Category: Retail Operations

Corona News Roundup

I spent my sequester time looking for smart people with fresh takes on the crisis.  First, in the “obvious” category: a lot of people got hurt, and dealers who could sell online got hurt a little less.  By the way, if you’re in need of some encouragement, click on over to Megadealer News and check out some of the philanthropic efforts underway.  I have been actively seeking positive news for my Twitter feed.

I like to frame this in terms of people developing new capabilities. 

Going forward, buyer behavior is going to change.  Some of this is an acceleration of existing trends.  Balaji Srinivasan writes that corona is putting an end to the Twentieth Century:

  • Offices → Remote work
  • Stadium sports → eSports
  • Movie theaters → Streaming
  • TV news → YouTube news
  • College → MOOCs
  • Public school → Internet homeschooling
  • Corporate journalism → Citizen journalism

He might have added socializing by video conference.  We had our kids staying with us, doing remote work by day, and Zoom parties in the evening.  I like to frame this in terms of people developing new capabilities.  Here is Andrew Tai talking about people in his neighborhood having groceries delivered for the first time.

I got to know Max Zanan from watching Joe St. John’s webcasts, talking about touchless car delivery and service pickup.  In a pandemic world, we are not just worried about dirt on the floormats.  Interior prophylaxis is part of the service.  Max also points out that, if you can’t sell service contracts in the dealership, you can still sell them Direct to Consumer.  This is something I know a little about, so maybe I’ll do another post just on that.

Ridership on New York’s transit system is down 90%, and experts say this could portend a permanent change in the mobility equation.  The alternative to a personal vehicle used to be public transit or, in drivable cities like Atlanta, ride hailing.  Both are good ways to get sick.

Guns, ammo, and survival gear sold out rapidly, as if everyone is suddenly a “prepper.”  I imagine these people will want to have their own vehicle, with four-wheel drive.  I can relate, because I lived in South Florida for many years.  You don’t want to be waiting on Uber when there’s a hurricane bearing down.

My last few findings are from the world of computer networking.  Infrastructure becomes a challenge when the dealership shifts to online work, notably network security.  Virus scanning and security procedures may not be up to speed when people are working from home.  Also, not all dealer software is web-based, so VPN access becomes a requirement.

Be safe out there.

Asbury Drive in the House

Photo Credit: Nyisha MorrisKelly 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.

Roadster is working with AutoNation, Lithia just bought a big stake in Shift, and Drive is in all Asbury stores.  The Lithia deal is pure genius, because it allows Shift to handle more inventory and slashes their floorplan costs.  The many links in this post show support for my prediction using publicly available information.

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.

Deconstructing the Dealership

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:

The Seven Profit Centers of a Car Dealer

  1. New Sales
  2. Used Sales
  3. Finance
  4. Insurance
  5. Parts
  6. Service
  7. 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.

In the Amazon Wilderness

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.