Attendees at the AADA National Dealer Convention & Expo 2018 will be treated to an in-depth discussion of the issues, opportunities and challenges facing franchised Dealers the world over, by a panel of some of the retail automotive world’s most powerful leaders.

AADA CEO, David Blackhall, will be joined by NADA chairman, Wes Lutz, CADA (China’s Dealer association) chairman, Shen Jinjun, and Glenn Mercer, one of the USA’s leading retail automotive consultants, on a panel moderated by Charlie Vogelheim – “The Car Guy” – from San Francisco.

Deloitte Motor Industry Services partner, Dale McCauley, and ANCAP CEO, James Goodwin, complete the line-up.

The 90-minute presentation titled “A Global Perspective on the Future of the Franchised Auto Dealer” is the feature session of the ‘Pre-Convention Day’ on Monday, 3 September.

Dealers will see significant change over the next few years, partly driven by regulatory intervention, margin compression and global disintermediation trends. Franchised Dealers all over the world make enormous investments in the current franchise system. This model is potentially under threat. Dealers invest in the brand and invest significantly in vehicle service and sales facilities. The panel will discuss the risks unquestionably posed as the future automotive world arrives.

Cost of entry, running costs and the capital expenditure required for Australian Dealers to be profitable under the traditional network model are all issues of increasing significance.

Australia has around 1,500 new car Dealers operating about 3,500 sites. The industry contributes almost $15 billion to the Australian economy, employing around 70,000 Australians directly and almost 150,000 in the value chain. New car Dealers generate over $6 billion in wages and over $4 billion in tax revenue.

NADA has 16,500 members and there are roughly 18,000 Dealers in the US. Investment includes property, plant, equipment and 60 days of inventory. US investment, if you include inventory, buildings, real estate, infrastructure, etc, is pushing towards a third of a trillion dollars (US$330 billion).

There are around 28,000 dealerships in China.

The service department

The increasing electric vehicle sales will see fundamental changes to a Dealer’s fixed operations and, ultimately, attendant challenges to profit performance. How Dealers respond to these changes in years to come is a matter at which the panel will look in detail.

Fixed operations are crucial to Dealer profitability and the service and parts market is highly competitive. As technology improves we see that we are servicing cars less frequently than we did five and 10 years ago. Fewer moving parts mean less profit, and it could be difficult in such a competitive environment for a Dealer who is making 1-1.5 percent profit on turnover to sustain investment in their service department.

Some worry that electric vehicles will further erode service department revenue, already under pressure as car quality has improved. For some, the answer may lie in improved customer service. It’s a debate worth having.

The challenge for Dealers will be to go after older cars. The ABS tells us that we have about 14 million light passenger vehicles on Australian roads, with an average age just over 10 years. The American fleet is even older than Australia’s. Dealers in both markets have traditionally left servicing older cars to the aftermarket repairers. That might have to change. The panel will address the consequences.

Data on electric vehicles and their impact on the market indicates that in Australia it is not ‘one size fits all’. Some of the production targets from OEMs for electric vehicles means that supply will affect the Australian market, but the percentage will vary depending on location. Inner city dealerships will likely have a higher electric vehicle component of their market share in the not-too-distant future, whereas in provincial and rural areas it might only make up a very small percentage of sales.

Even if electric vehicles reach the ambitious sales levels predicted by some by 2025, it will take a long time to filter through to the existing fleet on the roads and therefore significantly impact service bays. Nissan has recently released some interesting information on this issue, revealing that the Nissan Leaf has 40 per cent lower service revenue than the Ultima.

Although electric motors have fewer moving parts there are still many wear and tear items in an EV, such as suspension, brakes and tyres, all of which require regular servicing. Dealers have to prepare a maintenance and repair strategy that lets them claw back volume from the independents and gets them ready to deal with EVs. EV repair is the Dealers’ business to lose.

Future revenues

Dealership profits don’t just come from vehicle sales; areas such as F&I, aftermarket products and fixed operations underpin profitability. Our experts will debate whether every market is different for franchised auto Dealers; if these revenues will continue in one form or another, and the extent to which franchised Dealer profit mix is directly influenced by the OEMs.

Data which Deloitte has collected from 1,000 Australian Dealers clearly shows that the current business model, due to the current underlying market forces, has many challenges, particularly for smaller Dealers. Larger Dealers can survive thanks to economies of scale and the acquisition of more businesses to get greater throughput through the existing cost base, but even their levels of profitability are declining.

The costs of selling a car are increasing and margins are falling due to competitive forces and some OEM strategies on variable margin programs. As a result, we are seeing Dealer groups and OEMs talking about different sales strategies to retain higher levels of profitability or improve the customer experience.

Some of these include the subscription model and the agency model. Deloitte says Dealers are overstocked and there is an oversupply of vehicles in the current marketplace. With the agency model OEMs might potentially mitigate this by saying, “We’ll cover the cost of holding that stock”.

The current levels of performance are the outcome of the evolution of the current strategy

Average network profitability for lower-tier Dealers is between 1-2.5 percent and has declined in each of the last three years. About 25 percent of Dealers responding to Deloitte are losing money year-on-year.

There are a number of market challenges, Dealer profitability being the main one for the individual, privately-owned Dealer. They need to find ways to bring down the cost of selling a car or to improve the gross margin. Our panel will examine both aspects of this challenge.

We are seeing winners and losers every year. In a market that is stable at about 1.2 million units per year – tiny by global standards – brands continue pushing hard for market share growth. This cascades into higher inventory levels carried which, in turn, is a key factor contributing to downwards pressure on pricing, and gross margins are therefore declining.

Toyota New Zealand implemented an agency model in an attempt to eliminate a couple of the pressure points for Dealers: the cost of holding stock and intense intra-brand competition. The jury is out as to how effective this model will be. The panel will be sure to have differing opinions.

Australia is one of the most competitive retail automotive markets in the world, with 72 brands available for sale every day – not counting trucks and commercial vehicles.

But 75 per cent of our volume is sold in the top 10 brands. That leaves 62 brands fighting for 25 percent of the market. By comparison, the US has around 36 brands available for sale in a new car market of 16-17 million annual sales (Australia’s is around 1.2 million).

This important point of difference will be explored, as will the trends in the world’s biggest new car market – China.

Electric vehicles vs legacy ICE technology vehicles

Our experts will discuss how both worlds will exist in parallel. There is definitely a need and desire for change but most of it is coming from customers saying, “if there were an easier, better way to do it, I’d try it”, and secondly from Dealers and owners saying, “if I keep doing business the same way I have for the past 20-30 years, I can see where I’m heading. I can see the trending and the charts are telling me I’m going to end up losing more money year-on-year”.

Deloitte sees two streams. The existing distribution model will continue for years to come, but in parallel we will see a (small) take-up of electric and other alternative vehicles. The message to Dealers is they can choose one or the other, or both. If they continue with the current model they might lose a small percentage to electric vehicles, or they can diversify into new formats and models.

Spread your income base: add a body shop, sell tyres

In the US most Dealers have a body shop facility and sell tyres, while in Australia only a very low percentage operates collision shops. Likewise, only one in 20 Australian Dealers retail tyres.

Delegates will hear why they need to get into this area – and fast – because it pulls in so much other business. In 1995, US Dealers had less than 2 percent of the new tyre market, but that would be approaching 10 percent now.

The standard knock is that tyres have too low a margin and body shops are ‘too hard’, but they can be important profit centres.

The collision repair business hit record sales in the US in 2017. The bright shiny future of autonomous cars ‘talking to’ each other and avoiding collisions has some questioning the worth of such businesses, but in reality, we are a long way from that scenario coming to fruition.

The US has enjoyed five consecutive years of record revenue in collision repair. Repairing vehicles with infrared sensors and radar is expensive. If Australian Dealers are not looking at doing collision repairs and selling tyres, that is a potential weak spot for the future.

In China most of the large groups have a body shop centre for the region they are in. In Beijing there will be a body shop centre for all the dealerships in a group, while in some areas different groups will share a repair centre. This could be the model for Australia.

Body shops require a certain level of scale so don’t always make sense for single-point Dealers.

Is Used Cars still the Dealer’s business?

The panel will investigate whether the used cars opportunity is still lucrative, if we can improve it, and how we interact with the online environment. Factors such as safety and fuel economy are important to consumers – do we as Dealers need to change our marketing tack to factor in those things?

Used cars is traditionally the Dealer’s business. In this market, with the strong emphasis on new cars by the OEMs, we are in the age of the ‘disposable car’. The Australian car park age is around 10.4 years, and we have a young fleet compared to most countries. New Zealand imports used cars and their fleet has an average age of 14.7 years. In the US the car park is just under 12 years old.

According to Deloitte the real opportunity is in used cars. The used car market can be lucrative. The internet is the driver – in Australia 85-90 percent of used car enquiries are driven through the internet.

On websites you see a lot of other factors displayed, like ANCAP (safety) rating of vehicles, aimed at influencing the customer’s decision of what to buy.

Wes Lutz shared a common saying in the US: “A new car franchise legitimises your used car sales”. He sells 2-to-1 used to new and his gross is twice as much on used cars.
The smart Dealers are gravitating towards increasing their used car business. Auto Nation is coming out with a whole series of new dealerships dedicated to used vehicles. It’s a potential growth area for auto Dealers. Add to that the F&I and service opportunities and all the variable income sources that bounce off increased used volume.

However, in Australia over the last five to seven years our used car volume through the franchised networks has shrunk mainly due to peer-to-peer transactions facilitated by and Gumtree. That’s disruption at its most pronounced.

The ageing car park is telling us that more and more of the public are buying used cars instead of new, and keeping their cars longer. For a Dealer not to be in the used business is a bit like saying that you want to be in the real estate business but you will only consider selling new homes.

The panel will discuss whether Dealers have fallen into the trap of chasing OEM-driven incentives for artificially high targets and getting rewarded for reporting cars sold that actually aren’t sold (called cyber-cars in Australia).

This target-bonus nexus will be challenged in the discussion.


How do we interact with customers? Safety has long been a consumer focus in vehicle purchasing. The panel will look at whether new technologies and bodies such as ANCAP will result in vehicle safety becoming an even more important driver of consumer choice, and how franchisees meet these challenges in an online environment.


Our leaders will talk about how important strong advocacy by Dealer associations and related groups is to the short, medium and long-term future of the franchised Dealer.

In the US it is so valuable for Dealers at grass roots level to be able to communicate with members of Congress on so many issues. Often issues are handled by OEMs, but Dealer input is required, reinforcing the need for the whole chain to work in harmony.

In Australia advocacy keeps all the components together. It’s not just about Dealer metrics, it’s about the products they purchase (F&I, etc), services they buy, the entire community around the retail automotive industry.

The AADA CEO, David Blackhall, will have a bit to say about the success of the advocacy program in the last three years.

This promises to be a fascinating and valuable session. Any Dealer serious about arming themselves to best deal with a changing future simply cannot afford to miss out on this crucial discussion.

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