Pub. 4 Issue 3

28 to rapidly evolve. By 2025 the shift from margin to volume will be complete, changes in online technology and in mar- ket preferences will ensure the transition away from negoti- ated prices continues, service will be the primary source of profit growth, OEM payments will become a new “shop” for dealers to manage, control of cost will be more crucial, and other departments (finance & insurance (“F&I”), used, collision) will all be challenged. On the human resource front, these changes will accelerate the trend to transition from salespeople to product advisors, and concurrently with this, a movement away from seeing front-line personnel as variable-cost, short-term expenses, and toward treating them more as fixed-cost, long-term investments. • While we do see these changes to the dealership business model taking place, we do not yet see entirely new business models emerging (e.g. dealers as mobility service providers). • When it comes to the store itself in 2025, we expect signifi- cant change. As to the physical store , we see only a slight increase in BTO (build to order), such that inventory levels will remain high (falling only from 60 to 50 days). We also hope that building costs will by then be relatively lower. As for the digital store , dealers will leverage IT to strengthen personal links with customers, but on a lower cost base. But IT will also drive increasing OEM control of the store, cy- bersecurity risks, and power struggles with both vendors and customers. Where the two stores overlap is in an expected “death of geography,” as online sales reach beyond tradi- tional geographical sales territories, again allowing stronger dealers to displace weaker ones. • Finally, we have tried to project to 2025 what the regulatory and legal environment for dealers might look like. Our view is that the regulatory outlook is difficult, but manageable: existing issues dealers can deal with; emergent new issues will probably be resolved over time; and the likelihood of a shift away from the franchise system seems very low, al- though dealers should remain alert to ongoing challenges to the system. In terms of specific topic findings (discussed in the lettered chapters): • We see smaller, rural dealers facing different challenges than larger, metro dealers, such as low growth prospects, relatively higher investment burdens, and minimal OEM support. Conversely they have the advantages of geographi- cally-protected markets, strong customer relationships, and lower rates of change to manage. Accordingly, such deal- ers should consider adopting creative strategies for grow- ing scale, diversifying income streams, and preserving the characteristics of that make them such strong competitors. These steps will be easier to take if OEMs will adjust their policies to become much more f lexible and supportive of these stores. • We spoke with heavy-duty (HD) truck dealers, because they face today some of the issues which car dealers will face tomorrow. We learned two key lessons. First, there is “life after margin:” dealers can evolve to thrive despite minimal new-unit profits. And second, key to this is growth in ser- vice revenue, such that HD fixed absorption easily can run at 110% or more. • We asked the experts at ICDP (the International Car Distri- bution Programme) for insights American dealers might take from the European experience. Among these were: decide now if you want to be a consolidator yourself, or to sell out to one; don’t panic about company stores, but worry more about growing indirect control by OEMs; and aggressively pursue service work, on cars of any age. • We turned again to ICDP for insights from the Chinese market, which is instructive because it is unburdened by history (and so is more open to innovation). The lessons here for the US include that: it is crucial to command the digital space; again, dealers must not give up on service work on older cars; and good operating skill is more crucial to dealer profitability than simply scale. • When we turned our attention to four technology topics, we first looked at the outlook for electric vehicles (EVs). We peg their market share at 5% of US retail sales in 2025, a small volume that won’t make or break any current dealer (and if the number is higher, dealers will adapt). We do argue, however, that for various reasons it is important for dealers to more actively embrace EVs. • The second technology field examined was that of autono- mous vehicles (AVs), about which there is vast amount of debate. Nevertheless, our projection is that 100% of new- car sales by 2025 will be equipped with high levels of as- sisted driving features, with 50% of new cars enabled with partial autonomy, and 10% capable of a high percentage of driving in fully autonomous mode. The impact on dealers may very well be positive, both in new-car sales on fixed operations. But see their interaction with mobility services, discussed next. • Our third technology topic was another controversial one, that of mobility services (MS), as exemplified by rideshare. Our view of MS is that, as currently configured , they represent only a modest headwind to vehicle sales in 2025. But, in the case that AVs and MS can be linked together , they might have a much more negative impact on dealers, particularly if this linkage leads to Americans renouncing car ownership en masse , in favor of “eternal rental.” In this eventuality sales would definitely fall and new-car margins and all F&I in- come evaporate (as these cars are bought by fleets rather than by individuals). • Finally, our fourth technology topic was the connected car (CC). Much CC activity does not directly affect the dealership. However, the impact it does have should be generally positive, as CC technology acts to more tightly and seamlessly bind the car to the dealer’s service lane.  DEALERSHIP OF TOMORROW — continued on page 28