Strategy – Page 4 – Virag Consulting

Toward a Digital Auto Marketplace

Will the big public groups dominate online retail, as I predicted last week, and drive private dealers from the field?

This trend seems to have recovered, after some false starts, with the availability of fresh talent like Shift, Drive, and Roadster. Shift has $253 million in funding, notably including Lithia. AutoNation has recently invested $50 million in Vroom, valuing the online startup above $700 million.

How can smaller groups compete in this high-stakes contest? One way, as I wrote here, would be to consolidate themselves online.

To defend themselves online, private dealers will migrate into the most capable of the platform sites. The winning platforms will not be mere lead providers.

I know something about platform marketing, having organized the Provider Exchange Network around cross-side network effects. The more menu systems we added on the dealer side, the more success we had with F&I providers on the other side.

The difference between a selling platform and a mere lead provider lies in the site’s ability to deliver a completed deal. That is:

Show the true price online.
Sell protection products.
Provide a firm offer for the trade-in.
Offer hard-pull credit approval and deal structuring.
Allow the customer to save multiple deals and self-close.
Sign the contracts online.
Provide for home delivery.

Home delivery is not just a nice touch. It demonstrates the capability to truly complete the deal online, with no tasks left over. It is the acid test for online retail, even though most customers will opt to finish the deal in person. The tasks are described here, and the workflow is here.

This capability is not so far-fetched as it was when I started writing about it, some years ago. Delivering it on a multi-dealer site, however, poses special challenges. The only eCommerce capable sites I can think of are run by monolithic used-car dealers Shift, Vroom, Carvana, and CarMax, or single points using digital storefronts from Roadster, Drive, and TagRail.

So, I am back to writing about the future. In the fullness of time, someone will figure out how to do eCommerce for:

New cars
Multiple new-car stores in a group
Multiple unrelated new-car stores

When I started writing about the platform concept, I naturally assumed that Autotrader, et al., would be there. Now that I have spent some time exploring Autotrader, Cars.com, Car Gurus, Edmunds, GoGo, Carfax, TrueCar, Autobytel, Kelley, and Deliver My Ride, I can tell you this is still uncharted territory.

Everybody promises eCommerce, of course, but most stumble at the first gate. This challenge, price transparency, was supposed to be TrueCar’s edge. In fairness, the platform model poses some special challenges:

Price Transparency – This one needs no explanation. Despite glimmers of hope from the Rikess Group, online pricing is mostly confined to used cars. A new car marketplace would have to disclose, on the search results page, prices from competing dealers.

Protection Products – Same story here, as regards pricing. Also, if you want to do it right, you need to copy the dealer’s menu system setup, and ping those providers for pricing. In fact, each step of the online process needs an interface with its “system buddy” in the dealership.

Trade Valuation – There are plenty of tools, but participating dealers must agree to honor the platform’s valuation. This is easier if the platform happens to be Kelley.

Credit Approval – Each dealer will have their own stable of finance sources. It’s best simply to bounce the application off the dealer’s Route One or Dealertrack credit system, and then return the results to the platform. This data needs to be in synch with the dealership anyway.

Deal Structuring – I complain all the time about weak payment calculators on consumer sites. The special challenge here is that data must be shared with each dealer’s desking system, and the calculations must match.

The rest of the process is pretty much unchanged from single-dealer: saving and transmitting the deal, signing (standardized) forms with DocuSign, and scheduling the delivery.

I recognize this is but the broadest broad-brush outline. My purpose here is not to explicate the design, but to illustrate how progress toward the digital marketplace is impeded by these special challenges.

We may need to cooperate with a direct rival due to interdependent business models or mutual challenges from outside our industry.

How will these challenges be resolved? Will competing dealers learn to cooperate, for the sake of their online survival, or will the palm go to a single online victor – like AutoNation, or Amazon? The quote above is from Professor Rogers’ definition of “coopetition.”

Smaller groups cannot afford to invest $50 or $100 million, as AutoNation and Lithia have done. Look a little farther down the league table, though, and it’s not hard to find four or five dealer groups which, combined, match the scale and revenue of a public group.

Joint ventures are not unheard of in our industry, especially when it comes to eCommerce. My own brainchild (and eCommerce platform) PEN, like CVR before it, is a joint venture between archrivals CDK and Reynolds. Route One is a creation of the Detroit three captives, plus Toyota. Honda and GM are working together on electric cars, while BMW and Daimler collaborate on mobility services.

Combining four or five dealer groups simplifies the problem, relative to a fully open marketplace. It reduces the number of systems, lenders, and product providers that need to be integrated. The ideal venture partners would already have a high degree of standardization within each group, and similar choices of software among them.

Such a project might proceed “depth first” by developing core functionality in one partner, and then folding in the others, or laterally by function, or by merging the existing eCommerce capabilities of the partners. What to aim for as “minimum viable,” and how best to expand it, depends on a number of factors.

Meanwhile, the commodity lead business is under pressure. Damage reports and reviews do not offer adequate differentiation, whereas investments in eCommerce could yield significant new opportunity. The Cars.com situation marks the beginning of the shakeout, consolidation, and – just maybe – the digital marketplace.

Asbury Drive in the House

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.

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

New Sales
Used Sales
Finance
Insurance
Parts
Service
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.

Worry about Mobility, Continued

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.