Article: Giving All Consumers a Chance to Drive Part Deux

A few weeks ago, Maddy Low from DrivingSales asked to republish my article, Giving All Consumers a Chance to Drive. As a gesture of appreciation, I offered to write a follow-up piece just for DrivingSales.

Before I jump into the Q&A, I’d like to thank all of those who have engaged in the discussion with me. For some, this is an exciting topic, while for others it’s very threatening. When the typewriter died, we got computers. When the landline phone died, we got to put a computer masked as a phone into our pocket. As with many disruptions, technical or otherwise, it’s not about who you know: it’s about those you don’t know. Just because you can’t imagine a world without paying monthly for an expensive depreciating asset to move from one place to another ten times a week, doesn’t mean that the majority of people look at it the same way. In other words, keep an open mind.

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Give it to me straight, do you like the idea of car subscriptions, or is it just something you’ve come to accept?

I live about thirty minutes from our children’s school, and our property adjoins more than 300 acres of farmland. For my family, having two vehicles is a necessity. Finding a place to park on nine acres of land isn’t a problem. But, for the more than 80% of Americans who live in urban areas, something as simple as where to park a vehicle is an expensive problem.

I believe it will be the extrinsic factors such as stagnant wages, congestion charges, emissions and safety regulations, along with ballooning insurance costs that will drive consumers to fractional ownership, then eventually to autonomous vehicles. I don’t like the idea of a shrinking middle class or the death of loud V8 engines, but it’s something I’ve come to accept. As I mentioned in my previous post, we don’t have to like it.

What are the pros and cons of this, for automotive dealers?

The cons are fairly obvious. All of the quibbling over website design and DMS regulations will cease to mean anything when the retail model as we know it collapses.

There are several pros for the dealerships that are forward thinking and business minded enough to survive the transition.

Luxury, high-line, classic, and exotic dealerships will likely be safe, or may experience a slight uptick in business. These types of vehicles are emotional purchases, with buyers well-heeled enough to drive them through any economic conditions. They will also cater to those who seek the nostalgia of gasoline, stick shifts, and analog controls. Even though everyone has a smartphone in their pocket, some still choose to wear a wristwatch.

I believe car dealers to be among the most resilient business owners in the world. There are already dealerships who want to stay ahead of the coming transition. In fact, just a short time ago, one of our dealerships discussed working with us to add fractional ownership to its portfolio of products and services. Instead of letting the Silicon Valley set and the OEMs dominate the space, dealerships have a unique opportunity to convert millions of existing buyers before someone else does. These dealerships will likely remain key players in the suburban and exurban markets as autonomy takes over the city centers.

Dealerships in rural markets will most closely resemble today’s dealership model, as fractional ownership and autonomous vehicles are largely impractical for these markets. The best of these dealerships will become e-commerce distribution hubs to serve the urban markets where traditional dealerships evaporated. Mink, Louisiana didn’t receive landline telephones until 2005, so this is a pretty safe bet.

How much time do you think we have before things like Flexdrive are inevitable?

Flexdrive is demonstrating that the technology already exists to offer such services, as the hardware and software infrastructure to make it possible have existed for a few years. The real hurdle (or barrier, depending on your standpoint) is the economy. Many economists have predicted a significant market correction that will happen sometime between now and 2020. That market correction, in conjunction with the record amount of off-lease customers from the SAAR boom years, will drive the demand for these services as it promises a model for a lower overall cost of ownership.

What should dealers be doing to prepare for this type of innovation?

After working with dealerships big and small all over North America for the last ten years, I can say most simply won’t make it. It’s been predicted that up to 80% of vehicles may be off the road by 2030, and production can fall as much as 70%. We all saw what happened during the great recession, and that might be a cakewalk by comparison.

The dealerships that will thrive in this new environment will be the model of efficiency, with every square inch of their lots monetized in one way, shape, or form. Inventories will be optimally populated by early forms of artificial intelligence, that will maximize inventory turn and profitability based on any given market. Walk-in, Internet, and phone traffic will also use similar technology to offer a nearly infinite combination of messaging, timing, and personnel assignments to predictably manage all potential and existing customers. The once lauded expert sales people will rapidly become legends in their own time, as the last people who want to be sold bought their last car. As a result, profit margins will surge.

What is a mistake dealers are making when it comes to this type of innovation?

The biggest mistake that dealerships can make is feeling like it’s too far fetched to happen. There are so many examples of dominant companies that had the opportunity to adapt, but utterly failed to see the writing on the wall. Companies like Kodak, Nokia, Compaq, Blockbuster, and MySpace went from market leader to life support in just a few years.

The second biggest mistake is not embracing the change. Dealerships already have the first mover advantage. They just don’t realize it yet.

Who should we be watching out for to take the lead in this space?

The OEMs are already uniquely positioned to take advantage of this market shift. GM’s acquisition of Cruise and VW’s acquisition (via Audi) of Silvercar send a signal that the manufacturers look to capitalize before outsiders can make a significant impact. GM has already rolled out a subscription service with Cadillac, while BMW offers ReachNow, and Daimler (Mercedes Benz) offers Car2Go  We all need to remember that the OEMs control the hardware, meaning once they decide to make it difficult, they can as soon as the next vehicle life cycle begins.

Clearly, Silicon Valley start-ups pose an existential threat. Thanks to their perceived hostile nature to the auto industry, I see them mostly as acquisition fodder for the established players.

Cox, smartly, opted to strategically partner with a dealer group to roll out Flexdrive, allowing it to get a footprint quick. Like the airlines, the retail conglomerates tend to fall in line with each other. It’s easy to imagine that CDK and Reynolds & Reynolds could be on the hunt, given that their DMS duopoly is under serious threat.

Are you seeing dealers have concerns about this, and if so, what are their biggest worries?

I can’t speak for all dealerships, but I can say that among DealerKnows dealer clients, only one has shown interest, and that’s only after reading my original article. Most dealerships are coming to grips with a collapsing retail market, and are trying to find ways to maintain the record sales of the past few years. In other words, they’re trying to find magic bullets to fight the current threats, while a completely impervious threat looms on the horizon.