There are a few years we can point to that were “tipping points” for automotive retailers. Recall 1990 when the country was facing war in the Persian Gulf, consumer debt was high, and confidence was low. No one can forget the end of the “Dot-Com Bubble” in 2001, and more recently, the great recession triggered by the financial crisis in 2007.
2017 is going to be a transition year
However, the future is not as bleak. While we are seeing record sales numbers, there are a number of challenges lying just below the surface–ones we’ve seen before and new ones that are sure to test the resiliency of the industry.
It’s times like these when the fittest quickly adapt to change, separate themselves from the pack and reap the rewards of the new paradigm, leaving the slow-to-adapt in their wake. Make no mistake, those that are slow to adapt in this environment will find it very difficult to stay in business.
Fortunately for the fit, there are now an unprecedented number of tools and solutions they can leverage to keep themselves one step ahead. But be warned, the solutions are mostly about using technology and data to make better decisions about how to advertise, communicate with customers, design business processes and more effectively manage inventory and finances.
Are YOU ready to get fit?
If not, I’ll challenge you and give this advice: Carpe Diem! Now is the time to seize the day, embrace change and face the rapidly changing industry head on. If you’re not ready to embrace new ways of running your business or you’re rooted in the old “this is how I’ve always been successful in the past”, you’ll soon be making room for the fit who will act swiftly and decisively to embrace the change and leave you in their dust.
In part 1, below, I examine the main challenges facing the industry right now and and in part 2 (stay tuned for next week), I’ll provide 6 key must-have strategies to meeting them head-on, thriving in this new landscape, and growing your market share.
The Flattening Market
Over the past several months, we’ve all seen the reports and although we’re likely to see another record year in sales, the market has plateaued. This year, new car sales are estimated to be between 17.54 and 17.6 million units and are only projected to increase between 0.1% and 0.2%.1
Sales of passenger cars and vans are way off target, while sales of SUVs are up significantly. And, while the higher margins of SUVs are helping to prop up revenues and profits, there are significant challenges coming for the remainder of the year.2
Key Takeaway: The only way to grow this year is to take market share from other dealership(s).
The Increasing Inventories and Incentives That Are Pressuring Profitability
Inventories are at record levels not seen since 2004 according to Jessica Caldwell, Edmunds Executive Director of Industry Analysis. J. D. Power said incentive spending in the first 12 days of February reached $3,748 per vehicle, which represents more than 10% of transaction prices for the first time in any February since the Great Recession in 2008-2009. With demand flattening and inventories building, there will be increasing pressure on margins.
Deirdre Borrego, SVP of Automotive Data and Analytics at JD Power states, “The challenges for the industry remain maintaining profitability while coping with high inventory levels and elevated incentives, which continue to rise year over year.”
Key Takeaway: You need to look at all aspects of your business, identify and reduce waste. Ask yourself ‘What does my business need to be future-proof?’ For instance, look at your advertising. How is that TV spend working for you? Are you still buying print?
The Leasing Hangover
As an industry, we’re experiencing a hangover from the go-go lease days of the past few years. Leasing was a key driver that buoyed, and extended, the market comeback. While leasing was once the domain of luxury brands, with up to 70% of their sales were attributed to leases, it has now gone mainstream with mass market passenger cars, SUVs and even pick up trucks. It is estimated about a 1/3 of all sales are now leases, which is the highest lease penetration ever.3
Now that we’re a few years in, those lease vehicles are coming back into the used car market in record numbers. 2016 saw a 33% increase in off-lease vehicles coming into the market. 2017 is going to be up another 9%, adding almost 3.5 million used cars into the market.3
As a result, residuals dropped 23% last year, compared to an annual average rate of 18%, according to Edwin Groshans, an analyst for Height Securities LLC citing NADA’s data.
Lower than expected residual values inhibit the OEM’s ability to offer leases because it causes their leasing arms to pile up losses. Ford has already provided guidance that their financing arms expects profits to be $300 million lower in 2017 due to this phenomenon.
This glut of used cars coming into the market also puts pressure on both new and used car pricing as supply outstrips demand.
Key Takeaway: OEMs will be forced to ease back on leases. Dealers will need to reach customers who can purchase from them–and they’ll need to do it cost-effectively. While late model off-lease vehicles will flood the market, there will be a surge in demand for lower priced higher mileage vehicles as customers coming off lease will have to find affordable transportation.
The Challenges Facing Financing
Financing is also facing challenges. Lenders have become a lot more aggressive and may now be over extended. In the last two years, $244 billion in auto loans were made to drivers with credit scores lower than 620, according to Bloomberg. This level has not been matched since 2006-2007, just prior to the great recession.4
The Federal Reserve Bank of New York reports that outstanding car loans are now at $1.16 trillion, with a $96 billion increase in auto loan balances in 2016 alone.
So? Well…lenders have been very aggressive with auto loans, possibly over extending. According to Quartz the number of cars & trucks on the road increased by only 1.5% in 2016, while outstanding loan balances increased 9%. There are indications in the market that cheap credit has led lenders to become aggressive allowing borrowers to finance more than they can afford. Sound familiar? Indeed, loan delinquency rates are at a record 3.8% and rising.5
On top of this, we can expect the fed to further increase interest rates through the year.6
Key Takeaway: All of the ingredients are present to indicate credit will tighten in 2017, creating a drag on sales at the same time inventories are increasing, further pressuring margins and revenues.
The (quickly) Shifting Market
You’ve all been keeping a pulse on the industry news. Manufacturers are ramping up autonomous vehicle capabilities. Ride sharing services are on the rise. Online buying sites are popping up with serious venture capital backing them. Multiple vendors and dealer groups are quickly developing “buy online” processes.
While you can weigh pros and cons in each of these trends, what you cannot ignore is the unprecedented investment in these new business models as the needs and desires of our customers change.
As the Millennials find their footing in the economy, they’re driving seismic shifts in retail. At 92 million strong, Millennials are the largest generation in US history (!). Believe it or not, they drive 72% more miles per year than Baby Boomers and 18% more than Gen X-ers. 80% of them use a car as their primary method of transportation.7
Millennials are also the first generation born into the “fully digital” age. They’re a big driving force behind the big shift in how customers are shopping for, and purchasing, their vehicles.
Specifically, today’s auto shopper is predominantly online, mobile and watching videos. These are the key methods of their shopping process. For auto buyers 18 + , 88% research online, 63% use their smartphone to shop and 61% watch online video to inform their auto purchase decisions.8
With the advent of the smartphone, the shopping process has become more fragmented and “spur of the moment”. Google refers to this phenomenon as “micro-moments” (think ‘short attention span’ and ‘instant gratification’). 34% of new car buyers now look for information in between other tasks; 32% research their new car while commuting or waiting, and 28% research on their smartphone while watching TV.9 And those percentages will only continue to rise.
As a matter of fact, according to Google, the two most commonly used touch points used by all car buyers (online and offline) were search engines (74%) and video (61%). Furthermore, auto shoppers are only visiting 2.8 dealerships, and taking only 1.6 test drives, before they purchase.
Increasingly, auto buyers are researching online, led by the millennials, and they’re doing a lot of this research on their smartphones. They’re also watching online video to help them make a decision on what to buy. The shopping process is spontaneous and disjointed (again, think ‘short attention span’ and ‘instant gratification’), with many touch points.
Key Takeaway: Digital advertising is no longer an ‘option’. Dealers need to be where these new buyers are, every step of the way, and everything needs to be mobile-optimized (ads, websites, video, etc.). They’re no longer walking onto your lot to shop, they’re arriving with a purchase in mind, after making a decision using online resources.
4U.S. Auto Sales rise less than forecasted in February – Kain Oyedele, Business Insiders (http://www.businessinsider.com/us-auto-sales-february-2017-2017-3)
5America’s love affair with the automotive may be reaching dangerous new heights The Fiscal Times Staff Feb. 22, 2017 (http://www.businessinsider.com/auto-loan-debt-america-2017-2)
6Why three rate hikes in 2017 may not be enough, Gerald P O’driscoll, Jr. a senior fellow at the Cato Institute. 3/13/2017 (https://www.cato.org/publications/commentary/why-three-rate-hikes-2017-may-not-be-enough)
7Devin Koskan, Feb 24, 2017 Dealer Elite Blog (http://www.dealerelite.net/profiles/blogs/are-millennials-disrupting-the-auto-industry)
8Google The Drive to Decide Feb. 2017 (https://storage.googleapis.com/think-v2-emea/v2/a2cb1_Report%20ITA%20-%20Gearshift%20%202016.pdf)