The Apple Auto Store Could be More Disruptive Than the Car


retail_store_gallery_istanbulAs the discussion about a possible entry of Apple in the car business continues, yet another wildly premature question arises. How would Apple go about selling these totally speculative vehicles?

Developing and building a modern car from the ground up is a vastly more complex problem than anything that Apple has previously attempted. Elon Musk, Henrik Fisker and countless others before and since can certainly attest to this. However, that is largely an engineering problem with basic technical issues to address and regulations to adhere to. Aside from scale and the nature of the engineering challenges, it’s an area that Apple is somewhat familiar with.

Retailing cars, at least in the United States can be just as problematic, if not more so. Unlike most industries, the system of selling automobiles is very highly regulated and the rules are set at the state level with each of the 50 states having their own nuances. One common feature across the country is the franchise system.

The Franchise System

The network of independently-owned franchised car dealerships was established in the early years of the industry. In those days, it was hugely beneficial to all of the startup automakers by providing them with an inventory buffer and some extra working capital. With a system of franchises, automakers don’t actually sell product to the end consumers that drive around. Vehicles are purchased by independent dealers who maintain the inventory and sell to end consumers. Even when a customer special orders a vehicle with a particular configuration, it is still sold twice, once by the factory to the dealer and then by the dealer to the consumer.

In the early years of the industry, this system benefited manufacturers because they sold franchises to aspiring retailers and them sold them the product shortly after it came off the assembly line. It also benefited the dealers that could charge a healthy markup and also make money selling parts and service. Finally, the system benefited the consumer because with so many independent dealers that could charge whatever they liked, there was an opportunity to shop around for the best price or to find the exact car they wanted.

However, as dealers became more wealthy, they would increasingly wield their influence over state legislators to get laws passed to prevent automakers from competing by selling directly to consumers. Until the import brands started arriving in force in the 1960s, this all worked well with dealers only competing with each other for sales. However, the imports seeing the thousands of dealers selling the cars at a discount had a different idea.

While they didn’t try to go against the franchise laws, they also realized that by selling fewer franchises, their dealers wouldn’t be undercutting each other as much, selling more vehicles per store and earning higher profits. Until GM and Chrysler went through bankruptcy in 2009, all efforts by the Detroit automakers to cull their dealer networks or compete directly had been firmly rebuffed. Even now with 20-25 percent of their dealers shut down during the bankruptcy process, the Detroit three still have several times the number of franchises of their import brand competitors.

Tesla and the company store

Having seen the success that Apple had with its company owned retail outlets since the first opened in 2001, Tesla decided to eschew the franchise model for its fledgling lineup of battery powered vehicles. Starting in California and a few other states with more lenient regulations that allowed carmakers without any existing dealer network to sell direct to consumers, Tesla has opened several dozen stores modelled on the Apple boutique concept.

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Unfortunately, Tesla’s attempts to expand beyond that initial retail footprint have been largely rebuffed by the legislatures and courts. In fact laws against automakers selling direct to consumers have been made even more strict in a number of states including Texas and Michigan.

So what might Apple do?

As with everything else about a potential car program, we can only speculate at this point but Apple’s history and some emerging technology provide some clues. Prior to the opening of the first Apple Store in April 2001, Apple’s products had been sold through third-party retailers including CompUSA, Best Buy and a range of independent stores. In the larger stores, Apple products were often relegated to a remote corner and rarely given much support.

Automotive retail is a very different environment where the vast majority of stores are dedicated to a single brand. However, because they are independently owned and operated, automakers have very limited control over what the stores look like or how they are configured. Automakers have resorted to a carrot and stick approach to getting dealers to follow certain guidelines, such as providing support payments to remodel or withholding allocations of certain models if dealers don’t tow the line.

In lieu of a franchise system for the computer business, Apple just went into direct competition with their third-party resellers. By providing a halo experience for customers where they could show off their latest products, Apple was able to grow their sales dramatically. While many independent resellers went out of business, most of the larger chains like Wal-Mart, Target and BestBuy saw the increasing attention that Apple brought to its products as a boon. By advertising that they had the same products, they were able to draw in consumers that also needed other products.

There was one significant distinction here from the auto industry. Apple has always sold its products at premium prices and virtually never discounted anything, thus avoiding one of the major concerns from franchised car dealers. They also discouraged third-party retailers from discounting Apple products. In this way, they avoided the appearance of undercutting third-parties and competed on providing a better retail experience.

With its huge cash horde and influence, if Apple chose to take on established car dealers to set up their own retail network, the tech company could potentially lobby and win over state legislators that have so far done the bidding of dealers. Apple already has nearly 300 stores in the U.S. and has shown a record of playing nice with those third-parties which could help if it does go after changes in franchise laws. Apple would likely have a better chance of success with its polite and well-mannered CEO Tim Cook than the outspoken Tesla CEO Elon Musk.

It’s also entirely possible that Apple could go the traditional franchise route. There is probably no shortage of potential dealers willing to put up a multi-million dollar franchise fee to give the brand a shot.

My own personal guess is that we’d actually see a mix of both independent dealers, stand-alone Apple car stores and some support from the existing Apple store network. Given that existing Apple stores largely live in malls and are often overcrowded as it is, Apple could provide a virtual reality introduction to its vehicles from the existing stores.

dk2-productImagine walking into your local Apple store, walking over to the car section across from the new watch counter and slipping on a set of Oculus Rift goggles. You could sit down in a mock driver’s seat and reach out to experience the entire Apple automotive user interface. When you are done, one of the Apple geniuses could set up an appointment for a physical test drive at a nearby Apple car store or third-party store or even pull up the loan application on an iPad and arrange for your new car to delivered right to your driveway.

If anything, Apple taking on the car buying experience may end up being far more disruptive to the industry than any Apple-branded car. As the old curse says, “may you live in interesting times.”

 

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