Forecasting the future of auto retailing

Dealers have been lulled asleep by the franchise model,” says one dealer principal. “Dealers have had the luxury of being reliant on the manufacturers to set the pace and to lead the charge.”

That’s a recipe for failure in a future where the role and business model for auto retailing change drastically — toward mobility services and away from straightforward vehicle sales — he warned.

“Dealers that will be successful will partner or lead” in determining what the “future of retail looks like,” he said.

The following predictions are based on interviews with dozens of dealers and other auto-retailing-related experts. Most spoke off the record.

There was broad agreement on several points:

The sales and financing part of the business model will change.

Service will remain an important part of the business.

Dealerships will look quite different physically.

There will be fewer of them.

While there’s no certainty that all of the predictions will come true, it is certain that today’s dealership model — based primarily on selling one vehicle at a time to individuals and then servicing those cars and trucks — won’t emerge unscathed in a world of shared, autonomous, electrified vehicles.

Here’s what an industry observer may see in 2030.

New mobility

Autonomous vehicles started with long-haul trucks around 2020. About 10 years later, self-driving cars dominate American roadways.

In this new world, some consumers want group leases on one self-driving car to share or to buy monthly subscriptions that allow them to switch from one kind of vehicle to another as their needs change day to day. In addition, large fleets have emerged, offering ride-hailing services to either their members or the general public.

As those alternative ownership models have burgeoned, fewer and fewer consumers want to lock themselves into the high cost, limited daily choice and general hassle of private vehicle ownership, especially those living in metro markets.

To be sure, dealerships for some performance and off-road brands linger, selling cars and trucks — and memberships at private tracks where those buyers can get behind the wheel — to a dwindling pool of individuals who like to drive.

New business

To stay in business, dealerships have had to reinvent themselves, adding more products and services to their portfolios. Dealerships that have survived added mobility to their stores as a separate department, alongside parts, service and finance and insurance. Dealerships have become more independent. They still work with automakers, but they’ve had to diversify.

For the most part, the dealerships of 2030 are fleet management and distribution centers. They have the capital to invest in new tools and training for service technicians to adapt to electric, autonomous vehicles’ service and maintenance requirements, as well as those of rapidly proliferating drones.

For most dealerships, the business splits roughly into thirds.

Mobility services account for about 30 percent of revenue. That includes fleet and subscription-plan management and services. Another 30 to 40 percent is in service.

The final 30 percent or so comes from those consumers who own a personal vehicle but monetize it by renting it out when they aren’t using it, as some European car-sharing companies did in the 2010s. The sale and service of those vehicles most resembles the business model that auto retailers followed for a hundred years, but that model now includes other revenue, depending on how involved the dealership is in the in-vehicle data streams and content sales related to those consumers.

More revenue

Here’s how changing the business model changes dealerships’ potential revenue.

  • Now: Annual revenue = vehicle sales X average transaction pricesIf the average vehicle transaction price is $30,000, and 17 million vehicles are sold annually, then it’s a $510 billion industry. U.S. dealerships divide up that $510 billion pie.
  • Future: Annual revenue = miles driven X cost/mile to driveIf there are 260 million vehicles in operation, based on 2017 estimates, each driving on average 15,000 miles/year, that equals 3.9 trillion miles driven annually. And if the average cost per mile is 60.8 cents, then 3.9 trillion miles X 60.8 cents equals a $2.37 trillion industry. If future dealerships-turned-mobility centers can charge more than 60.8 cents per mile for providing vehicles, maintenance packages and other services to vehicle users, they could have more than $2.37 trillion to divvy up among themselves.

Source: AAA data; Jim Press, president of RML Automotive

Subscriptions

About 5 to 10 percent of consumers opt for a ride-hailing subscription plan instead of buying a car. Holman Automotive Group Inc., of Mount Laurel, N.J., partnered with Cox Automotive’s vehicle-subscription platform Flexdrive in 2017 based on its belief that people would prefer to rent the use of a car over owning one at some point, said Bill Cariss, Holman’s chief strategy officer.

“There’ll be more shared autonomous vehicles than personally owned” ones, Cariss predicted. “You don’t need to own one. They’ll be very expensive, so they will be shared and pooled. Based off all that, we said, ‘Let’s invest in a subscription company.'”

Those who can afford to own a personal autonomous vehicle pay one base price no matter which distribution center they buy it at, reflecting the almost identical vehicles ordered en masse by the large fleets. The idea of dickering over price is now antiquated, almost barbaric, a practice of bygone times. Interior accessories are the major price differentiators.

Also gone are third-party lead providers such as TrueCar Inc.

Making money

Those dealers who shifted their thinking away from selling a tangible asset — a car or truck — as the primary means of profit thrived.

Consider that the average transaction price of a vehicle was about $30,000 in 2017. That means in a year when 17 million vehicles were sold, the auto industry was about a $510 billion business.

Not bad, but peanuts compared with what came when personal car ownership dwindled and subscription transportation plans ruled the day.

In 2017, AAA estimated the average car cost about 60.8 cents a mile to drive. It also estimated there were 260 million cars on the road traveling an average of 15,000 miles a year. On a dollars per mile basis, that made the auto industry potentially a $2.37 trillion business, said Jim Press, president of RML Automotive in Dallas and former president of Toyota Motor North America Inc.

“That’s the way the dealers of the future will look at the industry,” Press predicted.

‘A gold mine’

In 2017, Press started work on a plan to segue into fleet ownership and management as RML prepared to become more of a mobility company rather than a car-sales operation. He decided RML eventually would make money selling subscription plans that allow consumers to hail a car when they need one. RML would make more money than it did under traditional car sales, Press forecast.

“If my cost is $1 a mile and I can charge $1.10 a mile, there’s gross in there. I can make a profit,” said Press. “It doesn’t matter if it’s diesel or electric. It’s all commerce.”

Also, what about large numbers of consumers moving in and out of various vehicles all day, every day? That’s a lot of eyeballs. How do these consumers pass the time while they are driven wherever they need to go?

“You can watch advertising, entertainment; you can plan your vacation,” predicted Press. “If I sell the service, it’s my subscription deal. Then I get a cut of that. If I signed up with Dish, and that’s in the car, that’s my cut, too. It’s a gold mine.”

Indeed, Cariss forecast that dealers turned distribution-center owners would make a similar amount of money to what they did when they primarily sold cars. But the profits would be spread over a three- to five-year cycle, rather than coming in one-off sales.

To get there, though, would require more scale, meaning “1,000 cars under subscription,” Cariss estimated.

“With the subscription companies now,” he said, “the dealer actually handles all of the pricing and puts their cars on Flexdrive’s subscription. We charge $179 a week for a Ford Fusion. [Out] of that, we have to maintain it for three or four years or whatever the service life is. The pricing is passed back to the consumer.”

Service

Service, long the most profitable part of a dealership, has become increasingly important and therefore is monitored more closely.

Autonomous pods constantly cycle in and out of the dealership, and their near-continuous use means their mileage adds up — fast. The dealership must track the car and send it an alert when it needs service. The car then drives itself to the service bay. While much of the process is automated, service centers face an ongoing challenge in scheduling service technicians to match the work, which is done 24/7.

The service business is dominated by repairs and maintenance to vehicles in the distribution center’s own fleet, as well as other fleet management companies’ vehicles, more so than customer-pay work.

The biggest risk to dealerships’ profits, of course, has been the electrification of vehicles. Electric vehicles require less service work, and the increase in over-the-air vehicle software updates has reduced in-shop work.

But distribution centers, which established themselves as the go-to place for drone maintenance and repair, have seen an ever-rising flow of revenue from that work.

Brick and mortar

Huge, shiny showrooms with automaker-mandated improvements are extinct. Dealers no longer need those elaborate showrooms to store vehicles; boutique showrooms, akin to the smartphone and cellular-service outlets of the 2010s, suffice.

Cars flow in and out of the dealership for service or charging, none staying for long. Some dealerships are relatively empty throughout the day as their fleets drop off and pick up consumers.

Many urban dealerships have partnered with large auto-auction sites outside densely populated cities to store fleets of pods overnight. In the early hours of each morning, the autonomous pods leave the auction site and drive themselves to their home dealership or directly to the consumer’s home.

Inside the smaller showrooms are fewer employees. The advances in technology mean the expected sales volume per salesperson has doubled from what it was in the mid-2010s, given faster transaction times.

“If you reduce the amount of time it takes to buy a car, the salesperson can be more productive,” predicted Rick Ford, CEO of RFJ Auto Partners in Plano, Texas, which owns 24 dealerships. “So they will sell more units, but they will make less per unit. They can still make the same amount of money, but they have to sell more.”

Consolidation

While the number of dealership service centers has surged, the number of smaller, particularly single-point, dealerships has shrunk. Large dealership groups, such as AutoNation Inc. and Penske Automotive Group Inc., have expanded and acquired smaller groups and stand-alone dealerships. Through their acquisitions, they have added more service centers within a short radius to care for the vehicles in their fleets.

In 2030, there are 2,250 fewer rooftops and 2,000 fewer owners. Only those who understood the digital world, adapted to consumers’ e-commerce preferences and delivered customer-centric service thrived. The rest sold or closed their stores.

Initially in that consolidation, buy-sell advisers and brokers saw their businesses spike. But ultimately, the buy-sell business withered.

“There is no future for buy-sell brokers in the next 10 to 15 years,” predicted Sheldon Sandler, founder of buy-sell advisory service Bel Air Partners, in Hopewell, N.J.. “You have to face reality. It’s all I think about. Every car dealer thinks they are immune to change, but the entire world is going to change.”

 

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