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

  • 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

  • Dealer Solutions: Catching Red Flags on Millennial Resumes

    Does it ever feel like the term “millennials” is an annoying buzzword or something that the American workforce can’t stop mentioning? Regardless of how this may make you feel, this is a term that won’t be going away anytime soon. You probably keep hearing something about “Generation Y is the future” or “right now is the time to attract millennials at your organization”—although it might seem repetitive, it’s true. This generation currently makes up approximately 23% of the dealership workforce, according to a report released by the NADA last year. Additionally, the percentage of millennials in the workforce is only going to increase in the years to come. This also means that there’s a good chance you’ve had a decent influx of resumes coming from this specific generation at your dealership. While hiring millennials is essential to growing business, it’s also important to make sure you’re hiring the best-fit candidates. One way to avoid poor hiring decisions is by scanning resumes for certain warning signs. The following are several red flags on millennial resumes that hiring managers should search for in order to avoid hiring a potential turnover candidate at your dealership: Careless Grammar & Spelling—This is an obvious red flag to spot on any resume. If a potential candidate is lazy enough to not carefully proofread his or her resume, then it’s likely that same candidate will not perform to the best of his or her ability. Full Sentences—Resumes should never be writRead post

  • Dealerbaby Announces Newest Customer – Blevins Brothers

    Dealerbaby Announces Newest Customer - Blevins Brothers Blevins Brothers Launch Their First Native Mobile App  Saratoga Springs, NY: Dealerbaby (www.dealerbaby.com), a custom mobile app platform for auto dealerships, is proud to announce that Blevins Brothers, an auto group in Ogdensburg, NY has launched their first native mobile app via the Dealerbaby mobile platform.  “Dealerbaby allows us to connect with our customers like never before.  It puts our store literally in the palm of their hands, anywhere, anytime,” said Marc Blevins, Sales Manager at Blevins Bros. Blevins Brothers, a Chrysler, Dodge, Jeep and Ram dealership, serving Gouverneur, Canton, Watertown, Potsdam and Fort Drum, NY, has been a family run business since 1983. Last year, Blevins Brothers, began looking for a new way to reach current and potential customers. After a thorough review of options, Blevins Brothers, choose to invest in mobile for the following reasons: reach, loyalty, and the future of car bu...Read post

  • DrivingSales Announces Innovation Cup and Dealer Best Idea Award Winners for 2014

     New Car IQ from Pearl Technology wins 2014 Innovation Cup Award and “YouTube Postal Service” from Robert Karbaum E-Commerce Manager, Weins Canada Inc./Don Valley North Lexus, wins the 2014 Dealer Best Idea Award; presented at 2014 DrivingSales Executive Summit     Salt Lake City, Utah – October 20, 2014 – DrivingSales today announced the winners of the 2014 DrivingSales Innovation Cup and Dealer Best Idea Awards. “New Car IQ” from Pearl Technology won The Innovation Cup Award for the most innovative dealership solution of the year. Robert Karbaum, E-Commerce Manager, Weins Canada Inc./Don Valley North Lexus took the Dealer Best Idea Award for “YouTube Postal Service.” This is the second year in a row Karbaum has won the award. The awards were presented in Las Vegas on October 14th at the sold-out DrivingSales Executive Summit (DSES). Over 1,000 dealers and industry professionals attended the three-day event, which concluded on Tuesday.   “It always gives me g...Read post

  • Auto/Mate Integrates DMS with etfile Document Management System, Streamlining Auto Dealer Workflow

    ALBANY, N.Y. – October 20th, 2014 – Auto/Mate Dealership Systems (http://www.automate.com) announced today the integration of its dealership management system (DMS) with etfile's electronic document management solution. Auto dealerships using the etfile document imaging, filing & retrieval system can now receive deals from F&I and Repair Orders (RO's) from service, via real-time delivery from Auto/Mate's DMS. The integration also allows dealers to identify all documents that were not scanned on a given day.   "Auto dealers can create hundreds of documents on a daily basis, and if they're using an electronic filing system the ability to retrieve documents out of their DMS in a timely manner is critical to increasing efficiencies," said Mike Esposito, President and CEO of Auto/Mate Dealership Systems.   "Partnering with Auto/Mate will allow hundreds of dealerships to take advantage of the benefits associated with our document management system, which include saving tho...Read post

  • 3 Phone Training Strategies That Apply to Every Department at Your Dealership

    What do your BDC, sales department and service department all have in common? The phone. Though each department is very different, talking with prospective or current buyers on the phone is a crucial part of how they do business. As the dealer, do you think your employees’ phone skills are up to par? If your answer is yes, the chances are you aren’t looking at the data. Dealerships are actually losing more than $400,000, just because of poor phone skills alone! There are things that you as the dealer or manager can do to promote uniformity on the phone, and ultimately achieve top-notch customer service. By having a once a week meeting with your teams, you can set out to address these three items that will increase credibility, customer service and revenue into your dealership. 1. Product knowledge- The only way your employees will get a prospective buyer into the dealership is if they sell them on the car the customer is interested in over the phone. Whether it’s questions abou...Read post