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Car Dealerships and Higher Ed
April 1, 2012 - 9:00pm

Remember when we all thought that the Internet would cause the car dealership to disappear? We'd all buy our cars online. We'd tell our grandchildren about the days when buying a car meant going to a "car dealership" and spending time with a "car salesperson". Life would be so sweet when car buying became a virtual, friction free experience.

I don't know about you, but the last time I bought a car (a Sienna minivan in 2008 if you must know), I bought it at the Toyota dealership. Same with the car before that. And I'm betting that the next car I buy will also be from the dealer. How about you?  

The point is that place-based businesses might be more durable than we give them credit. 

How often do we hear that the traditional higher ed campus will disappear like so many record and book stores? Some skepticism may be in order.

What lessons about the future of campus-based higher ed might we learn from the auto dealership?

Survival, But With Challenges:   

What would higher ed look like if it followed the path of new car dealers? We would see that most people would still be educated on campuses, just as most new cars are purchased at dealerships. But we would also see a great deal of disruption and change, as well as a re-alignment around fewer campuses each serving more students. According to the National Automobile Dealers Association (NADA), the number of new car dealerships in 1980 was 27,900. By 1995 the number of new car dealers had dropped to 22,800. Today, we have only 17,700 dealerships. Have vehicle sales declined by such large numbers? In 2010 there were about 14.5 million sales and leases of new cars and light trucks (including SUVs and minivans). This is less than the peak of 22.7 million in 2000, but not far off the 15 million new sales or leases in 1990. And again, almost every new car sale is through a dealership.

How have new car sales stayed relatively constant since 1990 (not counting the big dips in 2008 and 2009 during the Great Recession), while the number of dealerships has declined so precipitously?  The answer is that the dealerships got bigger. Small car dealers were consolidated under multi-brand mega dealerships. Dealerships that could not achieve scale, or could not diversify by offering a range of popular brands and models, were forced out of business.  I am not predicting that one-third of all colleges and universities will close in the next 30 years (as happened to car dealers from 1980 to today), but we should recognize that we could also experience large scale changes. A campus, place-based higher ed system will not go away - but that does not mean that typical college of 2012 will look like the typical college in 2040.

Survival, But With Changes 1:

We still buy our new cars at the car dealership, but that experience today is very different then in the pre-internet years. Today, we all go to the car dealership having done our web research. We know the invoice price and the MSRP.  We may have contacted a number of dealers in our region to find the best price.  The web has eliminated much, if not all, of the information asymmetry that drove dealer profits. The Internet has changed how we shop for new cars, if not where we do our new car shopping. We can expect a similar dynamic with our students of the future. The choice to apply or not to apply to our colleges and universities will be based on much better data. Once on campus, they will interact with our faculty and our courses in much different ways. We should expect that an abundance of quality open educational materials, and ubiquitous networked devices such as smart phones and tablets, will change our student's perception of the value of the higher ed services we have traditionally offered.   

Survival, But With Changes 2:

The NADA State of the Industry Report 2011 makes for fascinating reading. I always assumed that car dealers made their money by selling new cars. In reality, car dealers make money by selling a whole range of services around those new cars. Finance, insurance and service contracts accounts for almost 30 percent of gross vehicle profit.  Your dealer may not make much of a profit on that new car, but can expect to earn more money on your trade-in (after they polish it up and re-sell it).  The largest source of profit, however, is in the service department. In 2010 the average car dealership made over $400,000 in profits from the service and parts department, compared with around $100,000 profit for used cars. (New cars have been almost a loss-leader since the Great Recession).   

The service and parts department is the cash cow of the auto dealership. This explains why the service department has changed so much over the past 20 years.  Today, the average dealership service department stays open for business 56 hours per week. At my local Toyota dealer the service department contains a gorgeous drive-through bay (so I never have to get cold or wet), and I can wait for my minivan to get fixed in a "quiet service lounge" with free wi-fi, comfortable chairs, and pretty decent coffee.  

Dealers have had to change how they make money, and it will also be interesting to see how higher ed adapts. The new two-tiered tuition plan at Santa Monica College (a community college) may be one glimpse into the future of new higher ed revenue models.  


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