For many outside the industry, it is hard to understand why during a pandemic and acute vehicle shortage, could the typical dealership be so profitable.

Eagers Recent Profit  

But only a dealer insider understands that historically a vehicle margin is very slim, intensely competitive and how much sales target pressure a typical dealership is subject to. All these factors lead to a situation where a dealer is likely to lose a significant amount of money selling new vehicles and then depend on used vehicle department, finance, service and parts to recoup losses and then make a meagre profit.

However, with the semi-conductor shortage leading to unprecedented shortage of vehicle supply, the sales margin of most dealers have doubled – dealers are simply unwilling to discount vehicles that are near impossible to replace. Which means that many dealers are currently making a profit selling cars and are utilising the other departments to make healthy record profits.   

But this won’t last.

It could be 6, 12 or 18 months, but eventually the factories will wind back up and once again dealers will be under pressure to meet aggressive sales targets and to take on large inventories. This scenario will result in sales margins close to the historical small amounts. However, the last two years have also seen a huge pressure on expenses and employee shortages have also pushed up wages, which have lately been covered by increased margins.

Dealerships (like many other employee heavy industries) have had stagnant productivity for the past 3 decades and will eventually need to address this. Based on KPIs’; sales per salesperson, RO’s per advisor, technician efficiency, vehicles sold per sqm and deals per admin head, there has been little (if no) improvement and technology seems like the only option to improve dealership profitability long-term.   

The solutions that are needed to improve the sustainability of dealers must include; online car sales that require less salesperson resources, improved advisor/service client handover and more efficient admin processes.

Dealers probably only have a few years to get it sorted before lower margins will harm their business substantially.

The car researching experience has changed a lot over the years, from marketplaces such as carsales.com.au to professional review sites such as caradvice.com.au. But neither of these services have changed the way consumers transact a new or used car.

The closest contender has been the colossus carsales.com.au, who today dominates the market for used car classifieds where buyers and sellers are efficiently brought together. Being a classic case of a network affect, means that carsales.com.au position is unlikely to change anytime soon. But considering this privileged position and technical knowhow, why hasn’t carsales.com.au become the place that consumers transact online? - rather than just a glorified classifieds site.

When observing the successful companies who have pioneered online sales for their product categories – think Warby Parker (Glasses), casper (beds), Zappos (Shoes), Wayfair (Homewares), Tesla (new cars) and Amazon (everything else). They all have overcome most of the following:

Control & Branding

While Amazon has proven that you can dominate retail transactions by selling other products, many successful e-commerce pioneers have concentrated on the product first and let their customer experience do the promotion of their offering. By giving consumers an exceptional and unique experience, the power of word-of-mouth has propelled these brands to success and by controlling the brand, have given consumers no choice but to transact via their online store.

Therefore, it would be very difficult for carsales.com.au to control the transaction as they would be relying on private sellers, dealers and car brands to relinquish control of their products and customer experience to a third-party.

Thus far, no established car brands have successfully pivoted from a traditional ‘dealer’ model to an online model. However, they do have the advantage of control and branding to make a success of online sales.

Pricing   

For many consumers, the issue holding back any online transaction is ‘am I paying a good price?’. Amazon fixed this issue by obliterating away their competition so a buyer has little doubt on whether they could have got a cheaper price elsewhere. For other brands, controlling the product and retail options available has enabled them to give their customers certainty and transparency on pricing. Tesla solved this issue by selling direct to customers and thereby giving their clients certainty on pricing.

To date, cars are transacted at wildly different values. A used car buyer could search sellers on carsales.com.au to see the listed prices, but the inconsistency of quality and the transaction price is often very different to the advertised price. With new cars, transaction prices can sometimes vary by $1000’s difference to RRP and consumers have no choice but to visit a dealer and find their best price.  

Because of this need to search for their best price, consumers are unlikely to embrace online sales under the traditional dealer model. Recently, Honda and Mercedes have or will soon be operating a ‘Agency model’, where they can fix prices across their networks and it is possible that these brands become pioneers in online car sales. However, they will need to find solutions to the following;

Reviews

While car brands and models are extensively written about and published online, the source of consumer information on cars has not changed much in the past 50 years. Essentially journalists, who have access to a car for a few days typically on a junket in the south of France do some power slides and report back on the ‘lack of power’. But the needs and wants of a motoring journalist are often widely different to the average consumer.

Successful marketplaces have often recognised this and placed importance on capturing real reviews from owners and users of a product who can often report on fundamental features of the products sold on their marketplace. The resource of trusted and relevant reviews are often the catalyst that propels online sales and help a category get online traction.

Car brands will find this difficult, reviews on many controlled sites are often poorly contributed to and are often seen cynically by the consumer. The best review resources must be seen as an impartial forum for consumers.

Currently, there is no trusted and substantial review resource for cars.   

Touch and Feel

Even if a resource is created to host verified reviews of cars by owners, it is a fact of life that everybody is different. With such an important purchase, most buyers want to see how the car accelerates, how comfy are the seats, how direct the steering is, what is the smell? And that is why successful online categories have returns.   

Returns

The last, and perhaps most crucial aspect of an online sale traction is the ability (or option) to return a product if it doesn’t meet expectations. Before returns were the standard, shoes and clothing sales online were a rarity where feel and fit are crucial. With the introduction of returns, customers could feel comfortable that they could return an item just because ‘it didn’t feel right’.

In the used vehicle space, returns are increasingly being used by retailers to promote their online sales and drive the popularity of fixed price used cars. In most states, registration and stamp duty is easily reversed in a reasonably short period of time. However, new vehicles face a significant hurdle by having heavy depreciation in the first months, small margins and the expectation that a new car should have very low kilometres at delivery.

So, why aren’t cars sold on the internet? If we can solve these 5 challenges, there is no reason why a car can’t.        

Tell me an industry that has more data than Automotive retail….. I can’t think of any. Whether it be via new or used vehicle sales or vehicle servicing, a modern-day dealership reaches thousands of customers per month. Multiplied across the industry, it is likely that majority of the Australian population interacts with a car dealership at least once per year.

But what makes the data captured by dealerships even more interesting is the quality and depth of its data. To service, sell, register, finance, insure, trade-in, repair and market an expensive item like a car, a dealership must get varied, detailed and accurate data from its customers.

This trove of useful data and their high revenues are the primary reasons why they are increasingly being targeted by hackers and criminals. https://www.autonews.com/finance-insurance/retailers-prime-targets-data-theft. It’s a bit sad that hackers are extracting more data from dealers than the dealers themselves!

But why is this?

The primary reason is because most dealerships data isn’t centralised and worse still, isn’t interconnected. The Payrol system doesn’t talk to the DMS, the DMS doesn’t interact with the prospecting system, the prospecting system doesn’t relate with the OEM, the OEM doesn’t communicate with the finance company, the test drive app doesn’t talk to the document storage solutions etc.

To make matters worse, a lot of these stakeholders discourage the free movement of data between systems and therefore create these disparate data siloes. They believe THEY own a dealers data. When they do allow data connections, they often have a short-term focus on high fee’s, which discourages new entrants and innovation.  

DMS providers are unlikely to change their business model anytime soon, so dealers will have to start taking back their data….. And then use it.

Excel SalesLogs are an excellent way of tracking your sales performance of individuals but also of the overall team and their common target. They are also commonly used to plan deliveries and act as a source of truth for many dealership sales departments.

Despite, all the data being available in a DMS, dealerships still create custom spreadsheets to measure, compare and track their daily, weekly and monthly sales performance. Does it matter?

For a number of reasons, it doesn’t make sense for dealerships to persist with siloed spreadsheets. Ideally, a Dealer Management System should have a detailed and flexible sales log that just represents the data already inputted into a format that Dealers want. This is obviously not happening, or they wouldn’t be going to the effort to create complex spreadsheets.

Stop using spreadsheets!

They are inefficient. Your sales team has already entered in the data, whether it be the sales contract or other means, it is a waste of everyone’s time to re-enter the data just to produce a report that should be automatic.

If you add up all the hours these spreadsheets cost in inputting and maintenance, is the data that is extracted really that important?

They are not secure. Because spreadsheets have the flexibility of macros imbedded into their code architecture, they can be easily customised and automated to complete tasks. This is fantastic, but it is also a security risk. Hackers, frequently target business computer users with phishing emails which often have word and excel documents attached, which then have macros programmed to exploit a companies IT infrastructure. The best way of combating this is to have a network policy of preventing macros on all devices, however this can prevent many useful spreadsheets from operating.

In addition, these spreadsheets are often full of useful data and customer information which in the wrong hands could become a target of ransomware.   

The data is siloed. By having a dedicated spreadsheet for sales performance and delivery information, this data often sits in the spreadsheet never to be referenced or cross joined to other useful data. For example. Wouldn’t it be nice if you could compare and combine your sales delivery performance with your finance performance? Or easily understand which customers have a finance application pending? Or, measure the total income generated by your salesperson including aftermarket, finance and vehicle gross?

They are not historical. Often, SalesLogs are workbooks with tabs setup for individual branches or months. By having this data housed within individual spreadsheets, it is very difficult to compare that data to previous years or even months. 

Ditching the spreadsheet could be the best decision you make this year.  

It appears that no matter the challenges involved in getting a car to completely drive itself, they are nothing compared to the ingenuity and self-belief of our tech savours (Silicon Valley engineers). While the progress of humankind is likely to solve the many challenges of level-5 autonomy (driving with no human input), it is likely that many of the unforeseen challenges and consequences will take longer to solve than the challenges solved thus far. Here are some of the challenge we don’t think are going to be fixed anytime soon…

Congestion

There is a lot of speculation that congestion in our cities will reduce because people will go from owning a car to using a car sharing service, this will free up parking garages as people won’t need their car during the day or when they are at work. While this may reduce the overall number of cars, it is unlikely to reduce congestion and will probably make it worse.

There is a very real possibility that congestion may increase as cars that would normally be left dormant will now be on the road looking for a rider. Or for privately owned autonomous cars, they will be travelling home empty to wait at home until the afternoon pickup. 

Charging

It is speculated that most autonomous and electric cars will be more suited and more economic for congested cities rather than rural areas or urban sprawl and this makes sense. However, cities are the most difficult areas to keep electric cars charged and ready as many people don’t have off-street parking, many people don’t own their roof, making solar generation and battery storage unlikely for most. Requiring large parking and charging garages will likely be necessary, contradicting predictions that parking garages will become obsolete.   

Systemic failure

The hardest consequence to predict is a possible systemic failure. While human drivers are fallible, we are all bad drivers in our own individual way meaning that we are unlikely to all make the exact same mistake on the road. Individualistic and chaotic systems have served humans and nature well, they create paradoxically stable systems overall. However, when you remove millions of individual decisions being made on the road and replace it with one decision logarithm the consequences could be diabolical.     

A nightmare scenario could be thousands of cars plunging off a ravine like lemmings because of some bug or miscalculation that only occurs because of the autonomous cars interaction with other autonomous cars. i.e. an individual autonomous car wouldn’t make the same error in isolation, but it’s interaction with others causes some unforeseen feedback loop.  

This is a science fiction nightmare and it’s scary to think about.

Blackouts & Disasters

I was fortunate to be driving home from work in what was considered to be an apocalyptic blackout in Adelaide on the 28th of September 2016. It was caused by a once in a 50 years storm and a main transmission connector line being flattened by high winds that left the majority of the state (about 1.7 million residents) without power. There are many reasons for the cause of the debacle, which I don’t want to go into here.

The weather that day was horrible, with rain pelting the windscreen, wind blowing debris onto the road and all major traffic lights on my commute totally blank on my 30-minute commute. Because of the sheer number traffic lights down, the police had no way of policing and regulating traffic through the major intersections that I needed to pass through that night.

So, what happened? Chaos? Crashes? Violence?

Not at all, in fact I don’t even recall hearing a beeping horn. Drivers just nudged their way through the intersections giving way where they seemed appropriate, taking turns to pass through the intersections that normally handle up to 50,000 vehicle per day. While we always assume that technology can do a better job than a human, faced with a complicated and nuanced scenario, humans generally do a pretty good job.

I can’t help but wonder, what will happen in the future with autonomous cars trying to negotiate an intersection that has no rules? Sure, some clever spark will write a logarithm to deal with downed lights, but no one disaster scenario is likely to be the same. Or, what would happen if all the communications went down for a period? I assume the autonomous cars would carefully stop in traffic while the riders just wait for communications to be restored. I can’t think of anything more frustrating!

Even more worrying, what happens when people need to evacuate a hurricane or bushfire? I can’t help but think of the confusion and helplessness that people might experience when a fleet of robo-taxi’s are tasked with evacuating large populations all at the same time and all in the same direction.

Freedom

The transition to autonomous cars has been compared to the disruption that automobiles had on the horse and cart, but I believe this will be a much bigger impact to society. When we ditched the horse and embraced the steering wheel, at least we gained more control over where we wanted to go, when and how, and as a bonus, we reduced the likelihood of being kicked in the face by a horse. A computer may be better at driving than the average human, but people will be receding control and it always feels more comfortable to be driving verses travelling in the passenger seat.  

In addition to the perceived loss of control, there is a very real threat that humans may need to be segregated from robot cars just like factory workers are with their fellow robot workers. There are already predictions that human drivers may be banned from entering certain areas of future cities and special walkways for pedestrians will need to be erected as to make the life of robot cars easier and more predictable.

This isn’t the way technology is supposed to be. We shouldn’t have to yield our freedoms to make technology work better, it should adapt to us. 

So many goods and services are bought on the internet these days that it almost seems arcane to buy something looking at someone and not a screen. So why is it still not possible to buy a car on the internet?

There are two big obstacles still preventing online purchases, but once they have been solved there is no reason why some people won’t.

The biggest obstacle is the sales process at the dealership. The ability to negotiate the price at a dealership and potentially ‘save’ thousands means that most people won’t want to buy a car online knowing that they could have saved money. Even if the dealer has an online only price, the perception of the consumer is that they could have always got an extra $100 or so dollars out of the salesperson.

Proof of this, is the sometimes sale of special supply-restricted models offered by manufacturers as an online only model, think Subaru BRZ or recently the Toyota Supra. These companies know they have a massive demand for these cars with little supply. So, they sell these cars online only as they recognize that they can sell these models at no discount and they recognize that the consumer won’t batter an eyelid.  

The only way to encourage online sales, is to have a fixed price across the dealer network so that the advertised price is the same as the transaction price and likewise the online price. i.e. there is no disadvantage to a consumer wanting to buy online. An example is Tesla and its control of the whole process including the retail of vehicles. They have proven what can be achieved online.

In New Zealand, both Honda and Toyota have transitioned to an ‘Agency’ Model, where the distributor holds all trading stock and hence controls the sale price. Consumers aren’t worse off because the advertised price came down to the transaction prices that were being offered by dealers anyway. But this model has ensured that both these brands are ready for online sales in the future.  

The next obstacle is that buying a car is a major purchase and subsequently most consumers prefer to test drive a car before they buy. If the car has a fixed price, why would a consumer test drive the car at the dealership and not buy if they are happy with the car?

For consumers to completely do their research online and progress to purchasing online, then the potential ‘buyers remorse’ issue will need to be resolved. Like how clothes and now shoes were encouraged to migrate online, these businesses offered free shipping and free returns to remove the risk of a consumer buying the wrong item. This then increased the volume of sales done online and made up for any increased shipping and return costs.

Sorry for the plug! – but at drivible our mission is to make the whole car experience seamless and to reduce the risk to such an extent that consumers and dealers feel comfortable selecting and transacting a car online. By transacting a car through a subscription, drivible can ensure that the official subscription price is the best price possible, whilst limiting the risk that you select the wrong car by only having a rolling monthly commitment.

Once consumers are comfortable with the subscription option, it is only natural that this model will migrate online.     

A lot has changed in the past 30 years and the characterisation of the sleazy salesperson is outdated. With the professionalization of the industry and the transparency that the internet has brought, salespeople today are as professional as any other. 

However, when you look at various studies, salespeople are still ranked as dishonest as lawyers, journalists, politicians and real estate agents. But is it any wonder that consumers dislike these professions? Their jobs dictate, that they must find a middle ground i.e. negotiate and most people hate negotiating!

The act of negotiating means that from the very start of a conversation both parties know that the other will try and better their position. A customer will try and save money, which they should, and a salesperson is trying to make money, which they should. A customer enters a dealership in defence mode and salesperson in attack. 

The reality is that a new car today is hardly sold for a profit, in fact a recent report by Deloitte showed that the average dealer makes just $70 per vehicle in margin after negotiation. Dealerships mostly sell cars at a loss so they can sell more finance, sell more aftermarket, service more in the future and crucially make manufacturers targets. The aim of the salesperson is to lose less money! And it is the job of every other department in a dealership to earn it back.

Sales targets often come with large bonuses attached, if the dealership doesn’t get their target, they get nothing. Therefore, the central aim for a customer is to ‘get the best price’, but unfortunately, under the current system a salesperson has no way of knowing what the best price is. It varies from day-to-day or month-to-month depending on the dealer’s relative sales to their target for that period. And customers find this lack of consistency and transparency frustrating.

The current system of buying a car is broken and isn’t serving anyone well and perhaps it is the central reason why there are so many businesses trying to ‘disrupt’ the car buying process. However, many of these disrupters just magnify the current process i.e. negotiate a car purchase harder on the customers behalf. This just amplifies the current problem, as the dealer tries even harder to earn back the money they lost through up-sells and higher service costs.

Making the dealer honest through competition is important but to create better customer outcomes, the whole buying, financing and maintenance process of a car needs to be changed

The car subscription model is in its infancy and entrepreneurs, vehicle manufacturers and consumers are just trying to get their head around what the future will look like. The reality is, no one really knows what consumers will embrace. 

As such, lots of different businesses are being launched that attempts to find out ‘will consumers shun car ownership and embrace the subscription of a car?’ But a valid question is; ‘What’s the difference between a car subscription and renting a car?’.

For many new subscription services being launched, very little. The ability to use a car for a short period of time has been available for over 100 years through rental companies. While most people use rental cars for holidays or to complete a specific job, there is no reason why rental car fleets can’t be used for those consumers wanting a bit of variety and also want to avoid commitment. The question should be, why haven’t they?

The downside of rental fleets and some new entrants to the subscription business, is that they often have dated cars with dated technology and with many kilometres of use. 

So, you would have to agree that some new car subscriptions sure do look a lot like renting a car. There is obviously a market for these types of businesses and some consumers will enjoy the ability to have an SUV one month and a convertible the other, but is this just an attempt to re-brand the established rental market?

The challenge will be to offer a car subscription that will give the consumer all the upside of car ownership; huge choice of makes, models, colours, features and accessories that suits their needs and lifestyle. While also eliminating the downsides of car ownership such as depreciation & commitment.