Last October, the eyes and ears of high-stakes investors around the world turned to the U.S. auto retail and finance industry when billionaire Warren Buffett and his investment firm, Berkshire Hathaway, agreed to purchase Van Tuyl Group, the nation’s fourth-largest dealer group. The multibillion-dollar deal set the industry ablaze with speculation. What convinced Buffett to make the move? Would he take an active role in operations? Would the newly renamed Berkshire Hathaway Automotive form its own finance company or F&I product lineup?
Those questions were answered (or assuaged) in large part over the course of a discussion among Buffett, Larry Van Tuyl, chief executive of the dealer group and the son of its founder, Cecil Van Tuyl, and Becky Quick, host of CNBC’s “Squawk Box.” The Q&A was the highlight of the 2015 NADA/J.D. Power Automotive Forum, held at the Grand Hyatt Hotel in New York City on March 31. And the six preceding sessions, which touched on a range of topics — from the economy to today’s digital car shopper — seemed to build up to the much-anticipated discussion.
State of the Industry
U.S. automakers have benefited from positive economic trends at home, strong overseas sales and the emergence of new markets, according to Nariman Behravesh, chief economist at IHS Inc., and John Humphrey, J.D. Power’s senior vice president of global automotive operations.
Behravesh pointed to falling gasoline prices and a U.S. dollar that has grown stronger since 2012 as prime contributors to the growth expected this year and beyond. He acknowledged the possibility that the Federal Reserve could raise interest rates for the first time since the Great Recession but assured attendees they would do so “very, very gradually.” Turning to foreign markets, he noted that emerging markets such as China, India, Brazil and Russia could, to varying degrees, provide new customers for U.S.-based manufacturers, and total worldwide sales showed no signs of slowing.
“… Lower oil prices, monetary stimulus in Europe and Asia and solid U.S. growth will provide the foundations for a pickup in the global economy,” Behravesh said.
Humphrey went a step further, delineating the good (the United States, India and China), the bad (Brazil and Japan) and the ugly (Russia) among worldwide markets. He also projected 16.5 million new-unit sales in 2015, a 6.4% increase in sales from last year. He noted that MSRPs, which have been largely stable since the economic downturn, could begin to show incremental increases, but the continued growth of leasing and incentives would help stabilize car buyers’ monthly payments.
Humphrey did note that a glut of new and redesigned vehicles would continue to fight tooth-and-nail for the affections of new-car buyers, reducing the impact typically enjoyed by new-to-market entries.
“Last year, 59% of all vehicles showed some degree of sales growth,” he said. “Two years preceding, that was 70%. You can see where this is going.”
Opportunities for Change
Sandy Schwartz, president of Cox Automotive, took the stage to discuss AutoTrader’s Car Buyer of the Future study, which was released the evening before the event. He led off by listing Blockbuster Video, Borders bookstores and RadioShack as three examples of major companies failing to adapt to the trends that changed their respective industries and suffered the consequences. He then pointed to Travelocity, Minute Clinic and Zappos as three companies that were formed in response to the needs of modern consumers and have succeeded as a result.
“Change now while times are good,” Schwartz said, before delving into the results of the AutoTrader study, which was based on a poll of 4,000 car buyers. Highlights included:
- Test drives: 70% of respondents said they liked the idea of a “test-drive center” at which they could try multiple vehicles in a single location; only 19% said they like the typical test-drive experience.
- Deal structure: 14% of respondents prefer to negotiate on the lot; the other 86% would prefer to do it online.
- Service: Only 8% of respondents said they want to get their vehicle serviced at the dealership; the vast majority would support the establishment of a network of local service centers that could access their vehicle’s service history.
Schwartz saved the most damning statistic for the end: Only 17 of the 4,000 car buyers polled said they like the current car-buying process exactly the way it is, and most said they would be more likely to visit dealerships and replace vehicles more often if the process could be improved.
“Give customers the control they want and the convenience they expect,” Schwartz said. “This business is changing rapidly. Things are happening daily and we have to embrace them.”
The Proliferation of Touchpoints
Embracing the way customers prefer to connect with dealers was the focus of a panel hosted by Nielsen Automotive’s Mark Sneathen and staffed by Christian Fuller, chief relationship officer for Search Optics, and Michelle Morris, Facebook’s group director for automotive and financial services.
Fuller related a story from the mid-2000s in which he visited “Art,” a San Francisco dealer with a reputation as a friendly, progressive businessman. After Fuller spent several minutes detailing the latest advances in digital marketing, Art pushed back from his desk and said, “I wish I was born 20 years ago. Then I wouldn’t have to deal with this Internet stuff.”
“That was an ‘aha’ moment for me,” Fuller said of his realization that Art was unwilling or unable to grasp what was in fact a “very approachable,” if somewhat intangible, marketing platform.
“Find clarity in the desired result. Define the goal, don’t overthink it,” he added.
Fuller encouraged dealers to concentrate on their conversion rate by making sure, for example, their website loads properly on mobile devices, finding new ways to generate phone calls and emails, and never withholding information car buyers are constantly seeking. “I was visiting a dealer in Canada who said, ‘I don’t want my inventory on my site. If they want a blue one and I only have a red one, I’ve lost them.’ I said, ‘You lost them already.’”
Facebook’s Morris pointed to the advent of the Internet, social media and the smartphone as watershed moments for dealers who wanted to know what customers thought of their store and their experience. “We could put our ear on the track. We could hear what people were saying about us. Marketers assumed we could change what people were saying,” she said, noting that, though that contention proved to be misguided, “Facebook can help us determine which campaigns are working and which are not.”
When asked whether dealers are operating in a “golden age” of advertising, Morris nodded. “When we think about the ability to create personalized messaging, it’s an incredible time to be a marketer,” she said.
“It’s the ability to market to people who have visited the dealership — the lost souls who have visited your store,” Fuller added.
Buffett and Van Tuyl
From the moment Buffett and Van Tuyl took the stage, it was apparent that both men were ready to take on any and all questions related to their headline-making partnership. CNBC’s Becky Quick did the honors, poking Buffett and Van Tuyl with a series of hard-hitting questions before taking further queries from the audience.
She started by asking Van Tuyl how he “got to the point” at which a sale to Berkshire Hathaway made sense for the family-owned company. He said it was a result of long discussions about succession planning, a topic around which he had felt pressure from within and outside the organization, including from his partner OEMs.
“I thought the best possible person to own it — who would understand our entrepreneurial model — was Warren Buffett,” Van Tuyl said. “He’s a quick study. He understands what we have.”
“It’s a huge industry,” Buffett interjected. “It can be, if run properly, a good business. This was the right time, right person, right company.” He noted that, with 75 dealerships in 10 states at the time of the sale, it was a complicated deal.
“It took a long time just to do the paperwork. … But in terms of a meeting of the minds, it was easy.”
Quick asked whether Buffett would take a personal interest in the day-to-day operations of the group, a notion he quickly rebuffed.
“We own all kinds of businesses. We own a railroad. I don’t know where they buy their diesel fuel from,” he said, laughing. “I’m not even sure I know what diesel fuel is.” He pointed out that his investment in Forest River, an Elkhart, Ind.-based RV manufacturer, had yielded only two phone conversations with the company’s owner in the past 10 years.
“It’s going to be business as usual,” Van Tuyl added.
When asked what opportunities he saw in the F&I space, Buffett deferred to Van Tuyl. “That will be up to Larry. He’s got his own bank arrangements. We don’t get into that.”
Buffett noted that the group’s new ownership would almost certainly spur quicker approvals from manufacturers for new points, adding that he is already friends with at least two OEM executives. He said he met with Ford’s Mark Fields and General Motors’ Mary Barra last year, and, while riding to lunch in Buffett’s 2006 Cadillac, Barra was able to convince him it was time to trade up.
“She only had six minutes, and she made the most of it,” Buffett joked.
Both men were asked to comment on advances made by Tesla, the electric-vehicle manufacturer led by Elon Musk, a proponent of the direct-to-consumer sales model. Van Tuyl noted that, as a small-volume manufacturer, Tesla was not likely to influence his operation or the wider auto retail market.
“However, new technology is always good,” Van Tuyl said. “It always forces us to take a look and challenge ourselves, so it certainly isn’t a bad thing. But I don’t see it as a threat.”
Buffett added: “The dealer system works well for the manufacturer. It works well for the dealer. It works well for the consumer. And it’s been around now for a very long time. Usually, when a distribution system becomes that firmly established, there’s a reason for it. … And I just don’t see that changing.”