The traditional business model for auto dealers is to buy a big piece of land on a busy highway, put up a showroom, and surround it with acres of cars. Conventional wisdom in sales is “You can’t sell from an empty wagon.” Customers don’t want to see one apple at the grocery store, they want to see dozens. But new internet tools are changing the way people shop for cars.
Nearly 90% of car shoppers use the internet to shop for a vehicle according to a 2016 study conducted for Autotrader.com by IHS Automotive. The study found 59% of customers at one dealership are using their smartphones to compare prices at other dealerships and 38% are comparing inventory available elsewhere. “Today, car shopping is all about matchmaking — uniting sellers and buyers online,” says Jared Rowe, president of Cox Automotive Media.
That change in customer behavior is driving changes in how dealers configure their operations. Auto dealers own or lease about $130 billion of real estate in the U.S., according to Kerrigan Advisors, an advisory firm that helps dealers sell their businesses. Many are finding they can store much of their inventory off site on land that is less valuable and shrink the size of their real estate holdings in prime marketing areas.
AutoNation, the largest new vehicle retailer in the U.S., currently owns about $3 billion worth of real estate. It is poised to sell off some of its holdings to raise $500 million. That money will be used to create a new chain of used car stores known as AutoNation USA. They will be located on less valuable land and keep more of their inventory off site. AutoNation CEO Mike Jackson says “It’s a very prudent approach to brand extension.” He expects those used car stores to have higher gross margins than the company’s new car stores.
Dealerships looking to expand today are faced with record high land prices in prime areas. Jeff Dyke, executive vice president of the Sonic dealership group, says many of its EchoPark used car locations are located closer to neighborhoods. They operate on smaller parcels of land and carry smaller amounts of inventory.
“What we did is develop a hub and spoke model,” he says. “For example, we have a large store in Thornton, Colo. with smaller stores surrounding it. We are going through a massive transition in our industry. We know that down the road, we’ll need less and less real estate.” EchoPark uses computer algorithms to determine what vehicles sell best at each dealership location. If a vehicle a customer is interested in isn’t on the lot, EchoPark will ship the vehicle to that location.
Brian Bates, president of Holman Automotive, a dealership group with 33 locations across the U.S. says, “The big thing we’re able to do is lease or purchase space off site. We can store cars in old warehouses about two to 5 miles away. It’s much more cost effective.”
The other force that is changing the automotive marketplace is Tesla. It typically has few cars in inventory, preferring to build each car it makes to the precise specifications desired by the customer. But even that is changing. Not everyone is willing to wait weeks or months for a new car to arrive. People don’t buy a new car every day, but when they do, it is usually only a matter of days between the time they start looking and the time they start driving it.
Tesla says it will be selling 500,000 cars a year by this time in 2018. In order to do that, it may need to build up its inventories of new cars. It has already announced it will build large lots of cars all equipped the same way in an effort to boost gross margins as production of the Model 3 gets underway. That suggests the “build to order” model will not apply to the Model 3 as much as it does to the company’s other cars.
Perhaps a form of convergence is under way in the car business between the traditional model that features big stores with big inventories on prime land and the non-traditional model employed by Tesla that features smaller stores with fewer cars parked outside.
Source: Wall Street Journal