Why Warren Buffett Is NOT Wrong on Car-Dealer Model

Why Warren Buffett Is NOT Wrong on Car-Dealer Model

When Warren Buffett gets involved in any business, people notice… the car-dealership space is no different. Everyone has a perspective, but I wanted to take a moment to reply to a recent CNBC piece that is calling out Mr. Buffett as being wrong when it comes to his belief that the dealership model is not going to change. This is certainly a topic discussed at every dealership in the country and there are many leaders wondering what the future will hold in regards to how the current model will change. The author, Daron Gifford, lays out some compelling arguments, but I want to take a moment to illustrate how I see the model changing (and in some cases, has already changed).

In Comparison

Mr. Gifford refers to Walmart, Target and Costco as examples of Retailers who wouldn’t have two months’ worth of inventory on the ground. But is this really a fair example? The Automotive Industry is like none other. Perhaps the Housing Market is the closest as the price and sheer physical size of the product are factors when it comes to shipping and the ability to purchase the product.

But unlike most other retail, you don’t need good credit and a down payment to buy a pack of Hanes Underwear. I’m pretty sure that if the store runs out of the undergarment it could have them overnighted, but you can’t do that with a car. I also wager a bet that they don’t sell pre-owned either … or, at least I hope they don’t.

So when considering the auto sales industry it is hard to compare it directly to big box, high SKU industries. So what about the challengers in the direct space.
As Gifford points out, and everyone is well aware, Tesla is making a lot of noise with their push for direct sales, but when considering Tesla and the change they are bringing to the market a question that needs to be asked is “What will Tesla do with pre-owned?

What’s their model? If they don’t control remarketing like BMW does, their product residuals will diminish quickly and lenders will think twice about funding their deals.
Also, how will Tesla handle pre-owned without lot space?

Additionally, if the retail model of ordering a product online and then waiting for that product to ship is the future, then why do Windows and Apple stores exist?

American Consumers love to try out the product and “experience” those stores. The employees at those stores are “Product Experts” if not Geniuses on their product lines. American shoppers are not only impulse buyers, but once their research is done, they will purchase a vehicle with only visiting 1.2 dealerships in person. This is why the Automotive Industry must change … but it isn’t necessarily going to be the way Mr. Gifford explains.

I am certain Tesla will work through these questions, but this shows that the answers regarding the future of dealerships are not so simple.

The Model has changed … and it is the evolution from selling to becoming product experts

Now by pointing out why some of the comparisons need more thought, it is obvious that the consumer has changed and with that have demanded a new experiences in how they interact with businesses. They no longer want or need to be “sold.”

As Gifford accurately points out:

Buyers have changed, too; they are more informed, Internet-savvy and less likely to accept high-pressure sales techniques.
Most customers dislike the current model, despite recent enhancements. They still feel forced into a choice and lack trust in sales personnel. Buyers in one survey said they would rather give up sex for a month than haggle on a price with a sales person.
This is where the model needs to, and is being changed.

Forward thinking dealerships are currently at work changing both their process online and the in-store “Customer Experience”. The change is driven by the consumer raising the need for more relevant information, product experts and a shorter purchasing process.

The new model is more like the following.

Dealerships are responding to the fact that the buyer has changed. Progressive dealerships are changing to focus on how to keep customers engaged with their online inventory longer by providing consumers with specific relevant information about these vehicles. The more accurate and detailed the dealership can be the better served they are at establishing the true value for their inventory and driving more consumers to their websites.

After the online research is complete, the consumer chooses the dealerships that they will either contact or visit. In the newer, faster model, the stores have formalized the manner in which they can quickly communicate specific answers consumers have about the vehicles of interest. They need real, detailed answers … and they need them in real time. The consumer is informed, and dealership staff need to be experts too … on every car on the lot. Technology is a huge equalizer here. Dealerships also are working to transform the Sales Team from the salesperson of old to true product experts to handle the needs of the consumer once they arrive on the showroom floor? We now know that over 60% of consumers are using their mobile phones while on the lot, and progressive Dealership Sales Consultants are also using mobile technology while on the lot to facilitate their ability to get real time information when it is most critical.

Change is good and yes, dealerships must change. Will dealerships turn into order takers? I doubt it, but will they need to become product experts and provide a better customer experience? Yes.

MAXDigital and FirstLook Merge

MAXDigital and FirstLook Merge

I want to share some exciting news. Our digital marketing and retailing software company, MAX Digital, was recognized by Inc. Magazine as the #3 fastest growing software company in the United States in 2014 and #1 in the Automotive Industry. We are proud of the growth and the innovation that drove it. If you haven’t seen MAX Digital Showroom or MAX for Website 2.0 you will be amazed by the power that each provides your dealership in winning with today’s internet consumer, especially the growing Millennial generation.

To better serve our growing base of customers going forward, we are also excited to announce that the initial company that I founded, FirstLook Systems, is becoming a company under the MAX Digital umbrella. In addition to enhanced customer service, this merger will allow us to combine our engineering capabilities to ensure that FirstLook customers will get the benefit of the many cutting edge technologies responsible for MAX’s remarkable growth. The combined companies will conduct business together under the name MAX Digital.

As a part of this transition I have appointed our long time Chief Operating Officer, Steve Fitzgerald as Chief Executive Officer. Steve brings significant operational strengths as the leader of our talented (now combined) MAX and FirstLook management teams. John Aiello, an experienced and highly successful technology entrepreneur has joined the management team as Executive Chairman of the MAX Digital board of directors. I will continue to support the success of both companies.

With the incredible array of product engineering resources available, the new MAX Digital will be introducing a wide spectrum of cutting edge products for both our FirstLook and MAX suites of products in 2015. Please look for announcements from your Account Executive on the first of these many innovations in the coming weeks.

Sincerely,

Pat Ryan, Jr.
Founder

How Can You Keep “Showrooming” from Killing Your Closing Rate?

How Can You Keep “Showrooming” from Killing Your Closing Rate?

3 out of 5 consumers using mobile on your lot visit another dealer within 24 hours.

Dealers are experiencing yet another shift. A phenomenon known as “showrooming” is altering the way dealers must think about the integration of mobile in their sales process. “Showrooming” at its core is when a consumer examinines a vehicle in your brick and mortar dealership while simultaneously browsing for competing deals via their mobile device or tablet.

Physical retailers across the country are struggling with the challenges from showrooming and are finding that the millions of dollars they have invested in beautiful buildings and branding are often not enough to stop the consumer from driving to another dealership for a better deal. In automotive, more than 3 out of 5 consumers (60%) who used mobile while shopping at a dealership visited a competitor within 24 hours.

How can you keep “showrooming” from killing your closing rate? 

  1. Offer your own on the lot mobile experience: Showrooming isn’t going away. Your best chance at overcoming it is to adapt your process. Since you aren’t going to stop consumers from utilizing their phones, your best bet is to be where they are. Create a mobile experience that fulfills both of your needs. Who do you want to be in charge of the data your customer is looking at, you or Google? A high quality in-store mobile shopping experience not only intercepts the consumers urge to browse through your competitors inventory but more importantly holds value in the vehicle they have immediately in front of them.
  2. Utilize the information consumers value and trust: Consumers need evidence supporting why they should buy your car and why your price is fair. Utilize the opportunity you have during their mobile browsing to make sure their mobile experience is beneficial to you both. Use objective “evidence” to win them over by highlighting features like manufacturer packages, safety and quality ratings, price vs guide books, vehicle history reports, certification benefits, as well as consumer ratings of your dealership.
  3. Focus on letting consumers use their own device: Consumers are used to being able to individually access anything, anywhere, at anytime thanks to their smartphones. Dealerships that push their own mobile device in the sales process (like iPads) can make consumers suspicious. Consumers think to themselves “why do I need a special device from the dealership to go online?” Many consumers report that sharing a tablet or smartphone with a stranger is uncomfortable because it violates their personal space. Consumers are also more likely to trust information they find on their own device. Don’t make them doubt your knowledge by forcing them away from what they trust. The bottom line: don’t develop a mobile process that isn’t focused around the consumer’s mobile device. Make sure consumers can access your vehicle’s story from the comfort of their own smartphone or tablet.

The Good News: Thanks to extensive consumer research we have not only developed insights such as those mentioned in this article but also a solution. Dealers using MAX Digital Showroom have enjoyed incredible success and bridged the gap that mobile has created. For example, Leith BMW in Raleigh North Carolina saw their gross profits jump up +$400 per car and sales up +17% when they implemented MAX into their mobile sales process.

Some experts say that Circuit City went out of business in part because it failed to effectively address showrooming. Which path do you want to follow?

“When It’s Time to Change…”

“When It’s Time to Change…”

Over the last 10 years I’ve been on the technology side of the Automotive Industry, I’ve witnessed and have assisted dealers with changing their process using technology.  A little over 10 years ago, we changed how we appraised cars from using a hard book to using online books and VHR Reports.  Because retail customers would push their trades down the street for an extra $500 bucks, we needed a way to ensure we were putting the right number on a car.

Eight years ago we changed how we price cars by using pricing tools that gave us insight on how each dealer in a set radius was pricing their cars.  No longer did we have to look through the newspapers or conduct time-consuming research online.  We changed the blanket “cost +” process to intelligent pricing strategies for EACH pre-owned vehicle.  (Unfortunately for gross profits, some took this a little too far and thought turning all used cars into a commodity was a good idea?)

Four years ago we changed how we market our cars online.  It was critical that we get a relevant description that included specific information on a car so we didn’t have to manually type the descriptions anymore. On one particular UCM webinar training, I misspelled “power stearing”, that was quite embarrassing!  More importantly, this is what the retail customer demanded and we had to change from a standard VIN explosion to answering specific questions a customer had about the vehicle.

Two years ago, we woke up to the fact that once a vehicle became “pre-owned”, we didn’t use any factory terminology to sell the value.  OEM’s spend millions on focus groups just to decide that colors like, “Winter Crystal Pearl White” or “Montana Sky Blue” sell cars!  Why did it go from an “All Star Package with 8-way power seat, remote start MSRP $1,525” to “pwr seat” just because it’s now a used car?  We changed that by using Factory Packages in our ad descriptions to increase the value in our pre-owned vehicles.  Let’s call it what the factory did like when it was a New Car!!!!

In 2015, as an industry, we need to focus on our Sales Process.  Not just the BDC or how we get customers to sign paperwork, but how do we as an industry change the way we interact with today’s retail consumer.  Personally, I like the traditional Road to the Sale, because we USED to do proper Walk Arounds and even had contests on who did the best one!!  Now in the “Age of the Consumer”, the retail customer shows up knowing so much more than our salespeople do.  We’re now seeing a phenomenon called “Double Discounting”.  This happens when the store lists an Internet Price online only to have the retail customer negotiate it lower when they arrive at the store.

The 2015 consumer wants the “experience”, just like an Apple or Windows store.  Even Best Buy has re-trained their team.  They may not be an expert on one particular TV, but they do know where to find the information customers need.  The Salesperson is still very relevant in this process, but the difference is that they MUST know about the product they sell or where to get the information quickly.  Now I’m helping dealers change their process by using better web tools, mobile technology, relevant e-mail response content and over the phone/on the lot customer experience.  This builds Trust and Value, lessening the double discount, leading to better gross profits and higher closing rates.

So I challenge the Automotive Industry to change their sales process this year, the question is, “how will you help your sales team know as much or more than the customer knows?”

3 Ways to Better Connect with Your Millennial Audience

3 Ways to Better Connect with Your Millennial Audience

64 million Millennials are expected to purchase a car in the U.S. in the next five years alone. A new study provides important insights into what the emerging Millennial Generation is really looking for when buying a car.  The Millennials, once known as the “Baby Boom Echo” (or Gen Y), are the largest generation in history; given this enormous and growing buying power it is safe to say that few dealers will be successful in the coming years without cracking the code on how to best serve this critical demographic.

Our friends at Deloitte recently released their 2014 Global Automotive Consumer Study.  Here is the most critical headline for dealers:

  • Millennials care more about the buying experience than the design of the car itself: Millennials find customer experience three times more important than vehicle design when making their final purchasing decision

Why do Millennials seem to care more about the buying process than the design of the car?  Here are a few thoughts based on our own research:

  • Millennials aren’t that into cars: As we have discussed in earlier posts in this series, Millennials are a generation that is more into technology than cars – there just aren’t a lot of “car guys” and “car gals” in this age group.  In our research we also found that Millennials tended to have much weaker brand affinity and product knowledge than older generations, leaving them with less excitement and anticipation going into the buying process. Enthusiasm for any purchase is dramatically enhanced by excitement and anticipation going into the purchase process – just watch the child who finally gets the Xbox they have been dreaming of for Christmas.
  •  Millennials have higher expectations for their purchase experience across all products:Because Millennials aren’t that into cars and haven’t necessarily been dreaming of buying that particular car anyway, their focus is instead on the buying process, which puts tremendous pressure on dealers to rebuild their process around this emerging majority of car buyers. As a generation raised on buying products on Amazon and music on iTunes, Millennials expect a streamlined, fact-based, convenient process, and find the idea of the stereotypical car buying experience repelling.  When asked how far the current car buying experience is from what they expect, Millennials gave Deloitte an alarming response:
  •  Only 27% describe their recent dealership purchase experience as “positive”.  And remember, more than half of Millennial buyers say that a negative buying experience would preclude them from buying from that dealership or manufacturer again.

So what can you do to avoid being in that 73% of non-positive dealership experiences and ensure that you are getting your share of the 64 million cars they are expected to buy in the next few years? Here are three of the most important ways to win with Millennials:

1. Speak Their Language: Don’t let your web presence feel like the negative stereotype of a car dealer with “car guy talk” in your ads.  Instead gather as much objective “evidence” as you can from across the Internet to build value in each car and trust in your dealership.

2. Ensure Your Salespeople are Product Experts First: Few want to be “sold” to and most consumers feel that they know more from their online research than your sales “pro.” They will only embrace your sales “consultants” if they are truly product experts. For new cars, ensure your team is practiced and certified in the walk-around for each model.  Pre-owned presents a much bigger challenge given all of the different variables for each unit (packages, Carfax, pricing, etc.).  Make every sales person an “instant expert” with tools like MAX Digital Showroom and ensure they use it in every consumer interaction in the showroom, on the lot or even on the phone. Keep in mind that 65% of Millennials would prefer to buy a car without having to negotiate with a salesperson.

3. Make Mobile Your Ally, Not Your Enemy: Most salesmen panic when they see a consumer pull out a mobile phone on the lot to check the market. Millennials are online all the time.  It is naïve to think that they won’t use the computer in their pocket to help them level the playing the field when spending tens of thousands of dollars. The best way to win on mobile is to be proactive and make a trusted third party tool like MAX available to consumers so that your mobile tools are fulfilling consumers’ needs on your lot instead of leaving it up to Google.

The best news?  There are no headlines on getting rid of dealers or taking all of the profit out of the business.  Millennials are focused on a high quality, convenient experience.  Deliver on those needs with a “win-win” and they are happy to reward you with their business.

How to Build Trust and Value with Consumers

I’ve discussed the reasons why your sales staff needs to demonstrate its expertise on every unit in your dealership. Here’s how successful dealerships are doing just that.

Mike Anderson Auto Group has been able to close sales without double discounting and taking the subsequent reduction in gross profits or closing rates. They did this by proactively building value into every car. How?

  • They sold consumers on specific units—not on the model alone.
  • The sales team proactively pointed out the differences between their units and their competitors’ instead of waiting to be asked by the consumer.

The Right Tools

Essentially, Anderson armed its staff with the tools to become product experts instead of salespeople. And it’s not just about building value—it’s also about developing trust in your process. Remember, consumers inherently distrust car salespeople. But by taking a proactive approach, Anderson created a sense of “transparency” in the process.

Tools like MAX Digital Showroom allow salespeople to search for specific stock or VIN numbers and access detailed vehicle information—including packages, MSRP values, and certified information—all of which helps you sell on value rather than price.

Salespeople can email this information directly to customers while they’re on the lot so they can view it on their own devices. Anderson’s sales team was able to develop trust by sharing this information with customers versus simply telling them.

 

Amazing Results
In the end, Anderson no longer had to discount to get the deal closed (or if they did, the discounts were significantly smaller). Because the salespeople provided detailed information proactively and offered a sense of transparency, customers were confident that they were getting a good value at the asking price. As a result, Anderson raised its pre-owned gross profits by more than $700 per car.

The old ways of closing a sale are no longer relevant. Today, you have to build trust and value into every car on your lot. That’s what Mike Anderson Auto Group has done, and the results speak for themselves.

Consumers Want Product Experts, Not Salespeople

Here’s a news flash for you: car shoppers don’t want to talk with salespeople. Not only do they come to your dealership armed with more knowledge than most of your sales staff, they simply don’t trust auto dealers. Yet too many dealerships continue to stick with the old ways of trying to close the sale and neglect becoming product experts.

Lack of Trust
According to a 2013 Gallup poll, 91 percent of consumers said they don’t trust car salespeople. So they do what any wise person would do—they try to negotiate as low a price as possible or they walk away. And as I’ve previously explained, salespeople have been trained to negotiate to close the sale by discounting or else take a hit on their closing rates, in effect offering a “double discount.”

It’s that focus on “always be closing” that is keeping dealerships from building trust and adding value. When a shopper enters your dealership, they already know what they want. They’re simply there to find out why they should buy that particular car from you. But before they can get any of that information, a salesperson is usually hounding him or her for their phone number. No wonder the customer’s first reaction is typically, “Slow down. You’re moving too fast.”

Product Specialists Needed
That approach doesn’t foster trust or communicate value to the consumer. That’s because too many sales staffs aren’t equipped to collect customer information without sounding like the creep in the bar.

If you stick with the old ways of trying to close the sale, you’re not building trust or adding value. That’s why dealerships need to convert their salespeople to product specialists. How do you do that?

In my next post I’ll share a case study with you that demonstrates how one dealership was able to add value into every car sold and build trust in the process—without double discounting or chipping away at closing rates.

The Amateur Knows More than the Pro

I’ve discussed the various issues that are putting gross margins under pressure. Those factors aside, there’s another barrier that dealers have to contend with—the fact that consumers come to the dealership armed with more knowledge than ever. When the amateur knows more than the professionals on your lot, it’s difficult for salespeople to develop trust and add value.

Wanted: Product Experts
The average customer conducts about five months of research before visiting a dealership. Information available on the Internet and the ubiquity of mobile devices mean consumers can access all the information they need about a car anytime, anyplace—including your showroom.

According to a Nielsen/Cars.com survey, 83 percent of consumers have a smartphone in their pockets when they walk into your dealership. That means even when they’re in your showroom, they’re able to access information not immediately available to the salesperson. That makes it nearly impossible for your salespeople to build trust and add value.

The fact is that today, consumers don’t want salespeople; they want product experts. Salespeople tend to be very knowledgeable about models in general but not necessarily about specific units. But consumers already know about makes and models. You have to talk about why the cars on your lot are preferable to the ones offered at a nearby competitor.

 

Why Buy This Car?
Used car buyers in particular have done their research online and have already made the decision to visit your store to see a specific vehicle—for instance, a BMW 328i. Unlike new car buyers, they didn’t come to your store because you sell the BMW 3 Series. They came because they found a particular 328i on your website and they want to know why they should buy the one on your lot today. So when your salesperson starts talking about the benefits of the 3 Series in general, the used car buyer is thinking, “I already know this.”

That’s why it’s critical for dealerships to equip their staffs with the insights that consumers already have. Your salespeople have to be instant experts on every car on your lot. They have to be able to demonstrate why the BMW 328i on your lot is better than the one a mile down the road that’s $1,000 cheaper.

The only way to build that value and trust to reach today’s car shopper is to adapt your processes. In my next post, I’ll elaborate further on why this is necessary.

Double Discounting Is Hurting Dealerships

So far I’ve discussed two factors that are putting gross profit margins under pressure: market-based pricing and the impending increase in the supply of used cars. There’s a third element to this equation—the fact that dealers have fundamentally changed their pricing strategy without also changing their sales and marketing approach. That’s led to a disconnect that we call the “double discount.”

“Double Discounting” Defined
The first discount used to be taken at the desk with the “first pencil.” But now with market-based pricing and the transparency of the Internet, the first discount is actually taken with the Internet price before the consumer even gets to the store. Then when the consumer is negotiating the car deal, salespeople are often programmed to try to close by discounting price, leading to a double discount.

That’s because salespeople have been trained to negotiate to close the sale by discounting and consumers have been conditioned not to buy unless they negotiate a significant discount. This has put dealers in a bind. Either they double discount on price and erode their margins, or they refuse to negotiate on price and discount their closing rates.

The Need to Adapt
So what’s the solution? Increase your close rates without discounting. Or at the very least, minimize the discount offered when already priced to market. How? By adapting the way you market and sell your cars.

That’s easier said than done, of course. But the bottom line is that dealers have fundamentally changed the way they price their inventory without adapting the way they market their cars online or sell them on the lot. In the long run, that’s an unsustainable situation.

Over the next few posts, I’ll describe how dealers can avoid the double discount problem by changing their sales and marketing strategies.

The Bubble Is Bursting: Gross Profits Are Headed for a Fall

In my previous post I discussed why pre-owned profit margins are under pressure. The factors driving this trend include transparency from the Internet, market-based pricing, and rising overhead costs from new dealership buildings. And that’s not the bad news—the bad news is that the problem is only going to get worse over the next few years.

The NADA average gross profit of about $2,300 likely represents a bubble in used car profitability. Why? It’s a simple matter of supply and demand.

The Rubber on the Road

New car dealerships sell the bulk of late-model used cars, typically aged one to five years. That means the number of new cars sold in a particular year impacts the supply of late-model used cars over the next five years.

During the financial crisis from 2008 to 2010, new car sales fell dramatically. That means the supply of late-model used cars plummeted over the last three to five years, as depicted in the chart below. In the wake of the recession, consumers’ increased frugality also led to an increased demand in used cars at a time when there was less inventory available.

 

So in the last five years, while the supply of used cars decreased compared to the prior five-year period, demand was on the rise. As a result, used car prices have climbed. And because supply and demand moved in opposite directions, that led to an increase in the average gross profit per vehicle.

 

But over the last couple of years, used car units in operation have been on the rise and will be peaking over the next three to four years, climbing to levels last seen in 2006. Back then, according to NADA, the average gross profit per vehicle was less than $1,800—more than $500 less than 2013 average gross profits. Are you ready to take that kind of hit to your profit margin on every pre-owned vehicle you sell?

 

The good news is that there is one thing every dealer can fix to avoid eroding pre-owned gross profits.  In my next post, I’ll detail what that is.