The need to invest more in digital creates dilemma for dealers

Dealers are facing a moment of reckoning. They need to invest in a fully digital experience while also offering an offline sales process, at least for now. While the record profit levels generated in 2020 continue, the conditions that allowed that won’t last forever.

Microeconomics was the key factor: a huge increase in demand while supply decreased due to COVID-induced OEM shutdowns. Additionally, increased efficiency was a factor as employee count was reduced with the onset of the Pandemic then not restored as quickly as the rebound.

Extremely low interest rates were also a contributor. Most of these COVID-related themes will not endure. The window is closing. Those that don’t invest in a full omnichannel experience will inevitably fall far behind the competition and possibly fail. Robust digital solutions are the future of the dealership industry. But not all dealers have the desire or financial wherewithal to adopt those solutions.

“Digital discovery, pricing, scheduling, commerce and delivery are ubiquitous today across almost all sectors, and auto retail full adoption is inevitable,” said Brodie Cobb, Founder and CEO of The Presidio Group.

Presidio worked with Scott Fink to sell his group of seven dealership franchises to Lithia Motors. The need for greater investment in digital processes was one factor in that decision. “The consolidators that have the capital to invest have a distinct advantage” Fink told Presidio.

“Digital retailing is here to stay,” he said. “I think a dealer is not only remiss but at risk if you don’t have all the tools necessary for a consumer to make all the decisions they wish to online.”

Beyond that, there is the need to analyze enormous amounts of digital data to make the best business decisions. That requires manpower and money. “I am a financial guy,” said Fink. “I love data. But I don’t have the technology and human capital to analyze data on an ongoing basis.”

To be sure, the average dealership made a record pretax profit of $2.1 million in 2020, according to NADA, with a profit margin of 3.6 percent. That was more than a percentage point higher than 2019 though sales fell 4.2 percent in 2020. But that will not last, said Presidio President George Karolis.

Extremely low interest rates in 2020 provided for very inexpensive inventory carrying costs, said Karolis. COVID and supply chain production issues at the auto manufacturers also made for tight inventory supply and thus healthier margins. As those conditions abate and full production returns, “margins will likely be reduced to historical norms and may face additional downside pressures,” said Karolis.

Many dealers also reduced costs through staffing reductions brought on by COVID and the rapid shift to digital. But staffing levels are increasing with increased sales levels and as some consumers want to return to a more in-person shopping experience. Wage pressure will impact profitability.

That points to a dilemma for dealers. While they have to offer a full online experience for those who want it, not all consumers want to do everything online. A growing number do, however, and dealers must cater to both sets.

Digitization of End-to-End Retail, a recent study by Cox Automotive, found that 76 percent of consumers were open to buying completely online and 72 percent were highly satisfied with a more digital shopping experience. “Customers now expect to do more online,” Sonia Kher, research manager at Cox Auto, told Presidio. “It is the new normal. Going back isn’t really a question.”

Dealers don’t want to go back — 69 percent of franchised dealers added at least one digital step due to COVID, the study found. And three in four agreed they won’t be able to survive in the long run if they don’t adopt digital retailing.

Getting there may be onerous. The study found 80 percent of franchised dealers plan to offer more parts of the transaction online — within the next one to two years. But only one in three dealerships currently offered an end-to-end online experience.

Dealer principal Rene Isip said he “absolutely” agrees that dealers need to adopt more digital practices, and that the industry for the large part isn’t ready, mostly because of a lack of resources. Presidio successfully represented Isip and his long-time partner John Eagle in the sale of 11 of their high-volume dealership franchises in Texas to Lithia in 2020.

Isip figured he was ahead of the game at his dealerships, looking three to five years down the road and turning his business development center into an internet sales center. Customers could get trade-in appraisals online and remote delivery. Isip offered remote oil changes. But it wasn’t enough. The sale to Lithia provided additional capital and best in class resources for the dealerships in this rapidly changing environment.

“It is so hard for the small dealer to compete with the publics that have billions of dollars,” said Isip. He didn’t have the budget to hire both on the floor salespeople and internet salespeople, said Isip.

And doing digital halfway isn’t good enough. “You have to go all-in,” he said. “You can’t go one foot in.”

Contact

Alysha Webb
Director of Communications
(415) 449-2520
awebb@thepresidiogroup.com

The Presidio Group provides M&A advisory services through its wholly-owned investment bank, Presidio Merchant Partners LLC, Member FINRA and SIPC. 

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©The Presidio Group LLC, 2021

The Presidio Group LLC’s Investment Banking services are offered through its subsidiary Presidio Merchant Partners LLC. Member FINRA, SIPC. Check the background of this firm on FINRA’s BrokerCheck.