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Reports of demise of auto retail have been greatly exaggerated

December 1, 2017
By Ryan Kerrigan, Kerrigan Advisors
 
A recent Automotive News edition was filled with countless anecdotes and opinions, largely coalescing around the demise of auto retail as we know it. No question, we are seeing historic technology and business model disruption on the horizon, and dealers need to be thinking deeply about how to stay relevant, competitive, and profitable in the paradigm to come.
With that in mind, I think it is important that we recognize that dealers do not face a "light switch." Specifically, no one’s going to flip the switch and put dealers out of business anytime soon. This is just another set of challenges and changes that will confront this hundred-year-old business model, much as prior disruptions have confronted auto retail.
All industries, and all business models, are evolving. And if you take a long enough view, all business models are, in effect, "going away".
In this regard, the future facing auto retail is not unique. We are simply facing the same disruption, technologies, and shifts in consumer preferences that most industries confront every year and every product cycle.
Imagine the enormous bets placed every year by companies in consumer electronics, fashion and other retail oriented business models. These industries face the need to reinvent themselves regularly.
Right here in our own industry, our automotive OEMs are betting billions of dollars on each major product roll out, and each major technology initiative, to stay current in this highly competitive market space. And the volatility of their earnings tells the story of how challenging it is to stay competitive in automotive.
Auto dealers are simply joining the long list of other entrepreneurs and business people facing constant strategic choices, and calculated risks.
 
So, the big question is not really around change, or even the business model eventually going away. The questions are the same as they’ve always been: What are the expected cash flows for the foreseeable future? Can dealers expect to earn good returns from their businesses, and from investments they are making in their businesses?
I think the answer, clearly, is yes.
Precisely to this point, in a conversation with the recent buyer of a large group of dealerships, he painted the picture this way: "We agree it [the dealership business model] may well go away. We just don’t think it’s going to go away nearly as fast as some might think, and there are few places where you can earn this kind of return. So we are quite happy buying dealerships and allocating capital, even if we ultimately may not be able to sell them for today’s prices."
So, for the readers of Automotive News, don’t panic.  Continue to read, and educate yourself on this fascinating new world that we are entering.  And, certainly think about how you position your business, and the investments that you make into the auto retail model of today.
But don’t lose too much sleep. The massive automotive industry business is completely reliant on the franchise dealer system to sell $800 billion dollars’ worth of cars this year, and that’s not going to change next year, the following year, or the year after that. The near term outlook for continued cash flow is strong.
But in your decision-making, make sure you position your business to sell tomorrow’s products to tomorrow’s customers, and in the manner that those customers want to be served.
Certainly, our industry faces change, and the winners of tomorrow are positioning themselves today. This has always been true of successful auto retailers.
 
 

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