Once in a blue moon, I get contacted to share my opinion on things that aren’t necessarily related to DealerKnows. Somewhat randomly, Mega Dealer News wanted an opinion regarding a fractional ownership service. For those who follow me on social media, you know that I have strong feelings towards the Mobility Movement, so I was obliged to share them. Before we get to the article, I’d like to preface it a bit.
During January 2016 I wrote a post titled You Don’t Have to Like It where I explored some changes that were brewing in the future. Since that post was written, my feelings towards the Mobility Movement have solidified. Between the time that I jotted down those feelings, we’ve taken on a client in the space, and that client was acquired by an OEM. Eighteen months, people. Too much has happened in the way of investment from the Silicon Valley juggernauts to the automotive supplier conglomerates to the manufacturers themselves to stop the tides of change. At the time of this writing, Apple has more available cash than the combined market capitalizations of GM and Toyota combined. If you don’t think there is enough intellectual and financial capital available to completely disrupt the current vehicle distribution model, I have some lovely oceanfront property in Nebraska for you.
It’s not all doom and gloom. For those dealerships who embrace the change, it’s going to be like winning the lottery. The boat anchors of negative equity, bad credit, and high insurance costs could become relics of the past. The complicated, yet sizable, market of lower-income Americans can once again be tapped into without the reliance on alternative financing. This can still be a gold mine…that is until a new gold mine comes along.
Higher car payments, rising insurance rates, expensive vehicle repairs and congested areas with too little parking available will eventually become a luxury for millions of people, according to an auto industry consultant.
These reasons are why a subscription car service, such as Flexdrive, may find consumers racing to sign up. Cox Automotive, the same company that brings consumers Autotrader and Kelley Blue Book, recently entered into a joint venture with Holman Enterprises as shared owners of Flexdrive, a new mobility company that enables consumers to subscribe to a vehicle, rather than buying or leasing it.
Bill Playford, vice president of DealerKnows Consulting, told Mega Dealer News that ventures such as Flexdrive are developing because new vehicles are increasingly out of reach to the average American, especially considering the type of vehicles consumers are demanding.
“Customers who aren’t good candidates for leasing are having to turn to long-term financing – up to 84 months – to get to an affordable payment,” Playford said. “Objectively speaking, these changes are out of the manufacturers, retailers and consumers’ hands. It’s something that we all have to contend with, and it’s part of a much larger shift.”
A vehicle subscription service likely will benefit dealerships for at least a short period.
“It will help dealerships better address the need for late-model used vehicles that better reflect market demands,” Playford said. “Instead of having to rely on off-lease manufacturer vehicles and fleet auctions, dealerships will have access to their own vehicles once they are out of subscription service. They can either choose to keep them or offer them up for sale to dealerships where subscription penetration is minimal, thus creating a completely new market for vehicles.”
However, a shift from ownership to subscription will essentially remove the need for the traditional retail model.
“Banking on a diverse inventory mix, multiple service bays and palatial dealerships will be a thing of the past,” Playford said. “As in other industries, this dramatic shift will create a ripe opportunity for a startup (Uber), a non-automotive entity (Google), or the manufacturers themselves (GM/Lyft) to cut the dealership out of the equation entirely. It only makes sense for the large dealer groups and vendor conglomerates to move first during the transition phase. In essence, it allows the traditional players to keep what is theirs before it gets taken away from them completely.”
Also, this concept will go a long way in improving customer perception, Playford said. Likely, the shift will move from everything being about price to convenience and customer experience.
“Does the customer want a Holiday Inn, Marriott or Montage experience?,” Playford asked. “Dealerships (or any organization involved in the space) gets to decide on how they’d like to compete, without the notion of having to gamble money on back-end profit and service loyalty to ensure the customer feels like they got a fair deal. It’ll take time for dealerships to unlearn the behaviors that were successful in the past. Those who do will cash-in on automotive’s future.”
With any new innovation comes questions and potential negative consequences.
Playford said those in the automotive industry will be wondering, “How long will investors and shareholders be willing to wait before this model reaches critical mass? Can fleets scale with demand? Will vehicles always be available when people actually want them? How fast will these vehicles depreciate, and will there be any demand to purchase retired units (will the cars just be considered sunk cost at some point)? Will the future of the industry end up with a Microsoft Zune or an Apple iPod?”
Playford predicts densely populated areas, such as New York City, its neighboring New Jersey boroughs, the San Francisco Bay area, Boston, Washington, D.C., and Chicago, will be “waiting in line” to get in on a subscription service.
“The privilege of parking a vehicle in these cities can exceed what a working underprivileged person makes in a year,” Playford said. “As these services become more ubiquitous (and thus more cost competitive), usage should increase across all income levels, with the higher income levels moving from two or more daily-driven vehicles to just one and lower income strata getting rid of their vehicles altogether.”
Early and continued growth should also be expected in American technology centers, such as Seattle, Austin, and Denver, due to the high concentration of innovators, non-traditional workforces, and extremely diverse populations in those cities, Playford said. “Detroit should be thrown in the mix because, like it or not, they’ll still be the motor city, no matter what,” Playford said.
The first Holman franchise to offer consumers the ability to “flex” is Flexdrive of Cherry Hill, New Jersey, located about 10 miles outside of Philadelphia.
Through Flexdrive, consumers can subscribe to a car via a mobile app within minutes and drive away without worrying about insurance, maintenance or any other expenses that typically come with buying or leasing a vehicle, according to Cox Automotive. Drivers can swap vehicles at any time, giving them the flexibility they crave without committing to a long-term contract.
Flexdrive aims to address the pain points of vehicle purchasing, vehicle ownership, and vehicle disposal. Subscribing doesn’t require a down payment or a credit check. Also, weekly and monthly payments cover maintenance, roadside assistance, and insurance, according to Cox Automotive.
Does this mean the end of car dealerships? Absolutely not. However, it does mean that dealerships who aren’t already adapting, may be too late to make the necessary changes. To quote Alexander Graham Bell, “when one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.” Over 5,000 retail stores are slated to close through the first half 2017. That’s almost as many that closed during the entire Great Recession year of 2008. You don’t have to make the same mistakes.