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”?

Looking Ahead

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.

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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.