At long last, the Vehicle 2.0 summer series of podcasts from the Auto Intel Summit comes to a close. Capping off a wide array of guests from last month’s conference is Jeremy Alicandri, Managing Director at Maryann Keller & Associates. In that role, he provides professional advisory services for companies and professional firms throughout the automotive industry.
Give the episode a listen for yourself, or dive into a selection of highlights from our interview below. As always, be sure to subscribe to stay tuned for future episodes!
Jeremy on dealerships combating margin compression after 2018’s operating loss
Scot: So here on the show, we discuss the four components of the Vehicle 2.0 framework: changing car ownership, connected car, electrification, and autonomy. You're out there talking to dealers; are these kinds of things on their mind? It sounds like some of the reports you're putting out are more tactical, like “how do you do advertising in the franchise level” and that kind of thing.
Jeremy: Yeah, so you certainly touched on a lot there. Some of those what I would call very high level trends, but essentially that's what they are probably still very far away, not on the top of mind issues for dealers. I think dealers right now are more concerned about things like margin compression. For the first time since the Great Recession, the operating profit of the average dealer in 2018 was a net loss. Dealers are concerned about vehicle affordability. Vehicle prices are an all time high today, making them financially out of reach for many consumers. In fact, the average new car buyer is age 54 and has an income of $122,000 a year. Compare that to the rest of the US and it's easy to see a tremendous delta in income and age.
Dealers are also concerned about the effect of consolidation. Consolidation means that there's less and owner's going to be in the automotive retail space between now and 2025, and more dealerships are getting gobbled up into larger groups. So whereas we have an estimated 8,500 owners right now, within the next five or six years we're probably gonna see about 6,500. And that's going to give a further economies of scale to some of the larger groups - some of the publicly traded and also some of the privately owned dealership groups - that may further jeopardize the small mom and pop mom and pop independent store that doesn't have access to the scale economies that would be associated with the larger group. So these are some of the issues that our dealers are really concerned about. And I would add that the biggest is the fact that more so now than ever before, automakers control the profitability of dealerships via incentives.
So what we've seen here is that while the operating profit of dealerships in 2018 went into the red, dealerships are still profitable for as a net profit. And the reason for that is because of automaker incentives that favor dealerships to engage in certain types of activities that the manufacturer incentivizes. So that can mean investing in a project to improve the look and feel of the dealership. Most often, that can mean meeting certain sales quotas. So a dealership may sell cars for loss. In fact, most new car price departments in the US or dealers are not profitable. So dealerships will sell cars for a loss and then make up the money at the end of the year, maybe every quarter or every month through income incentives that come from the automaker.
Jeremy on the acceleration of digital retailing among new and used car dealerships vs services, such as Carvana
Scot: So one of the big topics of the show seems to be, and this is probably in our both of our wheelhouses, giving the auto buyer more of that e-commerce type experience. You've had Carvana come in and really kind of disrupt the used car market and then a lot of the topics here at the show are, how do you give that e-commerce like experience at the dealer? Is that more top of mind with folks?
Jeremy: Yeah, this is something that we covered in our advertising study that we published earlier this year, which I'll add is on our website if anybody wants to download it. What we found is that pretty much every dealership group is experimenting or fully entrenched in what we call digital retailing, where they'd actually sell a vehicle online. From talking with dealerships that are successful with digital retailing, what we found is that the only way it really works is if you fully embrace it.
When I'm talking about digital retailing right now for the purpose of this conversation, I'm talking about a dealership fully selling a car online. So someone goes to the dealership's website, they see the price that they're going to pay for the car, they put their credit information in, they upload their driver's license, their insurance card, and the car is delivered to them. That's to me is 100% online digital retailing, or however you are comfortable in defining it, but kind of the true Amazon-like experience. And that's a very insignificant amount of cars that are being sold that way.
Carvana is a different business that just sells used cars and has a great brand proposition. That proposition basically tells consumers that are going to get an upfront and easy experience. And so Carvana facilitates that online. But again, most franchise dealers are selling new cars to a generally a higher FICO segment of the car buying population, as well as offering things like leases and things like that. So it's just different, but dealerships are adapting based off of what consumers want and the technology is there.
We here at Spiffy were thrilled to wrap up our time at the Auto Intel Summit with Jeremy on the Vehicle 2.0 Podcast. If you’re interested in keeping up with his work, then be sure to follow him on LinkedIn or check out of his contributions to Forbes!
If you don’t want to miss a future episode of the podcast, then be sure to subscribe via your favorite podcast app or website and stay tuned for new releases!
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