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Robert Karbaum

Robert Karbaum National Digital Strategy Manager

Exclusive Blog Posts

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Right, Wrong or Insane: My Auto Industry Predictions for 2015

da1ec014517df7057c2674328ffec169.png?t=1There are three types of people in our industry; those who are drawn to change, those who hide from it, and those who pull out their big guns to protect the way things were. I have never had a problem determining which side of the fence a person stands on, as I am never shy about sharing my visions for the future.   

When discussing the future of the automotive business I often use the analogy of when the Finance Department first entered the dealership. Prior to this, the concept of removing the salesperson from the deal was preposterous. It would be perceived as a disaster if the customer was handed off to someone else, let alone someone in another office. Today, a dealership without a Finance Department would seem ludicrous. The potential profit loss would be monumental, right? Maybe right now, but again, the tides are a-turning and what seems crazy today may be commonplace tomorrow. Often, the best ideas start out sounding the craziest; as Einstein once said, “For an idea that does not first seem insane, there is no hope.”

Since John North Willys sold the first vehicle out of his Elmira, New York, sporting-goods shop in 1901[1], the car-buying process has fundamentally remained the same. That’s 115 years of an industry operating on the same basic principles that it was founded on. Fortunately, or unfortunately, depending on which side of the fence you subscribe to, that is about to change in 2015. In fact, next year has the potential to be one of the most revolutionary years the auto industry has seen in a very long time.

Some of these changes are small, some are crazier than others, and some have monumental implications, but I believe we will see all of them happen in 2015.

 

 OEM Direct Sale to Consumers

OEM Direct Sale to Consumers

Tesla is doing the dirty work for the other automotive manufacturers right now. The manufacturers won’t admit it, for obvious reasons, but they are all cheering on Elon Musk behind the scenes. While Tesla is fighting to sell their niche vehicles online and in their boutiques, the big OEMs are rapidly approaching a digital wall, preventing them from innovating into the future. Last year General Motors launched their Shop-Click-Drive online platform nationwide,[2] but it represents the furthest the manufacturers can progress unless Tesla is successful in their manufacturer direct-to-consumer sales battle. Sooner or later, the big OEMs will need to sell direct to consumers too.

Shop-Click-Drive is an online e-commerce-style platform where a customer can select their vehicle, estimate payments and trade-in value, apply for credit, accessorize and schedule a test drive at the location of their choosing[3]. In its first year of operation, the platform sold over 13,000 vehicles nationwide[4] with only a third of the dealers participating and little, if any, advertising. 2015 will see a sharp increase in Shop-Click-Drive sales as GM will be forced to advertise heavily to fend off new competitors to the online vehicle sales space. Additionally, GM may even make the program mandatory for all participating dealers, as they have with other online initiatives this past year[5].

Once fully up and running, Shop-Click-Drive will begin to have a profound impact on the automotive industry. Unfortunately, it still falls short of competing with every other retail sector because you cannot fully buy a vehicle online. Yes, with Shop-Click-Drive you can get close, but ultimately you must finalize everything in the dealership. Imagine your disappointment if you were told you HAD to physically go to a Best Buy to pick up the GoPro you just ordered online.

GM is sure to gain market share until the other OEMs catch up but this is a small Band-Aid on a gaping wound. Customers want everything online, and if you refuse to adapt, someone else will happily provide a better solution. Blockbuster believed heavily in the customer in-store experience[6], while Netflix realized there was a much better solution online.[7]

If you want to see a glimpse into the auto industry’s immediate future, we can look at what is happening to the car-rental industry right now. First, car-sharing services started eating up market share, then came Uber to finish the job. This resulted in almost zero growth[8] for the rental industry in 2013, yet car-sharing memberships increased globally by 53 percent [9] and Uber is expected to generate $10 billion in revenue for 2014.[10]

The emergence of new competition was proof that the car-rental industry’s old business model wasn’t working. It was stagnant, outdated and needed to be overhauled for the needs of the modern online shopper. Fortunately, they decided to change and fight back by both buying out some of their competition[11] and, more importantly, modernizing their business model. For example, National Car Rental just launched their “Control Enthusiast” campaign this November featuring actor Patrick Warburton. The concept of the commercial is about eliminating their old business model and showcasing the new:

“That’s why this road warrior rents from National. I can bypass the counter, and go straight to my car and I don’t have to talk to any humans unless I want to. And I don’t.”[12]

The car-rental industry was forced to adapt to the needs of the customer, and so will we. Teasing the customer with an “almost e-commerce” experience may actually do more harm than good. The efficiencies GM is attempting to create with Shop-Click-Drive are all but eliminated when the customer is forced through the same old hoops once they arrive at the dealership. Once you invite customers to the online space, they will expect it to operate like every other online retail space. Otherwise, you are just putting lipstick on a digital pig.  

Where this will take us in 2015 is that one of the major automotive manufacturers will begin a direct-to-consumer e-commerce trial “coincidentally” in one of the states in which Tesla has successfully changed the laws. Instead of stopping before the sale is completed and forcing customers into the store, the trial will allow a customer to 100 percent purchase the vehicle and wait for it to arrive, just like any other online purchase. But what about the test drive, you ask? The percentage of customers declining a test drive before purchase has risen to 17 percent in 2014. [13] That would equate to 2.8 million out of a potential 16.4 million[14] new car sales in the United States in 2015 that would be purchased without a test drive. That is more than enough for an OEM to do an online direct-to-consumer trial.

The OEM will convince their dealer body that this trial is a good idea by counting each online sale towards the targets and bonus plans of the lucky dealer who represents the market area of the online purchaser. The dealer will benefit by getting sale on their books, much like when the manufacturer gives away vehicles in large contests. The closet dealer to the winner gets a complimentary house deal—if their Customer Satisfaction Index is high enough, of course.

We may hear rumblings of this direct-to-consumer trial by summer, as the manufacturers, save for GM, have to act quickly because the dealers themselves have already started trekking down this trail. AutoNation announced in November it would be launching its new online SmartChoice Express platform[15] backed by a promised $100-million investment. While it is similar to GM’s Shop-Click-Drive platform, it is significant because it serves as an awkward reminder that a dealer group is leading the digital race against the other manufacturers. 

Remember, it will only be a trial, but the results could change our business forever.

 

Satellite Service Centers Will Fuel Fixed Operations Sales for Dealer Groups

Satellite Service Centers Will Fuel Fixed Operations Sales for Dealer Groups

If the sales process is headed online, the need for expanding brick-and-mortar shifts entirely to Fixed Operations. Why, then, would anyone buy or build new dealerships (other than by force) when one can buyout our industry’s oldest enemy: the mom-and-pop repair shops.

As vehicles become more computers than cars, the traditional repair shop is already having trouble handling the new technology. Any vehicle produced today can have as many as 50 to 100 different tiny computers controlling everything from steering to acceleration. [16] The modern mechanic needs to know just as much about re-flashing the ECU as she/he needs to know about a cam shaft. So it’s not as much of a takeover as putting this component of the auto industry out of its inevitable misery.

When Starbucks sought to take over the local coffee shop, they did so by oversaturating the market to the point where Starbucks locations were literally across the street from other Starbucks locations[17]. A large auto group can easily do the same against the small-point competitors in their market.

Ford already started down this road when they began opening their Quick Lane Tire & Auto Centres to compete against the Jiffy Lube and big-box stores. Now they have over 700 locations across the United States[18] and 69 in Canada[19] capturing market share.

Expect to see large auto groups buying up and converting existing local shops as a means of handling overflow and, more importantly, increasing market share in geographical areas between or surrounding dealerships. The consumer can receive the same factory-trained technicians, the same loyalty promotions, and the same OEM parts at a shop around the corner, as opposed to driving the extra distance to your main operation. With careful purchasing, a large automotive group could entirely take over the fixed operations in a geographical area overnight.

Added satellite locations can also fuel additional sales opportunities, with additional test-drive starting points, e-commerce parts and accessory sales pick-up locations, and most importantly, more parking. What dealer group wouldn’t want to expand their footprint in a short period of time for a significantly lower cost than buying or building entire dealerships?

 

 The Death of the Salesperson

The Death of the Salesperson

This is not a new concept and has been the heated topic of many arguments around the auto industry for some time now. The concept is that people will no longer need a salesperson to purchase an automobile and can do everything online. There is some merit to this. In 2012, 10 percent of car buyers opted not to test-drive. [20] By the beginning of 2014 that number was up to 17 percent.[21] While a surprising number, it still leaves 83 percent of the population wanting a test drive.

Eventually there will be no need for a car salesperson, but that time is more than a little ways off. What we will start experiencing in 2015 is something entirely different. The current salesperson is dying off with age, not by lack of interest.

The seasoned salesperson that sells you 16-25 cars a month, with a large portfolio and years of experience, is on her/his way out of our industry. They are just getting older, and many are tired of what the industry has become. Margins and commissions are thinning every day, everything is online first rather than belly-to-belly, and their customer base is buying fewer vehicles at longer intervals. As these veterans start retiring out of our industry, a huge gap is left in their wake, as fresh bodies are nowhere to be found.

The newest generation of workers, Gen Y, has little to no interest in entering a career as a car salesperson. They are highly educated, digitally focused, have zero experience with negotiating and, most importantly, cannot grasp the concept of 100 percent commission. Try asking someone under the age of 35 if they want to work 60+ hours a week for an average of $1,500 a month with no guaranteed pay. [22] There is a break in the line, and dealerships are really starting to feel the pinch.

Ask any manager if she/he has enough salespeople on the floor. The unanimous answer is a definite no, followed by, “Why, do you know of anyone?” The situation has reached despairing levels, and seasoned salespeople are taking advantage of it. If you have any previous experience selling cars, it is nearly impossible that you couldn’t walk in the doors of any dealership in the country and get a job on the spot. This is a dangerous situation for management. Job security and loyalty are meaningless, and if the dealership next door is offering an extra 1 percent on the commission plan, your salespeople could be out the door tomorrow. Managers are dealing with a declining level of control on the floor, as discipline becomes next to impossible if every dealer is one-upping each other to take the best sales staff. Suddenly you are more worried about your competitor’s pay plan than the price of the cars in their advertising.

What will become the new trend in 2015 is the “Product Specialist,” replacing the commissioned salesperson. In order to refill the barracks with fresh blood, dealerships will have to adopt a salary and bonus, or all-salary structure. [23] The 100 percent commission strategy will either be grandfathered out or removed altogether. It’s not going to be an easy pill to swallow, but there are no alternatives on the horizon. The next generation to fill the ranks of your dealership value opportunity over money and job security. [24] They would much rather receive standard pay than a possible range based on their performance, and more importantly value a flexible work-life integration over anything else.[25]

In 1989, Best Buy modified their pay structure away from commission, a revolutionary move at the time that was scoffed at by their competitors.[26] The reason for doing so was because their business formula was out of sync with their customers. At the time, the electronics customer had little need for a salesperson and preferred the hassle-free buying experience. The gamble paid off, helping to grow sales from $439 million in 1989 to $2.6 billion in 1993[27]. Auto dealers have already begun to follow suit, moving to non-commission pay plans already as a means of acquiring a new generation of car salespeople[28]. Some are even dubbing it the “Best Buy” pay plan, in reference to the company’s very successful shift away from the aggressive salesperson. But these numbers have been small thus far, as the perceived risk is quite high.

The commissioned pay plan isn’t only a problem for attracting talent, it also is viewed negatively by the purchaser as well. Much like Best Buy’s problem in 1989, today’s automotive customer does not like dealing with commissioned salespeople as much as they wouldn’t want to be one. So much so that in a recent Microsoft study on millennials found that more than half said going to a dealership was more painful than going to the dentist. [29]

J.D. Power and Associates agrees. The company has advocated for years that to avoid commission breath, dealerships should pay bigger monthly salaries and less commission. But there have been few takers -- certainly too few to be statistically significant, says Jon Osborn, research director for J.D. Power, of Westlake Village, Calif.”[30]

So as a dealer, you have a problem at both ends. Attracting top-level sales talent is getting harder and harder, in addition to your CSI dropping because you are putting more pressure on your staff for higher sales and higher gross. It’s a dire situation to be in, but for many, the solution of a non-commission pay plan appears riskier than staying the course. 2015 will spark the beginning of change, where by force or by courage, many dealers will take the Best Buy pay plan leap of faith. Those who keep their heads in the sand will find their sales floor quite empty in the coming months.

 

Death of the Single Point 

Death of the Single Point

It used to be that if you worked in the automotive industry, a viable dream was to one day own your own store. Today, unless you’re Warren Buffett[31] that likely will never happen. Furthermore, if you did achieve that dream and currently own a single-point operation, or maybe even two or three stores, that dream is also about to roll the credits.

For once, the Canadian market is ahead of the U.S. market in an automotive statistic, with close to 50 percent of vehicles sold in the country coming from automotive groups[32]. The largest group and the only publicly traded, AutoCanada, literally has been buying locations on a bi-weekly basis[33].

It’s not all bad news – rumors are rampant on both sides of the border that groups are happily paying two to three times the value of the stores. It makes for an easy decision for the single-point owners. Rather than face increasing competition, smaller margins, increased employment and capital expenditures, they can opt to sell for a gigantic cheque and retire in paradise.

Not to mention increased pressures from the manufacturers to update facilities on increasingly shorter timeframes. Hyundai recently unveiled their new Global Dealership Space Identity a mere four years after 50 percent of its U.S. dealers spent millions to update their facilities to the rooftop cube.[34] In Hyundai’s defense, they are also spending a monumental amount of money to upgrade their own headquarters in Korea [35].

The acquisition of the Van Tuyl Group by Buffett’s Berkshire Group sparked a frenzy of mass acquisition rumors across the industry. Overnight, the “more is more” philosophy was reignited, as the vast majority of dealerships in the United States are currently not part of a dealer group.[36] With big names like Buffett entering the picture, groups like AutoNation and Asbury will be forced to continue their single-point buying spree like they have been doing in 2014. [37]

What does all this mean? 2015 will see a significant move towards grouping dealerships together into large, corporate and too-big-to-fail entities, not unlike what has happened to the banking industry over the last 20 years[38]. The same fate will find Berkshire Automotive, AutoNation and the largest dealer groups in the United States invading single points like it’s a giant game of Risk.

 

 Dealer Advertising Goes All-In on Digital

Dealer Advertising Goes All-In on Digital

This may seem like old news, but in reality an alarming number of dealerships are still spending the majority of their yearly advertising budgets on newspaper. This is the result of manufacturers’ outdated co-op rules, in addition to the perceived risk of abandoning what has worked for so many years.

2015 will represent a full swing in the digital direction with a new industry forecast predicting newspaper spending by the automotive industry will decline 27 percent over 2014 to a mere $2.14 billion, down from $2.94 billion.[39] Other traditional forms of advertising are also expected to decline.

Dealers are expected to slow spending on TV, telemarketing and direct mail by 11, 7 and 5 percent, respectively, in 2015.”[40]

Most importantly, it also forecasts automotive online advertising spending will increase 25 percent, to $15.1 billion in 2015. This will produce some interesting opportunities for digital vendors in the automotive landscape as advertising online is big step up from putting together a newspaper ad. Dealers know they need to be advertising online, but few know how to do it themselves.

Pay-per-click, display advertising and email marketing vendors have long existed, but new emerging advertising mediums have yet to be adequately represented. Social media marketing (SMM) is one example where few vendors have yet to provide a quality solution to dealers. SMM is far more than being coached on how to respond to negative reviews, it is an entirely new advertising medium that is crushing other digital advertising investment returns. Without SMM vendor representation, the savviest dealers can succeed in this advertising venue without being swallowed by a wave of competition.

Unfortunately, with such a rapid switch to digital, many dealerships will find themselves at the mercy of their vendors. When new technology sweeps across any industry at this pace, it can be difficult to discern who are the "good guys". At the 2014 NADA convention it was evident this was the direction the industry was headed. If you were there, you would have noticed that for the first time, digital vendors significantly outnumbered traditional vendors. Not surprisingly, all claimed to be the best solution to the trendy buzzword “big data.”

As dealers get deeper into the weeds of digital advertising, they will realize the need to hire help from within to protect themselves. This will result in a significant increase in Dealership Marketing Manager job postings in 2015.

 

 Finance Fallout Begins

Finance Fallout Begins

It is no secret that vehicle loan terms are getting longer each year, incentives are rising, and collectively we either don’t realize or don’t care about the gigantic hole that the auto industry continues to dig itself into. In the first quarter of 2014, 25 percent of all new-vehicle car loans were at a length of 73- to 84-month terms. Four years ago, that number was under 10 percent. The current average new-car loan today is 66 months,[41] an increase of 5 percent over the 2010 average of 62.9. [42] While that increase may seem small, extending the vehicle-purchasing cycle of the entire industry by four months while attempting to increase sales is a monumental problem.

In order to maintain sales forecasts and capture market share, manufacturers are forced to shell out more incentives and larger loans to get customers out of their contracts earlier each cycle. Hitting targets each month means expanding the “bubble” a little more each time.

In 2013, new vehicle incentives grew by 3.7 percent to an average of $2,576 per year.[43] In July of 2014, incentives were being pushed higher at a year-over-year increase of 7.1 percent. [44] As manufacturers continue to fight each other for top spot, these incentive increases have seemingly no end in sight. What that does is directly reduce used-vehicle pricing and demand, as in many instances a new car is less expensive than a pre-owned one. The industry is literally robbing Peter to pay Paul.

Now, add infinitely increasing incentives to lending amounts and terms at an all-time high. According to Equifax reports, “U.S. auto loan volumes are at an all-time high, with some $902.2 billion outstanding at the end of the first half of 2014, up 10 percent year-over-year.”[45] Car buyers are financing new-car purchases by rolling old debt at an alarming rate. Ninety-six-month amortization is now commonplace, as is rolling negative equity from the last vehicle into the new contract.

“A debt-rating agency noted recently that in some cases consumers are borrowing up to 135% of the value of the vehicle. These “Negative Equity” loans, as they’re called, are the same sort that premeditated the U.S. mortgage market before it collapsed in 2008.”[46]

Now add the sub-prime business on top of all this, which in the first three months of 2014, increased upwards of 15 percent to $145.6 billion[47] with no signs of slowing. Oh, and don’t forget that the average vehicle lifespan is also at an all-time high of 11.4 years[48].

This perfect storm, or “bubble,” will burst sooner than later, and the cracks will be large enough to see in 2015. Any change in the system, be it the expected Federal Funds Interest Rate hike beginning in spring 2015[49] or increased delays on a global airbag shortage[50] or the Japanese recession,[51] could be the catalyst to pull the floor from underneath our industry.

 

2016 – What Is on the Horizon 

2016 – What Is on the Horizon

I can’t close this off without taking a Hail Mary stab at the long, long-term future for the automotive industry. Having already tackled some pretty significant topics for how I envision 2015 will play out, I might as well share a few things that I have on the radar for 2016. We will see how these, and all my other predictions, fare come December 2015.

  •          Uber Takes Market Share from Auto Industry
  •          Uber goes public, or Uber acquisition talks begin
  •          CarMax, EchoPark strengthen hold on used market
  •          Self-driving cars on sale
  •          No-haggle pricing dominant
  •          Insurance plug-in “snapshot” mandatory
  •          Car loan bubble bursts/Picking up the pieces
  •          Eric Miltsch and Jay Radke become world's first human cyborgs

 

In Closing,

If I wasn’t open to criticism, I wouldn’t publish something like this. The goal wasn’t to be a fortune-teller, but to spark conversation about the future of our industry. As the old adage goes, “If you are not riding the wave of change, you will find yourself beneath it.”

So please, comment, critique or call me crazy; conversation allows us to be a part of writing the next chapter.

 

Droppin' Baums

Robert Karbaum arguably has the best name in the automotive industry. His combined experience over the past decade in E-Commerce and the automotive industry has allowed him to master the art of “AutoSpeak”; the ancient language that bridges the gap between internet geeks, the showroom floor and everything in-between. He manages the E-Commerce, Social and Digital Marketing operations at Weins Canada Inc. (formerly Don Valley North Automotive Group); a prestigious automotive group in Canada which includes the #1 volume Toyota and Lexus dealerships in the country. 

Catch him on Twitter (@karbaum) or DroppinBaums.com.

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[28] Jones, M. (2013, November 18). Innovative Texas Auto Dealer Ditches Sales Commissions in Favor of "Solutions." Retrieved from http://www.edmunds.com/car-news/innovative-texas-auto-dealer-ditches-sales-commissions-in-favor-of-solutions.html

[29] Wells, G. (2013, February 1). Selling to Millennials. Retrieved from http://www.autodealermonthly.com/channel/the-showroom/article/story/2013/02/selling-to-millennials.aspx

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Bill Simmons
Great insights Robert. Eric & Jay are almost to the Cyborg status already. Those are two really smart guys. I would say that we will see more ways that wearable tech could benefit car dealers. Thats a topic that Eric & Jay are certainly on top of.
Robert Karbaum
Thanks Bill! Jay just posted on my Facebook to confirm he is already half cyborg. I honestly added that in as a spot test, haha. To see if people read to the end :P
Kathi Kruse
Robert you, my friend, are awesome! Thank you for such a well-thought out and well-written piece. I happen to agree with everything you wrote. One of my observations: I was just at the CPO conference and learned that the dominate loan term was 72 months! I've been out of the day-to-day operations of a store since 2008 so it came as a shock. JD Power gave an alarming report on the repercussions of this and I have a feeling everyone in the room had doom in their eyes but once they left the room, they went back to their "comfort space." Second observation: Online selling is happening elsewhere in the world so it's only a matter of time before it's here. Your line that Tesla is doing the dirty work is spot on. I could go on forever about your post. Instead, I will bookmark it and write my blogs about your observations and link back to you. Right on, brother.
Daniel Boismier
Robert, exceptionally well written! You summarize very well the current threats / opportunities facing our industry. Still not flying car....
Robert Karbaum
Thanks Kathi & Daniel!

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