Back to the Future: Dealerships Are, and Always Will Be, the Ballast of Our Industry

Five reasons our industry, especially the pre-owned sector, will recover and thrive.

Jeffrey Schwartz – President, SureSale

I started my career in the auto industry during the boom of the dotcom era as CEO of one of the early stars of the ‘web’ – I was a tech guy and former Disney exec and my previous contact with auto dealers had been as a customer in the showroom. Back then, as the “world-wide-web” was evolving in a frenzy into the “Internet,” and upending every business model that was not bolted down in the process, people who knew even less than I did about auto dealers were predicting the demise of the traditional dealership model. The ecommerce platforms, like the one I was part of, were forecasted to become the de-facto way to buy a car, no auto dealership required. Well, it didn’t take long for the dotcom whizzes to realize that auto dealerships were savvy, shrewd and deeply resilient, and also crucial to their communities — and still the place where consumers preferred to transact on the second biggest purchase of their lives! The ‘game-changing’ online models were also deeply dependent on auto dealerships for revenue and, let’s face it, for our survival.

Some of the most intuitive and savvy business people I have met in my career were the dealership principals and managers who were our customers back then. These are the ones who evolved their business in tune with new technology models that endured, versus the many shiny objects constantly thrown their way.

We’ve all been through a lot since then – the bust of the dotcom era, the boom of recovery, the Great Recession, the recent boom of auto sales and now, COVID-19. And my opinion of the auto dealerships who form the ballast of the auto industry continues to be just that. They are the auto industry’s ballast.

While there is no question that, in the near term, the impact of COVID-19 is huge, it differs from previous auto boom-bust cycles because it is not the result of underlying economic fault lines but of a global, catastrophic, natural disaster that almost no one could have predicted. Yes, pundits had already been forecasting economic challenges ahead: a recession sometime in the next two years, a stock market that was over-blown and due for correction, and slowing new vehicle sales.

But the underlying fundamentals in our economy and our industry were still strong and especially powerful in the segment of the industry in which I currently operate – the pre-owned segment, and, more specifically, certified pre-owned (CPO), where demand and sales had been breaking records: the first month of 2020 was the strongest January for the CPO market in a decade, and February sales increased another 10%[1]. But, not surprisingly, those sales dropped 33.4% in March[2] as overall used vehicle sales began to decline as a result of the social distancing consumer base and, in many areas, the closing of dealerships brought on by the coronavirus crisis.

Indeed, these numbers may get worse before they get better, leaving deep but, I believe, healable wounds. And it is the collective auto dealerships’ ballast, along with their willingness and ability to migrate to new ways of doing business, that will reinvigorate our industry. With that in mind, here are five reasons I’m sure our industry, especially the pre-owned sector, will recover and thrive:

  1. Auto dealers are smart, innovative, and resilient, and they are already adapting to changes in the marketplace, as they have before. Case in point is digital, and distance, retail. Pre-COVID-19, it was expected to represent over 25% of used car sales in the next decade[3], and that will most certainly be accelerated by the current environment. Dealers will lead the charge here. As consumers change the way they want to purchase vehicles, dealers will adapt to their preferences.
  2. Used car sales offer a relatively countercyclical safe harbor from events that shock the economy, and dealers with strong used car programs should survive and prosper. Peak-to-trough declines for used car sales have averaged about 11% over the past two decades, compared to 23% for new car sales[4]; and, historically, used car sales have had less volatile reactions to economic disruptions, such as the 2009 recession. Dealers who focus on and optimize their used car operations during these times will reap the benefits.
  3. Challenger models are going for the jugular right now, but traditional dealers are well positioned to compete. Carvana just raised $650 million in equity and increased their flooring line by $2 billion[5], CarMax is putting the pedal to the metal, expanding its omni- channel model, and Vroom expanded its inventory flooring by $450 million[6]. Dealers have been challenged before and they have risen to the occasion by adapting their business practices to the way consumers want to buy. Digital and distance retail, online condition reports, pick-up and delivery, and remote test drives and appraisals are all practices that dealers I speak with every day are working on and adapting to. These changes will be key to their success.
  4. The current environment gives dealers the impetus to create efficiencies as they pivot their business models around the digital shopper. Used car shoppers spend 40% more time researching their vehicles online than new car shoppers, and they visit fewer dealerships than ever before (2.2 vs. 2.8)[7]. In fact, during the COVID-19 crisis, used vehicle shopping has declined significantly less than sales, another key indicator that dealers should continue to organize their business around digital.
  5. The powerful economic factors that were making used vehicle and CPO sales soar will be magnified in the aftermath of this crisis. Economically shaken consumers will want affordable vehicles that they can have confidence in, and they will want to buy them from trusted members of their local community. Dealers are in a unique and defensible position of incumbency, and they will adjust and adapt their business models to account for these historic changes, leveraging their inherent advantages. 

In the weeks to come, I will be sharing some key insights from just-completed research SureSale conducted on the used vehicle sales process, as well as some ideas on ways of doing business that we believe can help dealers both during, and in the aftermath of, this crisis – and on into the future. I will be posting these insights on SureSale’s LinkedIn, so be sure to follow SureSale there as well as on Instagram, Facebook and Twitter. We would love to hear your feedback as we release these insights and hear how you are navigating this crisis. 

In the meantime, at SureSale our strongest wish is for the health of all our industry peers, their families, friends and communities. The auto industry is a strong family. We are proud to be part of it. #autoindustrystrong 

[1] https://www.autoremarketing.com/trends/early-look-cpo-vehicle-sales-march-q1

[2] https://www.autoremarketing.com/trends/early-look-cpo-vehicle-sales-march-q1

[3] https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/as-dramatic-disruption-comes-to-automotive-showrooms-proactive-dealers-can-benefit-greatly

[4] https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/used-cars-new-platforms-accelerating-sales-in-a-digitally-disrupted-market

[5] https://www.fool.com/investing/2020/03/25/why-carvanas-stock-has-rocketed-68-higher-in-two-d.aspx

[6] https://www.businesswire.com/news/home/20200331005204/en/Online-Automotive-Retailer-Vroom-Announces-450-Million

[7] https://b2b.autotrader.com/wp-content/uploads/2019/06/2019-Cox-Automotive-Car-Buyer-Journey-Study-Research-Deck.pdf