Episode ONE: Margin Compression in the Automotive Industry
Do you feel like you're constantly struggling to keep up with changing culture and new technology? Do you find that the old way of doing things just isn't working anymore?
We'll, you're in the right place. Your margins are being compressed, BUT not all hope is lost. This episode is the first step in educating yourself to change your mindset so that you don't end up like the rusty junker in the scrapyard.
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Dealers. Your margin is being compressed like a rusty junker in a scrapyard.
That’s Dale’s main point in the first chapter of this book. It’s the crux of the challenge. The one that must be addressed. While car sales used to be the source of generous profits, the internet has done what it does to every industry it touches. It squeezes out the fluff.
Extreme transparency, information availability, and refined consumer preferences are forcing retailers to deliver exactly what the customer wants how they want it and when they want it. If dealers are going to succeed, profits must be preserved in just about every area of their business operations. NADA data shows us that between 2005 and 2014, new car front-end margins have dropped 43%, used-cars have dropped 10%, and the cost of acquisition is up a strong double-digits.
In short, cars cost more to acquire and yield smaller returns and it’s only getting worse. The old adage of “sell more to make more” no longer applies and Dale suggests the new way of thinking should be “You can make up the decline in front-end profit only if you sell more cars, more efficiently.” And Dale says that dealers don’t seem too concerned because of these last few record years, but he’s certain the old model is running out of gas.
He identifies 4 very direct threats:
Rational volume limits
Rising interest expenses
Growing F&I regulation
New competitors the internet has brought
Companies like Amazon and Carvana couldn’t care less about the old way. In fact, they are doing everything they can to exploit its vulnerabilities. They’re trying to put some more nails in the casket. And, of course, all of this perpetuates the cycle of ongoing margin compression.
So Dale organizes dealers into three groups. We’ll call them proactive, active, and reactive. The proactive group makes up the first 10 % of dealers and this group is paying attention to future trends. Actually, they’ve been paying attention for a long time. They’ve been addressing and implementing strategies to combat this margin compression and it’s really been paying off. The next 10% to 20% are the active group. They aren’t the leaders, but they’re paying close attention to what the proactive group is doing. They see the risks of margin compression and they just aren’t sure what to do about it yet. And finally, the remaining 70% of the dealers, they make up the reactive group. They need proof to move. Or crisis. And they’re about to get both. They don’t see or understand how imminent the threat of margin compression is.
So, I ask…which group are you in? The good news is you get to decide.
Dale Pollak’s ‘Like I See It’