I’ve had several eye-opening conversations with dealers lately. And, frankly, I’m worried.
The conversations start with an acknowledgment of the extremely good run we’re all currently enjoying in the car business. Volumes are up at most dealerships. Profits are good. Dealers are looking forward to closing 2015 in even better shape than they were a year ago.
But I get concerned when I ask dealers, “What’s next?” Too often, the answer amounts to, “What do you mean, ‘What’s next?’ We’re doing pretty good doing what we’re doing.”
I’m oversimplifying, but the truth is that many dealers don’t seem to be paying much attention to, let alone preparing for, the inevitable day when business won’t be so good.
Dealers don’t really feel the pain of a 20-percent decline in front-end margins in used vehicles, and a 31-percent decline in new vehicles, between 2009 and 2014, according to the National Automobile Dealers Association (NADA).Increased sales volumes tend to mask the fact that dealers are selling more expensive vehicles and, for the most part, are making less money on each unit. Most dealers aren’t directly addressing this margin compression, much less thinking about how much more pronounced — and painful — it will be when sales volumes aren’t as robust.
Take Interest Rates
I don’t buy the view that we’re in a “new normal,” and the cost of capital for facilities and cars will remain next to nothing. I agree with analysts who predict that a rise in interest rates is inevitable, which will create additional cost pressures for dealership facilities, land and inventory.
Take Sales Volumes
Ours is a cyclical business, a reality that’s easy to forget when year-over-year volumes continue to increase. Some estimates suggest sales volumes will level off, if not decline, in a year or two. But such projections don’t necessarily account for unforeseen economic conditions, or the longer financing terms that make today’s new and used vehicle deals possible. To me, it’s not a question of if sales volumes will decline, but when and by how much.
Take Buyer Expectations
We now know that buyers want a faster, simpler and more transparent purchase process when they buy a vehicle. Many dealers may recognize these changed buyer preferences, but they haven’t aligned their vehicle merchandising, pricing and sales processes to meet them. Together, these market realities suggest that it will be increasingly difficult for dealers to enjoy the same level of profitability and prosperity they’ve come to expect in the not-too-distant future.
To me, there is a single strategic imperative that defines the way forward for dealers — your future prosperity, relevancy and success will be directly proportional to the levels of increased efficiencies you achieve in all aspects of your business.
Some dealers already embrace this view of the future. “We’ve become hyperefficient and technology-smart so we can achieve our goals for growth without bloating our operation and adding costs,” said the COO for a California dealer group. “All we need, if the truth were told, is for the market to constrict a little bit. We’ll watch stores tumble from 400 units a month to 125 units a month. The dealer will put the store up for sale. We’ll buy it, and get it right back up to 400 units.”
Five Inefficiencies That Hamper Dealership Performance
The path to higher levels of dealership efficiencies starts by recognizing where inefficiency will become increasingly problematic for most dealers — and deploying the proper blend of people, processes and technologies to achieve higher levels of operational efficiencies and profitability.
New Vehicle Departments
As interest rates increase and demand lags, it’ll become even more of an imperative to optimize new vehicle inventory to local market demand, and proactively manage the pace of sales to maximize profitability. Today, too few dealers regard the velocity of new vehicle sales as a priority. They order cars based on instinct rather than market intelligence. They price their new vehicles with little regard for the competitive landscape and buyer desire for fair, transparent deals. They view inventory age as a non-issue. The good news: Dealers can address these inefficiencies today by using technology and tools that provide competitive and market insights to increase efficiencies.
Used Vehicle Departments
Today, the best-performing dealers rely on technology and tools to make fast, market-informed decisions in used vehicles. These dealers recognize that most used vehicles lose their ability to deliver a sufficient return on investment in 30 days. This timeline makes operational speed an imperative — acquiring a greater share of vehicles online and through existing customers, reconditioning vehicles in a matter of hours, and pricing and retailing vehicles in a more buyer-friendly, market-transparent manner. As the market becomes more volatile, dealers who consistently meet these efficiency imperatives today will enjoy greater performance and profit advantage tomorrow.
Vehicle owners increasingly expect convenience, ease and transparency from dealer service departments — delivered, if possible, through mobile devices. As dealers adopt the technologies that help them meet these expectations, they typically expose current inefficiencies — including poor customer communication, parts delays and less-than-optimal productivity in each service bay — that have long made higher customer retention and satisfaction rates seem elusive. As market conditions make variable operations and traditional vehicle ownership cycles more volatile, a highly efficient service department may well dictate a dealer’s ability to operate a profitable, let alone prosperous, business.
Traditionally, dealers have set the terms of engagement in sales and service. Looking ahead, it’s clear that dealers will need to let customers dictate the terms, a shift that will have profound impact for people and processes. Dealers should be asking themselves, “How can we minimize a customer’s time in the dealership? What aspects of our sales and service processes can we shift online? What technology and tools will best facilitate more customer-centric engagement? How will these changes make our people more productive contributors to the business?” By asking these questions, dealers can begin to build a more efficient and profitable model for capturing a greater share of future business.
Employee turnover is perhaps the most costly and glaring inefficiency in our industry. Yet many dealers accept a 50 percent-plus rate of turnover as the norm, and view employees as a “necessary expense,” rather than an ongoing investment in future growth and profitability. The good news: As dealers become more customercentric and efficient in the way they do business, they become more effective and efficient managers of their people. They stop hiring the wrong personalities and skill sets. They realize that well-guided and training-intensive career paths and a people-focused culture matter as much, if not more, than compensation plans.
It should be mentioned that the efficiency imperative extends to everyone who serves dealers, from factories to vendor partners, present company included.
For all of us, “doing what we’ve been doing” won’t be good enough if we expect a profitable and prosperous tomorrow.