By Phil Villegas
On a recent flight, I was seated next to someone with whom I unsuccessfully avoided conversation with. Within a millisecond of finding out I worked with automotive dealerships, he asked, “How do you feel about working in an industry that will be gone in five years?” Before I could respond, he was already blabbering off about Air B&B, Uber, Tesla, Amazon, and others, and about how dealerships will not survive in an autonomous car age. The plane was full and had just started taxiing, so switching seats or getting off the plane was no longer an option; fortunately I had good Marine Corp training and knew that this pain of having to listen to this guy would either kill me or come to pass.
The reality is auto dealerships are going to face a level of financial disruption in the years to come. Do I believe traditional automotive dealerships will be extinct in the next five years, how some have predicted? Nowhere even close. While the mobility movement has some merits as it relates to autonomous vehicles, ridesharing, community-based vehicle ownership, subscription services, and the like, from my perspective, the more significant challenge facing dealers, is the current infrastructure of how vehicles are retailed. Over the course of the next few years, a dealer’s approach to retail needs to evolve, not only adapting to changes in vehicle technology, but also adapting to possible changes in consumer preferences. The right mentality is not to go into the next five to ten years believing everything is going to be how it was in the past five to ten years, but rather having an open mindset to change and evolve.
We are looking at total revenue reduction anywhere from 15-35% in the next five to ten years, due to some of the disruptive technologies and forces we are seeing today. Mature and well-capitalized dealers will not have an issue in being able to withstand this anticipated drop in revenue. This drop will pale in comparison to the Great Recession most dealers went through; however, the most significant difference will be the ability to recover revenues and profitability in a shrinking market where margins will continue to be compressed. One major tool auto dealers have to use in this evolving market is how they reward and compensate sales people, F&I, and sales management. We currently live in a retail environment where volume is the formula for profitability, whether it’s in new volume incentives or in turning pre-owned inventory as fast as possible and making as much as possible on the “back-end.” So the question is if dealers are in a pure volume mindset, why are we compensating over 20% of this right from the get-go, particularly when we have technology sourcing and approving the funding, desking deals, and iPads presenting all the products, and administrative personnel wrapping it up.
The point being, as we start preparing for changes to the retail environment, dealers need to start preparing their infrastructure for adapting to a changing marketplace, besides ensuring that dealerships are customer-centric, providing clarity in the transaction, whether onsite or online.
The dealer will also need to right-size the business for pending disruption. Dealerships need to start applying the use of five, ten and twenty-year plans in their financial outlooks. Besides preparing for potential reduction in sales volume and impact on profitability, dealers will need to consider capital infrastructure investments and succession planning in greater increments than previous generations.
The next decade for dealers is very similar to my flight with the “Dealership Doomsday Dude,” which I opened this article with, change was not an option for me; it was instead a matter of preparing for what was to come no matter how unpleasant it might be.