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.
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.
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 ex-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.
Car dealers today face a growing array of new systems and capabilities. These are primarily in F&I, thanks to disruptive new entrants in financial technology – fintech, for short. Mark Rappaport has a nice roundup here, from a lender’s perspective, and I maintain a list on Twitter.
AutoFi – Auto finance plug-in for dealer web sites. See Ricart Ford for an example.
AutoGravity – Customer obtains financing (via smart phone) before visiting the dealership.
Drive – Online car selling, with delivery, from the Drive web site.
Honcker – Customer obtains financing (via smart phone) and they deliver the car.
Roadster – E-commerce platform for dealers, with full sales capability (as I anticipated here).
TrueCar – Customer sets transaction price (via smart phone) before visiting the dealership.
The new entrants blur familiar boundaries in the retail process. They’re basically lead providers, but all aim to claim a piece of the F&I process. AutoGravity, for instance, provides a lead already committed to a finance source. TrueCar provides a lead already committed to a transaction price. If you’re unfamiliar with the canonical process, see my schematics here and here.
In my previous Megatrends installment, Consolidation, I cited the influence of PE money. It’s the same with fintech. AutoGravity, to name one, is backed by $50 million.
The new F&I space is also home to “predictive analytics.” Automotive Mastermind examines thousands of data points, to produce a single likely-to-buy score. Similarly, Darwin Automotive can tell you which protection products to pitch.
The technology’s proprietary algorithm crunches thousands of data points, combining DMS information with … social media, financial, product and customer lifecycle information
My specialty is F&I, but it seems pretty clear that predictive analytics has a place in fixed ops as well. In terms of the earlier article, you can see that consolidators have an edge in evaluating new technology. Speaking of fixed ops, they’re also better positioned to obtain telematics data.
McKinsey says fintech can help incumbents, not just disrupt them. That’s why I have focused on technologies a dealer could employ, versus apps like Blinker that are straight threats. Of course, you have to adopt the technology. Marguerite Watanabe draws a parallel with the development of credit aggregation systems.
Fintech will induce dealers to adopt an online, customer-driven process. I see this as an opportunity. On the other hand, those that fail to adapt will be left behind. This article is aimed at dealers, but the challenge applies equally to lenders, product providers, and software vendors.
In the 2006 data, NADA noted a “moderate consolidation trend.” Since the recession, sales have recovered but the dealer population has not. My chart, below, is based on the last eleven years of NADA data. You can go back as far as you like. The dealer population has been shrinking steadily for fifty years.
This means the surviving dealers are selling more cars per store, but the real story is consolidation – the powerful trend toward fewer owners and bigger groups.
In 2005, the top 100 dealership groups were 9% of the total. In 2015, they were 17%. The Automotive News ranking is by gross revenue but, for simplicity, I am counting stores. I imagine that the big, efficient groups command more than 17% of the total gross.
Gee group’s purchase of 16 Tonkin stores, backed by private equity, is instructive. Both groups are family owned, with seven and 21 stores respectively. Brad Tonkin will join the combined entity as president. The Automotive News article also describes a Soros-backed purchase by the McLarty group, bringing its count to 19 stores.
The owners may be public, like AutoNation and Penske, private equity, or something in between. Larry Miller group, for example, is still family owned but independently managed. An IPO seems the next logical step. Broker Alan Haig predicts his buy-sell business will continue strong in 2017.
This is about economies of scale, obviously. The New York Times mentions efficiency in staffing, technology, and inventory management (as I did, here). There is a lot of money chasing this trend, and only so many operators who know how to exploit scale. That’s why Haig also has a recruiting arm.
Small dealer groups can compete online only by joining platforms that aggregate inventory.
If you are running a small group, you might want to start thinking about M&A. That’s not my area, though. I am interested in the related trends toward technology and process change. I’ll examine these more in my next post.
One example is online retail. Small dealer groups can compete online only by joining platforms that aggregate inventory, like TrueCar or Autotrader. What I am proposing is that the (relatively) little guys compete with the consolidators by consolidating themselves online.
Dealers should seek help from their OEMs and software vendors. Well, maybe not the OEMs. GM’s Shop Click Drive only searches inventory for a single dealer, and it makes you choose the dealer first. Not only will it not give you a price, it won’t even present a model list until you’ve selected a dealer. No one shops this way anymore.
Modern shoppers will have found a model and trim level, a price, and even a lender, before landing on a dealer. While Shop Click Drive has the machinery to structure a deal, and even sell protection products, some genius decided to make the “choose dealer” button its primary focus. Most GM dealers I looked at were also on Autotrader.
I did a survey of platform capabilities last year, with Cox Automotive far in the lead. The other guys seem still to be in the world of single-dealer web sites. I also noticed that these sites are mostly hideous, and lacking consistency in even simple functions like credit application.
The consolidators have strong tech teams devoted to online shopping. Dealers may fail to see the threat, because it’s not a physical presence. If you owned a hardware store, and Home Depot went up across the street, you would notice.
Armchair strategists are feeling vindicated now that AutoNation CEO Mike Jackson has abandoned his “asinine” plan to ground all vehicles under recall. I see the same argument whenever anyone tries to change dealer operations. They estimate the reduction in profits and write about that, as if that were the end of the argument. It’s not. That’s not how competition works.
If you talk about disclosing product prices online, you will hear that F&I gross is now $1,500 and who wants to screw that up? Same story with TrueCar and their diabolical plan to disclose transaction prices. You even hear this complaint about vAuto and the velocity method, which sounds to me like the most logical thing ever.
My back-of-envelope calculation says that AutoNation carrying an additional 10,000 units of inventory, at maybe 2%, would cost them roughly $5 million per year. That’s 0.02% of sales. For comparison, the related “Drive Safe” ad campaign was $10 million.
AutoNation, with investment-grade credit, enjoys a lower carrying cost than its private dealer competitors. Selling diverse brands, they are less exposed to a recall by any one manufacturer. They can also exploit their scale to mitigate the cost of such a policy, not to mention the PR benefits.
If federal regulators had followed Jackson’s lead, this would have raised the bar for all dealers. Two senators, now disappointed, were lined up to make that happen. Jackson’s policy, a minor challenge for AutoNation, might have proved fatal for smaller dealers. That’s how competition works.
It is a mistake to look at process change only in terms of the costs. Athletes training hard for a competition don’t think about how much it hurts. They think about how much it’s going to hurt the other guy.
Update: Motley Fool estimates the cost to AutoNation at $0.06 of EPS, a little higher than my estimate (and Jackson’s) due to the Takata debacle.