Category: Strategy

Dealer Megatrends Part 1 – Consolidation

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.

chart

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.

Raising the Bar

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.

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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.

Stop Worrying About Self-Driving Cars

I am planning an article on car dealer “megatrends,” and this is the first item not making the list.  It’s a sexy topic, though, and journalists can’t leave it alone.  For example, here is top Cox guy Mark O’Neil trying to change the subject.  Mark would rather talk about online sales which, with predictive analytics, is a key trend dealers should be watching.

Autonomous vehicles are part of a cluster of technologies which have the potential to reduce car sales, dramatically in some scenarios.  This McKinsey study does a nice job of explaining the cluster.  In short: car rental fleets go away because everyone uses Uber, and Uber drivers are obsolete because the cars drive themselves.  Car ownership will be fractional, like a time-share.  If you do own a car, it can work as a taxi all day while you’re at the office.

This is indeed a formula for sharply reduced car sales … in Europe.  Most of the U.S. is sparsely populated, and poorly served by public transportation.  The Boston Consulting Group has produced the best study on autonomous vehicles, here, and this is from their study on car sharing:

Car sharing … will not do to the automotive business what iTunes did to music: it will not redirect a stream of revenues to a disruptive upstart, and it will not spark a widespread change in consumption.

The BCG predicts that, by 2021, car-sharing will have a trifling impact on U.S. sales: fifty-two vehicles, total (chart on page 11).  They predict that fully autonomous vehicles will not be available until 2025, and will not be 10% of the market until 2035.  It is only these vehicles that trigger the nightmare scenario for car dealers.  “Driver assistance” systems are luxury features, which boost dealer profits.

sae-levels

NHTSA policy guidance is based on the five-level SAE model.  This roundup, from Automotive News, envisages Level 4 autonomous vehicles by 2021.  No manufacturer is even guessing at a date for Level 5.

Bringing these vehicles to market is an important challenge for the manufacturers, and they will have an important impact on society.  They will not change the business of selling cars, however, for a good long time.  For car dealers, other trends are more urgent.

Links for the two BCG studies, in case you can’t download the PDFs: Car Sharing, Autonomous Vehicles.

Cox Strategy Redux

It has been a few months since I posted my lighthearted Cox Automotive home strategy game.  In that time, four new projects have been announced linking members of the conglomerate.

Cox Game2

I am still watching for some extension of auction functionality into the used-car department, maybe leveraging vAuto.  No word yet on the development of COXML.

The Expanding Dealer Automation Space

In my earlier article on Cox Automotive, I wrote that the subsidiaries tile our “function space.”  By this, I usually mean the F&I function space, although Cox is broader than that.  In today’s post, I will explain about function spaces and why this idea is important for software strategy.

Let’s say that you have been asked to identify all the functions performed in the F&I office, and then find software to automate them.  I did exactly this for AutoNation, back when PVR was $600.  The first thing you discover is that a simple list won’t do.  You at least have to put the functions into workflow sequence.

Tasks in sequence are a one-dimensional function space: a timeline.  This will help you to define where the credit process ends, for example, and menu selling begins.  Ah, there’s the rub.  Maybe the workflow branches out, and now it occupies two dimensions.

As I wrote in F&I Magazine, the workflow that produces a finance contract is a lot like the workflow that produces a VSA.  If you can picture the “F” workflow as parallel to the “I” workflow, this is much more useful than a simple timeline.

Function Space

Typically, when you see a diagram like this, it is already partitioned into the familiar systems: CRM, Desking, etc.  That’s the definition of “thinking inside the box.”  If you were designing an integrated system, you would want to start with the unpartitioned space.  That’s the only way to properly scope and organize your web services.

In fact, it may give you some new insights about how to pass data and control among the functions.  Should a desking system pull VSA rates?  Should the menu run OFAC?  Can you instantiate a “deal object” somewhere, and pass it by reference?

Last summer, I wrote about mapping dealer-system functions onto the consumer space.  So, that’s a third dimension based on who the user is, plus a strategic imperative that the online experience must dovetail with the dealership experience.

Pillars

What we see with Cox Automotive is an expansion of the domain covered by a single vendor.  The space dominated by the old CDK-Reynolds duopoly is a subset of this one (I will illustrate this in a later post, using a function point inventory).  The overarching function space was always there, of course, but it was filled with disconnected niche vendors.

In practical terms, this means that an increasing share of the dealer’s software budget will flow to integrated vendors outside the duopoly domain.  Since this is a strategy post, I will close with a Go metaphor.  Reynolds and CDK have been playing the game on a quarter board, and now Cox has highlighted their absence from the other 280 points.

Cox Automotive Home Game

After Dealertrack, I started noticing how many other companies Cox Automotive has acquired. Many of my old friends are now Cox employees. I wondered if Cox would be able to find synergies among the subs. Acquirers always talk about synergy, which means that the combined entity should make more money than the subs could on their own. For example, listings on MakeMyDeal come from Autotrader, which benefits both.

There are other examples that I am not at liberty to disclose. Strategy buffs can play along using the exhibit below. Click the thumbnail for a larger image, print it out, and then draw lines connecting subs where synergies are possible. Look for cross selling, channel sharing, vertical integration, etc.

Cox Game

Be creative, but don’t be vague. You must be able to identify a project that will exploit each synergy. Extra points for stringing subs together in workflow sequence. Here is one that I spotted while making the chart. Any resemblance to an actual project is purely coincidental.

  • AiM snaps a photo of an off-lease vehicle. This photo, plus some data, is uploaded to Manheim, then forwarded to HomeNet and advertised for resale on Dealer.com … all using a proprietary message format which we’ll call, playfully, COXML.

You can see that Cox tiles our function space pretty thoroughly (not to mention the Chinese holdings) so there is plenty of opportunity. Enjoy the game, and feel free to share your results.