NCM Institute wants to know: Do Record Profits Threaten Shaky Fundamentals ?

 

A quick look at the current state of auto retailing would suggest that things are good. Tough times (and a couple of notable bankruptcies) have thinned dealer ranks. Although pressures are mounting, the manufacturers are still demonstrating discipline around production volumes. Most importantly, customers are returning to showrooms.

Add all factors together and the result is that volumes and margins on both new and pre-owned vehicles are strong. So strong, in fact, that many dealers are experiencing record profitability.

Look more closely though and you will see a troubled landscape. Long hours and low compensation limit the appeal of vehicle sales as a career and conspire to keep employee turnover high. High turnover raises the costs of training and limits the potential for profitable referral and repeat business.

While margins today are healthy, the long-term trend is for margins to be squeezed. The squeeze comes first from manufacturers simply reducing the spread from MSRP to invoice, and second from market pressure driven by dealers who aggressively discount as a short term fix when sales are needed.

Further threatening profits are demands from the manufacturers. Often these involve expensive facility relocation or upgrades. Even more common are requirements to chase outmoded ideas of customer satisfaction, as defined by largely irrelevant (to the consumer) satisfaction surveys.

For many dealers, marketing costs continue to creep up. New business acquisition is a good example. Few dealers have done the math, but for most, finding new customers is a loss leader. Profits come from repeat business and referrals. This has been true for decades, but for most dealers, both repeat and referral business remain at low levels.

In the minds of consumers, dealerships — with a few notable exceptions — are viewed as pretty much the same. This helps explain why customers tend to do business very locally. Customers focus on the default differentiator — geographic convenience — when nothing else is offered.

Finally, as I noted in my last post, consumers still dislike broad swaths of the purchase process. It takes too long and getting to net pricing is too difficult. This is a growing problem as consumer expectations are being shaped by other shopping experiences and, by comparison, auto retailing continues to fall short.

Any business with healthy profits but troubled fundamentals is an alluring target for outsiders seeking opportunity. But history has shown that retailing is something of a spider web, ensnaring the overconfident.

This is partially attributable to a web of state laws and manufacturer agreements. Both conspire to make it unlikely that change will come from outside our industry. But change can easily come from within. It is dealers who will transform auto retailing.

It fact, it is already happening. If you visit enough dealers, you will run across a very few who are dramatically different. The obvious difference is that they are much, much larger than their competition. But looking more closely, things get really interesting.

For one, you would expect their average vehicle gross profit to be lower than average, but it is actually higher. Secondly, stores like this rarely, if ever, use price leaders. They may have good-sized marketing budgets, but because it is spread across a large volume of sales, their per-unit costs are low. They draw from large geographical areas. And perhaps most importantly, they have very high rates of repeat and referral business.

How high? Try over 80%.

One more thing: they have been at it for a long time — sometimes decades. Their business processes are well honed. Management has been in place for years.

As you might expect, these stores make a lot of money. So much so, the wonder is why other stores don’t try to emulate their success.

There are some good reasons. To understand these, let’s step back a bit and consider the way our industry has evolved.

Remember what it used to be like to be a dealer? It wasn’t that long ago when being a dealer meant you had a single franchise; a business in which your entire net worth was committed. The manufacturers liked this arrangement as it meant that dealers tended to be highly motivated. A dealer was very focused on doing what it took to maximize profitability, making decisions that optimized business results moment by moment. This is a very efficient way to conduct business, but I have to note — from a consumer’s perspective — it is not very consistent.

Today, auto retailing has changed in many ways, but the “cultural overhang” of entrepreneurial optimization still exists. We have seen the growth of megadealers and corporate chains, but even in these cases the tendency is to defer decisions to the management “on the ground.”

Here’s the conundrum:

A store that is run by a highly-motivated owner or GM, where decisions are based on maximizing moment-by-moment opportunities, will financially outperform a dealership where the business is built around consistent processes. Outperform, that is, in the short term.

Therein lies the rub. The stores I mentioned above — those that are models of future dealerships – achieved their dramatic levels of success by being willing to stick to a way of doing business even though it meant they left money on the table in the short term. This is obviously not easy to do.

But it was their commitment, perhaps even their stubbornness, which over time meant these few dealerships began to see better results than their competitors. Given a long enough time frame, the results became dramatically better.

Commitment is one thing, but what exactly were these dealers committed to? And more importantly for dealers today, can the “cycle time to success” be shortened?

I will answer both questions in my next post. 

 

Written By: Jeremy Anwyl

Jeremy Anwyl is vice chairman of Edmunds.com and a guest contributor to the Up To Speed blog. To reach Jeremy, tweet @JeremyAnwyl, call 310.309.6393 or email janwyl@edmunds.com.

 

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Tags: Accountability, Associates, Auto, Automotive, Business, Dealer, Dealership, GMEP, Management, Model, More…NCM, Training

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Comment by Mr. Natural on May 21, 2013 at 2:21pm

I saw the word Fundamental, and I thought...I know about Fundamentals, but then it turned out that you were talking about a different set of Fundamentals. I went from thinking: "I can comment on this" to "I don't know squat about that."

I'm gonna' comment anyway...I'm not too worried about the state of the car business or dealerships in general, and I'll tell you why. The car business-arguably-is the biggest business in the country. It seems like at one point, it was too big to fail.

Being down in the trenches, from time to time I have wondered about if the business would survive. People seem to be moving down the economic ladder. More car buyers with lower incomes, less stability, deteriorating credit, etc., etc., etc. The trend seems to be that buyers credit ratings are getting worse, not better.

Most of us might think that these factors would lead to a downward spiral of our business, yet this does not seem to be the case.  Somehow, just when we need it, there's a local bank with a proviso that will let them lend to my problem child customer.  At the same time rates went down, and incentives increased making the purchase of new cars a very attractive alternative to low mile/late model used. I mean if the payment is less, why would you go used anyway.

With pricing, quality, and features evening out between new car brands, its less "where can I get the best price" and somewhat more "who do I trust" Though it's not that way all over, the culture of trust in the car business is starting to spread.  Many of us truly try to be of service to our customers. 

I can't quite figure out how to link this directly into the above article, but there you go.  OOOps...I forgot about the fundamentals.

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