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.”

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.