Category: Retail Operations

Worry about Mobility, Continued

This week, we examine the fourth piece of McKinsey’s automotive revolution, shared mobility.  This is really a collection of trends including car sharing, ride hailing, and mass transit.  I will show how to gauge whether a new program has the potential to be disruptive.  But first, let’s dispense with mass transit.

From Munich, you can ride the U-Bahn to the Schnellbahn, and get anywhere in Europe by fast rail.  This is where McKinsey’s analysis shows its European bias.  Europe’s population density is three times that of the United States, and her various rail systems carry twenty times the passengers.

American cities are linked by air, of course, but relatively few have commuter rail systems.  When you deplane at Las Vegas, for example, or Orlando, you are headed for the car rental counter.

“What’s happening in general, millennials, younger people, car ownership in and of itself is not the most important thing.”

When I worked at BMW, twenty years ago, they were already styling themselves a “mobility” company, and not solely a car company.  At the time, that meant mass transit.  If you look at BMW today, their investments tell a different story.  I won’t try to categorize Fair, Shift, Skurt, Scoop, and ReachNow – not today, anyway. Today I want to talk about capacity utilization.

If you’re like most people, you drive your car to and from work, plus errands and recreation.  Let’s call it 20 hours of use for the 112 hours per week you’re awake, or 18%.  In theory, any mobility scheme that increases capacity utilization will cause a proportional decrease in car sales. There is a variety of schemes, known collectively as Mobility as a Service.

“The success of a MaaS provider will be determined by how much utilization they can gain from their accessible fleet.”

Uber is the obvious example.  It increases utilization for the drivers, and reduces the riders’ inclination to buy a car of their own.  I meet people every day who won’t buy a car, or won’t buy a second car, because Uber meets their occasional driving needs.  In major urban areas, people have long gotten by without cars.  The way I see it, Uber has widened this circle out into the suburbs.

Uber will also take a bite out of traditional car rental, as will hourly rental services like Maven. Maven is basically Uber without the driver, good for business travelers who just want to attend their meeting and go back to the hotel.  Business travelers I know will often choose Uber over Hertz, depending on the city.

“Millennials like having an easy process, but they hate commitment,” Bauer said. “I think the next step for leasing has to be no fixed term, or a different way of term.”

Here in Atlanta, we have two subscription car programs, Flexdrive and Clutch.  It is wonderful to live in the nexus of so much new-auto activity.  Flexdrive is a joint venture of Cox Automotive and Holman Auto Group.  You choose from a variety of vehicles, and your monthly subscription includes insurance, maintenance, and roadside assistance.

The average car payment in America is $500.  Depending on the figures you use for gas, insurance, and maintenance, your car costs at least $7 per hour of use.  This may sound fanciful, accounting for the car as a utility, but this is exactly the way a new generation of mobility providers look at it.  A monthly subscription of $500 is the price point advertised by Fair.  Zipcar and Maven hourly rates start at $8.

The chart above shows that car sales per capita have declined, in fits and starts, by about one in six over the last forty years.  This reflects trends like gradually increasing urbanization and longer-lived cars, which are minor worries for our industry.  Increasing utilization, through various forms of renting and sharing, has the potential to be a major worry.

How to Worry about Mobility

I was impressed by this article, How to Worry about Climate Change.  It was neither activist nor skeptical, but rather placed the threat in an appropriate policy context.  So, I was inspired to update my earlier post on the “mobility revolution.”

McKinsey has some new research out which, I feel, overstates the case.  The case, as you may recall, is that four trends will come together in some kind of perfect storm:

  • Electrification
  • Connectivity
  • Autonomous driving
  • Shared mobility

The best research on mobility is still this series of papers from the BCG.  Like me, BCG is reserved about the U.S. market.  I strawman McKinsey a little by focusing on U.S. car dealers.  Their focus is on manufacturers, with a European orientation.

The right way to worry about mobility is to ignore the interaction effects, and look at each trend individually.  This is where I differ from McKinsey.  They model three different outcomes – small, medium, and large – for each of the four trends.  This gives them eighty-one different scenarios to evaluate (consultants love this stuff).

Electric Cars

My local BMW dealer has a lot full of i3s and i8s.  Electric cars won’t change auto retail at all – service, obviously, but not sales.  This “revolution” only affects dealers if Tesla succeeds in doing it without a dealer network.  From my perspective, not having a dealer network is a weakness, and a sign that the company lacks confidence in its product.

Connectivity

It turns out Jacques Nasser was right.  Kids today will ride in a hamster box as long as it has satellite, wireless, navigation, and a sound system.  Gone is my generation’s enthusiasm for hemi heads and dual overhead cams.  No one drives a stick anymore, and the steering wheel will be next (see below).

Connectivity will change auto retail the same way electric cars will – new features to sell and service.  I have the BMW connectivity app on my iPhone.  Connectivity in terms of telematics will open up new opportunities for service retention, as I described here.  There are new opportunities in F&I, and even lot management, as people invent more things to plug into the OBD port.

Autonomous Cars

I am deeply skeptical about self-driving cars.  People who promote them tend to focus on SAE level four, and overlook the greater challenge of full autonomy.  I see self-driving in limited contexts, like self-parking and advanced cruise control.  Check out BMW’s lane-departure technology.  This is cool stuff, and what it means to car dealers is … more expensive cars!

Remember that the nightmare scenario for self-driving cars only occurs when the cars are smart enough to be widely shared, i.e., robot Uber drivers.  A car that can autonomously drive the kids to school is years and years away.

A close examination of the technologies required to achieve advanced levels of autonomous driving suggests a significantly longer timeline; such vehicles are perhaps five to ten years away.

Like “catastrophic anthropogenic global warming,” that date keeps moving out as we approach it.  In 2012, Sergey Brin said self-driving cars would be widely available by 2018.  In 2016, Mark Fields said no steering wheel by 2021.  McKinsey, in any year, always says, “five to ten years from now.”  For a clear-eyed look at the challenges, see here.  For more about luxury driver assistance see here.

That about does it for my deconstruction of three mobility trends that should not worry car dealers.  Next week, I’ll report on that fourth one.  Now that I am living in a big, modern metropolis, I can see shared mobility first hand.  I may not even need a second car.

New Consolidation Stats from NADA

I chose consolidation for the first of my megatrends series, because it’s the least controversial.  Everyone seems to know it’s happening, and the records and rankings in Automotive News are dominated by big groups.

Ten years down the road, we don’t want to be the 13-point dealership group feeling that pain from the larger groups the way the smaller ones are now

This year, for the first time, NADA Data takes a look at consolidation.  Probably the best single number to look at is the ratio of rooftops to dealers, which represents the average number of stores in a dealer group.  This has grown from 1.8 to 2.2 over the last nine years – not exactly a revolution.  I was a little surprised to see such small numbers, but this is an artifact of how NADA presents the data.

NADA, logically enough, presents the number of dealers owning a group of a given size.  I would have preferred to see the number of stores, not owners, in each category.  This is a better reflection of the market coverage.  To show the distinction, I plotted the total count of both rooftops and owners.  You can see that, while the number of rooftops is recovering since 2010, the number of dealers is not.

Next, I recast the data in terms of rooftops.  The number of rooftops belonging to groups of ten or more has almost doubled over the period, from 12.2% to 21.3%.

Below, I have plotted the number of rooftops in three tiers, by size of the dealer group to which they belong.  The 2 to 10 tier has been remarkably stable, numbering roughly 8,200.  The single points have been in steady decline, losing 2,500 over the period.

Dealers know that single points are vulnerable to market shocks and competitive pressure, if for no other reason than being tied to a single make.  On present trends, we can expect them to vanish entirely within ten or fifteen years.

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 ex-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.

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.

Dealer Megatrends Part 1 – Consolidation

In the 2006 data, NADA noted a “moderate consolidation trend.”  Since the recession, sales have recovered but the dealer population has not.  My chart, below, is based on the last eleven years of NADA data.  You can go back as far as you like.  The dealer population has been shrinking steadily for fifty years.

chart

This means the surviving dealers are selling more cars per store, but the real story is consolidation – the powerful trend toward fewer owners and bigger groups.

In 2005, the top 100 dealership groups were 9% of the total.  In 2015, they were 17%.  The Automotive News ranking is by gross revenue but, for simplicity, I am counting stores.  I imagine that the big, efficient groups command more than 17% of the total gross.

Gee group’s purchase of 16 Tonkin stores, backed by private equity, is instructive.  Both groups are family owned, with seven and 21 stores respectively.  Brad Tonkin will join the combined entity as president.  The Automotive News article also describes a Soros-backed purchase by the McLarty group, bringing its count to 19 stores.

The owners may be public, like AutoNation and Penske, private equity, or something in between.  Larry Miller group, for example, is still family owned but independently managed.  An IPO seems the next logical step.  Broker Alan Haig predicts his buy-sell business will continue strong in 2017.

This is about economies of scale, obviously.  The New York Times mentions efficiency in staffing, technology, and inventory management (as I did, here).  There is a lot of money chasing this trend, and only so many operators who know how to exploit scale.  That’s why Haig also has a recruiting arm.

Small dealer groups can compete online only by joining platforms that aggregate inventory.

If you are running a small group, you might want to start thinking about M&A.  That’s not my area, though.  I am interested in the related trends toward technology and process change.  I’ll examine these more in my next post.

One example is online retail.  Small dealer groups can compete online only by joining platforms that aggregate inventory, like TrueCar or Autotrader.  What I am proposing is that the (relatively) little guys compete with the consolidators by consolidating themselves online.

Dealers should seek help from their OEMs and software vendors.  Well, maybe not the OEMs.  GM’s Shop Click Drive only searches inventory for a single dealer, and it makes you choose the dealer first.  Not only will it not give you a price, it won’t even present a model list until you’ve selected a dealer.  No one shops this way anymore.

Modern shoppers will have found a model and trim level, a price, and even a lender, before landing on a dealer.  While Shop Click Drive has the machinery to structure a deal, and even sell protection products, some genius decided to make the “choose dealer” button its primary focus.  Most GM dealers I looked at were also on Autotrader.

I did a survey of platform capabilities last year, with Cox Automotive far in the lead.  The other guys seem still to be in the world of single-dealer web sites.  I also noticed that these sites are mostly hideous, and lacking consistency in even simple functions like credit application.

The consolidators have strong tech teams devoted to online shopping.  Dealers may fail to see the threat, because it’s not a physical presence.  If you owned a hardware store, and Home Depot went up across the street, you would notice.