Pub. 58 2017-2018 Issue 2

36 40 However, if you are believer that rideshare companies will thrive, and begin to purchase their own fleets of cars, just as rental companies do now, then LD dealers may see the portion of their sales that earn low fleet handling fees come to grow, and if they do, then LD economics will start to look more like HD economics. 41 The fixed absorption metric is the percentage that the Parts, Service and Body Shop operating gross margin cov- ers of their own operating expenses plus the total of store fixed expenses and dealer salary. When it reaches 100% the back of the store, as it were, is covering all the fixed costs of the entire store. 42 Recently announced OEM plans for entry or re-entry to the US market include Peugeot, Citroen, Skoda, Ssangyong, and Geely/Lynk (plus, more speculatively, various EV start- ups such as Faraday, Lucid, and NextEV), but of course we do not know yet if they will a) use dealers and b) if they do, if they will need a separate rooftop. 43We are counting here only the main dealership rooftop: we expect (see elsewhere in this report) that the number of sepa- rate “satellite” service-only points will dramatically expand.  DEALERSHIP OF TOMORROW — CONTINUED FROM PAGE 34 SPECIAL TOPIC Chapter B: Insights fromTruckDealers While this report is focused on car deal- ers, we did want to tap into the insights of the best heavy-duty truck dealers avail- able for us to speak with (as suggested by Bert Hulgrave), via NADA’s ATD (American Truck Dealers) division. Of course, there are many differences be- tween light-duty (LD) and heavy-duty (HD) dealers: crucially, the former sell mostly to individuals, the latter mostly to fleets. And HD trucks cost easily $100,000 or more, making them much more expensive thanLDcars and trucks. Thus big-rig dealers carry very little inventory, partly because few can afford to floorplan a large quantity of these ex- pensive units. Further, the fleet customers that make up the bulk of HDvolume are commercial buyers who plan orders in advance, and sohaveno emotional urge to “drive it home today.”Thuswe cannot use the low inventories thatHDdealers carry as an example or goal for LDdealers.We also cannot necessarily extrapolate from the high concentration ofHDdealership ownership: again, when youhave regional or national fleets for customers, there is enormous pressure toown stores all across the region or nation in order to be able to service wide-ranging fleets (a big rig can easily drive 10 times the distance in a year that a car will). AndHDdealers are thankfully mostly unburdened by costly OEM-dictated image programs, as no fleet manager will be unduly impressed by gleaming new floor tiles. 40 But there are valuable insights that we gained fromHDdealer interviews, which directly do apply to LD dealers. First, there is “life after margin.” Long ago direct negotiations between truck OEMs and large fleets became the rule, and so HD dealers have for quite a long time learned how to survive on minimal margins (except perhaps for sales to the dwindling stock of independent owner- operators), or even on f lat per-truck handling fees (again, the “agency”model comes to mind), just as LD dealers do with their commercial sales. So if car sales compensation also collapses down to low per-transaction fees, truck dealers have shown that profits can be main- tained by other means. Which leads to the insight that… Second, fixed-ops absorption must and can be sky-high to offset those low new margins. And indeed it is: for an HD operation, as one leading dealer told us, “Fixed absorption 41 at an absolute mini- mum must be 100%, and 115% is the more typical target.” This is of course much higher than achieved by LD dealers, who generally aim at just 75% or higher. And truck dealers have to get to these levels in the face of a challenge LD dealers don’t often face: many HD fleet customers have their own in-house service operations. So HD dealers have had to be innovative in keeping service volumes up. They do this in part via widely-distributed (satellite) service- only points, and with rovingmobile tow and repair vehicles (Rush Enterprises stated on its website in August 2016 that it had 286 mobile service units). We believe that LD dealers will have to do the same: LD customers may not need roadside service 200 miles from the dealership (as anHD truck carrying valuable perishable cargo might), but it is true that LD customers generally can find many more aftermarket repair fa- cilities closer to their homes, on average, than the dealership from whom they bought the car. So if LD dealers are to make the transition to ultra-high fixed absorption, then they may need to take the same steps that HD dealers have: building distributed service-only points, and running mobile service vehicles. 3. Howmany dealershipswill there be? In our earlier report we answered this question with “about the same:” we ex- pected there would be dealers shutting down and new ones being opened up (from growing incumbent brands and fromnew entrants 42 ).We will mostly re- iterate that forecast this time around 43 – but not because our interviewees agreed on how many stores there would be… but because they could not. There was a very wide range of opinion on this, as these quotes illustrate: • “About the same as now: we thinned the herd in the last big recession, we are stable now.” • “Lower: in the next recession we’ll lose hundreds of stores. Last time we lost small stores who were too small to survive: next time we will see metro stores go, either because competition is too tough, or because their real es- tate is more valuable if used for other purposes.” • “A bit higher, as new entrants come in and as the population grows.”