Wall Street analysts are now predicting that 1999 will be a boom year for new vehicle sales in the U.S. Boom times are the right time for dealers to re-examine their business planning process and ask important questions. Is it best to retain profits or increase investments? Are business relationships deepening, or is this the "last hurrah"?
The industry can expect structural and fundamental changes in distribution channels due to consumer behavior, electronic commerce and distributor policy changes. The question is, will these changes bring economic opportunity for dealers? Will these opportunities outweigh the economic-cycles risk involved?
In looking to the future, dealers should compare those aspects of the retail business that are profitable today with those they expect to be profitable in coming years. This process may seem simple, but it's not. Dealerships are becoming increasingly diverse, creating profit centers that make comparisons difficult. And their owners have lifestyle location, skills and franchise partner choices that all affect the outcome.
It's possible to isolate three roles of dealerships that will be affected by structural and electronic changes: retail business operations; the way in which dealerships gain, retain and share customer insight (beyond a single transaction); and the way consumers get to buy and service vehicles.
The '70s and '80s might be called the "20-group" decades for efforts designed to fix business operations and share ideas among dealers to improve profitable practices. During that time, dealership consolidation and return on investment both increased. Business operations became more efficient, and expenses as a percentage of total sales dropped significantly. The search for efficiencies moved from tasks to departments to holding companies and now includes the multi-billion dollar enterprise searches for scale economies. Most dealers now know the rules for running a dealership efficiently. Lapses in sound dealership practices are simply errors in training or execution.
However, the same cannot be said about potential profits from those dealerships working to mine the customer data that flows into and through the business. Customer insight is a key area for adding value to those organizations that link to dealership information. In the past, insightful salespeople and service writers used customer information to increase profits by "up selling" products or services. But the use of customer information was fragmented.
Gradually, dealerships began to generate more systematic information as they invested in systems to control floor traffic and build databases from repair orders. But rather than use this information directly, dealers still relied on bulk mail vendors and merchants of direct mail lists. The role of customer-knowledge management began to move to outside companies. To dealers, customers represented transactions, not relationships. Knowledge was spilling out of dealerships because owners were ignoring their role as a "builder of customer insight."
With the advent of e-commerce, dealers need to decide how to fill this role of data manager. And they need to determine who will pay for the service. The good news is that there will always be dealerships involved in some phase of vehicle commerce-the issue is how vital will that role be? There is no refuge from the wave of Web-based applications that is changing commerce in all industries.
The next issue for dealers to address is how to combine efficient business operations and processes with a profitable role in managing valuable customer information and relationships. If a role can be found, then a need emerges that will keep the dealership in the commerce stream. Otherwise, dealerships are substitutable.
Searching for Solutions
One possible solution from other industries is to pay retailers for operating efficiently, as well as generating and managing customer insight as part of broad data-mining initiatives. More importantly, perhaps dealers should be paid for transforming that data into useful information through the various customer contacts that take place over an ownership cycle. Since that information is needed for activities beyond vehicle ordering-such as brand management, relationship marketing and life cycle targeting-why not create a new payment stream to dealers from manufacturers or distributors?
The middleman in any chain adds value to the product. Therefore, why not determine how much value should come from final customer payments, and how much should come from those other "customers" upstream who need the consumer-management knowledge of the retail outlet? In the process of refining the information-management roles in order to profit from those partners upstream, dealerships also may increase the need for their services throughout the entire distribution chain.
In determining the roles that can make retailing profitable in the future, dealerships also need to identify those in the industry who will pay for the value-added roles auto retailers can fill.
As the planning begins, it might be a good idea to bring distributors into the process. After all, they are the ones likely to provide funding for those roles that will enable dealerships to build new but proven capabilities.
J. Ferron is the automotive theater leader at PricewaterhouseCoopers.