Can cars sell via Web?

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Third-party automotive referral companies promised to save shoppers time and hassle. Consumers could access sites such as Cars.com, CarsDirect.com and Autobytel.com from the comfort of home.

The premise behind such start-ups was simple: Provide customers with a convenient, hassle-free way to buy a vehicle. Implied was the promise of purchasing the vehicle for the lowest price possible.

Reality has set in. Now, Web sites are disappearing as quickly as they appeared, and the survivors are facing an uphill battle from a combination of costs and regulatory restrictions blocking direct sales.

"I think they're goners," says Art Spinella of CNW Market Research, when asked what it would take for these third-party sellers to survive. For instance, Carorders.com is one such site that recently closed. "Con-sumers have gotten wise to the fact that buying online is more expensive than buying directly from a dealer."

According to Mr. Spinella, it's 4.5% more costly to buy vehicles through a third-party seller than from a dealer, since dealers have to offset the cost of paying for the service. Typically, dealers pay a flat fee to participate in a program and a per-lead fee.

LAYER OF COST

"The biggest stumbling block is that [third-party sellers] don't take cost out of the system. Their business models actually add a layer of cost," says Chris Denove, partner at J.D. Power & Associates.

David E. Cole, director of the Center of Automotive Research at the Environmental Research Institute of Michigan, echoes that sentiment.

"They have to have a value proposition. If they can't contribute value, they're gone," Mr. Cole says.

Mark Lorimer, president-CEO of Autobytel, disputes his company makes it more expensive for consumers to buy a car and cites a study that examined how Internet referral services affected dealer pricing of automobiles in California during 1999.

"The study was based on our data, and it showed that the average customer actually saved $450 on a car purchase of $23,696" by using Autobytel, Mr. Lorimer says. The study, a joint effort of Yale University's School of Management and the University of California-Berkeley's Haas School of Business, was released last September.

A factor working against third-party sellers is that they're not directly involved in delivering the final product, nor do they have much control once the customer's request has been forwarded to a dealer.

"When a dealer doesn't respond promptly to a customer's request, it reflects on Autobytel, for example, not on the dealer since the customer had dealt with Autobytel," says Jeremy Anwyl, president of car research site Edmunds.com. "About 30% of leads that go to dealers don't get responses, so consumers get upset with online services."

A recent survey by EDS backs up Mr. Anwyl's contention. "In our survey to a select number of dealers, 13% never responded, even after two e-mail inquiries for vehicle information," says Matt Parsons, VP-marketing at EDS Automotive Retail Group.

Both Autobytel's Mr. Lorimer and Rob MacNaughton, VP-business development at Cars.com, contend their companies work closely with dealers to ensure customer satisfaction.

Eventually, the industry shakeout could benefit the fittest companies and ultimately consumers.

"We are looking for consolidation to occur in the industry. This will eliminate the confusion a number of customers are facing with the myriad of choices currently available," Mr. MacNaughton says.

The industry may be already witnessing what the future holds for the remaining referral services.

EXPECT MORE PARTNERSHIPS

"I think the future of these companies lies in the partnership with" carmakers, Mr. Cole says.

General Motors Corp. last month announced it would start testing Chevrolet sales through Autobytel in the Washing-ton metro area. Shoppers can browse inventories and get prices and quotes on all the cars and trucks at regional dealers. The greatest benefit in the GM-Autobytel test, Mr. Cole says, is the pooling of dealer inventory, something dealers are already starting to do on their own. As dealers evolve, the referral companies may be forced to evolve, as well.

"There is one untapped opportunity for referral services, and that's to become lead management units for the smaller players," Mr. Anwyl says, referring to car companies such as Kia Motor America, Hyundai Motor America and American Isuzu Motors. "This would transform referral companies from business-to-consumer players to business-to-business players."

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