Remember when dealerships had body shops? Two out of five still do, but they comprise less than 20% of this $35 billion market. Somewhere along the line, it became clear that collision repair was better done by specialist facilities, unconnected to the dealer. Scale, capital investment, brand diversification, and (lack of) synergy were factors.
We may now wonder if parts and service belong in the dealership, thanks in some measure to the rise of automotive eCommerce. Jim Ziegler warns that Valvoline Express is beating dealers in the shop and online. Ward’s makes the same point, with emphasis on Google search optimization. In the same vein, Amazon has come up with a way to sell tires online.
There can be much synergy between the two ends of the business, which can be leveraged to manage and sustain customer relationships – Vincent Romans
My approach is to “follow the money” and, sure enough, here is Carl Icahn buying up repair facilities. Icahn Automotive Group is a classic consolidation play, with 2,000 locations including Precision Auto Care, Pep Boys, Just Brakes, AutoPlus, AAMCO, Cottman, and CAP. Icahn is vertically integrated through Federal-Mogul Motorparts, which includes ANCO wipers and Champion spark plugs.
So, will eCommerce pick off the dealer’s profit centers one by one? In this example, we see the convergence of powerful megatrends. The traditional dealer model is challenged by two new ones, which I like to call the Best Buy model and Amazon model.
History tells us that the Amazon model will prevail in the end, but it doesn’t tell us what the transformation will look like, or how dealers should prepare. To learn that, we employ an old tool from Business Process Reengineering, and we discover a surprising result. Here is a breakdown of the traditional dealer operations:
- New Sales
- Used Sales
- Collision Repair
We can consider each operation in terms of how it will respond to the new challenges – and whether it belongs with the others. We have to start somewhere, so let us define new vehicle sales as the nucleus of the dealership. The test drive is the process most resistant to eCommerce although, as I wrote last week, there are ways around it.
Used vehicle sales will certainly not stay in the dealership. It is vulnerable to both consolidators and eCommerce. This is a shame because taking vehicles in trade used to be a great synergy. The new specialists are true “auto traders,” using high-volume analytics to trade both ways with the public and the auction.
Coming back to fixed operations, there is a clear synergy. According to Cox research, customers who are properly introduced to the service department are two and a half times more likely to come back for service. But there are other ways to exploit this synergy, like the “zero deductible at our dealership” service contract – and the Amazon tire store shows that parts can be separated from service.
Lithia Motors has 186 locations including, by my count, fourteen collision centers. There is not much synergy between body shops and vehicle sales, or even service, but they run fine as standalone operations connected to the brand. Likewise, given a branded service contract, I can see Lithia’s mass market franchises supporting shared service facilities.
F&I is the subject of fierce debate, too much to cover here. Can it be merged into the sales function? Can protection products be sold successfully online? What is the future of indirect finance? Do “F” and “I” even belong together anymore? For our purpose today, we need only observe that while F&I has a workflow linkage to sales, it does not need a physical one. F&I could just as easily skype in from a call center.
As Carl Icahn would tell you, these are distinct businesses without much synergy, if synergy is defined as “positive return from shared personnel and facilities.” Dealers organized along these lines will, indeed, be picked apart by eCommerce and consolidation.
On the other hand, if synergy means “positive return from shared customer contact and branding,” then these businesses will hang together. Dealers organized along this principle will have diverse and independent operations, making them resilient to disruption. They will have “optionality,” to use Nassim Taleb’s term.
You may be taken aback by this assault on the venerable “rooftop,” and I admitted earlier to being surprised. However, decoupling and diversification (and divestiture) are textbook responses to an industry in flux. Just look at how many departments are no longer in department stores.