Kelly and I were sipping coffee at Digital Dealer, greeting participants, and speculating on how the ultimate online buying experience would come to pass. Presenters had talked about Amazon, obviously, and the recent opening of a Hyundai digital showroom on Amazon Autos.
A while back, I organized the various offerings into categories like: online platforms where multiple dealers may list their inventory (basically lead providers) versus eCommerce plug-ins to be placed on individual dealer web sites.
One key variable was whether the site actually holds inventory, i.e., is a dealer, not just a technology play. Carvana, for example, or Shift. Increasingly, what I notice is that the good technology either evolved from a dealership, or – I found this intriguing – they will buy a dealership to serve as a test bed.
Your rapper name is a top twenty dealer group plus a digital retail system.
Roadster came from a concierge buying service which, as far as I know, they still operate. A2Z Sync came out of Denver-based Schomp group. The Gogocar people operate a Kia dealership. This brings me to the next level of dealer technology tie-ups, those where big dealer groups choose an online retail solution and commit to it.
We philosophically do not believe that software development is our expertise. Instead, we’d prefer to partner with third parties – Craig Monaghan
That prediction is … continuing the consolidation megatrend, we will see dominant groups taking the lead in online retail, but unable to master the technology on their own. This is what I call the “Kodak syndrome.” Incumbent leaders are not agile enough to ride a paradigm shift. This means not only the dealer groups, but the traditional software vendors.
I expect to see the Sonics and Asburys of the world buying up the digital retail people, absorbing their talent, and denying access to their competitors. I characterized this as a “land rush” in the earlier piece. Direct to consumer is the final frontier.
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:
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.
I concluded Car Dealer Megatrends with the clear and present dominance of consolidated groups, which I like to call the Best Buy phase. Today, I will indulge in a little futurism, and explore the Amazon phase. In the Amazon phase, it will be possible to buy a new car enitrely online and have it delivered.
By 2025, experts estimate 30-40% of car sales will be online. The high end of that range is from Mark O’Neil. Used cars are easier to sell online, witness Carvana, Vroom, and Shift, but new cars will be there too. An estimated 25%, and that’s only seven years away.
The industry is rapidly solving problems like pricing and trade valuation. The only challenge people still talk about is the test drive. Carvana solves this with its seven day return policy, and Shift will bring the car to you for a test drive.
“The current dealer model is not a dying breed,” Benstock said. “It’s dead. It’s absolutely dead.”
I will order a new BMW sight unseen, because I know the product and I trust the manufacturer. Their online configurator is awesome, and I really would press the “build and ship as shown” button, although the process isn’t quite there yet. We’ll come back to BMW later, but for now let’s assume a test drive is required.
The tension between Best Buy and Amazon centers on a practice known as “showrooming.” This is where you sample the product at Best Buy, interrogate the Best Buy sales associate, and then turn around and order the product from Amazon. Amazon even makes a clever app you can use to scan product codes while you’re in Best Buy.
As auto retail moves into its Amazon phase, I can imagine the same challenge for dealers. You have invested in a monument to your manufacturer’s brand image, where customers can sample the product and then go order it online.
I had been pondering the showrooming challenge for a while when I ran across this piece in the Wall Street Journal. Nordstrom is opening stores with no stock, where shoppers can try on clothes and accessories, and then have them delivered.
It will contain eight dressing rooms, where shoppers can try on clothes and accessories, though the store won’t stock them.
The Nordstrom story reminded me of the old “catalog showrooms” operated by mail order retailers like E.L. Rice and Service Merchandise. Ironically, this was the last gasp of mail order, put out of business by brick and mortar retailers – including, ultimately, Best Buy.
All of this goes to show that, in the Amazon phase, showrooming and fulfillment can be disconnected. Where the customer goes, to test drive and learn about the vehicle, does not have to be the dealership or even affiliated with the dealership. This opens up a world of new possibilities.
I can think of several applications for standalone test drive centers. For instance, suppose a manufacturer wanted to enforce its ideas about how to present its vehicles, and also – since this is the Amazon phase – protect its own position online.
Were it not for U.S. franchise laws, manufacturers would run their own retail outlets. In Europe, they have company stores, where ideas about brand image, sales training, and product positioning do not depend on a network of autonomous dealers.
An OEM test drive center would bypass the dealer network (or complement it, if you prefer). It would be staffed by salaried, factory-trained product experts with no other objective than to educate customers in the finer points of their company’s vehicles.
There would be minimal inventory, attractive video displays, simulators, and samples of paint and fabric. No transactions would take place, but there would be plenty of Wi-Fi bandwidth and gourmet coffee for the online shoppers.
As I said, this is just one scenario. The new techniques of digital retail will create untold opportunity for dealers willing to adapt. Our exploration of the Amazon phase has just begun.
This week, we examine the fourth piece of McKinsey’s automotive revolution, shared mobility. This is really a collection of trends including car sharing, ride hailing, and mass transit. I will show how to gauge whether a new program has the potential to be disruptive. But first, let’s dispense with mass transit.
From Munich, you can ride the U-Bahn to the Schnellbahn, and get anywhere in Europe by fast rail. This is where McKinsey’s analysis shows its European bias. Europe’s population density is three times that of the United States, and her various rail systems carry twenty times the passengers.
American cities are linked by air, of course, but relatively few have commuter rail systems. When you deplane at Las Vegas, for example, or Orlando, you are headed for the car rental counter.
“What’s happening in general, millennials, younger people, car ownership in and of itself is not the most important thing.”
When I worked at BMW, twenty years ago, they were already styling themselves a “mobility” company, and not solely a car company. At the time, that meant mass transit. If you look at BMW today, their investments tell a different story. I won’t try to categorize Fair, Shift, Skurt, Scoop, and ReachNow – not today, anyway. Today I want to talk about capacity utilization.
If you’re like most people, you drive your car to and from work, plus errands and recreation. Let’s call it 20 hours of use for the 112 hours per week you’re awake, or 18%. In theory, any mobility scheme that increases capacity utilization will cause a proportional decrease in car sales. There is a variety of schemes, known collectively as Mobility as a Service.
“The success of a MaaS provider will be determined by how much utilization they can gain from their accessible fleet.”
Uber is the obvious example. It increases utilization for the drivers, and reduces the riders’ inclination to buy a car of their own. I meet people every day who won’t buy a car, or won’t buy a second car, because Uber meets their occasional driving needs. In major urban areas, people have long gotten by without cars. The way I see it, Uber has widened this circle out into the suburbs.
Uber will also take a bite out of traditional car rental, as will hourly rental services like Maven. Maven is basically Uber without the driver, good for business travelers who just want to attend their meeting and go back to the hotel. Business travelers I know will often choose Uber over Hertz, depending on the city.
“Millennials like having an easy process, but they hate commitment,” Bauer said. “I think the next step for leasing has to be no fixed term, or a different way of term.”
Here in Atlanta, we have two subscription car programs, Flexdrive and Clutch. It is wonderful to live in the nexus of so much new-auto activity. Flexdrive is a joint venture of Cox Automotive and Holman Auto Group. You choose from a variety of vehicles, and your monthly subscription includes insurance, maintenance, and roadside assistance.
The average car payment in America is $500. Depending on the figures you use for gas, insurance, and maintenance, your car costs at least $7 per hour of use. This may sound fanciful, accounting for the car as a utility, but this is exactly the way a new generation of mobility providers look at it. A monthly subscription of $500 is the price point advertised by Fair. Zipcar and Maven hourly rates start at $8.
The chart above shows that car sales per capita have declined, in fits and starts, by about one in six over the last forty years. This reflects trends like gradually increasing urbanization and longer-lived cars, which are minor worries for our industry. Increasing utilization, through various forms of renting and sharing, has the potential to be a major worry.
I was impressed by this article, How to Worry about Climate Change. It was neither activist nor skeptical, but rather placed the threat in an appropriate policy context. So, I was inspired to update my earlier post on the “mobility revolution.”
McKinsey has some new research out which, I feel, overstates the case. The case, as you may recall, is that four trends will come together in some kind of perfect storm:
The best research on mobility is still this series of papers from the BCG. Like me, BCG is reserved about the U.S. market. I strawman McKinsey a little by focusing on U.S. car dealers. Their focus is on manufacturers, with a European orientation.
The right way to worry about mobility is to ignore the interaction effects, and look at each trend individually. This is where I differ from McKinsey. They model three different outcomes – small, medium, and large – for each of the four trends. This gives them eighty-one different scenarios to evaluate (consultants love this stuff).
My local BMW dealer has a lot full of i3s and i8s. Electric cars won’t change auto retail at all – service, obviously, but not sales. This “revolution” only affects dealers if Tesla succeeds in doing it without a dealer network. From my perspective, not having a dealer network is a weakness, and a sign that the company lacks confidence in its product.
It turns out Jacques Nasser was right. Kids today will ride in a hamster box as long as it has satellite, wireless, navigation, and a sound system. Gone is my generation’s enthusiasm for hemi heads and dual overhead cams. No one drives a stick anymore, and the steering wheel will be next (see below).
Connectivity will change auto retail the same way electric cars will – new features to sell and service. I have the BMW connectivity app on my iPhone. Connectivity in terms of telematics will open up new opportunities for service retention, as I described here. There are new opportunities in F&I, and even lot management, as people invent more things to plug into the OBD port.
I am deeply skeptical about self-driving cars. People who promote them tend to focus on SAE level four, and overlook the greater challenge of full autonomy. I see self-driving in limited contexts, like self-parking and advanced cruise control. Check out BMW’s lane-departure technology. This is cool stuff, and what it means to car dealers is … more expensive cars!
Remember that the nightmare scenario for self-driving cars only occurs when the cars are smart enough to be widely shared, i.e., robot Uber drivers. A car that can autonomously drive the kids to school is years and years away.
A close examination of the technologies required to achieve advanced levels of autonomous driving suggests a significantly longer timeline; such vehicles are perhaps five to ten years away.
Like “catastrophic anthropogenic global warming,” that date keeps moving out as we approach it. In 2012, Sergey Brin said self-driving cars would be widely available by 2018. In 2016, Mark Fields said no steering wheel by 2021. McKinsey, in any year, always says, “five to ten years from now.” For a clear-eyed look at the challenges, see here. For more about luxury driver assistance see here.
That about does it for my deconstruction of three mobility trends that should not worry car dealers. Next week, I’ll report on that fourth one. Now that I am living in a big, modern metropolis, I can see shared mobility first hand. I may not even need a second car.
I chose consolidation for the first of my megatrends series, because it’s the least controversial. Everyone seems to know it’s happening, and the records and rankings in Automotive News are dominated by big groups.
Ten years down the road, we don’t want to be the 13-point dealership group feeling that pain from the larger groups the way the smaller ones are now
This year, for the first time, NADA Data takes a look at consolidation. Probably the best single number to look at is the ratio of rooftops to dealers, which represents the average number of stores in a dealer group. This has grown from 1.8 to 2.2 over the last nine years – not exactly a revolution. I was a little surprised to see such small numbers, but this is an artifact of how NADA presents the data.
NADA, logically enough, presents the number of dealers owning a group of a given size. I would have preferred to see the number of stores, not owners, in each category. This is a better reflection of the market coverage. To show the distinction, I plotted the total count of both rooftops and owners. You can see that, while the number of rooftops is recovering since 2010, the number of dealers is not.
Next, I recast the data in terms of rooftops. The number of rooftops belonging to groups of ten or more has almost doubled over the period, from 12.2% to 21.3%.
Below, I have plotted the number of rooftops in three tiers, by size of the dealer group to which they belong. The 2 to 10 tier has been remarkably stable, numbering roughly 8,200. The single points have been in steady decline, losing 2,500 over the period.
Dealers know that single points are vulnerable to market shocks and competitive pressure, if for no other reason than being tied to a single make. On present trends, we can expect them to vanish entirely within ten or fifteen years.
This is the conclusion of my series on car dealer megatrends. The first three articles covered the long running trend toward consolidation, steadily improving process maturity, and disruption from new technology. Like all good megatrends, these three flow together, reinforcing each other to produce a sea change in the industry. Consolidation means bigger groups with more money to spend on technology, and the scale to exploit improved procedures.
Big dealer groups crave stability, and repeatable successes. In my trade, software development, we have a formal process maturity model. The bottom rung is where your success depends on “heroes and luck.” When you own 20 stores, you are less interested in one superstar killing the pay plan, and much more interested in a hundred guys making base hits. If you are not clear on this, I recommend the movie version of Moneyball, featuring Brad Pitt as Billy Beane.
We’re making less per transaction, but we’re doing more transactions.
I work mainly in F&I, but you can see the same general idea in the velocity method for new and used car sales. That idea is margin compression. The quote above is from Paragon Honda’s Brian Benstock and, last I checked, he was still hard at it.
The locus of high gross shifted from new cars to F&I, and then from finance to products. Smart people tell me the 100% markup on products will soon be ended, either by competition or by the CFPB. Today, when you read about the latest PVR record from Group 1 (or whomever) you will also read management downplaying expectations of further such records.
The executive, however, said the group’s F&I operations may have reached the peak in terms of PVR.
Dealership ROI is above 20% but, as you know, highly cyclical. The stock market has been around 14% lately and, arguably, less volatile. AutoNation has been chugging along at a steady 10%. Investors will accept a lower return, in exchange for stability.
AutoNation was founded in the era of big box retail. My colleague there, Scott Barrett, came from Blockbuster. It was always our intention to remake auto retail in the image of Circuit City, which, by the way, was the parent of CarMax.
I spoke with an AutoNation executive recently who told me that learning to live with margin compression is an explicit part of their strategy. It is an iron law of economics that, in a free market, competition will drive margins toward zero.
Have a look at this NADA chart. In five years, gross has been cut almost in half. This is a breathtaking diminution, and then you go on the industry forums and find people bitching that vAuto has cut used car gross, and TrueCar has cut new car gross, and now some idiot proposes to cut F&I gross by putting VSC prices online.
Marv Eleazer has called this a race to the bottom, and he’s right, but this is not a race you can opt out of. That’s not how competition works. Think of it as a race run in Mexico City. The smart dealers and big groups are already training to compete in the thin air of lower gross.