CarMax – Virag Consulting

DR and Public Dealer Groups

In today’s post, subtitled, “the good, the bad, and the ugly,” we look at where the Big Six public dealer groups stand on Digital Retail. Some of them get it, some of them don’t, and others have missed the point.

“Once they start the process online, customers tend to buy a car at a much higher rate than … walking into our showroom” – Daryl Kenningham, Group 1

It’s not essential to spin up a distinct site, though many have taken this approach. It’s a clever way to get in the same space as Carvana. Thus, we have new brands Driveway, Clicklane, and Acceleride. For example, you can enter Group 1’s DR process from either Acceleride or the Group 1 site.

Penske – Penske started experimenting with DR way back in 2015 and something called Preferred Purchase. Today, it’s still called Preferred Purchase, but it’s the DDC Accelerate system.
Group 1 – GP1 recently (2019) launched a Roadster implementation called Acceleride. It is now selling more than 1,000 units per month, including new cars. This is the top initiative in their investor deck, clearly showing management attention.
Asbury – Asbury was also an early adopter, starting with Drive (2016) and now their own Clicklane offering. By my count, this is their third experiment – exactly what you want to see with digital transformation.
Lithia – Lithia has a branded DR site called Driveway which, unfortunately, requires users to create an account before entering the process. As I wrote in Design Concepts for Online Car Buying, you don’t create an account until the customer is ready to save a deal.
AutoNation – AutoNation has made strategic investments in DR vendors like Vroom, and launched its own AutoNation Express in 2014. As with Driveway, step one is a lead form.
Sonic – Sonic announced a plan to use Darwin but, alas, there is still no sign of DR on either the Sonic or EchoPark site. Maybe the new eCommerce team will fix that.

I can understand why new-car dealers might want to start with a lead form. New cars are commodities, and vulnerable to price shopping. This is where used-car dealers CarMax and Carvana have an advantage. Otherwise, DR requires a strong commitment to price transparency.

Digital Retail is synergistic with modern sales practices, like one-touch and hybrid teams. Sonic is the leader here, and has the highest used-car ratio, so you would expect them to have an edge.

Finally, it’s hard to sell protection products online. Groups with growing DR penetration are likely to see reduced PVR. This has long been a knock against Carvana. Experts agree that the solution here is an AI-based “recommender.”

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.

Taxonomy of Online Car Shopping Sites

I have been writing an ad hoc series about online car shopping. It started with a technical point about how software vendors should migrate into this space, and then along the way I started characterizing the sites themselves. In this article, I present a classification scheme which may be of interest to technology strategists.

One way to look at car shopping sites is in terms of functionality. In my last article, I presented six key functions:

Specify vehicle and trim
Price vehicle
Price protection products
Value trade
Structure deal
Obtain financing

For each function, there are grades of support. Does the site sell protection products, for example, and are they customized for the chosen vehicle? This would be a way to rank the sites, like Consumer Reports. I have strong opinions here, but they’ll have to wait for a later article. For strategy purposes, the sites are better characterized by three business decisions:

Control of inventory – Traditional car shopping sites are platforms for common inventory search across multiple dealerships. Because they do not control the inventory, there are limits on the functions these sites can provide. Looking at inventory (and delivery) is a way to characterize the site’s relationship with the dealer.

Disclosing the price – Most of the downstream functions are blocked until the price is settled. This is what separates shopping sites from buying sites. Unfortunately, price transparency is a problem for many dealers. In addition to no haggle pricing, we now have innovative solutions from TrueCar and Make My Deal.

Different makes – A site that specializes in a single make can also specialize in financing and protection products. In addition, some information systems may be standardized. On the other hand, most car buyers begin by comparing similar models of different makes, like the Touareg versus the 4Runner.

My approach groups the sites into eight categories, and gives us a way to describe the differences. For example, when the customer moves from a platform site to an individual dealer, the make (and the lot) is specified. Now the dealer can offer customized financing and products.

The difference between a platform site and, say, Carvana, is that Carvana owns the inventory and can quote a price. In fairness to new car dealers, price transparency is less of a problem with used cars. Carvana, Vroom, and CarMax have the inside track. Otherwise, AutoNation Express would be in this category.

You could slice it thinner, but I think eight categories is enough. I leave it to the reader to evaluate all twelve single-feature comparisons.

One thing I learned studying syntax as an undergrad, is that you construct a paradigm to fit the data you have, and then you prove the paradigm by using it to find new data. Here, I drew a blank for case #2, and then I realized it would be the web site for an OEM company store, as in Europe. Sure enough, Tesla fills this slot.

There is one more feature I would have liked to include, but I felt it was too much, and that is systems integration. AutoNation Express has the distinct advantage that whatever payment calculator, menu presentation, or other gadget they may add to the site, it is guaranteed to work seamlessly with an AutoNation dealer.

Another way to prove out my taxonomy is to explain and predict trends in the industry. Speaking of AutoNation, one of these trends is toward increasing consolidation by the big, public dealer groups. They are represented online by cases #1 and 3.

To defend themselves online, private dealers will migrate into the most capable of the platform sites, and there will be a shakeout. The winning platforms will not be mere lead providers. They will have to offer advanced shopping features, as I have described previously, and they will have to solve the problem of systems integration with a diverse dealer base.

Eventually, as both camps wrestle with the pricing issue, there will be a breakthrough. Like the first prehistoric fish to draw breath on shore, the platform sites will struggle into case #5.

The one strategic curveball would be if a consolidator decided to open up their site to outside dealers, blurring the line between cases #1 and 5, or a platform site started acquiring new car franchises. We’ll leave this chimera for another story.

Claiming Space on Consumer Sites

In my last article, I described a technique for extending traditional dealer functions into the consumer space. I used the metaphor of a land rush, with the extension feature claiming territory on one or more consumer web sites. This is part of a generic strategy, to update any dealer system and make it more relevant to the evolving world of online auto retail.

In this post, we will survey the consumer space, looking for opportunities to insert the various dealer system extensions. My plan is not to predict the future of online retail, but to show where these “plug-ins” may be placed today. Prediction only comes into play because we want to know how durable the relationship will be.

Sunnyvale Toyota is one of many individual dealer sites featuring the eLEND credit plug in. If you’re not clear on the plugin concept, take a look. Technically, this is an Iframe that passes control to the extranet formerly known as Dealer Centric. The site itself is by Dealer.com, and the dealer has chosen to delegate the credit process to eLEND.

I really like this technique, but that’s not the question. Credit systems are well represented on dealer sites, using a variety of techniques. The question is – where are the protection products? Pricing and presenting products on a dealer site is technically easier than doing a credit app. This is an obvious place to extend menu systems and provider networks.

A dealer site is not a good place to start desking, because the site is too far down funnel, and the process depends too much on pricing. A key advantage for the dealer’s desking system is the ability to include local taxes, fees, and incentives. We’ll talk later about how and why desking should be part of the customer’s online shopping experience.

A dealer site is also not a good place for opt-in CRM or, at least – as I wrote last week – not as good as an OEM site. People move around too much. Another thing to consider with dealer sites is that they will increasingly be dominated by shopping sites and consolidators.

You would think that specialist car shopping sites would offer the most functionality to their customers – and you would be wrong. That’s because they don’t own the inventory, and they don’t control the process at the dealership. It’s hard to initiate a credit app or sell a service contract on behalf of a heterogeneous dealer population. Auto Trader offers a link to a direct lender.

Even consolidator sites, like Sonic and AutoNation, leave the heavy lifting to their stores. They are better able to standardize process and systems than the other shopping sites, but they still have to work with different franchises and different captives. There is opportunity here for dealer systems to differentiate themselves by offering consumer-site features.

You would think that specialist car shopping sites would offer the most functionality to their customers – and you would be wrong.

Used car consolidators, like CarMax and Vroom, have much more flexibility. It is theoretically possible for these sites to offer a complete buying experience online. To me, that includes credit, desking, and products. Vroom wants to be “the Zappos of online car buying.” This brings me to that futurism topic I promised to avoid, and our next category … car buying sites.

I like to make a distinction between shopping sites and buying sites. Shopping is a nonlinear process, with rough ideas and estimates. Just look at all those asterisks on the shopping sites. Buying requires things to be done in a certain sequence, with exact values.

A shopping site is all about selecting and pricing a vehicle from inventory, and then turning over the lead. This means a variety of dealers with a variety of systems, and little opportunity to extend functionality toward the customer.

They may say “buy a car online,” but very few actually attempt a complete buying process. Vroom and ShopClickDrive are exceptions. Both use Route One for credit processing – and nothing for protection products. Buying sites, as they evolve, will be the Promised Land for dealer system extensions.

I was going to make a separate category for research sites, like Edmunds and TrueCar. For our purposes, these are the same as shopping sites, above.

Calculators and credit apps abound on the auto finance sites, and some of them are quite good. This is where you can “roll to amount financed,” for example, with current loan rates. I see untapped potential here, for desking, CRM, and product links. Plus, here’s an out-of-the-box idea – an inventory search plugin for the banks. It would look something like this, below. Bank of America already has the window. It’s just missing the car!

I include OEM sites even though they’re poor candidates for dealer system extension. The challenge with OEM sites is that they already have proprietary relationships with F&I partners. The Buick site takes you right to Santander, and the products on the Hyundai site are from Safe-Guard. Also, an OEM must consider all their dealers, so they can’t favor one system over another.

Your best bet here is to develop a generic interface, and then compete on the depth and breadth of your OEM integration. Dealer Track does this in the service department. If you know of anybody doing it in the front office, please let me know.

The table below summarizes the opportunity for extending dealer systems into the consumer space. There is no “official” taxonomy of auto retail sites. I chose these categories because they work well with the generic strategy.

Whether you are planning a strategic move into the consumer space, or just a new feature, I hope you find my analysis useful. You can’t beat the land rush if you don’t have a map.