By James A. Ziegler, CSP, HSG,
"The Alpha Dawg"
The Dealer Empire Strikes Back
I laugh until coffee spews out of my nose whenever I hear someone say, "Well, Carvana may be in trouble, but we learned a lot from them."
Excuse me, did you bump your head (as I often ask)? Exactly what have we learned from Carvana? I'll tell you what I learned: how not to run a business. It appears they lost another $2 billion in 2022. In the words of Groucho Marx, "If we don't sell too many of these, we might break even."
If we were paying attention, one thing we learned from Carvana is how not to pay too much for cars at the auctions. How often have we heard dealers say, I can't believe how much those Carvana buyers paid for those cars?
At the height of the insanity, Carvana was paying 'Stupid Money' to buy cars, thousands of dollars over market value, way too much, even paying more than the inflated numbers others were paying.
Of course, that's all coming home to bite them right now. They have thousands and thousands of cars in stock that they have to unload at huge losses as used car values continue to dive lower each week. Used car values are down 45% and dropping from the frenzied highs of recent years.
Every other day they're laying off more employees as the specter of bankruptcy appears to be lurking in the near future. This week's news, even as I enter these words into the keyboard, "Carvana just laid off another 2,500 employees," as their stock dives 99% off from their high last year.
They came roaring onto the scene at the height of the COVID-19 pandemic lockdown, touting online sales delivered offsite at your home or place of business. They launched heavy media campaigns depicting car dealers as criminals, implying they were the salvation with a frictionless 'buying experience.' Their counterpart, Vroom, actually outdid them with the sleazy car salesman commercials.
And you know what? It worked initially. There were the people locked down at home that needed a car. It seemed like the answer. After all, Tesla had already paved the way with the total online transaction without dealerships. There are many real reasons why Carvana and Vroom were never and never will be in the same category as Tesla. I'll save most of that for another article.
Their profitability initially was insane. But of course, that did not go unnoticed by those executive geniuses at the top levels with the manufacturers. Without exception, virtually every manufacturer's board of directors was watching Tesla marking up record profits, more than all of them combined.
For most manufacturers, the dream was coming true. What if we could sell directly to the public and eliminate the dealers?
Why can't we be more like Tesla?… And now, here was the answer to the missing parts of the equation, or so they thought: We can get in the used car business too, and we can totally transact online.
I'm getting ahead of myself here, but let's just say GM's CarBravo and Ford's Blue Advantage might be examples of where this is headed. The manufacturers wanted access to the dealers' book of used car business. They needed a complete database of information.
The Digital Retailers
Enter the stage now, the 'Digital Retailers.' But before we continue here, let me clarify my position on digital retail. No misconceptions - I LOVE digital retail. I urge every dealer I consult to have a digital retail application.
Now that I’ve cleared
Suddenly, we had Darwin, AutoFI, Prodigy-Upstart, Roadster... and a parade of others springing up on the automotive landscape.
They offered dealers the ability to transact totally online, just like Carvana and Tesla. In states that do not require a
‘wet signature,’ customers could e-contract and buy F&I products. For the
first time, we could sell the car online without human interaction. F&I was
the final piece of the puzzle, and now the Digital Retailers assured us they’d
solved that problem. Dealers were hesitant because let’s face it, F&I is
the most profitable department in the dealership.
Carvana, Vroom, and even Tesla are just the symptoms; the real 'Disruptors' were always the Digital Retailers.
Now, with digital retail, everyone assumed we'd deliver most of our cars offsite and very few people would visit the showrooms.
But, in reality, that's NOT what happened. Surprisingly to some people, most consumers didn't pull the trigger, and they didn't complete the transaction online. Many customers were reluctant to enter their financial information. As most of us in the business already knew, most consumers still wanted to see and experience the car in person. In other words, it didn't work the way they said it would, NOT for most people.
Perhaps you're thinking, wait a minute here, Ziegler, are you saying digital retail
doesn’t work? Spit it out and say it, big boy.
Okay, I’ll say it… digital
retail doesn’t work. At least it doesn't work the way some people sold it, some of you.
Digital Retail, Setting the Scene
Picture this, when digital retail first appeared on the scene, the manufacturers went slap-ass crazy with it. As I said, they viewed it as a way of getting rid of the dealers, or at least reducing the dealerships to being 'delivery centers.' I can picture manufacturer executives waking up from a dream in a cold sweat quivering with excitement at the idea.
Unfortunately, many manufacturers went ‘All-in’ and made a
major financial commitment to the ‘agency model’ and ‘direct to consumer sales.’
Then came the semiconductor chip shortage and supply chain issues, creating severe inventory shortages. Dealers were charging $10,000 over MSRP (sometimes much more), and customers were paying it.
“Uh-oh,” said the manufacturers, and the big three raised the
prices of their trucks, especially EVs, by more than 40% in less than a year.
They claimed it was supply shortages. But I have evidence that it was simply that they saw the dealers were making that excess profit and wanted to
move it to their side of the ledger. When the government put a $7,500 tax
credit on EVs, all three raised the prices of EV trucks by $7,500.
Let’s face it, everybody's supplier costs and prices didn’t go
up more than 40% in just nine months. If you believe that, let me sell you a
The current political party in power announced that all cars will be BEV (Battery Electric Vehicles) by 2035, and all manufacturers went different degrees of mad dog crazy. Remember, this isn't a law; it's not even an executive order, as far as I know. It's just them saying it (except in California, go figure).
Jim Farley with Ford was so excited that he split Ford Motor
Company into two companies, Ford Blue and Model-E. OR, as I call it, The haves
and the have-nots. Ford EV dealers now have to belong to a special club that costs a million dollars to join. They have special rings and secret handshakes
and stuff. Well, at least that’s the rumor anyway.
So, Ford jumped out front and started withholding EVs from
dealers that don’t meet certain criteria. Then, they went even further and told dealers that they would not participate in the brand's hottest-selling EVs if they didn't invest $1 million or more.
Of course, there are
lawsuits popping up on behalf of dealers asserting that when a dealer buys a
franchise, they have the right to sell all of the products offered by that
manufacturer as part of that franchise. I’ll not comment on that here, but many think the dealers have a valid argument.
Expectations & What's Essential
All the state dealer associations are marching onto the battlefield
now, as is NADA. The franchise laws are under attack when the manufacturers start
selling directly to the public; you can expect the dealer associations to suit
up and fight back.
Here’s where it gets stranger still. Earlier I said that digital
retail doesn’t work, and then I backed up and said your dealership needs to
have it. I would go as far as to say that some of them are the best ‘desking
tools’ on the market.
It certainly didn’t turn out the way they said it would. But
all dealerships need to have the methodologies with which consumers might
want to buy cars.
If the customer prefers to transact online, your dealership needs to offer that service, including the option to complete the total transaction, execute the contract, purchase F&I products, and have a 'no-contact offsite delivery.'
I’ve said repeatedly that most people will NOT transact online
even if there is a seamless digital process available, one thing that Carvana
and Tesla did prove, however, is that some people will totally transact and take
delivery at home or work (people in some market areas more than others, and more with highline vehicles than not). Certainly, total transaction online was more frequent
during the pandemic lockdown than it is now.
The biggest lie that somebody told dealers about digital
retail is that it sells F&I products as well and as profitably as an in-person
experience where the manager sells the F&I products to the customers, face
I’ve spoken to hundreds of dealer employees and dealers, and
I’ve yet to find anybody that says their digital retail tool is selling F&I
products. And virtually nobody watches those videos about F&I products that
they claim sell the stuff. Now, granted, I’m sure somebody did it somewhere at some time, but remember, I deal with what most people will do most of the
time, as opposed to what some people will do some of the time.
Sure, some people prefer skim milk, others only
drink almond milk, and little kids might be drinking only chocolate milk, BUT I’m
fairly sure most people drink whole milk.
So, if, by some stretch, I’ve heard them say, it improved
the dealership’s F&I numbers. I’m sort of thinking that dealership must
have had really crappy numbers to start with. Maybe I’m wrong — not a fat chance
of that though.
Now, here’s where the Disruptors lost. The car business is “normalizing
Used car values are coming back in line with rational
numbers, and dealers are getting more inventory every day. For the first time in
a long time, we’re seeing manufacturer rebates advertised on cars, even on EVs.
The most humorous thing so far is that even Tesla is offering a $7,500 rebate on some Tesla models.
Dealerships are wheeling and dealing again. And we're seeing commercials on television offering huge discounts, as much as $7,500 to $8,000 off of MSRP. Even the bow-tie guy in Atlanta is wheeling and dealing, and Linda Beaver says their prices won't be beat. As the car business normalizes, the disruptors are fading in numbers and importance.
Direct-to-consumer sales by the manufacturers— that's definitely not working because most of them can't produce the cars and trucks in a timely way for customers who are used to instant gratification and Amazon overnight delivery.
Ford is experiencing record recalls because of the worst
quality problems they’ve had in years, especially as Chicago continues to be an
embarrassment. They’ve evidently taken their eye off of the ball and inventory
is backing up.
Built-to-order direct sales of cars and truck sales is a
really dumb idea since they have difficulty fulfilling the orders they have.
Ford’s got Bronco orders in for a year they can’t fulfill. Some
dealers tell me that they have Ford EV trucks in stock that haven’t sold yet. Could
it be that premium merchandise is beginning to slow down as consumers are
afraid of inflation and a looming recession might be on the horizon? Interest
rates are creeping up, and people can barely afford entry-level vehicles coming
in the pipeline.
Carvana only taught us not to overspend on advertising, don't pay too much for cars, pay off the customers' loan payoffs; if you're going to sell a car, recondition it first; be sure you can produce a title, you need to pay off the trades and process the paperwork with the state. But, most of all, don't over-kick your coverage.
And Carvana and all of the Disruptors, taught us that dealers have been here and endured many hardships and adversities for more than 100 years, so the biggest lesson they taught us is … Don't poke the bear. #AlphaDawg
James A. Ziegler, CSP, HSG, of Ziegler SuperSystems, Inc., for 45 years, has been a recognized industry leader, writer, magazine columnist, professional speaker, and super performer following a record-setting sales career as F&I manager/director, and GSM with some of the top automobile dealerships in the country. Jim has worked with more than 15,000 dealerships nationwide, and over 125,000 dealers, managers, and factory executives have attended his automobile dealer management trainings.