National Automobile Dealers Association – Study Outlines Best Practices to Improve Dealer Performance in Digital Age
U.S. new-car dealers have tremendous opportunities to expand their businesses and improve profitability, despite challenges to current retailing models, consultants from McKinsey & Company said at the 2015 National Automobile Dealers Association/J.D. Power Automotive Forum in New York City.
During the forum, McKinsey & Company’s Stefan Knupfer, a senior partner and 20-year veteran in the auto industry, and Robert Mathis, a partner within the firm’s Automotive & Assembly Practice, unveiled “Fast forward: How US auto dealers can drive sustainable economic performance in the digital age,” a new study that provides a strategic perspective on opportunities and challenges in the U.S. retail-auto sector.
Among their key findings, McKinsey and NADA found that if carmakers and dealers make the necessary investments to achieve operational excellence and streamline marketing expenses, dealer profitability, on average, could hit the levels of today’s top quartile performing dealers. These benefits could include increased returns on marketing investments and higher customer satisfaction.
“A top industry priority should involve encouraging and creating high-performing auto dealerships,” said Knupfer. “Our research busts the myth that most of the factors that effectively drive dealer success, such as sufficient scale and brand strength, remain beyond the industry’s control. Instead, we discovered that internal operating practices differentiate highly-profitable retailers from their peers today even more than in 2006 when NADA and McKinsey conducted a similar analysis.”
The research shows that while dealerships are still the preferred place for making the final buying decision, today’s car shoppers are spending more time online on dealer and third-party websites to kick the digital tires of cars and light trucks. Simultaneously, new players with other business models are entering the retail-auto space with an eye toward profiting from sales and service revenue.
“More than 16.4 million new cars and light trucks were sold last year, but this recovery in sales has not translated to consistently increasing profits,” said Mathis. “While profits have risen from post-recession lows, they have plateaued over the last two years and have failed to keep pace with growing volumes.”
“To attract and retain today’s digital car buyers, dealers and automakers need to collaborate more to achieve better returns on their marketing dollars,” said Michael Regan, NADA vice president of industry affairs, in separate remarks at the Automotive Forum, which is hosted by the Greater New York International Auto Show.
Steven Szakaly, NADA chief economist, added: “While dealership profits are under attack from multiple fronts, such as Internet-based third parties and the hyper-competitive nature of auto retailing, this study provides a guide for how dealers and car manufacturers can work together to improve business performance and increase customer satisfaction.”
The study, conducted by McKinsey & Company in cooperation with NADA, included surveys of more than 750 new-car dealers, analysis of more than 2,000 dealer financial metrics, as well as consumer research conducted by McKinsey & Company last year.
Buffett: The Dealer System Works
Speaking about his recent entry into the auto-retailing market, billionaire investor Warren Buffett said that consumers, manufacturers and auto dealers all benefit from the nation’s franchised dealer network.
“The dealer system works well for the manufacturer. It works well for the dealer, and it works well for the consumer. It’s been around now for a very long time,” said Buffett, chairman and CEO of Berkshire Hathaway, at the NADA/J.D. Power Automotive Forum in New York.
Earlier this year, Berkshire Hathaway acquired the Van Tuyl Group, the nation’s fifth largest private chain of car dealerships.
“Usually when a distribution system becomes that firmly established, there’s a reason for it, and I just don’t see that changing,” Buffett said.
Late-Model Used Vehicle Supply to Reach Pre-Recession Levels in 2017
Jonathan Banks, executive analyst for NADA Used Car Guide, presented an analysis and forecast of the used vehicle market in the U.S., noting the used vehicle supply is swelling and should reach pre-recession levels by 2017.
Banks said, “The used car market has enjoyed high demand and short supply after the recession causing used car prices to reach all-time highs. As the automotive market continues its rapid recovery, fundamentals in the automotive market will inevitably drive used car prices down. The question everybody’s asking relates to how much prices will drop and when.”
For 2015, NADA Used Car Guide’s used vehicle price outlook accounts for several factors resulting from changes in the economy and financial sectors.
Positive factors affecting used vehicle price outlook:
Strong economic growth
Healthy employment gains
Higher home prices
Lower gasoline prices
Negative factors affecting used vehicle price outlook:
Higher used vehicle supply
Increased new market pressure (i.e., flat new vehicle prices or higher incentives)
Less favorable credit conditions
“A burgeoning off-lease supply of used vehicles will drive late-model [5 years old or newer] volume up 8 percent this year. While late-model supply will reach pre-recession levels in 2017, overall supply won’t reach this point until a few years later. Off-lease supply will be dominated by compact cars and utilities, along with mid-size cars and utilities, which is a pre-recession trend reversal,” Banks said.
According to NADA Used Car Guide analysis, the consequence of declining used prices coupled with recent finance trends creates risk for consumers having negative equity in their vehicles. This may result in residual losses as the high volume of lease returns flow back into the market now and over the next three years.
Banks presented his remarks a day before the NADA and J.D. Power Automotive Forum hosted by the New York International Auto Show.