Weighing pros and cons of vehicle subscriptions – Part III

Skeptics of the vehicle subscription model may, in fact, be right to pose questions about how the segment is addressing some very important concerns.

Many of those questions came to light during a keynote presentation from auto industry consultant Maryann Keller at the Automotive Intelligence Summit in July, and later recapped in Part I and Part II of this series.

Keller, who is the principal at Auto Intel Council member Maryann Keller & Advisors, “is asking the right questions,”  Flexdrive founder and chief executive Jose Puente said in a September phone interview.

“It is common sense that managing depreciation, fleet management, financing and operational costs are ultimately what defines profit or loss,” said Puente, who leads what is a joint venture between Cox Automotive and ARI.

“But given the current financing trends, you could say that consumers are already subscribing to cars and are the ones paying for all of these costs in addition to paying things like interest and taxes,” he said.

“And then over-incentivized leases are resulting in billions of residual liabilities on the balance sheets of captives. So, I think that there’s already a lot of risk in the current retail marketplace. So, the things that Maryann is outlining are true even in retail,” Puente said.

And subscription serivce providers like Flexdrive are already accounting for those risks through, for instance, having  a “strategic investor and partner” in ARI, a fleet management company.

“And we’ve effectively created consumer fleet management and it solves for everything from toll violations to vehicle maintenance and servicing at national scale,” Puente said. “We also have created with our insurance partners a usage-based insurance program that provides maximum coverage at the most efficient cost to the dealer. Managing the car and managing the risks are high variables to profitability and we’ve basically built those into our program.”

On the depreciation front, Puente said Flexdrive has a “pretty sophisticated (business intelligence) team” that has built an algorithm that can generate vehicle valuations in real time and based on market and usage.

“So, this ensures that participating dealers reduce or eliminate depreciation risk and make decisions based on profit targets,” he said. “And as it relates to financing, which is the other variable, I think (Keller) makes a good point about dealers having a hard time financing vehicles that are on floor plans.

“We are working on developing some options and we expect to have a solution to the market very soon, which would basically be able to provide dealers with subscription floor planning models,” Puente said.

And drilling down into profitability of the model, he said that “we’ve got to consider that automotive retail is already a thin margin business to begin with. And then if you add the fact that buying a car is among the most disliked experiences to consumers, subscription is definitely an option where dealers can leverage their existing assets and develop a new, healthier business model with recurring revenue and also deliver a great customer experience.”

‘Show me something that is cashflow positive’

After hearing Keller’s take on subscriptions at the Auto Intel Summit, DriveItAway founder and president John Possumato said it “almost mimics” what he is hearing from dealers.  DriveItAway is a provider in dealership-focused shared mobility solutions.

On the issue of cash flow, one franchised dealer described it to Possumato as such.

“I’m not against innovation and subscriptions in anything you want to give me. I’m all for it. What I’m against is doing anything where I have to fund the cashflow. If it’s not cashflow positive and it can’t scale, I’m not interested,” said Possumato, who is among the speakers at Used Car Week coming up Nov. 12-16 in Scottsdale, Ariz.

“On the other hand, show me something that is cashflow positive, it does scale and I’ll be all over it in 30 seconds. So, I’m not even against investing money, but we don’t take a venture capital perspective here when we put a lot of money in and three years later might get a return. That’s not the business that we do.”

In addition to considering whether something like this is cashflow positive, there is the scalability question. Plus, Possumato poses this question: “Am I just robbing what would have been a normal sale or a lease?

“Am I calling it something different? And am I selling this subscription on the showroom floor when in fact it could have been a sale or a lease?” he said. “Because if I’m doing that, one, I really haven’t had any sort of net gain,” and two, if a customer is paying a premium for a subscription and then the dealer doesn’t have the vehicle he or she wants to swap into, that can cause a customer experience issue.

Possumato acknowledges “it’s a hard sell to dealers,” but emphasizes that “I’m a big proponent and I believe you’ve got to get into the game in some way, right?”

He continues: “You’ve got to understand the tools and how to adapt to a shared mobility environment because while nobody knows exactly how it will roll out, forecasters are pretty determined the landscape is going to change.

“And the one vehicle sale one profit is going to change as well,” Possumato said.

Therein lies the “conundrum” for dealers. There are the challenges around profitability, scalability and potential customer service pitfalls that Possumato outlines above. However, “on the other hand, I don’t want to be blindsided either. All of the sudden if something turns — maybe it’s the tipping point — I don’t want to try to be learning that business when my competitors, maybe have already learned it in and are in the game.”

‘Not as a separate line of business’

The vantage point of dealers certainly has changed, however, in the four years since Flexdrive was launched, says Puente. And more opportunity has opened up.

“The areas where I see the most amount of opportunity is with dealers really looking at this not as a separate line of business. If you look at a lot of the dealers that are starting these things, they’re creating a new brand or they’re having to hire people and they’re really looking at it as a separate line of business,” he said.  “In our view that’s kind of a mistake. This is really an alternative to financing a car in the same way that leasing cars was years ago.

“Dealers should be offering this option to consumers from the very beginning as an option,” Puente said. “And once dealers get to, 25, 30, 40 cars out on the road, with paying subscribers, that’s kind of when the magic happens, when they realize that maybe they’re better off subscribing cars to consumers because now they have a recurring revenue model that they don’t have currently and it’s just a healthier experience that they have with their consumers.

“So, I think that it’s an ongoing thing. What’s changed is that the dealer acceptance of subscription has definitely changed and been more open to it,” he said. “I think that where dealers can do more work as they’re embracing this is really not looking at it as a separate line of business, but as part of what they do.”

 

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