Tag: AutoNation

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.

Why I Freelance

Recently, Linked-In reminded me that I have been an independent consultant for fifteen years.  Thanks to all who called and wrote with congratulations.  In fact, I have been either consulting, at a startup (or consulting for a startup) since business school.

I used “freelance” in the title because this word is in need of some rehabilitation.  There was a bitter post on Linked-In about how “freelance photographer” means “unemployed guy with a camera.”  I get that all the time.  I spoke with a recruiter recently who was startled to learn this is really what I do, and not just a placeholder on my resume.

According to McKinsey, there are 49 million of us “free agents,” equal in number to those who do it out of necessity.

I started consulting for a Big Six firm, back when there were six, and I noticed that our projects were always a big deal for the client staff.  They felt lucky to be on the client’s once-in-a-lifetime project.  We consultants, meanwhile, were continuously assigned to the good projects, client after client.  It becomes addictive.

If I were recruiting here, I would recount some groovy projects and then pitch the glamour and excitement – but I have a much more practical argument.  When you work for a long time at one company, you accrue specific knowledge about its organization, procedures, and history.  If you ever leave that company, the value of this knowledge falls to zero.

I was engaged by GMAC just before the crash.  Suddenly, my entire department was shuttered – desks empty, lights out.  It was a disaster for the faithful, lifetime employees.  Some were out of work for a year.  The consultants, however, rapidly found new jobs.

Job security no longer exists, and the good wages, generous benefits and secure retirement that used to be guaranteed with full-time employment are in decline or have disappeared.

It is a little scary not knowing where I’ll be working next year.  I won’t deny that.  My point about GMAC is that the people who thought they had job security were mistaken – and they were the ones most at risk.

Tom Peters writes that job security does not come from allegiance to your company.  It comes from having skills and accomplishments, plus a network of people who know about your skills and accomplishments.  This is where the exciting projects come in.  When I call around looking for work, I want people to recognize me as “the guy who created Provider Exchange Network,” or something like that.

Changing jobs enhances your value by exposing you to new people, technology, and business models.  This has certainly been true for me.  F&I is a small community, but it includes dealer groups, software companies, and finance sources.  This is great because it allows me to move around without violating any non-competes.

This article in Harvard Business Review echoes Peters’ observation about job security.  The author is a B-school prof, who writes that the gig economy is the future.  Focus on finding work, she says, not a job. I am lucky that this attitude (and related skills) were drilled into me at Coopers.   In case you’re inspired to quit your day job, I’ll follow up with a “how to” article.

Raising the Bar

Armchair strategists are feeling vindicated now that AutoNation CEO Mike Jackson has abandoned his “asinine” plan to ground all vehicles under recall.  I see the same argument whenever anyone tries to change dealer operations.  They estimate the reduction in profits and write about that, as if that were the end of the argument.  It’s not.  That’s not how competition works.

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If you talk about disclosing product prices online, you will hear that F&I gross is now $1,500 and who wants to screw that up?  Same story with TrueCar and their diabolical plan to disclose transaction prices.  You even hear this complaint about vAuto and the velocity method, which sounds to me like the most logical thing ever.

My back-of-envelope calculation says that AutoNation carrying an additional 10,000 units of inventory, at maybe 2%, would cost them roughly $5 million per year.  That’s 0.02% of sales.  For comparison, the related “Drive Safe” ad campaign was $10 million.

AutoNation, with investment-grade credit, enjoys a lower carrying cost than its private dealer competitors.  Selling diverse brands, they are less exposed to a recall by any one manufacturer.  They can also exploit their scale to mitigate the cost of such a policy, not to mention the PR benefits.

If federal regulators had followed Jackson’s lead, this would have raised the bar for all dealers.  Two senators, now disappointed, were lined up to make that happen.  Jackson’s policy, a minor challenge for AutoNation, might have proved fatal for smaller dealers.  That’s how competition works.

It is a mistake to look at process change only in terms of the costs.  Athletes training hard for a competition don’t think about how much it hurts.  They think about how much it’s going to hurt the other guy.

Update:  Motley Fool estimates the cost to AutoNation at $0.06 of EPS, a little higher than my estimate (and Jackson’s) due to the Takata debacle.

Six Month Term Bump for Menu Selling

Whenever I design a menu system, I always include a second finance term that defaults to the base term plus six months. When I did the first menu system for AutoNation, I was coached on this by Arthur Knosala who learned it, I believe, at JM&A.

We had an object lesson when I was working on Route One’s menu. The team was just getting into this requirement when the product owner happened to buy a new car, and took the term bump. She was able to maintain the agreed payment, and still buy some good products.  Even a three-month bump is significant.

My spreadsheet, below, shows how this works. The idea is to goal-seek the amount of product that maintains the original monthly payment, at the longer term. The input values are blue. Everything else is calculated. This allows the possibility that the APR may be higher with the longer term.

Term Bump

If your menu system won’t do this, you can download my spreadsheet. It automatically calculates the finance amount which, with the term bump, results in the same payment. Remember, only type in the blue cells.

Magic tricks are easy once you know the secret — Marshall Brodien

When I was at MenuVantage, one of the guys put together a demo in which he used the term bump to sell a raft of products, and then a biweekly payment program to ratchet the term back down.  It was like a magic trick.  Same payment, same term, and presto!  He pulls two thousand dollars’  gross out of his sleeve.  Dealers couldn’t sign up fast enough.

Ahead of Its Time

I like TrueCar.  I have used the service myself, and recommended it here before.  So, I was sorry to read that they are being forced out of Group 1.  My vision of Online F&I, in a nutshell, is that customers will someday desk their own deals.  That’s why I applaud AutoNation for their persistent efforts to move away from the antiquated “secret pricing” approach.

Group 1 had also been in the vanguard, but now Honda is pressuring them to drop the TrueCar relationship.  The comments from Honda remind me of some I heard way back when MSRP data first appeared on the internet.  “Unacceptable,” stormed Herr Heitmann, “must be stopped!”  Meanwhile, Edmunds was already publishing our invoice prices.

Of course, as an e-commerce guy, I am biased.  You can’t just say information wants to be free, to an angry factory exec – or a struggling GSM.  Except that it’s true.  Transaction prices, like invoice and MSRP, are going to be out there.  We might as well get used to it.

Upfront Pricing

AutoNation is going to have another try at no-haggle pricing.  This time, I think they will succeed.  I think the market is ready for it.  By coincidence, I had just read Zag’s white paper when Mike Jackson made the announcement.   He was talking about no-haggle in the showroom, but this has important implications for my field, e-commerce.

Zag’s argument is that if you’re the only dealer in town not giving a price on the internet, then you’ll be left behind.  The flip side is that if you’re the only dealer who is doing it, then your competitors can easily undercut you.  The trick is to create a movement in the industry – and AutoNation has the scale to do that.  The article also cites Sonic, Asbury and Lithia.

Mr. Jackson says pricing is the last frontier in auto retail, and this is doubly true on the internet.  It’s the one thing preventing true, business-to-consumer, online F&I.

Separated At Birth

I had lunch yesterday with an old friend from AutoNation.  David now works for JM&A, and I started thinking about the two companies.  AutoNation is the world’s largest auto retailer.  Jim Moran Enterprises is the most vertically integrated.  I picture them in opposite corners of a Gartner chart.

Mike Jackson put an end to AutoNation Financial Services in 2002, because he wanted no distractions from the pure retail business.  Mr. Moran’s vision, by contrast, was that he would control every revenue stream within his Southeast Toyota footprint – from the port to the stores, including financing and all the F&I products.  Today the finance arm, World Omni, is so strong that it does third-party servicing for other lenders.  Each of these businesses, up and down Moran Boulevard, is a strong competitor in its own right.

I wonder if a single entity could combine the two strategies – the depth of a JM with the breadth of a public dealer group.