“Skate where the puck is going, not where it has been.”
This legendary Wayne Gretzky quote has been used (maybe overused) by everyone from Steve Jobs to Warren Buffett but may be especially appropriate for car dealers right now.
Unexpected shortfalls in new-vehicle production, first with the pandemic and now with the semiconductor shortage, the lack of repossessions and other factors have caused, for the first time I can remember, sustained higher gross profit margins in the retail car business over the past nine months or so. And as I write this, it doesn’t look as if the chip shortage will ease anytime soon.
Also, as I write this, the latest headline reads “Manheim Used Vehicle Value Index Shatters Record Fueled by February Price Jump” for used-car values. So, the annual spring uptick in retail used-car profits likely will be sustained for a while as well, according to the Cox Automotive value meter.
However, I think there are good reasons why even the franchise consolidators seem focused more on establishing their own used-car brand – Sonic expanding EchoPark, Penske Group branding CarShop for used-only locations, etc.
I also think it is now impossible to ignore manufacturers’ signals of where they see the “puck going” for electric-vehicle franchise sale operations.
Whether Tesla’s market value is justified or sustainable, it clearly seems to be the envy of vehicle manufacturers ranging from General Motors to Volvo. Elon Musk’s direct-to-consumer model may or may not work for a mainstream brand, but one can read the handwriting on the wall – that traditional OEMs want to begin following Tesla’s lead for EV sales.
The most striking example is the recent announcement by Volvo Car CEO Håkan Samuelsson declaring Volvo will be an all-electric vehicle company by 2030 and by that time will convert entirely to online sales, essentially relegating dealers to delivery and service centers. If such an announcement doesn’t put car dealers on notice of where OEMs want this puck to go, I don’t know what will.
Volvo Car’s parent company, China’s Geely Automotive Group, also owns Lynk & Co., a new EV manufacturer that already has announced a direct-to-consumer U.S. strategy with no legacy network (with a vehicle based closely on the Volvo XC40 CUV).
This is not an isolated event, as I note GM’s recent move to buy out the franchises of dealers not wishing to take on the cost of selling electrified Cadillacs, and the semi-direct-to-consumer model the automaker will adopt when the new battery-electric GMC Hummer rolls out.
These are not innovations the OEMs have initiated in a vacuum; they’re what Wall Street is rewarding right now.
I spoke a while ago with a respected and prominent analyst at Ark Investment Management, one of the biggest promoters and enthusiasts of Tesla, who proclaimed to me – unequivocally and with a sort of dismissiveness that only a lack of knowledge of the car business can engender –that car dealers as they now exist would soon go extinct, as EVs require less service, and direct-to-consumer sales were the most efficient wave of the future.
I thought it was sort of a crazy forecast then, and still do, but since then, Ark has become one of the best-performing funds out there in recent years, with historically high returns – so much so it seems no OEM tied in any way to public markets can ignore this trend.
Nevertheless, even for a franchise dealer, the largest source of profit traditionally has been used cars and customer service, and as long as EVs remain a tiny fraction of U.S. sales, this will be the case for a long while to come.
Drilling down further on the used-car side, the most profitable and loyal sales always have come from subprime and even deep-subprime buyers of older (internal-combustion) vehicles. Of course, there are technology-focused competitors in that space as well (Carvana, Vroom, Shift).
But as long as dealers have the facilities and local presence, in my opinion, they can easily tack on the technology piece and always have the advantage...that is, as long as they stay focused on where the puck is going.
John F. Possumato (pictured above, left) is an attorney and founder and CEO of DriveItAway, which creates platforms and applications enabling automotive retailers to offer new app-enabled mobility options, including remote rental and rent-to-purchase.