Community

Share your automotive expertise

2 Write a Blog Post

Doom & Gloom? Self-Driving Cars and Dealership Valuations…

By Jeremy Alicandri on Mar 5, 2013

Dealers should consider the effects of self-driving technology in their 10 to 15 year plans.

Five years ago, the self-driving car seemed like something limited to an episode of the Jetsons. But then Google changed history, and built an autonomous car that proved safer and more reliable than its human controlled counterpart. Then in 2011, Google began convincing legislatures in Nevada, Florida, and California to allow Google’s autonomous cars to roam without a driver.

Depending on regulations, analysts predict the self-driving car will populate US roads within the next 12 to 20 years. While the self-driving car will bring society innumerable benefits, dealers may find that self-driving technology will disrupt the entire retail automotive sector.

But what about America’s passion to drive?
It seems the passion is fading among the next wave of buyers. According to Time Magazine*, in the next 10 years, 40% of new cars sold will be sold to Gen Y consumers. Gen Y consumers already prefer an iPhone over a car, and even view auto ownership as “uncool.” As one industry analyst explained, “Owning a car is thought to be very stupid by Generation Y and they are moving from car ownership to renting. The business model of the future is to rent. Today it’s not cool to own a car.”

Gen Y’s Take on Car Ownership? ‘Not Cool’: *http://business.time.com/2012/05/02/gen-ys-take-on-car-ownership-not-cool/

Moreover, despite what seems to be declining interest in automobiles by the next wave of buyers, it’s easy to predict that the societal benefits of self-driving cars will force autonomous adoption in most markets. While some drivers may enjoy the freedom and thrill of the open road, their personal needs will quickly be challenged by the need for the betterment of society. For better or for worse, it seems probable that in certain markets, only autonomous cars will be allowed on the roads.

Unit Sales per Dealership result in Historically High Profits
I recently attended a NADA 2013 workshop hosted by Erin Kerrigan, the Managing Director of the industry broker Presidio Group. Erin predicted that average unit sales per dealership in the US will reach 856 units/dealership in 2013 – an all-time high. As Erin and others have explained, sales per dealership is a “key driver” in dealership profitability. Thus, unit sales/ dealership played a prominent role in causing average 2012 dealership profit to reach an all-time high as well.  But what happens if the mass adoption of the self-driving car lowers unit sales/ dealership?

It’s believed that after the initial rush to purchase the self-driving car subsides, unit sales/ dealership will decrease for most dealers, as the consumer’s need for more than one automobile per household will decrease(opinion: from the current 2.28 to less than 0.5). Moreover, with the expected lowered cost of public transportation and tendency of Gen Y buyers to rent vs. buy, we may even see a greater shift to on-demand public transportation. Moreover, there is the risk that brand differentiation will subside, or become “commoditized,” as the focus of car buyers will shift to easily mimicked passenger amenities (e.g. plush seats) – and no longer brand distinguishing characteristics (e.g. handling, performance). It’s feared that the “driving experience” offered by each brand will be replaced with the “cabin experience,” therefore paving the way for the massive commoditization of cars. These factors, while hypothetical, may force dealers to compete for declining demand in what will likely be an over-dealered environment.

By 2018… The potential for “Doom & Gloom” is still a few years away…
Five years from now, in 2018, the greatest challenge for car dealers will not be self-driving cars. I predict, as well as many others, that dealers will be challenged by the necessity to revamp their variable(sales) processes to reflect the consumer’s demand for no-haggling and transparency. In addition, dealers will be pushing to be more profitable in their service departments, as warranty reimbursement will continue to dwindle. While the arrival of the self-driving car will be closer by 2018, the economic effects will still be unfelt and will remain years away.

However, during the early to middle years of the next decade, we may begin to identify small declines in dealerships values as the perceived effects of self-driving cars could begin to affect blue sky values and other aspects of the industry (e.g.  OEM credit risk ratings). Still, predicting this risk remains rather speculative, as no one can truly understand the future dynamics of this technology and how it will be implemented. At the minimum, dealers should be aware of this technology in their 10 to 15 year strategic plans, especially since “semiautonomous”* cars have already entered the marketplace.

In my opinion, dealers will continue to make acquisitions and invest in brand required facilities improvements for at least the next few years. According to Presidio, by measuring the Return On Invested Capital(ROIC) for most dealership acquisitions, we’ll find that the payback for purchasing a dealership is 4.5 to 6.1 years of pre-tax earnings. Thus, based on this data, investments in a dealership now or by 2016, should generate a positive return before self-driving cars even begin to enter the marketplace. Thus, despite the future uncertainty, it’s my opinion that car dealerships will remain a solid investment opportunity for the next few years.

Default and Necessary Disclaimers:

  • Opinions AND VIEWS SET FORTH HEREIN  are my own AND DO NOT REPRESENTS FACTS.   SUCH OPINIONS AND VIEWS COULD BE WRONG.
  • This blog does not provide financial advice, and should not be interpreted as such.

Comments

Love the vision Jeremy.

My thought has been along the lines of who these self-driving vehicles will be ultimately marketed to - I'm guessing they won't be positioned for people like you and me, but rather the blind and the handicapped. If this will actually happens, it should create more overall vehicle sales - another question to ask is where and how these vehicle will be sold?

Will there be a whole new layer of the retail market created with the addition of self-driving car dealerships?

Could these also make the job of the taxi driver disappear?

Mar 5, 2013

Eric,

Many will argue that the self-driving car creates too many benefits for society, thus the desire for certain individuals to drive could be considered selfish when compared to the benefits for society. Eventually, when accidents decrease, insurance costs decrease, traffic congestion decreases(imagine no rubbernecking), etc... then it will be difficult to justify any type of human controlled driving. And since Gen Y already appears to be "rent" generation, there may not be much opposition to losing this freedom.

I think many are hoping that a new layer of retail will be created, but others feel the industry will change as a whole. Yes, taxi drivers, and perhaps even the delivery man, could be replaced within the next 20 years. However, I'm quite certain there will be barriers to accomplishing this. And again, five years ago, I don't think I could have ever imagined seeing this type of change in my lifetime.

Jeremy

Mar 5, 2013

From my research there are GM, Volvo, Nissan and BMW/Continental indicating that they will have fully autonomous vehicles by 2020 and Google saying their technology will be in the public hands by 2017/2018. Then Google are talking about retro-fitting existing cars (District of Columbia draft laws indicate 2009 vehicles and later).
As soon as these vehicles are capable of operating unmanned then they can do work - which means that they can make money for their owner. At this point the new paradigm begins and private ownership plummets as autonomous fleets become a much cheaper and more efficient form of transportation for the average person.
Add all this together and you will see that the bottom could fall out of the second hand car market in a couple of years as people realize the new paradigm and only want post 2009 vehicles. Plus automakers will realize that the biggest market by far will be fleets rather than private owners. This scenario would be doom and gloom for dealerships in my opinion.

Mar 6, 2013

Hi Paul,

Thank you for sharing your insights, I understand you have experience in this field so I'm grateful you chimed in. I was not aware of the 2009 restriction, you brought up a very interesting point. I'm curious to see if this gains more traction.

Jeremy

Mar 6, 2013

While evolution is inevitable in every business....rarely does revolution happen. Especially in a multi-layer complex industry like Automotive Retail. The assumption that the average vehicles per household will drop to 0.5 (thus decreasing the value of franchised dealers) is unlikely due to the fact that the US is a lawsuit happy Country....after the first person dies from a Driverless Car accident (which will happen....even the best computer and programmers in the world cannot program for every single possible series of events....if that could be done that computer should replace our Federal Government not Drivers) no OEM or Tech company will take the liability of letting their products go Driverless (aka the driver then has liability...not the Company). Thus average vehicles per household will not be able to drop to such low levels (Mom needs a car to take the Kids around and Dad needs a car to go to work still).

Mar 12, 2013

Comments 1 - 5 of 5

You must be logged in to comment

Login Create an account

Add your comments:

   

Jeremy Alicandri's Recent Posts

Related Posts

  • 2014 DrivingSales Executive Summit Recap

    For the sixth year in a row, DrivingSales Executive Summit (DSES) sold out to an enthusiastic and progressive-minded audience. With the Bellagio Hotel as our venue, we were all treated to an impressive main stage, plenty of space, and exquisite food catering—and, of course, the most advanced content in the industry!   Day One We began the conference earlier than ever before, kicking off at 1:30pm on Sunday, October 12th—and that's not considering our Canadian breakout session sponsored by e-Dealer, Glovebox, and SCI Marketview that started at 8:30am or the Cox Automotive brunch and panel presentation that commenced at 10:30am. DSES indeed had a packed schedule! And then, the audience was shown the 2014 DSES Kickoff Video: Introduced by event emcee, Charlie Volgleheim, the founder and CEO of DrivingSales, Jared Hamilton, provided a high-level overview of Executive Summit, what the attendees could expect from the conference, and a brief look at the auto industry as a whole....Read post

  • Going Beyond All-You-Can-Eat In Loyalty

    When consumers think of loyalty programs, they typically think of racking up miles, or frequenting a business in exchange for rewards, perks or freebies. No matter what business you patronize, there is a good chance that it is offering some sort of loyalty incentive. In fact, many argue that loyalty programs are so prevalent nowadays that they are losing some of the initial qualities that attracted consumers to them back some 45 years ago. Namely, that feeling of being treated special in exchange for the customer’s ongoing business and continued loyalty. Today, some loyalty programs choose not to even offer rewards. Instead they just provide the concept of receiving lower prices. Many grocery store chains have the regular price and then a loyalty member price. Sale prices are reserved just for members of their loyalty program.  Your information and transaction histories are exchanged with the grocery store for a slightly lower total at the checkout counter.   Loyalty programs h...Read post

  • How to Find Out What Women Want and Reach The Modern Female Car Buyer

    A woman’s vehicle path to purchase needs may be prioritized differently than a man’s, and in order to sell to women, stores can benefit by understanding and caring about what women want when it comes to cars. They should ask Mel Gibson (about what women want…)Read post

    By Cobalt on October 23, 2014

  • Brand and Dealer Loyalty – a Fine Balance?

    Think about the last time you visited a business such as McDonald’s, Target, or a 7-11.  Now, think about the store itself – did you select the store because of convenience, or because you were dedicated to a specific location?  Sometimes the answer is both, but more often than not, like most consumers, you are making the choice based on convenience.  Either way, your decision was likely based on the brand or company name and not the individual business or the people that work behind its doors.Will a customer repeatedly choose your dealership for sales, service or your collision center because of who you are and the people on your team? Does your dealership name stand out in the minds of consumers? Or will they choose your location because of the brand you offer and the service they have previously received at a different dealership of the same brand?At your dealership, do you consider your regular customers brand loyal? Or do you consider them loyal to your dealership? If you...Read post

  • There’s Always Time to Do It Right!

    You don’t have to live in a bustling city to see that people are in a hurry. Compared to even ten years ago, it seems that everyone is in a rush to get something done fast and with as little inconvenience as possible. The reality is - people have less time, which means they demand more of businesses, including your dealership.   In today’s hurried environment, it’s imperative that your staff be on their toes to not just make a good impression, but also perform their best in every opportunity afterwards. With customers making fast decisions, one of their first could be to take their business elsewhere if the level of service is not meeting their expectations. The expectations customers have for businesses to provide stellar service is growing quickly.    If you polled all of your employees, it probably wouldn’t shock you that that virtually all of them would say that they provide good service. What metrics do you have to identify what good customer service actually is? ...Read post

  • Do Your Salespeople Spend Too Much Time Managing Software...Instead of Selling?

    The fact is, lead generation is an expensive business and having the right tools to manage this investment and deliver the most qualified leads to your dealership is paramount to your success. When it comes to mining your database and working your in-market customers, you have two choices: use your internal team to run and manage all aspects of it (self-service) or outsource many of the functions to a service provider who does most of the heavy lifting (full service).  Self-service options demand the installation of comprehensive software that requires training and hands-on daily interaction to be effective, while a full service provider will take over the day-to-day tasks (i.e., database management, developing marketing materials, mailings, e-mails, etc.) and, instead, deliver qualified leads to your sales force. Both approaches have their pros and cons. Full disclosure, I currently work for a full service provider, but I also spent eight years as VP of Sales and Marketing for a la...Read post

  • DSES: Can You Feel Me Or Is It The Customer Experience?

    DrivingSales Executive Summit 2014 is officially in the books. It was a sold out event once again that enveloped the Bellagio Hotel in Las Vegas for the better part of three days. Planned was a (digital) star-studded keynote speaker list plus some of the finest breakout speakers, many dealers, for those in attendance. Here's some highlights form the event from IM@CS' perspective: Day One Just as last year, there was a Canadian Breakout Session housing some of the top companies from our neighbors to the north along with some powerful presenters including Grant Gooley and Jeremy Wyant. Jay Radke and Brent Wees definitely brought the "eh" for a second time. Rumor is that next year will be bigger and better (and DSES will NOT be during Canadian Thanksgiving!). After Emcee Charlie Vogelheim’s grandiose welcome of the attendees, DrivingSales' founder Jared Hamilton managed a uniquely powerful opening recognizing a few members of the car dealer community from stage for thie personal tr...Read post

  • Proactive PR & the NFL?

    While I love to be active myself, I certainly could not call myself a big fan of watching and keeping up with sports. It seems, however, that you cannot turn on a television, read a newspaper or use any social media recently without hearing about continuous misdeeds and wrongdoings of NFL players. I’m sure that you’ve seen them as well. So this is not designed to rehash, recap or discuss any of these controversies. Much of the attention and negative PR has been directed towards those players involved, as well as the NFL itself, as can be expected. Due to the ongoing controversy, sponsors have distanced themselves and some have even disassociated themselves with the league. One sponsor, however, seems to be taking a slightly different approach to the controversy… Verizon.   Let’s face it. Regardless of any controversy, football is not only uber-popular in America, but also big business. It brings massive exposure to its partners and sponsors. Just as in the real world, howe...Read post