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DEALERSHIP OF TOMORROW By Glenn Mercer Commissioned by NADA Helsinki, November 2017
DEALERSHIP OF
TOMORROWBy Glenn Mercer
Commissioned by NADA
Helsinki, November 2017
CONTENTS
PROJECT: RECAP
PROCESS: REVIEW
REPORT: OUTLINE
FINDINGS: SUMMARY
PROJECT RECAP
GOAL: STIMULATE LONG-TERM PLANNING AMONG US DEALERS
HORIZON: LOOK AHEAD ABOUT TEN YEARS (2025)
AN INDEPENDENT REPORT, NOT A POSITION PAPER
COMMISSIONED IN EARLY 2016, PUBLISHED IN 2017.
WRITTEN ONLY FOR DEALERS – NOT FOR THE PUBLIC
FINAL REPORT IS ~100 PAGES: TODAY I SHOW ONLY HIGHLIGHTS
THE PERSPECTIVE IS ALWAYS “WHAT DOES THIS MEAN FOR DEALERS?” (NOT FOR CITIES, COUNTRIES, SOCIETY, HUMANITY…)
PROCESS REVIEW
THREE KEY ACTIVITIES
1. Interviews -- on phone and in person
2. Research – hundreds of read reports, articles, conferences, surveys
3. Writing: 16 chapters: 8 specific to dealers, 8 broader topics
KEY CHALLENGE: BALANCE
1. Balancing opinions: not just averaging
2. Balancing time: keeping the future in mind, not just today’s headlines
3. Balancing topics: dealer issues as well as broader trends
REPORT OUTLINEFOCUS OF TODAY IN RED
§ Will we still be selling cars?§ Do dealerships still exist? § How many stores will there be? § Who will own them?§ How profitable will they be? § How will they make their money? § How will the store change (off/online)? § What will the regulatory landscape be?
Dealer Specific Chapters:
§ What happens to small rural dealers? § What can we learn from truck dealers? § What can we learn from Europe? § What can we learn from China? § What will be the impact of…
§ Electric cars?§ Autonomous cars? § Mobility services? § Connected cars?
Special Topic Chapters:
FINDINGS SUMMARIZED - 1OVER THE NEXT DECADE, THE AVERAGE USA FRANCHISED NEW-CAR DEALER
WILL SEE MANY CHANGES TO THE STORE, BUT NO SIGNIFICANT DISRUPTION TO THE UNDERLYING BUSINESS MODEL. SPECIFICALLY:
1. THERE WILL BE MUCH CHANGE BY 2025, BUT EVOLUTION NOT REVOLUTION
2. THE SINGLE BIGGEST RISK TO THE SYSTEM IS IF MS (MOBILITY SERVICES) AND AV (AUTONOMOUS VEHICLES) COMBINE, REDUCING THE NEED TO OWN A CAR
3. DEALERS WILL CONTINUE TO EVOLVE FROM ENTREPRENEURIAL, UNIQUE TRADERS TO FACTORY-CONTROLLED, STANDARDIZED RETAILERS
FINDINGS SUMMARIZED 2: CORE TOPICS
WILL WE STILL BE SELLING CARS? Yes,
similar to today’s level, with a mix shift
to more expensive vehicles and higher-income customers.
VOLUME:
17-18million
DO DEALERSHIPS STILL EXIST? Yes,
the dealership model stays dominant,
direct sales (<10%) focus on high-end
vehicles. Dealers and OEMs adopt
features of factory stores as necessary.
CHANNEL:
HOW MANY STORES WILL THERE BE?
Slightly lower than today: a downward
drift (from 18,000) as some stores open,
but more close.
NUMBER :
16,500or so
WHO WILL OWN THEM? Fewer
people, down from 8,000 owners today. Private ownership
will continue to dominate.
OWNERSHIP:
6,500by 2025
HOW PROFITABLE WILL THEY BE? Less
profitable than today, with most
profit from service.
PROFITS:
€?
ARE WE STILL SELLING CARS IN 2025?
YES: WE PREDICT ANNUAL NEW CAR SALES STEADY AT ~17 MM TO 2025
FACTORS:
+ GROWING POPULATION (~325 MILLION NOW, ~360 BY 2030: +10%)
+ GROWING VMT: 3.2 TRILLION IN 2016, 3.7 2030), WITH INCREASED SPRAWL
+ GROWING ECONOMY: GDP FORECAST TO GROW @ 2.5% THROUGH 2025
+ (SO FAR) NO DECREASE IN DESIRE TO DRIVE- MILLENNIALS DID SHOW LOWER RATES OF CAR OWNERSHIP 2007-2015- BUT THEY ARE NOW OUR LARGEST MARKET SEGMENT- THEY DELAYED OWNERSHIP OF CARS, THEY DID NOT ABANDON IT
- BUT: IMPACT OF MS AND AV IS UNCERTAIN (DISCUSSED LATER)
SOURCE: Numerous, including IHS; CAR; BTS; DOT; Dargay, Gately, Sommer (2007)
AMERICAN DRIVERS “BACK ON THE ROAD”
SOURCE: AASHTO, DOT; red line show 2007 recession onset
USE: VEHICLE MILES TRAVELED, 1993-2017OWNERSHIP: VEHICLES/PERSON 1995-2014
Finland: flat, lower? Slower population growth, less “sprawl”
growth?
DO DEALERSHIPS STILL EXIST IN 2025?
YES: WITH MARKET SHARE >90% (AT PRESENT 99%)
+ DEALERSHIP MODEL IS DOMINANT EVERYWHERE IN THE WORLD
+ NO CREDIBLE ECONOMIC RESEARCH SHOWS ANY SUPERIOR MODEL
+ OEMs LACK FUNDS TO BUY THEIR NETWORKS (EVEN IF THEY WANTED TO)
+ OEMs ALREADY HAVE STRONG CONTROL: “I ALREADY CONTROL 95% OF WHAT THEY DO, WHY WOULD I BUY THEM TO GET THE LAST 5%?”
+ IF CUSTOMERS WANT WHAT LOOKS LIKE “FACTORY DIRECT,” DEALERS CAN PROVIDE A “FACTORY DIRECT” EXPERIENCE
- NEW ENTRANTS (e.g. TESLA, CHINESE, OTHERS) MAY HAVE THE DESIRE TO OWN THEIR STORES… AND THEY HAVE THE CASH NECESSARY TO BUY THEM
SOURCE: Numerous, including IHS; CAR; BTS; DOT; Dargay, Gately, Sommer (2007)
Finland: stable?May depend on OEM decisions.
HOW MANY STORES WILL THERE BE?
SOMEWHAT FEWER: 16,500 VERSUS 18,000 TODAY
+/- SOME OEMs EXIT (E.G. SUZUKI), NEW ONES ENTER (E.G. KARMA)
+ POPULATION GROWS
+ LOCAL SERVICE POINTS STILL VERY NECESSARY
+ CUSTOMERS STILL OVERWHELMINGLY PREFER BFS NOT BTO*
(INSTANT GRATIFICATION RULES: SHOP ONLINE FOR MONTHS, THEN COME TO DEALERSHIP AND INSIST ON IMMEDIATE DELIVERY)
- “DEATH OF GEOGRAPHY” MADE POSSIBLE BY THE INTERNET (NEXT SLIDE)
* BFS= buy from stock, from inventory; BTO= build to order
Finland: similar decline? Or are Finns more accepting of e-
commerce?
“DEATH OF GEOGRAPHY” EXAMPLETEXAS DEALER: AVERAGE DISTANCE TO CUSTOMER 550 KM
WHO WILL OWN THE DEALERS OF 2025?SOMEWHAT FEWER OWNERS (6,500 FROM 8,000 TODAY), MOSTLY PRIVATE:
WHY FEWER OWNERS?
1.STORES TOO LARGE, EXPENSIVE TO SELL TO AN INDIVIDUAL (ONLY COMPANIES)
2.AGING OWNERS READY TO RETIRE
3.IF NO GROWTH IN CAR SALES, ONE WAY TO GROW IS TO BUY MORE STORES
4.STORES ARE MORE EXPENSIVE TO RUN (FANCY BUILDINGS, HIGH I.T. SPEND)
5.WITH EACH GENERATION OF FAMILY, HARD TO KEEP THE STORE “IN ONE PIECE”
WHY MOSTLY PRIVATE OWNERS? PUBLIC DEALERSHIP CHAINS:
1.HAVE NOT PROVEN THEY ARE BETTER MANAGERS
2.HAVE NOT PROVEN THAT THEIR LARGER SCALE IS A STRENGTH
3.ARE NOT OFTEN FAVORED BY OEMs
4.HAVE HAD DIFFICULTY RAISING FUNDS FROM A SKEPTICAL WALL STREET
The 6 public chains in the USA are still below 10% market share
combined.
Finland: similar?Depends on individual decisions.
HOW PROFITABLE WILL WE BE IN 2025?SOMEWHAT LESS PROFITABLE, AND HIGHLY DEPENDENT ON SERVICE:
1.NEW CAR MARGIN “HAMMERED FLAT” BY THE INTERNET (~2.5%)
2.“BACK END” PAYMENTS FROM OEMs NOT ENOUGH TO COMPENSATE
3.USED CAR MARGIN FALLING AS COMPETITION INTENSIFIES
4.F&I ALREADY HIGH ($1,200 GROSS/CAR), UNDER REGULATORY THREAT
5.COLLISION REPAIR WILL BE PRESSURED BY FALLING CRASH RATES
6.SERVICE HAS UPSIDE: DEALERS HAVE ONLY 1/3 OF U.S. AFTERMARKET
NET PROFIT % WILL BE LOWER, BUT RETURN ON ASSETS STILL GOOD
1. MORE EFFICIENT INVENTORY MANAGEMENT REDUCES INVENTORY
2. MORE REASONABLE OEM DEMANDS CUT BUILDING INVESTMENT
Finland: similar. Hard to see profit growth.
USED CAR MARGINS FALLINGUSED-CAR GROSS MARGINS IN USA
OTHER TOPICS SKIPPED TODAY:SMALLER RURAL
DEALERS:
Challenges: low growth, high investment burden, low support; but also advantages: insulated markets, strong customer relations, and slower change. Should aim to grow scale, diversify income , and preserve small-town strengths.
Unburdened by history, and so more open to innovation. Watch for export of purely online third-party models.
INSIGHTS FROM CHINA:
[ Omitted: you in Finland already know the European story! See ICDP* ]
INSIGHTS FROM EUROPE:
Heavy duty trucks today = cars tomorrow (e.g. “life after margin”). One key to survival is strong growth in service revenue, which is most of profit.
INSIGHTS FROM HEAVY DUTY TRUCK DEALERS:
ICDP = International Car Distribution Programme, based in the UK, leading researcher of EU car dealerships
REPORT OUTLINEFOCUS OF TODAY IN RED
§ Will we still be selling cars?§ Do dealerships still exist? § How many stores will there be? § Who will own them?§ How profitable will they be? § How will they make their money? § How will the store change (off/online)? § What will the regulatory landscape be?
Dealer Specific Chapters:
§ What happens to small rural dealers? § What can we learn from truck dealers? § What can we learn from Europe? § What can we learn from China? § What will be the impact of…
§ Electric cars?§ Autonomous cars? § Mobility services? § Connected cars?
Special Topic Chapters:
“THE FOUR HORSEMEN OF TECHNOLOGY”
FORECAST: Penetration by 2025 of ~5% (PHEV+BEV). TODAY ~1%IMPACT: Minimal: dealers can handle EV as easily as gasoline, diesel, more.CONFIDENCE: HIGH
Electric Vehicles (EVs):
FORECAST: By 2025 ~100% of new cars have high levels of ADAS; 50% with partial autonomy (TODAY 1% @ L2); and 10% capable of often driving in this mode.IMPACT: Probably positive: AVs likely to boost VMT and may very well boost new sales (e.g. elderly or disabled), likely
age faster. But slow to penetrate total parc.CONFIDENCE: HIGH
Autonomous Vehicles (AVs):
FORECAST: Highly uncertain. IMPACT: As configured today (taxi’s, limo’s), modest head-wind to sales (TODAY 1% OF VMT). But if AVs and MS are linked up (“robotaxis”), we enter a world of “eternal rental.” Implications highly unclear. Lower sales but higher VMT. Unclear who will
do the maintenance!CONFIDENCE: LOW
Mobility Services (MS):
FORECAST: Already well under way, as relatively cheap and easy to do. 50% TODAY? 100% by 2025. IMPACT: Impact modestly favorable, as CC is tied more closely to the dealership). CONFIDENCE: HIGH
The Connected Car (CC):
NEUTRAL POSITIVE UNCLEAR NEUTRAL
Electric vehicles (EV) = BEV (battery EV, like Tesla) + PHEV (plug-in hybrid vehicles, like Mitsubishi Outlander) PHEV).
ELECTRIC VEHICLES*: USA AND FINLAND IN BOTH COUNTRIES: LOW BUT GROWING MARKET SHARE: USA ~1%, FINLAND ~2% DEMAND IS SENSITIVE TO TAX INCENTIVES LONG-TERM, LESS REVENUE FOR DEALERS AND REPAIR SHOPS
BUT LIKELY TO GROW FASTER IN FINLAND? PRICE OF ONE LITER OF GASOLINE IN USA 0.65 €, IN FINLAND 1.45 €
DEMAND REMAINS HIGHLY UNCERTAIN: (IN USA) IRRESISTABLE FORCE (GOVERNMENT RULES) MEETS IMMOVABLE OBJECT (CUSTOMER DEMAND)
YOU MUST BUY, FOR A CLEAN
ENVIRONMENT!
BUT YOU CANNOT FORCE ME TO BUY
WHAT I DO NOT WANT!
Finland: faster, already 2x USA (higher petrol cost?)
“THE FOUR HORSEMEN OF TECHNOLOGY”
FORECAST: Penetration of sales by 2025 of ~5% (PHEV+BEV). TODAY 0.6%IMPACT: Minimal: dealers can handle EV as easily as gasoline, diesel, more.CONFIDENCE: HIGH
Electric Vehicles (EVs):
FORECAST: By 2025 ~100% of new cars have high levels of ADAS; 50% with partial autonomy (TODAY 1% @ L2); and 10% capable of often driving in this mode.IMPACT: Probably positive: AVs likely to boost VMT and may very well boost new sales (e.g. elderly or disabled), likely
age faster. But slow to penetrate total parc.CONFIDENCE: HIGH
Autonomous Vehicles (AVs):
NEUTRAL POSITIVE
AUTONOMOUS VEHICLES (AVS) INEVITABLE: THE DEBATE IS ONLY ABOUT SPEED OF PENETRATION
THERE ARE HUGE DEFINITIONAL ISSUES! “AUTONOMOUS,” “SEMI-AUTONOMOUS,” “SELF-DRIVING,” “DRIVERLESS,” “ROBOCARS,” ETC.
THE IMPACT ON DEALERS MAY BE POSITIVE:
SALES: CAN GROW, AS THE ELDERLY AND DISABLED “GET BACK ON THE ROAD”
SERVICE: COULD GROW, AS THESE VEHICLES ARE USED FOR MANY MORE MILES
THERE IS ALMOST NO WAY TO PREDICT ALL THE EFFECTS OF AVs
DECREASE TRAFFIC (SHARED ROBOTAXIS) OR INCREASE (ABANDON THE BUS)?
REDUCE PARKING LOTS DOWNTOWN… BUT HAVE FOUR “RUSH HOURS?”
HARMLESS SOCIAL EFFECTS (SEX IN THE CAR!) OR HARMFUL (DELIVER AN IED)?
Finland: slower?(not a priority market?)
UNINTENDED AV EFFECTS?
My neighbor is always fighting with me, so for revenge I told his AV to drive itself
to North Korea!
Pyongyang è
“THE FOUR HORSEMEN OF TECHNOLOGY”
FORECAST: Penetration of sales by 2025 of ~5% (PHEV+BEV). TODAY 0.6%IMPACT: Minimal: dealers can handle EV as easily as gasoline, diesel, more.CONFIDENCE: HIGH
Electric Vehicles (EVs):
FORECAST: By 2025 ~100% of new cars have high levels of ADAS; 50% with partial autonomy (TODAY 1% @ L2); and 10% capable of often driving in this mode.IMPACT: Probably positive: AVs likely to boost VMT and may very well boost new sales (e.g. elderly or disabled), likely
age faster. But slow to penetrate total parc CONFIDENCE: HIGH
Autonomous Vehicles (AVs):
FORECAST: Highly uncertain. IMPACT: As configured today (taxi’s, limo’s), modest head-wind to sales (TODAY 1% OF VMT). But if AVs and MS are linked up (“robotaxis”), we enter a world of “eternal rental.” Implications highly unclear. Lower sales but higher VMT. Unclear who will
do the maintenance!CONFIDENCE: LOW
Mobility Services (MS):
NEUTRAL POSITIVE UNCLEAR
MOBILITY SERVICES (MS): E.G. UBER HIGHLY CONTROVERSIAL: HIGH PRENETRATION, LOW/NO PROFITS
IN CURRENT CONFIGURATION, A SMALL DRAG ON NEW-CAR SALES (NB: IN THE USA MS+TAXI+LIMO = ONLY 1% VMT)
BUT IF AV IS LINKED TO MS, THEN DRIVERS MAY GIVE UP CAR OWNERSHIP IN FAVOR OF “ETERNAL RENTAL” OR “ROBOTAXIS” – AS A RESULT SALES WILL FALL, ALTHOUGH SERVICE WILL LIKELY RISE
THIS ALREADY MAKES ECONOMIC SENSE IN LONDON AND NEW YORK* -- THE QUESTION IS HOW FAR WILL IT SPREAD, HOW FAST?
FINLAND MAY MOVE FASTER THAN AMERICA, THANKS TO ACTIVE EXPERIMENTS IN MS.
* BUT NOTE THAT ~50% OF FAMILIES IN NYC AND LONDON STILL OWN A CAR
Finland: faster to move than USA, thanks to aggressive MS
experiments.
MS IN FINLAND: LEADING THE WORLD?
CHART SOURCE: Kamargianni, Li, Matyas, Schäfer (2016); also US Census, Experian, Statistics Finland,
But America has “more to lose:” 275 mm vehicles, 125 mm households = 2.2 cars/hh.
Finland: 2.7/2.7 = 1.0 cars/hh
ON THE OTHER HAND…CARLOS GHOSN: “MANY THINK [MS] ARE SUBSTITUTION. NO, IT'S ADDITION. THE TRADITIONAL BUSINESS OF BUILDING, SELLING, AND OWNING CARS CONTINUES.“
1. MS ARE NOT (YET) OFFERING ANYTHING TRULY NEW. JUST A FORM OF TAXI. OEMS ARE INVESTING IN THEM JUST TO SECURE FLEET CONTRACTS
2. “CARS ARE IDLE 95% OF THE TIME” MISLEADS. THERE MUST BE IDLE CAPACITY MOST OF THE TIME IF WE ALL TRAVEL AT ONCE SOME OF THE TIME (RUSH HOUR)
3. “IT’S KM, NOT CARS!” REPLACE A CAR (25K KM/YEAR) WITH A TAXI (125K) AND IT WEARS OUT FASTER (3 YEARS VS 12), AND YOU SELL AS MANY CARS ANYWAY!
4. MS SO FAR RARELY MAKES MONEY (MAYBE IN BEIJING, WHERE IT’S HARD TO GET A CAR), IN PART BECAUSE MS COMPETES WITH SUBSIDIZED MASS TRANSIT.
5. MS VALUES EFFICIENCY EXCESSIVELY VERSUS EFFECTIVENESS: OWNING YOUR VEHICLE CREATES VALUE MS CAN’T (E.G. INSTANT AVAILABILITY, CUSTOMIZA-TION, STORAGE, FLEXIBILITY, CHAINED TRIPS, EXPENSE CONTROL, ETC.)
CLOSING THOUGHTS (USA)FRANCHISED DEALERSHIP SYSTEM REMAINS INTACT FOR THIS PERIODMANY CHALLENGES EXIST – BUT THEY CAN BE MANAGED (AS BEFORE)PROFITS ARE PROBABLY SOMEWHAT LOWERTHE DEALERSHIP BECOMES LESS A “DEALER” AND MORE A “RETAILER”
OEM CONTROL INCREASES FURTHER: BY 2025 THE DEALERSHIP IS A PRIVATELY-OWNED “COMPANY STORE”EV A MINOR NEGATIVE, AV AND CC POSITIVE
BUT A MASSIVE THREAT LOOMS: MS “PERMANENT RENTAL”IN FINLAND:PROBABLY DEALERS STILL EXIST, STILL SELL CARS, AND STILL ARE PRIVATELY OWNED -- BUT WITH LOWER SALES GROWTH AND LOWER PROFITS – AND GREATER EXPOSURE TO MS TAKING AWAY CUSTOMERS.
