“For everything to stay the same, everything must change.” – from The Leopard by G. T. di Lampedusa.
Lampedusa was writing about Italian politics in the 1800s, but his epigram also applies to the American dealership scene today. His meaning was that, in order to retain their dominant position in Italian society, the aristocratic families of Sicily would have to completely change their political stance, from monarchist to democratic. In this way, even as everything changed around them, their fortunes would be assured. And in the American dealership landscape today, everything is indeed changing, but the position of Dealers themselves seems to be as strong as ever, if not stronger.
This is one finding of the 2021 update of the NADA (National Automobile Dealers Association) ongoing DOT project, begun back in 2016. DOT was and is intended to provide new-car Dealers with information and insights regarding the evolving world of automotive retailing.
Before looking more closely at the report, two disclaimers are in order. First, our focus is wholly on America: how useful our report is for the Australian environment is for you to decide. Second, the report is an arm’s-length research paper, such that the views expressed are my own, not those of NADA.
As before, the report covers two main strands of developments: “inside” the store (e.g. digitisation) and “outside” the store (e.g. EVs and AVs). And as before, the report looks out over the next decade: not next month or even next year – thus we make no comment on whether Dealer chain X will buy chain Y in April, or whether OEM Z will launch a new image program in May.
As you can see, the report’s conclusions are fairly upbeat. And indeed, since our first edition came out in early 2017, we have been upbeat, despite a constant refrain in the press, and in the blogo- and Twitter-sphere that the dealership model is “broken” (whatever that means). We just don’t see that, and indeed our industry ended “The Plague Year” of 2020 with near-record profitability, and with record high share prices for the publicly-traded chains such as AutoNation. The demand for cars remains high (by the end of the year only fleet sales were still weak, with retail sales mostly recovered), and Dealers’ ability to serve that demand with ever-higher levels of efficiency and customer satisfaction became clear.
This is not to say there are not challenges. It is a truism that there always are challenges. But it is also a truism that Dealers have always risen to the challenges. For examples:
- There was the challenge of the new public dealership chains, which in the 1990s some thought would sweep the board of private ownership. That hasn’t happened, as after a quarter century of existence these firms (combined) still have no more than a 10% share of the US car market.
- There was the threat of online disintermediation in the early 2000s. That also hasn’t happened, as Dealers and OEMs adopted digital technologies themselves, and reduced disintermediators mostly just to lead generators.
- And there was the threat of forward integration by the OEMs (we’re looking at you, Ford and GM, and Daewoo before you!) – which was then abandoned (with the exception of Tesla, of course).
In summary, this brief history of repelling, let’s call them, “the barbarians at the gate” does give us confidence we can handle future challenges. But of course no businessperson can ever become complacent. Some of the issues that worry us:
- Increasing OEM control. The average Dealer in the USA is now receiving some $1 million (USD) annually from the OEM, in the form of performance-based incentives or bonuses. For most Dealers this is an amount equivalent to their total bottom-line profit! This is of
- course meant to offset the decline in front-end margin. But the Good Old Days of making one’s living from customer margin have transformed into the Brave New World of satisfying the OEM, as your most important constituent.
- Dropping the ball on the EV transition. More EVs on the road in the USA is not a matter of “if” but of “when.” Yet consumer demand for EVs – to date – has been sluggish (see chart above). Thus many Dealers have been reluctant to invest in EVs, whether in the form of expensive service equipment or in the form of salesforce retraining. If EV sales grow as we do expect, Dealers with struggling sales staff will miss out on revenue, and Dealers with lagging service departments will find their customers turning to the aftermarket for EV maintenance.
- Giving back the gains made in 2020, in terms of new-vehicle sales processes. The pandemic has been terrible, there is no doubt about that. But as a result of the pandemic we have moved to socially-distanced digital sales processes that have dramatically cut selling costs (by boosting employee productivity), and to lower inventory levels (due to virus-driven OEM shutdowns), which have boosted front-end grosses to near-record levels. Higher grosses + lower expenses = profit levels that we have not seen in many years. But will we be able to hold these levels, or will our newly-found efficiencies be eroded by the return of bad habits, and our newly-elevated margin levels be chopped as OEMs return to undisciplined overproduction?
But other storm clouds that seemed so threatening in earlier editions of DOT have to some extent dissipated. Let’s review two of these.
First, if we look at autonomous vehicles (AVs), we see that, while they are still on their way to our roads, their arrival is both delayed and narrowed, so that the vision of hordes of so-called “robotaxis” displacing privately-owned cars en masse has receded. The delay is due to the realisation that autonomous driving is an extremely hard problem to solve – though it will be solved, we have no doubt. The narrowing of scope is part and parcel of the delay: if generalised drive-anywhere-anytime autonomy is just too hard to execute right now, then it makes sense to go after lower-hanging fruit: maybe low-speed sidewalk delivery robots, or highway-only heavy-duty truck driver assistance, or yes even robotaxis – but robotaxis limited to clearly-delineated urban zones. And increasingly there is thinking that AVs might eventually be sold not just as fleet vehicles but also as personally-owned cars … and Dealers of course will be eager to sell them!
If we look at the other big scare of the mid-2010s, mobility services (specifically ride-hail systems like Uber or Didi), we recall that some pundits believed we’d all give up our own cars for “permanent rental” – why bother with your own car when you could Uber everywhere? This concern has also ebbed, as in the USA we see literally zero impact from ride-hail on owning or driving personal cars. Do ride-hail and its younger sibling, micro-mobility (think scooters and e-bikes) offer more ways for people to get around? Yes. Do they – so far at least – meet enough of our mobility needs that we would shed our cars for them? In the USA at least, no. (But travel to downtown Oslo and its vehicle-free zones and $7-per-gallon gasoline, and you do indeed get a different answer!)
One last thing to mention. And it is early days for this, and the nature of the challenge is not yet clear, but there is a development that bears watching. And that is the equating of EVs with OEM-direct sales. Probably inspired by Tesla, there seems to be an emerging sentiment (not as far as we know based on any real data) that somehow electric vehicles are better marketed and sold by company-owned stores (physical or digital) than by franchised Dealers. It eludes me how changing the powertrain changes the buying process (do we sell hardback books only in stores and paperback books only online?), but the sentiment is there. Some new-entrant OEMs are committed: Rivian for example will follow Tesla in going direct to customers. But incumbent OEMs are making feints in this direction as well.
This will bear close watching, not only for the obvious risks of disintermediation and asset-stranding, but also because in some situations perhaps there is a compromise that can make everyone happy. This compromise is the agency model, wherein the OEM keeps title to the inventory and so gets to set the selling price, while the Dealer steps back to just supporting the sale, on a commission or fee basis. Dealers on the one hand might hate the idea of giving up margin control, but on the other hand if margins are already compressed and prices are already set by the internet, there is something to be said for letting the OEM shoulder the burdens of setting prices and funding inventory.
But then again, direct sales work best when demand is greater than supply. And as more EV models are launched, surely demand will not exceed supply for all of them, and here is where we expect OEMs will quickly turn back to Dealers. Back to Dealers who, in country after country and for decade after decade, have proven that it is indeed they who can best… “move the metal.”
This article is written by Glenn Mercer, an independent automotive researcher based in the USA. You can contact him with any questions at firstname.lastname@example.org.