Exclusive Dealer Territories Are Ridiculous

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A number of US states have outlawed the direct sales of automobiles. Instead, franchise laws dictate that cars can only be purchased through independent dealerships. This is in spite of analyst research that estimates a direct to consumer model would save consumers 8%. Even the Federal Trade Commission is suspect of automotive dealer lobbies:

A fundamental principle of competition is that consumers – not regulation – should determine what they buy and how they buy it. Consumers may benefit from the ability to buy cars directly from manufacturers – whether they are shopping for luxury cars or economy vehicles. The same competition principles should apply in either case.

Tesla, like all of Elon Musk’s endeavors, should not be misidentified as a free market company. But it is ironically fighting for less governmental interference in the channel sales of its automobiles.

We mention the very public crucification of vested interests in the automotive market because it parallels much of what we see in the point of sale (POS) industry. That is, many POS stalwarts (Micros and NCR for starters) were built on a dealership model that rewarded exclusive territories to a limited network of resellers.

Now it seems this model is breaking apart in more ways than one.

The first, and largest crack, is the market response to the dealer network. Dealers have contended that they add a lot of “value”, and merchants are happy to pay for it. But when merchants were given an opportunity to back up dealer claims with their own pocketbooks, many chose to eschew the cost of a middle man.

Many more cloud POS systems are being sold directly than through the channel. It’s becoming more common for payments partners to make referrals which the inside sales team of the cloud POS company then closes. (Frankly the money involved in only selling cloud POS is not too appetizing for a dealer anyhow.) The growth of cloud POS didn’t come from nowhere: it’s cannibalizing sales of legacy POS systems.

Yes, cloud started far downstream and was mostly replacing pen and paper (or cash registers) in the early days, but now you’re seeing large retail and restaurant groups moving to cloud. In 2015 Five Guys, a 500-unit burger joint, chose Brink POS, and a 3,000-unit concept will announce the same decision shortly. By 2022 we estimate half the market will be using a cloud POS system.

The second crack comes from the POS companies themselves. Oracle opened territories when they bought Micros in 2015, deciding it was better for the market if there was more competition. Just last month NCR made the move to open their dealer territories as well, and that was welcomed with the expected dealer panic.

We think this is the right move. Merchants are adopting cloud POS in non-trivial numbers, and dealers have proven themselves unwilling or incapable of keeping up with the market demands. POS companies are spending an awful lot of money to artificially prop up their dealers, and this is just flat-out uneconomic in the long run.

We’ve been told there are 6,000 POS resellers in the US, with 4,000 dedicated to hospitality. Of those 4,000, we feel confident that only 100 – 200 are any good. People would often parrot that dealers followed the classic 80/20 rule, and we always thought it was more like 90/10. Now that we have these numbers it might literally be more like 95/5.

Dealers continue to struggle with relevancy. Their saving grace, at least in hospitality, is that on-demand support is needed when systems go down at all odd hours of the day. But companies like Boomtown are finding they can deliver this support cheaper, with more accountability to the customer. By eliminating dealer overhead, companies like Boomtown are drafting in the uberization of services that drives down prices while raising dependability. This is yet another axe to the dealer’s traditional business model.

As with all monopolies – which is really what a dealer territory is – the customer benefits when the monopoly cracks apart. More competition drives increased value and decreases prices. This is why capitalism has worked so well for driving living standards in the Western world.

If you think of your business, odds are you don’t get a guaranteed monopoly. When Apple formed it had tons of competition from Microsoft – so much so that Microsoft had to throw them a lifeline. Now Apple is worth more than Microsoft thanks to its investments in innovation and a free market system that rewarded besting competition.

Cloud POS has had to build new features and business models to compete against legacy systems. And they’re winning. Competition is good for everyone. Except for those who don’t want to work. In the words of the esteemed Kenneth Powers,

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