Vroom – Virag Consulting

In the Amazon Wilderness

I concluded Car Dealer Megatrends with the clear and present dominance of consolidated groups, which I like to call the Best Buy phase. Today, I will indulge in a little futurism, and explore the Amazon phase. In the Amazon phase, it will be possible to buy a new car enitrely online and have it delivered.

By 2025, experts estimate 30-40% of car sales will be online. The high end of that range is from Mark O’Neil. Used cars are easier to sell online, witness Carvana, Vroom, and Shift, but new cars will be there too. An estimated 25%, and that’s only seven years away.

The industry is rapidly solving problems like pricing and trade valuation. The only challenge people still talk about is the test drive. Carvana solves this with its seven day return policy, and Shift will bring the car to you for a test drive.

“The current dealer model is not a dying breed,” Benstock said. “It’s dead. It’s absolutely dead.”

I will order a new BMW sight unseen, because I know the product and I trust the manufacturer. Their online configurator is awesome, and I really would press the “build and ship as shown” button, although the process isn’t quite there yet. We’ll come back to BMW later, but for now let’s assume a test drive is required.

The tension between Best Buy and Amazon centers on a practice known as “showrooming.” This is where you sample the product at Best Buy, interrogate the Best Buy sales associate, and then turn around and order the product from Amazon. Amazon even makes a clever app you can use to scan product codes while you’re in Best Buy.

As auto retail moves into its Amazon phase, I can imagine the same challenge for dealers. You have invested in a monument to your manufacturer’s brand image, where customers can sample the product and then go order it online.

I had been pondering the showrooming challenge for a while when I ran across this piece in the Wall Street Journal. Nordstrom is opening stores with no stock, where shoppers can try on clothes and accessories, and then have them delivered.

It will contain eight dressing rooms, where shoppers can try on clothes and accessories, though the store won’t stock them.

The Nordstrom story reminded me of the old “catalog showrooms” operated by mail order retailers like E.L. Rice and Service Merchandise. Ironically, this was the last gasp of mail order, put out of business by brick and mortar retailers – including, ultimately, Best Buy.

All of this goes to show that, in the Amazon phase, showrooming and fulfillment can be disconnected. Where the customer goes, to test drive and learn about the vehicle, does not have to be the dealership or even affiliated with the dealership. This opens up a world of new possibilities.

I can think of several applications for standalone test drive centers. For instance, suppose a manufacturer wanted to enforce its ideas about how to present its vehicles, and also – since this is the Amazon phase – protect its own position online.

Were it not for U.S. franchise laws, manufacturers would run their own retail outlets. In Europe, they have company stores, where ideas about brand image, sales training, and product positioning do not depend on a network of autonomous dealers.

An OEM test drive center would bypass the dealer network (or complement it, if you prefer). It would be staffed by salaried, factory-trained product experts with no other objective than to educate customers in the finer points of their company’s vehicles.

There would be minimal inventory, attractive video displays, simulators, and samples of paint and fabric. No transactions would take place, but there would be plenty of Wi-Fi bandwidth and gourmet coffee for the online shoppers.

As I said, this is just one scenario. The new techniques of digital retail will create untold opportunity for dealers willing to adapt. Our exploration of the Amazon phase has just begun.

Why Price Transparency Matters

About a year ago, the McKinsey report came out, Innovating Auto Retail. It looked at how traditional dealerships will fare in a world dominated by online shopping, and how the business model needs to change. McKinsey has some good ideas, which they tested using a simulated dealer network. In the simulation, one dealer in six had to close.

For online shoppers, the primary motives are convenience, the expectation of lower prices, and avoiding certain unpleasant elements of the sales experience at dealerships, such as “haggling over the price” – McKinsey

Recently, Auto Trader conducted a survey of modern buyer behavior. It is more dealer friendly, but it reaches some of the same conclusions. The core function of a dealership is to provide expert assistance in choosing a vehicle, and to do test drives.

What does not belong in a dealership is the hour-long F&I ordeal. Customers, according to the survey, are ready to leave after ninety minutes. Spending sixty of them in the box is a non-starter. The more of this process that can be completed online, the better.

One finding in the Auto Trader survey that differs from McKinsey is the assertion that customers actually prefer to haggle over price. I see an editorial like this about once a week, and I just don’t buy it. It’s obviously self-serving for expert sales people to insist that customers enjoy the process – even as they argue against price transparency.

My purpose here is not to make a moral point about Sales, but a practical one about F&I. Pricing is the key obstacle to completing virtually all of the transaction online. You have all of this time consuming activity around financing and products – backed up, waiting for the price.

I would suggest that the opportunity to play games with the sale price is not worth what it costs F&I in lost profits and efficiency. Someone is going to figure this out. Here are a few possibilities:

Use no-haggle pricing, like Vroom.

Use transaction prices, like TrueCar.

Do the haggling online, like MakeMyDeal.

Use some hybrid approach, like AutoNation.

AutoNation recently had a falling out with TrueCar, but they have always been a leader in trying to solve the pricing problem, probably because they are aware of the efficiency issue (and the CSI issue). I understand that many sales people still consider haggling to be an important part of their job. Times change.

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.