Group 1 – 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.