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Competition in the U.S. Automotive Retailing Industry

Retail establishments in the automotive industry primarily engage in the retail sales of new or used automobiles. These establishments often maintain repair departments, and carry stocks of replacement parts, including tires, batteries, and automotive accessories.

The economic and business characteristics of the automotive retail industry starts with their marketing and distribution channels. Nationwide, the auto industry retailers generate around 533 billion dollars each year.

Developed largely before World War II, the current automotive industry was structured when demand was well above supply. Presently, over capacity in combination with demands for an innovative blend of products and services is swaying the industry into consolidation. For example, the purchasing alliance between Ford, GM, and Daimler Chrysler has formed the world's leading business-to-business Internet Company in terms of scale of operation and revenue. This online enterprise brings together all of their suppliers, streamlining their entire chain supply. These types of activities represent a significant percent of the value of a new vehicle and are an important potential source of cost savings.

The changes in this area reflect a shift from capital-intensive-operations (involving inventory investment) to information-intensive-operations (providing the right vehicle at the right time). This shift is leading to the development of the flexible and highly entrepreneurial structures as mentioned above.

The U.S. is a highly diverse market consisting of regional sub markets. Local environments, regional characteristics, economics, and lifestyle all come into play. In the past, mass produced vehicles was an accepted practice in the automotive retail industry. Today, however, mass produced automotive models are not working in the American market. In response to the shift in consumer preferences, the variety of products supplied by the automotive industry has risen dramatically.

For example, in one target market, lifestyle changes shifted from a one person per family wage earner to a two person per family wage earner. As a result, the demand for light utility vehicles has surged. Additionally, mass marketing plays an integral role in the automotive retail industry. Over two billion dollars is spent to hopefully bring in more customers while trying to create an acceptable return on investment.

For an industry that has been slow to change, it is now being bombarded from all sides with new technology, new players, new channels, and new ideas. The competition is fierce with the emergence of used car superstores, public ownership of car dealerships, and new car dealerships being bought up by large conglomerates. Along with the Internet, consumers are driving the changes in the automotive retail industry. Armed with information and taking charge of the buying process, the consumer is altering the automotive retail industry with increased knowledge and expectations. Moreover, when the manufacturer's effort to enter the automotive retailing market failed, Internet based third parties entered the playing field. It is these new entrants that are the strongest competitive force in relation to Porters Five-Forces Model of Competition.

These new players include, direct sellers, and lead generators. With these new players involved, dealerships thought they would go by the wayside. However, state franchise laws have made it difficult to sell directly online without involving the dealers. Nevertheless, with the competition ever changing, manufacturers in recent months have announced a new strategy for selling automobiles. Manufacturers will begin custom order selling that could possibly eliminate a build for dealer inventory in North America to a build to order business model. With this in mind, it would be next to impossible for other companies in other industries to win customers over to their own substitute products (Five-Forces Model).

Nevertheless, this could change too. Porter's Five-Forces Model assumes a classic perfect model. This is hardly the case in today's ever changing and dynamic markets. Breakthroughs in technology from other industries or startups may completely change business models, personal relationships, and relationships along the supply chain.

Franchise dealerships, mega dealerships, dot-com's, manufacturers, and small town dealers make up the strategic groups in the industry. Small and mid-sized dealerships can often benefit from the advantages of belonging to a larger automotive group. The benefits would include cross utilization of the same brand of new and used vehicles, lower cost in financing, and the ability to join larger computer systems. However, can these organizations stay as close to customers as the same independents they are rapidly acquiring? No one knows for sure; nevertheless the Internet is pressuring mega dealers and the dealer networks to develop closer ties to its customers. Additionally,