By Marc Spizzirri and Taylor Conant
The Internet. The Great Recession. Millennials. Oversaturation of franchise locations. Dealers, and their critics, might point to some or all of these to find a culprit for declining dealership profitability amongst franchised automotive dealership operations. But we think a more sinister force is at work — addiction.
We’re not talking about substance addiction, but new vehicle sales incentive addiction. This phenomenon is similar to a drug dealer’s influence over the user, ruining the dealer’s control over his or her business and future, and ultimately placing the dealer in a position of dependency upon the changing whims of his or her factory representatives.
Incentive-dependent dealers lose control over their business in several ways. First, there is an existential problem if a dealer can’t make a profit on operations without significant factory incentives. Under those circumstances, the business is at risk any time incentives retrench.
Rather than being franchised car dealers or in the business of providing customer service, the business model in question is “incentive dollar capture”. The business model disappears with changing factory decisions while the liabilities remain. This is a form of high stakes gambling, particularly as incentive dollars are increasingly tied to multi-million dollar facility image remodels.
Second, there is an organizational problem. When new vehicle incentives rule the roost, so do new vehicle salespeople, particularly star performers. It becomes harder for dealers to create the kind of processes, culture, and approach to customer service they might desire when they and their key salespeople know that without pushing more new units, the whole thing might spin apart. Other departments might be ignored and bad behavior might be tolerated to keep the machine going. It’s bad for morale and bad for the dealership’s image, and consequently it’s bad for the consumer relations.
Third, there is a strategic problem as dealers become “now” focused and lose vision over “later”. What matters foremost in everyone’s mind is hitting that stair step goal today, this week or this month, getting more inventory turn points for the coming allocation and playing the game again the same way next month. But where is the store going in the long-run? What is it doing to develop and adapt its business model in a world of increasing competition, technological and business model disruption, and the occasional mass economic meltdown? Dealers are being asked to mortgage the future to survive in the present.
How can dealers fight their addiction and get control over their businesses? We’ve seen a lot of things work for a lot of different dealers. Here are a few best practice ideas:
- Do a deep dive on your orphaned and old customer database across new, used, and parts and service departments, and get back in touch. The customer interactions that tend to come out of these “chance” encounters are typically higher margin and end up being higher-loyalty, because the customer has not spent time shopping and appreciates the proactive solutions on offer.
- Put your arm around your Parts and Service Managers and schedule an intensive meeting in which you can explore the strategic business opportunities available: wholesale parts, service market share, service department efficiency and retention-based marketing strategies can all be opportunities to drive repeat business through your store regardless of what’s happening with incentives.
- Develop your F&I operations and fund your own white label reinsurance structure for incentive-independent, long-term margin. There’s no TrueCar-equivalent for F&I products and customers who purchase extended service contracts and other services tend to be more loyal and do more business in total with the dealer.
- Get smart about your used car operations, adopt the latest process standards and software tools and spend time in your acquisition, reconditioning, and marketing channels to spot margin leaks and opportunities. The used car market often strengthens inversely to new vehicle incentive trends, creating a strong counter-balance to the incentive drug.
- Consider forming or joining a local, automotive business-related “20 Group”, not of fellow car dealers but of some of your competitors in the service, parts and even used vehicle markets. Study and share business practices and develop more intelligence about the choice your customers face in the marketplace and what you need to do better or differently to stand out positively.
Dealers are business chameleons. They’ve successfully changed their colors over decades of disruption and change in their economic environment. However, addiction to incentives is one bad habit many dealers have not found a way to kick.
We’ve offered some warnings about the danger of this addiction and some of the options for treatment. No matter which treatment the dealer picks, the most important ingredient for fighting addiction is willpower.
Marc Spizzirri is Senior Managing Director for GlassRatner Advisory & Capital Group, LLC (link), a specialty financial advisory services firm and wholly-owned subsidiary of B. Riley Financial, Inc. (NASDAQ: RILY). He can be reached at 949.922.1006 or MSpizzirri@glassratner.com.
Taylor Conant is Chief Strategy Officer at Condottieri Advisors, LLC. He provides on-demand Chief Strategy Officer resources to growing organizations in the retail automotive industry and can be reached at firstname.lastname@example.org.