are well positioned to install public DC fast charging stations on their lots and work with manufacturers to provide home charging solutions. With their legacy of service bays, qualified technicians and customer relationships, dealers can make the shift to EVs smoother for both automakers and car buyers.

 

Franchise Laws Protect Dealership Model in Canada

One of the biggest factors allowing traditional dealerships to maintain their foothold is franchise laws. In Canada, provincial franchise laws restrict the ability of auto manufacturers to sell vehicles directly to consumers without an independent franchised dealer as an intermediary. These regulations essentially grant dealers a protected geographic sales territory and prevent manufacturers from undercutting them with their own stores.

For example, Ontario’s Motor Vehicle Dealers Act prohibits manufacturers from acting as a dealer or operating a retail location for the sale of new motor vehicles. The law requires that all new vehicle sales must flow through independent third-party dealerships rather than company-owned stores. Similar regulations exist in other provinces.

These franchise laws shield dealers from the risk of manufacturers opening their own direct sales channels and competing against them. Efforts by manufacturers like Tesla to sell directly to customers have been stymied by legal challenges under provincial franchise regulations. This legislative framework provides a degree of stability for the dealership model in Canada.

While franchise laws have come under pressure as consumer preferences evolve, extensive lobbying by dealer groups has so far prevented major changes. Barring substantial amendments, these longstanding regulations are poised to sustain dealerships as an integral part of the Canadian auto sales system for years to come.

 

Potential Business Model Changes

To stay relevant in the evolving auto sales landscape, dealerships will need to adapt their business models. Some key changes we may see include:

 

More Online Purchasing, Test Drives and Deliveries

Many dealers are already expanding their online sales capabilities, allowing more of the buying process to be completed remotely. From vehicle selection to financing approval, customers can complete nearly everything without setting foot in the showroom. Home test drives and doorstep deliveries further remove friction from the traditional model.

 

Focus on Flexibility and Transparency

Younger buyers especially demand more flexibility and pricing transparency. Options like monthly subscriptions, vehicle rentals and hassle-free returns cater to those wanting short-term commitments. Dealers need to provide upfront, competitive pricing with minimal haggling expected.

Communication and interactions should focus on educating and assisting the customer, not high-pressure sales tactics. This shift builds trust and meets buyers on their own terms.

 

Arguments For Eliminating Dealerships Entirely

There are some compelling arguments in favor of eliminating the traditional dealership model entirely in favor of direct sales from manufacturers to consumers. Proponents of this approach point to potential cost savings and increased transparency that could benefit buyers.

One of the biggest criticisms of the existing dealership system is that it adds unnecessary costs that get passed on to car buyers. Dealerships have substantial overhead expenses related to operating large lots, showrooms and service centers. Their profits also rely on adding markups above the manufacturer’s suggested retail price (MSRP). Direct sales could cut out these middlemen costs.

Direct sales are also seen as enabling more pricing transparency. Car buyers often feel dealerships lack upfront pricing, pushing them to negotiate based on incomplete information. With manufacturers selling directly to consumers, advocates argue pricing could be straightforward MSRP without haggling or hidden fees. This streamlined experience appeals to many buyers.

Additionally, some view the sales practices at traditional dealers as outdated and inflexible compared to modern, online shopping. Hours at a dealership negotiating and finalizing paperwork contrast poorly against seamless digital purchasing. Younger buyers especially appreciate the simplicity of buying directly from a website or app.

By eliminating the dealership role, manufacturers could also gain more control over the customer experience and brand messaging. They argue interacting directly with buyers will enable better education on new technologies like electric vehicles.

 

Manufacturers Want More Control Over the Customer Experience

One argument made for eliminating traditional dealerships is that automakers want more control over the entire customer experience and sales process. Major manufacturers see companies like Tesla successfully selling directly to consumers through their own stores and online, without relying on third party dealers.

This direct sales model allows Tesla to control everything from how vehicles are marketed, to the information provided to customers, test drives, pricing transparency, and the full sales interaction. Many major automakers want to replicate aspects of this to promote their own brands, unify the customer journey, and have a direct relationship with buyers.

Manufacturers also want to lead the transition to electric vehicles and steer customers towards purchasing EVs. They feel having company-owned stores, potentially combined with some online sales, gives them greater influence over promoting and explaining the benefits of electric models versus independent dealers who may not be as invested.

While franchise laws restrict manufacturers from selling directly to consumers in many areas, some car companies are experimenting with new retail formats that come close to direct sales while still technically going through dealers. As EVs become a larger part of the market, automakers are expected to continue seeking more control of the sales experience.

 

Consolidation and Closures

Another trend that appears likely to continue is the overall decline in the total number of dealerships across Canada. Rising costs, inventory challenges and shifting consumer preferences have put pressure on dealers, leading many to go out of business or sell to larger dealer groups.

According to data from DesRosiers Automotive Consultants, the total number of new vehicle dealerships in Canada dropped from 3,230 in 2011 to 2,965 in 2021, a decline of about 8%. This consolidation is expected to accelerate in the coming years.

Regional dealer groups have been buying up standalone dealerships and smaller groups, aiming to gain economies of scale and the resources needed to invest in evolving their sales and service offerings. This consolidation means that car buyers are likely to have fewer individual dealer options in their local area in the future.

While some brands like Buick and Dodge have seen an especially high rate of closures and consolidation recently, the overall trend appears to be impacting dealers across segments and automakers. Larger dealer groups are positioned to survive better, while smaller independents face mounting challenges.

So dealership consolidation and a gradual reduction in the total dealer count in Canada will be an ongoing trend, though experts say it still leaves plenty of sales outlets to meet demand. The dealers that remain are likely to be part of bigger regional and national groups that have the size and capabilities to adapt to a changing retail automotive environment.

 

Coexistence With Some Direct Sales

The future of car buying in Canada will likely see a landscape that includes a mix of traditional dealerships and some level of direct sales from manufacturers. Rather than a complete replacement of dealers by manufacturer-owned stores, many experts predict some level of coexistence between the two sales models.

There are compelling reasons why direct sales make sense for certain automakers, especially new entrants focusing on electric vehicles. By owning their own stores, they can control branding, pricing, customer experience and their sales process. However, the substantial existing infrastructure of dealerships will be difficult for most manufacturers to completely replicate on their own.

For their part, dealerships can retain relevance by highlighting value-added services, flexibility and transparency that an automaker-owned store may lack. Dealers who invest in modernizing their sales practices and infrastructure will likely maintain a vital role in most markets. Their service, personalized support and convenience for customers still hold advantages in many situations.

Rather than a wholesale shift to one model, Canada will likely see more of a hybrid approach. Tesla may operate its own stores, while other automakers utilize a blend of company-owned flagship locations in key areas along with independent dealers in small cities. This allows manufacturers to complement dealerships in optimal locations, while still leveraging the reach of their franchise network.

The competition from direct sales should incentivize dealers to improve in areas where manufacturer stores hold an edge. This includes focusing on transparency, flexibility and customer service. Dealers who can adapt to offer competitive pricing, online buying options and high-quality support will remain integral to car buying. For manufacturers, company stores may make sense in limited areas, while independent dealers will still provide valuable national distribution.

 

Adapting to New Realities

While the traditional dealership model faces significant disruption, it’s important to recognize that dealerships still provide value to many car buyers through service, support and personal interaction. There remains optimism for dealers who can adapt to meet changing consumer preferences and industry shifts.

Forward-thinking dealerships are already embracing more flexibility, enhancing their online capabilities, and focusing on transparency and customer service. This includes options like at-home test drives, online purchasing with home delivery, subscription services, and more transparent pricing.

Rather than viewing industry trends as an existential threat, proactive dealers are finding ways to leverage their strengths while also evolving. They recognize the need to meet customers where they are now shopping and transacting. This means an omnichannel approach that bridges the online and in-store experience.

Dealers who double down on customer service and support can still thrive. With more electric vehicles coming to market, dealerships investing in EV infrastructure and technicians trained to service these new technologies will be well positioned.

While the role of dealerships will change, those able to adapt have reason for optimism. By embracing flexibility, transparency and service, they can retain value. Rather than fighting industry shifts, dealers should view them as an opportunity to refocus on the customer and shape their future.

 

Conclusion

In summary, traditional car dealerships face mounting pressures that threaten their long-standing business model. Declining new car sales, competition from online sales platforms, shifting consumer preferences, and inventory shortages have combined to put dealerships in a precarious position. Arguments around adding costs for consumers and lacking pricing transparency further call the dealership model into question.

However, franchised dealerships still retain value through personalized service, support, and their role in managing the transition to electric vehicles. Rather than disappearing completely, the future will likely see dealers taking on a changed but still important function in a landscape with more online interactions, flexibility and transparency.

To survive and thrive amidst disruption, dealers should focus on adapting to offer seamless online-to-in person experiences, flexibility in test drives/deliveries, and pricing transparency. Providing excellent customer service and support throughout the buying journey remains vital. Dealerships embracing change while still leveraging their strengths in service have reason for optimism about playing a key role in car buying for years to come.

 

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Questions About If Are Car Dealerships Going Away

Car dealerships in Canada are not going away anytime soon. They remain an important part of the auto sales and service ecosystem due to longstanding franchise laws and consumer preferences. However, dealerships are facing challenges from trends like online sales, declining car ownership, and new electric vehicle manufacturers that use direct sales models. To adapt, dealerships in Canada are investing in digital retail capabilities and shifting their business models. Most experts believe dealerships will remain relevant, but their roles may evolve over time.

The COVID-19 pandemic significantly disrupted car dealerships across Canada. Showrooms were closed for months during lockdowns, sales dropped, and operations were strained. Many dealerships invested heavily in online sales capabilities with virtual showrooms, home deliveries and touchless purchase options becoming commonplace. Federal subsidies for electric vehicles also drove demand. Coming out of the pandemic, the market remains constrained by inventory shortages and high prices. But sales have recovered close to pre-pandemic trends and the pandemic forced an overdue digital shift for dealerships.

Currently, over 80% of all new passenger vehicle sales in Canada are still conducted through franchised dealerships. This includes in-store purchases as well as a growing percentage of online orders that ultimately get fulfilled by dealerships. The remainder is mostly direct manufacturer sales that bypass dealers, which is only feasible for companies like Tesla which do not have franchise dealership networks. So dealerships still dominate the retail auto sales landscape in Canada. But their share has slowly declined and may fall further amid shifting consumer preferences.



Faced with growing consumer appetite for online transactions, most major dealer groups in Canada have invested heavily in e-commerce platforms and digital retail capabilities. Their websites now enable customized vehicle searches, payment calculators, online credit applications and even paperless transactions in some cases. Home delivery options have expanded considerably as well. Investments in online sales training and digital merchandising are also rising across the industry. Dealers aim to blend physical and digital experiences to match consumer expectations.

Every province in Canada has franchise laws that govern the manufacturer-dealer relationship and protect the franchise rights of dealerships. These laws evolved decades ago primarily to prevent unfair practices by automakers and provide more stability for dealers, as franchise terminations and forced capital investments had caused dealer failures. Franchise laws vary by province but generally ensure dealers have geographic sales exclusivity, require fair dealing by automakers and make it difficult for manufacturers to simply end franchise agreements without significant cause.



Canadian franchise laws generally prohibit auto manufacturers from selling new vehicles directly to retail consumers and bypassing their own dealer networks, unlike the case in the United States. However, limited exceptions exist in some provinces that carve out direct sales access for electric vehicle manufacturers without existing dealer franchises, such as Tesla and Genesis. So while traditional automakers could not easily sell new vehicles directly to consumers without overhauling franchise laws, EV makers have more flexibility in several provinces including Ontario, British Columbia and Quebec.

The rising popularity of electric vehicles (EVs) poses some unique challenges for traditional dealers in Canada. EV makers like Tesla use direct online sales that bypass dealers entirely. Meanwhile, some dealers are struggling to effectively merchandise and sell EVs alongside gasoline-powered models. Consumers also have concerns about service capabilities for EVs at some dealerships. To adapt, major dealer groups are investing to upgrade tech skills, charging infrastructure and EV inventory. But uneven EV adoption rates across dealer networks persist, and their influence over this critical segment is vulnerable.

Not under current laws. Auto makers have recently pressed certain provincial governments to ease franchise protection laws in Canada and give them more flexibility to consolidate dealerships and terminate franchise agreements as they see fit. They argue the laws are antiquated and limit their ability to adapt to market changes. But their efforts have achieved little traction so far, facing significant resistance from dealer associations and politicians wary of undermining local dealership businesses. It would likely require changes to decades-old provincial legislation for automakers to terminate dealer franchises without cause.

After decades of steady growth, private vehicle ownership rates in Canada have declined slightly over the past 5 years across most age demographics. Vehicle expenses, urbanization, usage-based models like car sharing, and improved public transit are all frequently cited factors. However, industry data shows that cars still represent close to three quarters of urban commutes. So while fractional ownership models are growing, predictions of mass departures from vehicle ownership even in cities seem unfounded currently. The longer-term outlook likely hinges on autonomous taxi economics.

It’s unlikely the franchised car dealership model will disappear entirely in Canada, but their role could shrink over time if more brands adopt direct online sales. Tesla has proven high-price vehicles can be sold profitably online without dealerships. However, consumers still value test drives and face-to-face interactions for major purchases. Mass-market brands require extensive physical footprints for sales, but also service, parts and collision repair. Dealer groups also carry significant political sway. Though their control of the sales process may diminish, a wholesale collapse of the dealership system seems a distant prospect in Canada’s market.

Tesla is arguably the most successful direct-to-consumer brand in Canada, controlling an estimated 79% of the country’s EV market. But Polestar, VinFast and Genesis also use online direct sales here without reliance on dealer franchises. Under provincial exemptions for EVs without legacy dealers, these newer brands sell vehicles directly to customers rather than through the franchised dealer model that has defined the retail landscape for decades. Their early success may inspire other entrants to follow suit.



EV purchase incentives boost customer demand but also present challenges to dealerships. Incentive levels can fluctuate purchase timelines as buyers await improved offers. Price transparency is critical since rebates are embedded in vehicle pricing. Inventory and staff training demands strain dealers lacking EV experience. Complex rebate applications also fall onto dealerships to manage. Governments anticipate most EV sales flowing through franchised dealerships, but direct online EV brands also benefit from growing incentive budgets. Dealers ultimately need to adapt sales processes to smoothly facilitate access to incentives.

Ontario, British Columbia and Quebec have implemented legislative exemptions permitting electric vehicle manufacturers without existing dealer networks to sell directly to consumers online. This exemption pathway has allowed Tesla to operate its unique retail model nationally. Polestar, VinFast, Rivian and Genesis have all launched or announced plans under direct sales frameworks as well. Alberta had allowed direct EV sales but is switching models. Dealers have opposed these policy changes but with growing inter-provincial consistency, the direct EV sales trend appears entrenched in leading Canadian markets now.

Franchised automobile dealers in Canada are much more comprehensively protected from manufacturer decisions compared to the patchwork of US state franchise laws. All Canadian provinces have overarching franchise regulations governing automaker-dealer relationships, rooted in a common history. US state dealer franchise laws emerged more sporadically in response to regional disputes. While powerful dealer lobbies perpetuate US protectionism, Canadian legal shields against automaker unilateralism are stronger, broader and more consistent nationally. This entrenched environment poses unique challenges for innovators seeking to overhaul traditional vehicle retail models in Canada long-term.

Quebec is renowned for having the most rigorous framework of franchise protections shielding automobile dealers from manufacturer decisions that could undermine their sales and service businesses. Its 1986 Dealer Act and 1998 amendments entitle dealers to exclusive sales regions, prevents carmakers from setting up company-owned stores, and requires “good cause” for any franchise termination while guaranteeing compensation for affected dealers. Terminations also require a complicated administrative process. These layers of protections make Quebec one of the most challenging provinces for manufacturers seeking to consolidate franchises or implement aggressive retail changes.

Rising interest rates slow auto sales since most vehicles are financed, and higher loan rates increase monthly payments. A 2022 Scotiabank study estimated a 100-basis point rate increase could lower annual Canadian auto sales by 4% over 2 years. Dealers also make less profit on financing with higher rates. On the plus side, greater finance income provides some offset. But ultimately rate hike cycles invariably lead to declining vehicle sales. The good news for dealers is slower sales also reduce inventory risks during rising rate environments.

Fully autonomous vehicles could disrupt the automotive sector profoundly, including dealerships. Self-driving taxi fleets may shift focus from retail sales to bulk commercial transactions. Vehicle design changes could also alter service requirements and parts needs. Dealers may tap new revenue streams assisting mobility providers. But their predominant role retailing and financing expensive personal cars would fade in a robo-taxi world. That landscape remains distant but threatens massive upheaval of traditional dealership operations if it matures.

Numerous digital retail innovations are transforming franchise dealership operations in Canada: Online purchases with home delivery, virtual showrooms, digital document signing, video appraisals and AI-assisted chatbot messaging are becoming commonplace. Tablets have also replaced printed window stickers on many lots, speeding customization. Behind the scenes, automated personalized marketing workflows utilize consumer data to tailor promotional outreach. And product recommendation engines apply machine learning to suggest vehicles aligned to buyer needs. Technology is rapidly improving consumers’ car shopping journeys.



Data aggregation and analytics tools are enabling dealership groups to glean more sales insights from the troves of information they accumulate across marketing platforms, CRM systems and website interactions. Tracking online browsing behavior helps dealers target and nurture high-potential leads. Sales managers can benchmark individual sales team metrics more precisely to optimize performance. Data also assists vehicle merchandising based on real local demand patterns rather than assumptions. When layered properly, data gives dealers unprecedented views of their sales funnels and where friction points exist.



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