The Industry's Leading Source For F&I, Sales And Technology

Done Deal

Rime of the Ancient Dealer

Still rattled from the NAF Association’s latest conference, the editor shares one speaker’s unsettling vision of the dealership of the future.

July 5, 2011

Another show, another group of lenders talking about how close they were to being swallowed up by the credit crisis three years ago. The more I hear these stories, the more I know auto finance is back. But that’s not what I want to talk about this month. I want to tell you where I fear we may be headed.

Before I do, let me run through a few insights I picked up at the National Auto Finance Association’s 15th annual conference. First, lenders have finally realized that F&I managers are fairweather fans. If they’re not buying, you’ll find someone who is.

I also got the sense that finance sources are no longer looking to grow by moving outside of their comfort zones. Instead, they’re looking to pick up market share by adding more dealers with the types of customers they like. That’s good news if you have a solid lender spread, but I’m not sure the "I’ll-send-you-four-good-deals-if-you-buy-this-one" tactic is going to work anymore.

The capital markets also are doing well, which means there’s money to lend. What’s driving the auto segment of that market, said Standard & Poor’s Amy Martin, is prime and subprime auto. Unfortunately, there was no mention of nearprime and nonprime, and I know that’s a problem out there.

Now for the scary part. Several conference presenters speculated where this margin-compressed, Internet-driven market is headed. Are we at the beginning stages of a recovery or in a race to the bottom? According to one speaker, the pain we’ve felt the last three years isn’t over, and you might not recognize what we’re left with when it is.

The speaker was Dale Pollak, founder of vAuto. The company, which he recently sold to AutoTrader, designed a used-vehicle management system that allows dealers to manage their inventory like an investment portfolio. The philosophy upon which this system was built is one that Pollak believes will eventually be the reality of the new-vehicle market.

He opened his remarks by saying that he’s feeling a little vindicated these days. He had been telling anyone who would listen that the industry was in for a major transformation. When times were good, the industry grew too fat and lazy to explore exactly how technology could change the way dealers do business.

"For my message, a wonderful thing happened," he said. "We saw the collapse of the market in 2008."

If you’re reading this, then you probably belong to a dealership that spent the last three years cutting variable, fixed and semi-fixed costs to weather that economic storm. But it’s not enough, is it? Costs are rising, new costs are emerging and the Internet continues to cut into your margins.

That’s a byproduct of what Pollak calls an efficient market. Such markets are characterized by pricing at the margins and more efficient operators. Those who don’t get in line with this movement will be lost, Pollak said, but those who do will enjoy higher margins in the future.

See, the vAuto software bucks the idea that the used market still consists of two segments: wholesale and retail. Pollak believes there is only one market, and that market is driven by what happens at retail. That’s why he believes a reliance on historical data, instinct, pricing guides, auction values and appraisals no longer works.

Instead, he thinks everything should start with an average retail price. Once you know that, you can subtract your profit objective, reconditioning, transportation and auction fees to come up with a more dialed-in acquisition cost. It’s this kind of granular look at pricing that will continue to cut into margins and drive down profits, he said.

In Pollak’s vision of the future, dealers will no longer be able to operate big, "Main Street" storefronts. Instead, we will see acre-and-a-half lots located off the beaten path. In-house service departments will be replaced by offsite facilities shared by multiple dealerships. The family-owned, single-point store, he added, will go the way of the family farm.

See, Pollak believes that the albatross hanging around the dealer’s neck is the soil on which his or her dealership sits. Margins simply don’t support it, and no amount of profit made in service or F&I will help. Then there’s the Internet shopper, who is making it so those prime locations are no longer required. Problem is, dealers simply can’t extract themselves from their property, leaving them exposed to interest rates.

I hope you’re angry after reading that. I don’t totally subscribe to what Pollak says, but I’m hoping that his message makes you think. We need to change, folks. Will we be like Amazon.com in the future? I don’t know about that, but change is needed.

Comments

  1. 1. klay kelso [ July 07, 2011 @ 05:02AM ]

    Great article. Kind of a mind bender. No doubt change is coming. Eight out of ten people,(or more), visit the internet before visiting the dealership now. Just compare that to the way it was 10 or 15 years ago, then project 10 to 15 years into the future. Scary...

  2. 2. Bob Boucher [ July 12, 2011 @ 01:13PM ]

    KInd of convenient to have a view that supports the product you are selling. I wonder why Wal-Mart and Target keep building bigger and bigger stores if, intead they could have dingy warehouses located off the beaten track and sell their goods over the internet. Yes, car shoppers look to the internet for research but they still want to take delivery in person at a true dealership

  3. 3. Bill O'Connor [ July 15, 2011 @ 11:20AM ]

    So we should use the Lumber Liquidators model? Warehouses in run down areas. Hmm! It is food for thought. I'm sure some version of Pollack's vision will find traction but meanwhile the Internet is a tool not an enemy.

Comment On This Story

Name:  
Email: (Email will not be displayed.)  
Comment: (Maximum 2000 characters)  
Leave this field empty:
* Please note that comments may be moderated.