Takeaways from the July Intel Automotive Ventures report
Welcome to this episode of The Friday 5 with Steve Greenfield, Founder and CEO of Automotive Ventures, an automotive technology consultancy that helps entrepreneurs raise capital and maximize the value of their business.
July Intel Report on Automotive Ventures
The July Intel Report on Automotive Ventures came out, and I wanted to recap two thematic areas that seem to be a priority for dealers, and are areas that dealers should particularly focus on monitoring.
First, consider the size of the franchised dealer’s footprint. NADA reports that there are 16,658 franchised dealerships in the United States, while Urban Science reports 18,230 physical “rooftops”.
As direct selling and more than one agency model are discussed with more regularity in the news, a key question is whether and how automakers will attempt to reduce the number of brick-and-mortar dealerships in the United States.
Some brands have oversized the number of dealerships required, especially since a larger percentage of consumers inevitably feel comfortable buying their vehicle without seeing them.
We can put this in stark contrast by comparing domestic and import OEMs, in terms of new vehicles sold by physical location. For example, last year GM dealerships sold an average of 290 new vehicles per location, and Ford dealerships sold an average of 493 new vehicles per roof.
This contrasts with the average Honda store selling 1,401 new units per store and Toyota dealerships selling an average of 1,884 units per location. Efficiency aside, it’s no wonder the average Honda and Toyota store transacts at a higher value than their national counterparts.
As for how a deliberate orchestration of dealer footprint reduction might play out, we need look no further than how things have played out across the Cadillac brand.
The number of Cadillac dealers in the United States has fallen to 564 from 921 just four years ago.
You may recall that Cadillac required dealerships to invest $200,000 in electrification upgrades: things like on-site vehicle charging stations, new tools, service upgrades, cosmetic upgrades and training for sales and service personnel.
Dealers who chose not to upgrade for the EV transition were offered a buyout package that would have been between $300,000 and nearly $1 million. Some dealerships have reported low customer interest in EV products, including some dealerships in more rural areas.
With the move towards electric vehicles and direct selling, it is very likely that other automakers will follow suit to deliberately reduce their dealership footprint.
It is also very likely that OEMs will encourage larger, more powerful dealerships to acquire weaker, more remote stores and operate them as satellite sites.
We will be keeping an eye on the total number of dealers, especially among legacy national brands, who have built a physical dealer footprint that is currently too large to provide strong dealer profits in the future.
Next, but related to this previous topic, I wanted to give some perspective on the benefits of size and scale for dealerships.
A question I get more and more often from small groups of dealers is “How big do I need to be to withstand all the dynamics of the market?” This question comes up more frequently as the news cycle introduces more uncertainty about the future.
I’ve thought a lot about how best to answer this question, and the answer isn’t necessarily straightforward. That said, I think dealers should look at this from three different angles: cost structure, diversification, and OEM influence.
In terms of cost structure, the scale and size of public groups give them an advantage over the average concessionaire. 10-15% of selling, general and administrative (generally referred to as SG&A) expense efficiency directly impacts the bottom line, and this efficiency provides public groups with more “dry powder” to acquire stores (or buy out shares).
Another way to look at profitability is to use advertising spend. In 2021, Carvana spent $479 million on advertising, 3 times more than CarGurus. CarMax spent $218 million, while Lithia spent $162 million.
It’s not unreasonable to predict that within a few years some of the major dealer groups will be spending over $1 billion a year on advertising, which is pretty amazing when you think about it. It will therefore be much more difficult for small dealers to capture the eyes of consumers.
Along with carefully monitoring their cost structures and using size and scale to centralize and cut costs, dealerships may seek to diversify across multiple OEM brands. Some of the automakers are moving into elements of an “agency model” at a faster rate than others, and having a diverse portfolio of OEM brands will allow dealerships to naturally protect themselves against an OEM becoming more aggressive with direct sales, inventory centralization and reducing the margin per unit sold.
Last, but not least, the more slots you own and the more units sold for a given OEM, the more influence and voice you will have when it comes to retail model evolution and priority. given to new car allocations.
The average location of a dealership doesn’t have much leverage over the size of the average automaker. But by growing through acquisition, small dealer groups can grow into mid-sized dealer groups, which gain more control and potentially a “seat at the table” in discussions with OEMs about how to shape OEM strategies. equipment manufacturers/dealers and to influence the future.
I will continue to think about how best to answer this question of “How big is enough?” given all the dynamics in the market. If you have any specific thoughts on this issue, please drop me a note at Steve@automotiveventures.com. I would like to discuss it with you.
Companies to watch
Each week, we highlight interesting automotive technology companies to watch. If you read my Intel Monthly Industry Report, I feature a few companies each month, and we take the opportunity here on Friday the fifth to share some of these companies each week with you.
Today we have two companies to watch: Armatus by DealerUplift and Rolling Energy Resources.
Armatus by DealerUplift
DealerUplift and its Armatus product help dealers increase their annual gross profit on warranty parts by $80,000 to $100,000.
Complex state statutes, manufacturer protocols and pressures, gatekeepers, and limited internal resources are just some of the challenges that make it difficult for auto dealers to get full retail warranty reimbursement.
Car dealerships across the country have been forced to “reduce” their warranty parts. When refunded, they usually only receive a 40% markup or MSRP. Neither reflect true retail reimbursement rates.
In addition, the laws of 49 states allow auto dealers to be reimbursed by manufacturers for retail warranty work, which is effectively the dealer customer’s “fix” rate.
The reason I love this business is that the valuable accessory is a lot like picking up dollar bills lying around in the service bays of a dealership. For almost no extra work from the dealer, the company guarantees results and doesn’t charge the dealer until you see a return on your investment.
You can consult Armatus/DealerUplift on www.DealerUplift.com.
Rolling energy resources
Rolling Energy Resources is taking a new approach to managing electricity demand from vehicle charging.
They connect directly to electric vehicles through the vehicle’s native APIs, using systems already in place.
Rolling Energy Resources can then control the load and monitor the state of charge of the battery, wherever the customer plugs in.
The reason I like this company is that they provide electric utilities with smart solutions for electric vehicle charging, demand response and research for all car brands, without having to install new hardware. . They provide ongoing battery health monitoring and their MyCharge reports inform customers of their charging costs and satisfaction.
You can check out Rolling Energy Resources at www.RollingEnergyResources.com.
So that’s your weekly Friday the 5th, a quick recap of the big deals in automotive technology over the past week.
If you’re a young automotive tech entrepreneur looking to raise money, or an entrepreneur trying to decide if and when to raise money or sell your business, I’d love to talk with you.
Thanks for tuning in to CBT News for this week’s Friday Five, and see you next week!
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