Sensing Optimism – and Realism – In an Evolving Retail Sector

By Gregory P. Dougherty, CPA, and Jodi L. Kippe, CPA  

Although the U.S. auto dealership sector is working through a period of shrinking margins and flat sales, the mood at the National Automobile Dealers Association Show in January was decidedly upbeat.

The consensus among dealers, speakers and seminar participants seemed clear: The retail dealership model remains the strong foundation of the auto industry — particularly if dealers are responsive to changing consumer preferences and willing to adapt their business processes accordingly.

Comments by industry observers suggested that the annual light-vehicle sales rate is likely to continue a slow decline until 2022, when changing demographics and maturing young buyers begin to reverse the trend.

Despite that, the mood at the convention remained positive, as dealers reflected on many encouraging signs. For example, consumer confidence remains high, gasoline prices are relatively low and interest rates are expected to rise only modestly over the coming year.

Other potentially negative forces — especially continued margin compression and dissatisfaction with manufacturer incentive programs — failed to seriously dim the upbeat outlook. 

Rising interest rates are affecting dealer operations and inventory management, and shrinking margins mean dealers must sharpen their focus on controlling expenses. 

Disruptive effects

Nevertheless, such challenges were largely offset by good news in other areas, such as continued strong profits from finance and insurance and fixed operations as well as expected increases in volume and margins in the growing used-vehicle segment.

In fact, most participants agreed that the used-vehicle market will become increasingly attractive. Growing supplies of pre-owned vehicles, coupled with rising new-vehicle prices, make buying used a logical and appealing alternative for many consumers. For their part, dealers are attracted by the ability to exercise greater control over margins, especially as their dissatisfaction with manufacturers' new-vehicle incentive programs and pricing structures continues to grow.

In contrast to last year's NADA Show, when potential disruptive effects such as autonomous vehicles, electric vehicles and subscription services drove much of the conversation, many of the 2019 presenters suggested the impact of those trends could be less momentous than previously expected.

The consensus seemed to be that the technology for producing Level 5 autonomous vehicles — capable of operating on any road and in any conditions without a human driver — is a dozen years away, and it will be a number of years longer before they can be produced cost-effectively.

In addition, the market share for EVs is expected to grow gradually over the next 20 years, allowing dealers time to prepare for the expected impact on their fixed operations.

Changing models

Rather than modifications to vehicles themselves, the changes most likely to disrupt auto retailing will be those related to the dealers' sales and business models. Many of this year's speakers focused on reducing friction in the sales process to provide a faster, simpler and less stressful customer experience.

With more than three-quarters of buyers doing online research before entering the dealership, the transition to a shorter, more automated sales process is accelerating. Even customers who prefer person-to-person interaction generally react positively to working with a single person rather than several, along with little or no haggling and less cumbersome paperwork.

The shift to online interaction extends to the service desk as well. Online scheduling is nothing new, but this year more dealers reported they were coupling online scheduling with in-store kiosks and other forms of process automation to make the service experience more convenient.

Beyond the technology investments needed to implement such systems, dealers must address other aspects of the business affected by these process changes. Among the most challenging adjustments will be reworking compensation, incentive, recruiting and training programs to reflect employees' changing roles. Ultimately, these changes will require a shift in the underlying dealership culture as well.

While dealers and other industry participants at the NADA Show recognized the significant challenges such changes present, most remained strikingly optimistic, with a realistic understanding of what they will need to do to adapt in an evolving industry.

 

This article was originally published as an op-ed in Automotive News on March 18, 2019

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Greg Dougherty
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Jodi L. Kippe
Managing Partner, Retail Dealer Services