The Impending Tsunami of Customer Defections from New Car Dealers and the Role of the Internet.

Many new car dealers know that something is not right with their service departments or for that matter with their dealership business model as a whole. Customer loss rates are at all time high, "Right To Repair" legislation is seemingly hanging over like a "sword of Damocles" and profits margins are shrinking across the board. I bet in almost every franchised new car dealership, management meetings are being held to discuss how to tackle these challenges and I can imagine the nature of some of these conversations. Some advocating for increased marketing budgets, some for increased employee count and some for adopting the newest kid on the block CRM tool that brings with it the promise land of unending revenues and skyrocketing profit margins,  only to end up as just another under utilized CRM contract. According to the latest NADA annual report for 2010, in 2009 "nations' franchised new car dealers sold just 10.4 million new light vehicles in 2009, as the recession deepened in the first half of the year. Sales were down dramatically from the previous year's 13.2 million units." Things were not substantially better in 2010 and yet again in 2011 the signs of a strong revival are not clear.

On the other hand the Aftermarket or the Independent service centers continue to have record years. Here's an interesting quote from Lang Marketing, a leading automotive Aftermarket research authority: "The Car and Light truck Service (DIFM) Market will increase more than $10 billion at user-price between 2009 and 2012, as Service Market product use expands its light vehicle aftermarket share." It also notes that "..vehicle Dealers will suffer the largest Service Market product loss between 2009 and 2012, an estimated $0.6 billion at user-price. Auto Parts Stores with bays and the residual category of Other Service Outlets will not contribute to Service Market product growth over this three-year span." If these reports and statistics do not alarm the franchised new car dealers, I don't know what would. So really, we know what the challenges are: Revenue losses are increasing and customer loyalty is decreasing: Bottom line.

So what really is going on? I believe that a "Longtail" effect is taking place. The internet is in the process of doing to Service what it did to Sales. It is simply starting to arm the consumer with unbelievable breadth of information as well as multitudes of price options, locally! if you disagree with my assessment just watch the latest Meineke commercial and you will come to know. Meineke has figured out that giving consumers different options in prices is the most effective way not just to market but also to increase revenues. As the internet continues to make its transition from a knowledge based utility to its logical end of a monetary transaction facilitator, a localization effect is taking place. Consumers are increasingly connected not just globally but also locally. They are increasingly aware of what is a fair price to pay for auto service and repairs and what it should include. The Aftermarket segment is aware of this and is constantly using price promotions and hefty discounts to generate traffic into their stores and then focus on ancillary revenue opportunities. On the other hand the franchised new car dealers largely continue to believe that spending money on direct mail campaigns, making BDC calls and posting coupon on their website is the most effective way to bring customers back into the dealership. In my opinion this lack of a targeted promotional campaign strategy that should price promotional items for each car owner based on his or her buying habit or demographic will no longer yield fruitful results. While at the same time many of consumers continue to hold a belief that business costs of new car dealers are just too large to ever offer a reasonable pricing structure for their needs in comparison to let's a Joe's Garage down the road. I believe this perception is correct because it is inherently held by the dealers themselves. Isn't this the reason a service charge at a franchised New car dealer is higher in the first place?

Due to the lack of smart internal process driven tools, dealers are not in the place to turn their large facilities and higher employee counts into an advantage. Their processes are too slow-moving and there is too much red tape and as a  result it is gobbling up a large chunk of dealership resources without any immediate monetary benefits. Now I know new car dealers can argue all day along about the value of their amenities and etc, but if the US economy continues the downward trajectory, consumers' number one priority will always be price, excellent service will be a pre-requisite not an option for every service center regardless of whether they belong to the franchised new car dealer segment or the Aftermarket or Independent. Online reputation mechanisms are not as forgiving as a past bad experience that only stay in a car owner's head. Internet's effect on the retail auto industry is fascinating. At one hand its highly effective on the other highly unforgiving. It's a beast that needs taming otherwise many will not survive its wrath.



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