In this week’s blog, we continue our review of the excellent book, The Future of Automotive Retail by Steve Greenfield. It covers the changing trends of consumer behavior and technology that will likely continue to shape the automotive retailing experience for decades to come.

In part one of this two-part series, we discussed the first part of the book, the “convenience economy,” including predictions of changes to power sources and vehicle production.

This post continues to march through the book and focuses on vehicle ownership, autonomous vehicles, connected cars, service and repairs, and the proposed future of the auto dealership.

Vehicle Ownership

As the book’s author notes, trends in vehicle ownership have changed several times in the last few years alone. Historically, traditional car ownership dominated the industry, with each household directly owning one or two vehicles. Leasing has continued to provide an alternative form of access to personal vehicles, even with common pitfalls such as mileage restrictions, down payments, expensive insurance, extensive fees, and difficulty exiting the lease. In some instances, these disadvantages have made leasing more complicated and costly than traditional ownership.

The proliferation of upstart rideshares such as Uber and Lyft provided additional alternatives to vehicle ownership. Rideshares were supposed to reduce the number of vehicles on the road, reducing traffic as consumers could be paired up with strangers heading in the same direction. While rideshares have disrupted taxis, not enough people are willing or interested in taking a taxi to work every day. The pandemic also caused the pendulum to shift back to direct ownership as fewer people were traveling and commuting,  public events were limited, and fears of germs and contamination led consumers to prefer the safety of their own vehicles.

Through both undercurrents, subscription services have always existed. The book notes that many experts believe a shift to subscription services could soon be a permanent replacement for vehicle ownership. In fact, a study by McKinsey predicts that at least 20% of all new and used car retail sales will be in the form of a subscription as soon as 2025.

Many experts believe a shift to subscription services could soon be a permanent replacement for vehicle ownership

What is a car subscription service? Car subscription services contain similar elements as long-term rentals or short-term leases. Subscription services offer the use of the vehicle for one all-inclusive monthly fee that typically includes repair & maintenance, insurance, taxes, licenses, and registration, leaving owners/drivers responsible for gas. One limitation with subscription services is that most packages have mileage limits, much like traditional car leases.

What is the value proposition of a car subscription? A vehicle subscription allows consumers to switch vehicles easily and frequently with varying minimum periods, some as short as one month. Are you in a market where it would be appealing to have an SUV for winter conditions but a sedan for commuting during the other moderate seasons throughout the year? The myth behind this value proposition is that most customers retain their current vehicle for an average of 10 – 18 months, according to the CPO for Faaren, an upstart subscription company.

However, consumers value the ability to bundle car insurance, service, and occasionally finance in certain subscription packages. The convenience economy is also a factor here, as consumers can experience different vehicle features while enjoying affordable subscription services for around $300 to $500 for small to mid-sized cars. While the upfront monthly cost is likely higher than direct ownership, it comes with more price assurances. Consumers with a subscription service wouldn’t have surprise maintenance bills when their car stops working, and some consumers will likely value not having to worry about such repairs.

Another challenge to car subscription services is the demographic of likely consumers. As we discussed last week, the prevalence of the convenience economy is primarily attributed to millennials. Younger consumers are dissuaded from car subscription services because they are unable to find insurance at affordable rates. In contrast, baby boomers, who can obtain car insurance for reasonable rates, are more comfortable with the traditional vehicle ownership market, which might explain why car subscriptions have struggled to gain momentum.

Another final challenge to subscription services is depreciation. Most readers understand that a vehicle loses value immediately after driving off the dealership lot. On average, a vehicle depreciates approximately 20% in the first year of ownership, and by the end of year five, a vehicle is generally worth about 40% of its initial value, according to Edmunds. With car subscriptions being shorter in duration, how do companies price in the lost value due to depreciation in the first three years of a car’s life span? Hertz is attempting to bridge this gap by pricing subscriptions in the $999 – $1,399 range to account for depreciation. Only time will tell if consumers will have an appetite for subscription packages at these higher prices.

Autonomy

Just as the Jetsons and Back to the Future 2 predicted, autonomous vehicles are on the horizon for the auto industry. Perhaps, autonomous taxis will gain popularity before individuals own autonomous vehicles. The auto industry believed autonomous vehicles would come sooner than what has actually materialized. Why have consumers been slower to adopt autonomous vehicles? One primary value proposition for autonomous vehicles is safety. Based on average statistics in the United States, a collision occurs every 500,000 miles, with a fatality occurring every 60 million miles. While that may seem remote, these statistics translate to approximately 1.5 million fatalities on roadways each year worldwide.

A large percentage of consumers are not comfortable riding in autonomous vehicles and prefer to continue driving their own cars. They would like to see increased safety precautions and widely support a congressional mandate requiring the installation of manual brakes in self-driving cars.

Let’s examine the levels of autonomous vehicles per the book:

• Level 0 – No Automation – Human driver fully operates the vehicle; added features such as backup cameras or blind spot indicators; this level represents most of the vehicles currently on the road;
• Level 1 – Driver Assistance – Characterized as having at least one driver-support system involving either braking, steering, or acceleration;
• Level 2 – Partial Automation – The vehicle can take over steering, acceleration, or braking, but the driver must remain behind the wheel and ready to take action;
• Level 3 – Conditional-Driving Automation – Drivers don’t have to actively steer or brake in certain situations such as a traffic jam; Vehicles monitor the driver’s state if/when they have to jump back behind the wheel;
• Level 4 – High-Driving Automation – No human interaction; many of these vehicles don’t have a steering wheel or pedals; This level may not work during severe weather conditions or limited visibility; currently limited in testing to specific low-speed geographies and areas;
• Level 5 – Full-Driving Automation – These vehicles travel anywhere and do anything; Passengers have full autonomy to enjoy entertainment, take a nap, perform work, etc.; Vehicles do not have steering wheels, pedals, or brakes; Interiors are designed more like “smart cabins”; There are currently only 1,400 autonomous vehicles on the road in the U.S.;

While the timing and full adoption of Level 5 vehicles is unknown, most experts predict there will be a hybrid mix of autonomous and human drivers for at least the next thirty years. Once fully automated vehicles are integrated into the mainstream market, experts predict that dealers will sell far fewer vehicles. The sale and ownership of autonomous vehicles will be shared or part of the subscription models previously mentioned.   Why subscription and shared models? Current vehicle utilization (the percentage or amount of time your car is actually in use) is somewhere in the neighborhood of only 4%. This means that 96% of the time, your car is either sitting idle at your house or in the parking garage at your office. Turo is an example of a service that allows you to list your vehicle on their platform when you’re not using it, like an “Airbnb of Cars.” Autonomous vehicles would improve upon a car-sharing model because they reduce the friction of handing off the car and the deliverer not having a ride back to where they came from.

Autonomous vehicles will provide more opportunities to be fully utilized and shared by multiple individuals through subscription-based ownership. Subscription models could take on the form of monthly fees or a price-per-trip basis, like current forms of rideshare or taxi.

Connected Cars

We previously wrote a post analyzing the impact of connected cars on auto dealerships. What are connected cars? In short, connected cars can communicate with other systems outside the car, allowing the car to share internet access with other devices inside and outside the car. Just as smartphones are mini-computers, smart/connected cars are also becoming mobile computers with infotainment options. The added connectivity that comes with connected cars can potentially engage the millennial generation, who has a strong affinity for smartphones. As cars morph into smartphone-like electronics, they could become a competitor for the attention of younger generations.

Like smartphones and appliances, the connectivity features of cars can be controlled and updated through a technology referred to as Over the Air Updates (“OTA”s). An OTA is a software improvement or upgrade sent directly to the vehicle from the vehicle manufacturers (or “OEM”) or industry software company through a wireless internet connection. Examples of OTAs include heated beam lights during inclement weather, changes to suspension systems, or alerts to the driver if windows, doors, or trunks have been left open.

The current struggle between OEMs and auto dealers is who controls the OTAs and, more importantly, who retains the revenue. McKinsey reports that the size of the OTA revenue pool could reach $750 billion by 2030, which equates to $310 of revenue per vehicle and $180 of cost savings per vehicle. Not only could auto dealers be left out of this revenue pool, but OTA updates that occur directly will forgo/reduce the need for vehicle servicing at the dealership.

ABI research estimates that 203 million OTA or connected cars will ship in the U.S. by 2022

ABI research estimates that 203 million OTA or connected cars will ship in the U.S. by 2022. That figure represents 91% of new, connected vehicles in the U.S. compared to only 51% in Asia-Pacific countries and 37% in Latin American countries. Perhaps dealers can join in the OTA revenue sharing by offering an “AppleCare” subscription for cars. Current examples are GM’s OnStar or NissanConnect, which provide services such as remote door locking, vehicle health reports, maintenance notifications, and others.

Two unintended consequences of smart/connected cars will be data collection, privacy, and protection, much like smartphones. What types of data will be collected, and will the data collection be limited? The additional connectivity allows data collectors to track where the vehicle has been or even predict where the vehicle is going next. Smart or connected cars could risk being hacked, not only for customer information but also to automatically unlock a vehicle from a wireless keychain or disable the operation of a connected car. How will this be prevented, and will liability rest with the OEM or the dealer?

Service and Repairs

How will all these technological and behavioral shifts impact the fixed operations of a dealership, more precisely, its parts and service department? Recall that the fixed operations department has historically represented the highest margin segment of an auto dealership’s operations. On the surface, electric vehicles, OTA updates, and autonomous vehicles could decimate a dealer’s service department. For example, electric vehicles have approximately 20 moving parts, compared to 2,000 moving parts in a traditional ICE vehicle. Fewer parts mean fewer opportunities for repairs and servicing, not to mention EVs don’t run on oil and will eliminate the need for oil changes.

Fewer parts mean fewer opportunities for repairs and servicing

The book describes the onset of EVs as the “Blockbuster” moment for Jiffy Lube, whose core operations have revolved around oil changes. Jiffy Lube’s shift to potentially adding charging stations and other services should serve as an example to auto dealers to avoid their “Blockbuster” moment. The stark reality is that the shift to EVs would eliminate approximately 41% of Jiffy Lube’s core services and render another 18% to a lower level of importance.

How can auto dealerships respond to these challenges, and what other opportunities might present themselves? EVs are not all doom and gloom, as previously described. One underreported characteristic of EVs is that they are much heavier than their ICE counterparts. The additional weight provides two opportunities for auto dealers:  EVs will wear out tires 30% faster than ICE vehicles, leading to higher purchases of tires, and collisions involving EVs will cause more significant damage, leading to higher-priced repairs at the body shop. Simple parts, like windshields, are much more complicated in EVs, and consumers will be more apt to trust a reliable service department at a dealership to reinstall a smart windshield than a local repair shop. In the future, dealers could leverage that consumer trust to add options like battery swaps and sensor calibrations.

As autonomous vehicles become more prominent, dealers could provide other services like late-night cleaning, car washes, or middle-of-the-night repairs. These added services could help dealers get a higher market share of fixed operation work while reducing the need for loaner vehicles if the car could transport itself to the dealership for these maintenance items. Until then, dealers can also offer remote or driveway repair services, including delivery and pick-up services, to compete with Lithia and others. Dealers could participate in the increased tire sales and potentially offer tire subscriptions to EV owners.

Finally, revenue from EV recalls may be more lucrative than initially reported. EV recalls will involve more expensive parts such as batteries, which can comprise nearly 40% of the EVs total cost. According to the U.S. National Highway Traffic Safety Administration, about one out of every four vehicles on the road are open to a recall. Higher EV recalls provide auto dealers with two revenue-boosting opportunities: 1) OEMs generally pay for the recall work, and 2) service technicians can diagnose problems and recommend additional service items when the vehicle is in the shop.

Future of the Auto Dealership

Auto dealers have navigated numerous challenges throughout their history and the last few years. The next five, ten, twenty, and thirty years appear to be continual challenges brought about by technology and shifting behavioral trends. Historically, auto dealers have focused on day-to-day operations:  how many cars have I sold today, this week, this month? A majority of the systems and processes have also been manual, as certain functions don’t directly communicate with each other. Auto dealers must also fight the stigma that they are among the least trusted professionals among consumers, with nurses and medical doctors ranking on the other end of the spectrum.

The central perspective to point out from the book is that the future of auto dealers is not all doom and gloom. There are plenty of growth opportunities on the horizon, but the key is to adapt and plan for those shifts in advance to avoid their own “Blockbuster” moments. At a recent auto presentation, I heard a motivational speaker use a quote that I think is fitting for today’s auto dealers: “so what, now what…”. Dealers should adopt this attitude while facing a growing market of EVs, autonomous vehicles, OTA updates, etc., and seek service offerings and solutions that will appeal to consumers in the coming years.

We highly recommend The Future of Automotive Retail to anyone in the auto dealer space. You will both enjoy the book and learn from it.

Mercer Capital provides business valuation and financial advisory services, and our auto team helps dealers, their partners, and family members understand the value of their business. Reach out to a Mercer Capital auto dealer team member to learn more about the value of your dealership.