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.
Around the turn of the century, I was helping RouteOne to build their now-ubiquitous credit system. Then, I moved on to aggregation models for the “I” side of F&I. It was a lot of work.
We had to develop scores of unique interfaces for lenders and product providers. We had to develop deal calculation engines, and then reverse engineer each DMS so our payments would match. There were no automated sources for finance or product rates. We had to walk ten miles in the snow …
Today’s eCommerce startups have it easy. All of the key tasks are supported by readily available services, leaving the entrepreneur to focus on user experience and dealer support.
When I started writing about this space, the key challenges were price negotiation and trade valuation (and the test drive, but I’ll cover that in a later piece). Today, you have reliable online trade valuation from Kelley, Trade Pending, and others. Price negotiation can be handled through chat or one-price, generally on used vehicles.
You can have payment calculations, including incentives, from MarketScan, provider networks from PEN or F&I Express, and finance networks from RouteOne or Dealertrack. Everything in this paragraph is an API, not to mention passing data from your eCommerce platform into the corresponding dealer system. Finally, even the old faithful DMS now exposes a variety of databases, like inventory.
A few months ago, I described the role of venture capital in driving process change. I think this eCommerce ecosystem is equally important. Entrepreneurs can enter the space at a very low cost, relative to ten years ago, and meet most of their requirements through interfaces.