Car Dealer Megatrends – Conclusion

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.

Cox Automotive Double Play

It is time to break out your game board once again and play “link the subsidiaries.”  I heard this one recently from a Cox person at a conference.  I don’t know if they have it in production yet, but it sure sounds good.

If you authorize vAuto to source new inventory as it sees fit, then it can connect to Manheim and automatically place the orders.  As soon as the gavel goes down, Dealer.com can pick up images and data from Manheim and immediately begin merchandising the vehicle.  Cox also owns the logistics company that hauls the vehicle, so they can report when it will arrive on the lot.

So, you could conceivably have a customer walk in to buy a vehicle that is arriving today, with the entire sourcing cycle untouched by human hands.  In fact, this sounds a little like what I described in Cox Automotive Home Game.  No mention (yet) of the COXML message format.

Update:  Details here from Mark O’Neil.  The chain goes: vAuto, Stockwave, Manheim, NextGear, and then Dealer.com.

The Voice of Experience

This is a funny little story with a serious message.  I improvised this coffee timer, pictured here, for the break room here at Safe-Guard.  On days when I arrive before Yarileen and make coffee, she can see that it’s from this morning, and not left over from the night before.

There is general agreement that “whoever made that thing is a genius.”  Well, actually I picked up the idea from another client some years ago.  This reinforces what I wrote in Why I Freelance.  If you keep moving, and keep your eyes open, you can’t help but pick things up.  I may not be the smartest knife in the shed, but I have been consulting a long time.  Más sabe el diablo por viejo que por diablo.

Dealer Megatrends Part 3 – Process Change

In my previous Megatrends article, I wrote about how advancing technology is changing the role of F&I.  This week, we examine some new business practices.  You already know what I mean.  We’re going to talk about:

  • Hybrid Sales Process
  • No Haggle Pricing
  • Salaried Employees
  • Flat Reserve

High line manufacturers have tried to promote “one face to the customer,” since I was at BMW in the twentieth century.  Lexus Plus is the latest iteration.  Tellingly, BMW called it Retail 2000.  I fondly remember hearing a radio spot for “the last BMW dealer” in San Francisco, because we had styled all the others as retailers.  “If you want to pay retail, go to a retailer,” the ad went, “to get a deal, you need a dealer.”

So, it goes in cycles.  Lexus, or Scion, or AutoNation, will roll out a new process only to be outmaneuvered by the wily dealers.  Then they retrench and, five years later, someone else tries the new process.  They could literally be passing around the same procedure manual.  Look at me.  I have been advocating price transparency since Zag.

One Sonic-One Experience offers no-haggle pricing with one sales rep using an iPad who takes the customer through the entire vehicle sales process, including financing and the F&I product presentation.

A good example of the new process is Jim Deluca’s exposition of the Sonic One Experience.  In their EchoPark process, Sonic also eliminates dealer reserve.  The fight over flats and caps lasted from roughly 2012 to 2014.  See here, and NADA’s endorsement of caps here.  Next, Sonic will leverage their heavy investment in training to roll all of this into an online process called Digital One-Stop.

I suspect that Sonic would soon like to fire all their trained F&I professionals in their self-interest of saving a buck.

Forum comments reveal that old-school practitioners dislike the new process.  It’s funny to hear an F&I manager accuse a dealer of shameless self-interest, but there it is.  On the other side, Sonic’s Jeff Dyke reports good results from hiring people with no prior automotive experience.  Meanwhile, at rival consolidator AutoNation, 70% of the sales staff opted to go on salary.

Well-known F&I trainer Tony Dupaquier is here, advocating the hybrid process at First Texas Honda, and here is Findlay Group’s Las Vegas Subaru.  Savvy dealers everywhere are experimenting with at least two or three of the four new practices (online selling and iPads come up a lot, too).

Smart people have told me that the hybrid process will never produce four-digit PVRs, but many dealers – and certainly the consolidators – reckon that’s a price worth paying for a streamlined process, reduced turnover, and improved customer satisfaction.