SOUTHFIELD, MI – Automotive-retail guru Dale Pollak says many people in auto retailing eschew certain industry issues, both current and looming.
That tentativeness is one reason he’s written a new book. He feels “an obligation to bring voice to topics too few in our industry want to talk about.”
The industry is “confronting a challenged and uncertain future,” says the industry thought leader and founder of vAuto, an inventory-management software provider. Available on Amazon, Pollak’s fourth book is entitled Like I See It: Obstacles and Opportunities Shaping the Future of Retail Auto. It devotes chapters to dealer margin compression, increased automaker control, dealer network consolidation, consumer preference for digital retailing and more.
Pollak is a former dealer and ex-farmer who once grew corn and soybeans near the Mississippi River in western Illinois. “I was the only blind, Jewish farmer registered with the U.S. Department of Agriculture,” he quips.
WardsAuto spoke with him as he made the rounds in metro Detroit. The book was written in collaboration with colleague Lance Helgeson, vAuto’s director-industry analysis, whom Pollak calls “the guy behind the curtain.”
Here is an edited version of the Q&A.
WardsAuto: So, a fourth book.
Pollak: It’s premised on a lot going on. There’s the transformational stuff, the move to mobility (car-sharing and ride-hailing) that potentially has profound consequences for the retail automotive network. That’s looming out there.
Of more immediate concern is that although we have a vibrant industry today, you could make a case that dealers are an endangered species.
It’s an extremely challenged industry. The auto industry is a big ecosystem. It has never been more interdependent than now. Historically, there has been a lot of money to be made in this industry. All the constituents, whether they are dealers, OEMs, solution providers, financial institutions and the like, had the ability to pull on their end of the rope and get out of it what they needed to get out in their own interest.
I don’t think there’s enough profit in this industry today. The margins at every level are tight.
We’re all interconnected in some ways, and the strength of that depends on the viability of the profitability, which is quickly evaporating.
Evermore, we’re going to make it together or lose it together.
WardsAuto: With mobility coming, will dealership service departments be more involved with these fleets of cars that are coming?
Pollak: I don’t think so. I see the confluence of two things that are fundamentally challenging to a dealership’s sales and service: the autonomous car and ride sharing.
Most people don’t know that if you drive fewer than 11,000 miles (17,600 km) a year and consider the total cost of vehicle ownership, it’s cheaper to Uber. When you take the driver out of the seat of that car, that 11,000 miles goes to 25,000 miles (40,000 km).
So, if you believe in the basics of behavioral economics and the psyche of Gen Y that’s less interested in owning stuff and more interested in service-on-demand, you got to know mobility will begin to erode vehicle ownership.
Moreover, the next level is that these (self-driving) cars we’ll be transported around in largely will be commercially owned. Maybe wealthy people will own their own autonomous car, but the vast majority will be commercially-owned.
So take an industry that has a 2.5% net to sales profit margin. Consider the potential percentage shift from private-party ownership where (the auto industry) makes money to commercial entities where the industry doesn’t make much money. What percentage increase from private-party to commercial sales tips it negative? Not a lot in a 2.5% industry.
WardsAuto: What about the service side? Can’t dealers make money there?
Pollak: If you are the owner and operator of a commercial fleet, is it efficient to have those vehicles serviced at a highly disparate network of individual locations? No, you have scaled commercial service centers. Maybe if you are way out in the country, you might take it to a dealership. But largely speaking, dealership sales and service are challenged in a mobility environment.
WardsAuto: If you talk to dealers about where they will fit in that coming age of mobility, they’ll say, “We’ll figure it out.” They say they are agile and will come up with something.
Pollak: We all wear rose-colored glasses to varying degrees. It is human nature to view the world in a way that’s friendly to our individual survival.
I will acknowledge people have predicted the demise of dealers for decades for lots of reasons: franchise laws decaying, the Internet. We’ve heard this story before. It has proven not to be true.
To be sure, dealers are generally a pretty tenacious, innovative and resilient bunch. I would not be fast to write off the dealers’ role in that future mobility environment. But you have to be realistic, have a clear-eyed hypothesis about what that environment will look like, and then ask yourself as a dealer how you fit in. Or do you fit? A solution provider like us has to ask the same thing.
WardsAuto: Do you see dealers potentially playing a bigger role if the automakers are the commercial fleet operators?
WardsAuto: They can’t be part of that network?
Pollak: No. I’d like to believe it, but I’m not sure what value they would add.
WardsAuto: They could be the service and distribution centers for, say, General Motors operating a fleet.
Pollak: OK. Could be. Maybe. But the way I think about it, rental-car companies look sort of like a model of commercial-vehicle mobility. There are exceptions, but rental agencies are pretty centralized. They are not on every corner of every town.
WardsAuto: In the book, you say there’s a lack of transparency. Some dealers might say there’s too much transparency about their business.
Pollak: That’s the conflict I talked about. Dealers optimize their sales process around lack of transparency, around control. It’s not the way the world works today.
WardsAuto: But there is much transparency out there, a lot of it brought about by the Internet. People can readily get regional going transactional prices for any car they are interested in.
Pollak: There are pockets of transparency on used cars. I’m presumably a so-called industry expert insider, and I don’t know what to pay for a new car. Do you want to know why? Because there are all these crazy dealer-money programs from automakers, these stair-step incentives.
Who in the world knows what to pay for a new car? If you hit the right dealership on the right day of the month, which might be the last day, when they are trying to make their bonus goals (set by the automakers), there are dealers who have sold cars for $30,000 less than their costs. They will do that because if they make that bonus goal, they’ll make $300,000 or $600,000 or whatever. What kind of transparency is there in that new-car environment?
WardsAuto: Those financial incentives from automakers have become a huge revenue stream for dealers, especially as profit margins on vehicle sales have compressed. Even though dealers complain about stair-step incentive programs by some manufacturers, they’re not going to refuse that money.
Pollak: You know what it is? Heroin.
Pollak: Lance and I wrote a chapter in the book about it. NCM and Associates just did a study. It looked at the average dealership in America and backed out its adds and deducts and then backed out what we call the below-the-line money you get from the manufacturer if you jump through all the hoops like a circus animal, some of them hoops of fire, to get your reward. If you did not get your reward, the industry on average would be 6.4% negative profit.
So the factory has fundamentally changed the nature of its relationship with dealers. The dealers no longer are independent businesspersons. Arguably they are not even a franchisee in the traditional sense. They’re an agent. They have to have that factory money.
The factory often says dealers must do things that don’t make sense in an economic environment, such as take a certain number of cars and lose money on cars they sell. The dealer has no choice but to do it. Otherwise, the factory would withhold the money, like the drug dealer withholding the drug.
WardsAuto: But shouldn’t an automaker have some control over the franchisee or agent who represents the particular brand?
Pollak: Some control. I wouldn’t advocate there shouldn’t be a relationship without common guidelines or that sort of thing. I totally get that.
WardsAuto: Are bonuses a viable way to have that control or whatever you want to call it?
Pollak: It depends on how those bonuses are structured. If they are conditioned on behaviors that are reasonable, it is OK. But if they are conditioned on dealers doing things that aren’t in their interest or in the long-term interest of the OEM, then those bonuses are inappropriate.
WardsAuto: Given all these market pressures, what two or three things should I be doing as a dealer? Where should I be spending my money?
Pollak: That’s a really good question. First and foremost, look for efficiency in your operations. One category would be human capital. The average dealership turns over 67% of salespeople a year, 40% overall. That’s pretty atrocious. There are lots of opportunities to do a better job there.
The second area is process inefficiency. Dealers are maniacal about expense control, and should be. But what they almost always fail to realize is they have operationally intensive environments.
In every department every day there are thousands of tasks that need to be performed. If they aren’t performed properly, timely or at all, those operational shortcomings add up and affect the bottom line as much as (excessive) expenses do. The only difference is operational inefficiencies are not audited and don’t appear on a financial statement where you can see them. But, too often, they exist.