Pub. 58 2017-2018 Issue 1

33 FALL 2017  DEALERSHIP OF TOMORROW — CONTINUED ON PAGE 35 The future number of dealers we saw as constant, with the sharp decline in counts now mostly completed. Some OEMs will keep dropping stores, but others will add points, for a net change of roughly zero. Holding the number constant and applying con- sensus forecasts as to the growth in annual sales over the next decade or so, we saw the average size of a store rising to 1,000 new units annually. There seemed to be clear economies of scale for local and regional groups to continue to advance their con- solidation, typically a half-dozen or so stores in a minor metro area: concentrated enough to be manageable, and big enough to be able to share facilities and staff to bring down costs. While volumes per store will grow, we saw advanced inventory man- agement techniques (e.g. dealer swaps, inventory-management software) as enabling turns to accelerate, so that acreage need not increase. The showroom itself would (finally) be enhanced by very-high-resolution virtual reality displays, allowing dealers to not have to have every model physically inside at all times, thus shrinking footage. 4 As for the service area, we had no one specific forecast, but rather a range of options that dealers can tailor to their local clientele, in order to capture or recapture service volume that otherwise will be lost. We saw these options including satellite service (customer-facing or not), pickup and dropoff services, increased hours up to 24/7, centralized shuttle runs, on-lot touchscreen displays for unattended service dropoff, service facilities shared with other brands, driveway service (both own-brand and AMM 5 ), etc., etc. The point is we felt we needed much greater flexibility in meeting the needs of the ser- vice market, beyond building ever-larger onsite service facilities on very expensive land. If the average dealer cannot in this way claw back service volume, there is no way to financially support the investments in the brand that OEMs are seeking from deal- ers, as we cannot expect any help from (ever-shrinking) new-car sales margins. All other functions we saw as moving offsite, as the typical body shop already has: it is a matter of matching a function’s economic value to the appropriate real estate cost, and modern technology allows the unbundling of these functions. In terms of location, changing consumer needs and wants, and the revival of city centers, as well as retail innovations generally, implied to us a greater diversity of dealer locations than the past default template of “follow ‘em to the suburbs.” Beyond our forecast for the physical aspects of the dealership industry of the future, the forecast exhibit shows a few other pre- dictions. We did not see multi-branding (i.e. cars from different OEMs) taking hold in the USA in this timeframe. Nor did we see the national chains gaining much more market share – but we do see that local groups’ share of the market may very well soar. More fundamentally, however, we were worried about the role of the dealer him- or herself in this future. In the 1950s the dealer was truly a “dealer:” making money by buying low at wholesale and selling high at retail, living and dying by the margin on the car. Fifty years later the dealer is now really a “retailer:” living and dying not on margin, but on the numerous bonuses, allocations, spiffs, incentives, holdbacks, subventions, and supplementary payments awarded by the factory, for compliance with dozens of metrics, from CSI scores to sales targets to image compliance to tech training and IT implementation. The degrees of freedom open to the dealer – who may not even be allowed now to have the family name on the store – have been and are shrinking. If dealers cannot demonstrate to OEMs their value in customizing people, processes, and store formats to local market needs, by 2025 the dealer may be a company store in all but name: funded by the family’s capital, but operated entirely according to an OEM’s rulebook. Dealers would still exist in this future, protected by, among other things, decades of tradition and customer loyalty – but they may not like this future very much, as they become less like entrepreneurs and more like corporate managers. That was our view in 2013. Now let’s return to the current project, and see what we’ve changed or updated in our forecast, as well as what we have kept the same. The Dealership of Tomorrow: 2025 Our story about the outlook for 2025 follows a sort of funnel, starting with very broad and general topics, and then getting more focused and specific as we go along. So let’s begin with the broadest question possible: 1. Will we still be selling cars? The obvious answer to this is “of course!” But we lead off with it to illustrate that there are more than a few pundits who expect that the advent of autonomous vehicles (AV), and of mobility service (MS) companies like Uber, will combine to slash new car sales. Their thinking is that few rational consumers will choose to buy their own cars, if they have on-demand access to low-cost vehicles (whose low cost will be the result of replacing human drivers with software and sensors). We take a look at various predictions related to both of these developments in separate chapters elsewhere in this report, but—to cut to the chase – we believe that their net impact on new car sales volumes will be minimal in 2025 (although it will be growing, and the impact on profits could well be greater). There will be negative effects (if people share cars there is less demand for cars overall) but also positive effects (if a self-driving vehicle lets senior citizens who have lost their driver’s licenses get back on the road, there will be more demand for cars). These effects are almost impossible to forecast out for a decade, but in our view they will have modest impact on new car sales volumes by then. 4 And we strongly recommended that OEMs follow our suggestion to allow brand customization in the sales area through static (graphics and photos) and dynamic (imaging, projections, lighting) displays, which can be changed frequently and at low cost, rather than continuing on the current path of ripping up and redoing tiles, carpets, fixtures, furniture, and architecture (walls, balconies, facades, entries) to update brand support, which is both extremely disruptive to business and needlessly expensive. 5 All Makes and Models