Pulling a U-ey – How changing market dynamics are driving car dealerships to evolve

By June 27, 2017Insights, Retail

Article by Daniel Resnick, SATOV Principal

Disruption in the automotive sector is everyone’s favourite parlour game – or at least, it is at the cool parties we go to. What impact will Electric Vehicles have on refueling infrastructure? Can big taxi recover from Uber? Can the auto parts supply chain survive changes to NAFTA? All of these conversations revolve around the different types of cars people want, and the changing ways they use them.

The part of this conversation we’ve been thinking about is the question around how people actually buy cars. The car dealership business is large – the National Automobile Dealers Association reported there were over 16,700 franchised dealers in the US in 2016, employing over 1.1 million people and selling almost $1 trillion worth of new vehicles. While most people think of pushy dealers and cheesy commercials, the car dealership market has garnered significant attention from the investment community, who see opportunities for consolidation and sophistication.

Have we hit peak auto?

Automotive sales reached record levels in 2016 – both in Canada and the USA – thanks largely to low interest rates and attractive buyer incentives. Per the Globe & Mail, North Americans bought almost 20 million vehicles last year, and most industry experts expect market conditions to remain buoyant in the near term. And yet, the prevailing long term narrative is around the impending disruption and decline of the automotive sector.

The main thrust of this argument is that ride sharing and autonomous vehicles will take significant inventory out of the market. Barclay’s predicts that at full implementation, a single autonomous vehicle could displace 7 personal vehicles. A steady flow of announcements touting new technologies and business models, such as the recent announcement of a partnership between Lyft and Waymo (Google’s autonomous vehicle arm) will further amplify predictions on how quickly consumers will stop buying their own car.

The counterpoint to this is that the average car in North America stays on the road for almost 12 years, so even if theoretical consumer demand for autonomous vehicles is high, it would take multiple turnover cycles for self-driving cars to comprise the bulk of the fleet. Without the pressure of rapid consumer demand, it’s hard to imagine the enabling evolutions required from regulators, insurers, and traffic infrastructure developers happening quickly.

Moreover, people still like to drive, and adoption – at least of ridesharing – may not preclude car ownership. A survey performed by Techanalysis Research, for example, found that 96{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748} of car owners who use ridesharing see it as a complementary offering to their own vehicle. They’ll call Uber if they’ve been drinking, or to travel short distances for work, but it doesn’t displace the car in their garage.

The reality is that for dealers (and investors) looking at a 5-10 year horizon, whether or not we’ve hit peak auto may not even matter. Whether you believe in bullish or bearish forecasts, few people should be surprised by the conclusions of an Autotrader survey which found that <1{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748} of respondents prefer the current car buying process. Shifting customer expectations and buying behaviours will necessitate a new look at pricing, channels, business models, and customer experience.

Prices in the rearview mirror may appear exactly as they are

The automotive sector is one of the last B2C sectors – at least in North America – where haggling is an accepted practice in formal contexts. Online shopping is quickly making this a thing of the past. Consumers now have access to detailed manufacturer information and – more importantly – social forums make it easier than ever to learn what others have paid for similar products. Sites like TrueCar aggregate actual purchase prices at a national and zip code level to give buyers real data points on what their neighbours have paid for comparable vehicles.

Costco’s entry into the auto sales market has demonstrated the latent demand for straightforward pricing. As reported by Business Insider, Costco sold 465,000 cars in 2015; in comparison, Auto Nation, the leading US car dealer, sold 533,000 the prior year. Costco is not actually a dealer, but they partner with dealers to make cars available to their members at fixed prices. Furthermore, the people gravitating towards fixed pricing are the affluent consumers that generate high margins for dealers – per Fortune, 18.5{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748} of vehicles sold by Costco were luxury brands, compared to 12.2{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748} of total vehicle sales across the US.

By shifting the focus away from pricing and towards areas they can control – like customer experience – dealers can establish profitable long term relationships.

Context is key

One challenge auto dealers have relative to higher velocity retail brethren is the information asymmetry that exists when a customer walks in their door. The customer will have had ample opportunity to research the dealership, the inventory, and the OEM’s sales practices. The sales representative, on the other hand, will know nothing about the customer. While fast moving goods retailers have the benefit of high frequency and broad baskets to build up a picture of their customers over time, automotive dealers are not so lucky. The growing use of online platforms as a research tool – Autotrader forecast that 80{a23d3e3aff46d689b50c88cc1d7606a7a28ed4b695b585c6bb0ea43784184748} of car buyers would use online devices to shop by 2020 – does, however, create opportunity for dealers who can work with OEMs to seamlessly link their online, mobile, and in-dealership experiences.

Car dealers will need to ensure they avoid the “data without insight” trap that other sectors face. The challenge is to make smart investments to proactively engage customers at the moments where they’ll be receptive and appreciative of the message. How can dealers do this? By taking a page from their higher frequency retail cousins and adopting a proactive, data driven approach to customer targeting and channel selection. Car purchases don’t happen in isolation – they are triggered by a life event. The end of a lease is the obvious indicator dealers have used for years, but what about recent graduation? A move to the suburbs? The birth of a child, or a big promotion?

Dealerships can take a proactive approach by partnering with other organizations or third parties to round out their data set, and use it to make informed decisions on what channels to use at different times. The most bankable dealers will know when to send you a ‘baby on board sticker’ and coupon for a new van, when to knock on your door and ask if you want to test drive a sports car, when to target you with a personalized ad about the best car for Uber drivers to own, and when to leave you alone because you’re perfectly happy taking the bus.

Take to the streets

A key component of knowing the customer is understanding when, where, and how they make purchase decisions. In a society where time is an increasingly valuable commodity and convenience is an important differentiator for consumers, the dealership may not be the central purchase destination for certain customers.

Automakers at the high end of the market are recognizing this and adapting accordingly. Genesis, Hyundai’s entry into the luxury vehicle market, has cut out the dealer entirely. Prospective buyers can shop, finance, and complete purchase of a vehicle online. More importantly, Hyundai’s concierge service will have a Genesis employee bring a demo car right to the customer’s doorstep to answer any questions and go for a test drive. Hyundai – as well as other luxury brands like Lexus – have introduced a similar offering for after sale maintenance. Owners can request a representative to come pick up the car for service, leave a loaner behind, and then return the car once it’s ready for the road again.

These automakers have recognized that it is worth their effort – and investment – to go the extra mile to develop, sustain and protect relationships with target customers. This will put pressure on dealers to get out of the showroom and into the living room of their most valuable customers.

Looking to the future

The pace and nature of the automotive sector evolution is impossible to truly forecast. Will consumers “cut the cord” on having their own car and fully embrace ride sharing? Will shifting regulations and increasing costs of real estate make it prohibitively expensive for the average household to park two cars in the family garage? Will Amazon translate their Vehicles platform into a destination for mass online buying?

We’ll continue to keep our eye on these trends, but the bottom line is that it’s hard to imagine the current fleet of cards disappearing overnight. We believe that consumers will continue to buy cars for the foreseeable future. More importantly, we believe that some – but not all – dealers will continue to profitably sell them.  For investors, the challenge is thus to spot the signs of dealers who can adapt their business model to meet changing consumer needs. Once you find them, jump in and enjoy the ride!

 

Third party sources:

  • Auto News
  • Auto Guide
  • Auto Trader
  • Barclays
  • Business Insider
  • Fortune
  • Globe and Mail
  • Recode
  • True Car