The 5 Things Dealers and OEMs Can Do Today to Stay On Top During the Next Downturn
I hate to be the bearer of bad news, but the next down market in automotive retail is coming. No one knows precisely when – and none of us is certain what will trigger it – but, it is coming. Moreover, given the current market realities, it might be coming a little faster than most of us in the industry imagine. Take, for example, these fast facts:
- The average length of a new car loan in 2014 was 66 months.
- The number of subprime borrowers missing payments is at the highest level in over 6 years.
- We saw a softening of overall (non-automotive) retail sales beginning in the fourth quarter.
- Roughly 56% of American adults do not have a full-time job.
Don’t get me wrong; the car business is a great place to be in 2015… just as it was a great place to be in 2005 when the industry accounted for 16.9 million new units. Slightly higher than where I see 2015 sales; my prediction is 16.7 million. If you’re in the automotive industry, you hope I’m wrong about 2015. Heck, I hope I’m wrong about 2015. Unfortunately, hope is not a strategy.
We’re having good times in autos right now and I don’t want to become Chicken Little; but the good times won’t last… they never do.
In the only decent Brian Flanagan quote from the 1988 movie Cocktail, we learn that “… everything ends badly, otherwise it wouldn’t end.”
Given that the good times will end – and end badly, according to young Mr. Flanagan – what can a dealer or OEM do today to ensure they stay on top during the next industry downturn?
The good news about the five pieces of advice I provide here is this: Enacting these not only help you grow market share in the future, they help you profitably grow your share today. What’s more is that it doesn’t matter if the industry actually turns negative or not, these five will keep you well ahead of the competition regardless of what happens to new unit sales.
The five things dealers and OEMs can do today to stay on top during the next down market are simply:
- Increase your lease portfolio
- Keep your costs in line
- Spend for the long term, not the short term
- Be dissatisfied
- Offer an exceptional customer experience
Increase your lease portfolio
There are plenty of great reasons to encourage leasing, but the best one for dealers looking to sell cars 24 months from now is that leasing today equals a customer tomorrow. Dealers who are actively pursuing 24- and 36-month leases wherever possible are well-positioned to retail more units in 2017 and 2018 than those writing mostly 72-month loans.
The math is simple: A customer who finances a new vehicle with little down at an average interest rate for 72 months is basically upside down for at least four years. If this same customer had leased the vehicle for 36 months, they’d be back in your dealership and ready to buy in three.
Moreover, customers who financed or paid cash for their vehicles maintain less loyalty to you or your brand than those who leased. (So, even if the 72-month buyer was ready to buy again in 36 months, there is little guarantee that you’ll be in their decision set.) Finally, since roughly 90% or more of lease customers enjoy their vehicles until the end of their term, you can target your marketing dollars and messages more precisely at those most likely to be in-market.
I could write an entire book on the dealer and OEM benefits of leasing, but the bottom line on growing your lease penetration boils down to this: Your business becomes more predictable and more lucrative because of the increase (in both quantity and frequency) of repeat buyers you enjoy from a robust lease portfolio.
Keep your costs in line
But Steve, we watch our costs every single day! What’s new about your advice?
Two words: Get efficient!
During the last downturn many dealers realized (some too late) that they had “slack” built into nearly everything they did. From salaries to marketing spend to processes, the good times led to lots of fat and little meat in many areas. The problem for inefficient dealers in a down market is that they end up cutting bone when going after the fat –and I saw this play out again and again in 2009-2010.
Did you close a successful BDC in 2009 because of costs? Did you stop buying third party leads in 2010 in an attempt to reduce your marketing outlays? Congratulations, you probably cut lots of bone.
Let’s address salaries first: Because of the compensation structure on the variable side of the business, many dealers weathered the last downturn without any actual layoffs on their sales staff. However, those with hourly call centers (that were created improperly) were forced to let go entire teams that were effective at driving business, but inefficient in terms of costs.
It’s time to get efficient, and that starts with your call center or BDC. Above all else, it must be a profit center and not a cost center. Anything less and it will be the first thing to go in the next downturn. The best way to make your BDC a profit center is to ensure you have sustainable pay plans in place. Sustainable pay plans ensure that as your BDC grows more successful, your overall sales compensation remains in check. Moreover, in a down market, your BDC’s results-driven compensation keeps you from having to lay off anyone who is performing. (For more on the proper way to set up and staff a BDC, you can check out my FREE video series: The 5 Must Haves for Creating a Successful BDC.)
Beyond a sustainable BDC, dealers should be certain they are looking at the economies of scale for any salaried positions on their sales and marketing teams. For example, many smaller dealers I know employed a full time Social Media Marketing Manager in 2008. This was a costly mistake; as these duties could have and should have been either outsourced to a reputable (and cost-effective) third party or divided among the current team. (If you’re AutoNation or Penske, you enjoy the economies of scale to have Social Media and even Search Engine Optimization expertise in house; for nearly everyone else: outsource this.)
Okay, but what about my marketing spend? Where is the “slack” in that?
Simply put, if you’re an average dealer there’s a high probability that you’re wasting thousands on digital marketing right now. Why? Because some salesman or some OEM vendor or some dealer in your 20 group told you that you were behind the times if you weren’t buying this or that shiny object; no questions asked.
It’s time to ask some questions to get your marketing costs in line. Luckily for you, there are only a couple of questions to ask any vendor before dropping a dime on their “cutting-edge” solution:
1. What will your product/service do for me in terms of growing my business? And
2. What are my expected costs per unit sold?
If anyone offering digital marketing today cannot answer those questions with data, then you might be better off spending those dollars on the billboard across the street. (At least that way you’ll know what you’re buying.)
Simply put: Digital marketing can and should be the most measureable advertising spend you make. If those people fighting for your digital dollars cannot give you straight answers to my two questions, ask them one more:
3. Who are your best competitors and why?
The answer to this third question should suffice in giving you a nice alternative to the guy selling snake oil in front of you. (If you’ve got time for a quick video lesson, here is a link to my FREE series Avoiding Snake Oil.)
Okay, but what are processes? Sorry, that’s a bit tongue-in-cheek and (unfortunately) a bit of reality.
The fact remains that few dealers have any strict processes in place when it comes to the variable side of the business. That said, given the rise in pricing transparency, the next market downturn is not going to be as kind to those dealers who lack process. (You know who you are: each customer is a little different; each negotiation has its own twists and turns; each deal has its own unique challenges.)
Strict adherence to your written processes (and especially continuous process improvement) ensures that regardless of the market direction, you and your team are doing everything you can to sell cars today and tomorrow; and at a greater pace than your competitors.
The whole idea of “strict adherence to process” reminds me of story I heard from a general manager of a successful dealership in Texas. He told me a buddy of his was managing at Texas Direct Auto, but quit, because (in his buddy’s words) “if they would just do things like a normal dealer, they’d sell ten times what they sell now.”
I responded with “Oh, you mean they’d be selling 25,000 cars a month instead of ‘just’ 2,500 from a single location?”
According to this GM, the issue was a discount of “only $500” that his buddy wanted to give to a buyer on a truck where Texas Direct already had a very healthy markup. The manager’s bosses wouldn’t budge on price and the buyer walked. Apparently, that was the final straw and – according to this GM – the manager walked, as well.
I wasn’t there, so I don’t know if this story is true. However, I do know this: stores that have strict adherence to their processes (like Texas Direct) do better today and in a down market than stores that run everything based on the mood of the desk managers. Moreover, stores like Texas Direct understand math; and the math on this $500 discount was not $500 or even the nearly $2,500 they stood to make if they sold this truck at the price the buyer wanted to pay. No, the math on this $500 discount was $1.25 million a month. (That’s how much the dealership would lose in monthly gross if they capitulated on every deal by “only $500.”)
Quick tip: If you use the word “sometimes” when describing your processes, then you don’t have processes.
Spend for the long term, not the short term
This advice may seem counter-intuitive given my earlier claim that “Enacting these not only help you grow market share in the future, they help you profitably grow share today.”
I still mean that.
There is an interesting dynamic that happens when you start spending for the long-term success of your business: you stop chasing and gaming and cutting corners and making excuses. This means that you start making better choices that not only ensure your future success, but actually drive current sales higher. For example:
- Real Reputation Management vs. Gaming the System – Dealers can and do pay companies to “repair” their online reputations every day. The problems with these efforts are that they are mostly artificial and any positive impact from the gamed reputation is short-lived. By maintaining an in-house reputation management process that produces real reviews from real customers on the sites that matter (like Google and Yelp) positions you for growth today and (especially) in the future. Not sure how to get started? Believe it or not I’ve got a FREE video series for that one too: Real Reputation Management.
- Real SEO vs. Phony Links (and other short-term “fixes”) – Real, White Hat Search Engine Optimization can drive great organic traffic in the short term – it really can. But, the greatest benefit from this exercise is the long-term credibility your website maintains when this is done correctly. Don’t know how to spot a great SEO company? The best ones will tell you all about their “secret sauce” since Real, White Hat SEO is completed primarily on your own website, is not a secret and cannot be accomplished by building fake relationships with websites that have no credibility with the search engines.
- Spend for Real Results on SEM – So many businesses have no real visibility into their current Search Engine Marketing spend that this is now the single biggest area where I see vendors taking advantage of dealers. First: If all you receive from your current SEM/PPC vendor is a report showing you things like impressions, click-throughs and click-through rates, you should switch SEM companies immediately. Then, keep switching until you find one that will also give you Cost Per Lead/Acquisition and Cost Per Sale (in conjunction with your CRM data). Finally: Make sure that the keywords you’re buying are effective at driving business today and not just branding for the future. SEM branding is not as impactful in the long term as the SEMs would have you believe. (If you don’t believe me, ask yourself this question: Where do TrueCar and AutoTrader spend tens of millions each year to drive their branding? The answer is not via pay-per-click ads on Google.) Of course, you might say that my advice on SEM runs counter to my spending for the long term theory – it does not. Given that great SEM drives business today, the resulting long-term benefit comes from growing your fixed operations revenue and by building a robust database for future sales. (Learn how to spot and stop SEO and SEM wasted and Fraud here.)
- Employ sustainable pay plans. While this topic was already addressed in theKeep your costs in line section (above), it deserves repeating here. When you employ sustainable pay plans (and not just add phony packs to cover new expenses like your BDC) you ensure that everything you’re “buying” today from this group will still be affordable in the future – regardless of the direction of the market.
- Your database is King. (And Queen and Prince.) Spending now to keep your database robust and complete helps you sell cars today and in the future; let me give you an example: What would happen to your be-back business today if your team truly did record every Up in the CRM? Not just name, but also email address, phone number, vehicle of interest and trade information? Now, what would happen to your business in two years if your team not only recorded all of that information today, but also followed up with each prospect and for those that bought elsewhere, they recorded what they bought, where they bought it and why they didn’t buy from you? Imagine what a well-trained BDC could do with that information in 2017? They could call each of those bought elsewhere customers and offer to buy their vehicles.In other words, you could begin an in-house, cost-effective Owner Marketing Campaign for people who bought elsewhere; because you have ALL of the information in your database; your CRM. (Now, wouldn’t it be great if your team had started doing this two years ago? Oh well, we can dream.)Spending on your database is a long-term investment that delivers unequaled dividends now and in the future.
The biggest difference between the mega dealers and the guys treading water is simply this: dissatisfaction at the top. It’s not about market size (look at Dave Smith Motors in tiny Kellogg, Idaho – population 2,117); and it’s not about having a great OEM brand to offer (look at Texas Direct Auto).
It’s all about never being satisfied with what you did yesterday; never being satisfied with average or even above average.
Too often I see dealers come off a great month and sit on their laurels while they congratulate themselves on a daily basis – assuming the good times will just get better. Think about it. If the last time you had your “best month ever” in new or used cars was more than a month ago, what happened to the momentum? What did you sell in the first few months following your “best month ever?” If you’re a satisfied dealer, then your team put the store in neutral until you coasted back down to average.
I’ve seen it happen over and over again. Satisfied dealers beget satisfied managers who beget satisfied teams. Everyone is so satisfied with being average that no one tries to be the absolute best. (Remember: it’s not your market or your brand that’s holding you back from being a mega dealer – those are just excuses.)
When top dealers have a blow-out month they’re excited for about a minute; then it’s on to the next task: beating that great number. Salespeople who routinely sell 25+ vehicles a month are the same way. They don’t come off a 30-car month and coast for the first week of the new month while patting themselves on the back. No, they get right back at it and work to beat 30 this month.
So, how do you become dissatisfied?
This starts at the top. The dealer principal needs to celebrate his or her team’s successes and then immediately ask “What’s it going to take to blow this number out of the water?” (And mean it.) If you follow this sentiment with daily challenges to exceed yesterday and last week and last month, you’ll soon know if your managers can become dissatisfied with you. If they can’t, it’s time for a change.
Finally, you will want to hire dissatisfied salespeople to replace those on your team who don’t like the pressure that comes from expectations of greatness. They’re not bad people; they just want less success than you. They can go want less somewhere else.
Offer an exceptional customer experience
Between pricing transparency and the desire by some to remove the dealer completely from the sales equation, it’s time for you to decide if you plan to be the Walmart of Car Dealers or the Ritz-Carlton of Car Dealers. You see, in the next down market, the only ones who will continue to profit will likely be those who’ve staked a position at one end or the other. Those in the middle will probably have margins that are too small and costs that are too high to focus on anything more than treading water.
The Walmart of Car Dealers will be uber-efficient, totally driven by cost-saving processes and making money on volume. They will do fine in the next downturn.
The Ritz-Carlton of Car Dealers will provide an exceptional customer experience that affords them better margins, a great reputation, lots of repeat business and a slew of customer referrals. They will also do fine in the next downturn.
Unless you’re part of a big group like Asbury, Sonic Automotive or Lithia, it’s not that easy to become the Walmart of Car Dealers. This is primarily because you cannot enjoy the economies of scale that come from things like centralized accounting, centralized call centers and the buying power you get from having scores of locations.
So, let’s focus on you becoming the Ritz-Carlton of Car Dealers, shall we?
But Steve, I don’t sell Ferrari or Lamborghini, how am I supposed to be thought of as a Ritz-Carton?
Relax; this has nothing to do with brand and everything to do with the customer experience. When you make buying from you or servicing with you a true VIP event, you break down the traditional barriers customers construct when faced with the thought of interacting with a car dealer.
Not sure how to offer an exceptional customer experience? That’s okay, you’re not alone. Most dealers have been doing things the same way for so long that the way we treat customers today seems fine to everyone… everyone except the customer, that is.
An exceptional customer experience is all about reducing the stress, the time and the conflict of buying or servicing a vehicle. Once those are reduced, treating the customer like you genuinely value their business makes the entire experience truly exceptional in the customer’s mind. (Once they have an exceptional experience with you, they tell others; and then they can’t imagine buying or servicing anywhere else.)
Moreover, nearly everything about creating an exceptional customer experience is free – it just takes effort. In fixed operations, this means little things like:
- Treating your appointments as if you’ve been expecting them. Case in point: I go out of my way to pre-schedule service with one local dealer; yet when I arrive, invariably, they have no idea who I am or why I am there. I end up having to regurgitate everything I already told them on the phone yesterday. This not only is a waste of my time, but it creates a conflict when the advisor tells me something different than what I was told just the day before.
- Keeping your word. If I drop off my car at 7:30 and you tell me it will be ready at 5; then you have two choices: Have my car ready at 5 or call me well in advance to tell me when it will be ready. Anything less is unacceptable (yet seems to be the standard operating procedure for most dealership service departments).
- Keep me informed. Along with keeping your word, you also need to keep me informed. You should do this not just to reduce my stress and align my expectations with reality, but also to have me happily increase the amount of the repair order. For example, if at the time of dropping off my vehicle, the advisor explained that the technician was going to perform a free multi-point inspection (MPI). Then, 90 minutes later I received an email with the results of the MPI and a couple of recommended services with costs and expected repair times associated with them, I am more likely to buy these services than if you waited to spring this on me when I arrived at 5:00 PM expecting to drive away with my fully-repaired automobile.
- Working Wi-Fi. I use the concept of a working customer Wi-Fi signal to cover all of the little things that are unimportant to your team, but annoying to your customers when they don’t work as designed. Any of these little annoyances ensures this will not be an exceptional experience.How hard is it to be certain the Wi-Fi is working every morning? How hard is it to make sure the service waiting area is clean and clutter-free? To ensure there are always coffee cups and a fresh pot available? To make sure the soda machine is working and full? To have clean bathrooms?Apparently, for some dealers, these tasks are too hard for their team to tackle on a daily basis. For these dealers, they’d better hope they’re more efficient than their neighbor; because if they’re not, it’s going to be difficult to get consumers to pay extra to service with them.
On the variable side, an exceptional customer experience starts with understanding that the average prospect that walks on the lot has already done 19+ hours of research. They’ve selected your dealership for a reason – don’t blow it with typical road-to-the-sale shenanigans. They are there for one reason: They need someone to sell them a car; so let’s do that. Let’s assume the sale until they tell us differently. Let’s stay positive and handle every question and objection with a response that brings them closer to sitting down and working the numbers.
Now, this means shortening the sales process; though not just because we’re going to narrow down their selection faster or because consumers are sick of giving up their entire Saturday to buy a car; but because there is no way to create a true VIP event if it takes 4+ hours from beginning to end.
Last year I purchased a used vehicle from a franchise dealer in our area. I was there on a Sunday and was the only customer on the lot. I completed the deal with the sales manager quickly, but still waited about an hour to see the F&I manager. Again: I was the ONLY customer on the lot.
What started as a pleasant negotiation turned into a dreadful overall buying experience. Unfortunately, this dealership’s F&I manager, like most managers I encounter in the business office, had her own clock; her own sense of urgency; and none of this was aligned with the customer or even the sales team. This has to change.
I’m not talking about cutting corners; that’s short-term thinking. I am talking about creating processes that move customers into the business office more quickly, and that keep the entire transaction closer to a VIP event and less like a trip to the dentist office.
Speaking of dentists, the best way for you to truly create a VIP experience is to start thinking like dentists: That is, it’s time to start setting REAL appointments that actually SHOW and BUY. It’s time to move to an Appointment Culture.
Dealers who’ve fully adopted the Appointment Culture are seeing better than 80% show rates, closing better than 80% of those who show, doing the deals in under 90 minutes, and getting perfect CSI from their VIP customers. The Appointment Culture delivers an exceptional customer experience, and the best part is that it’s 100% free to enact. In fact, you don’t even need to pay someone like me to help you create an Appointment Culture in your dealership, because (you guessed it) I have a FREE video series for that one too: Creating an Appointment Culture.
As I wrote in the beginning of this post, the next downturn is coming. (Though, I am hopeful that I’m wrong about the timing.) If the industry only sells 16.7 million new units this year (as I’ve reluctantly predicted), then you can likely bank on further flattening in 2016, 2017 and 2018. If this is the case, then growing sales in the future means stealing share. Where will you steal your share? Will you have the resources to price competitively when everyone else is also scrambling for growth? Specifically:
- Will you reap the rewards of having focused on leasing way back in 2015?
- Will your cost structure allow you to earn a profit in a race to the bottom?
- Will you benefit in 2018 from the marketing you purchased in 2015?
- Will you and your team be dissatisfied enough with 2% growth to go after more than your share?
- Will your customers be fiercely loyal because you offer such an exceptional customer experience?
A wise Dealer Principal once relayed a Chinese Proverb to me when we were discussing the pain of making changes at his dealership: he said “The best time to plant a tree was twenty years ago; the second best time is right now.”
I’m hopeful my 2015 prediction is off by a million units; it would be phenomenal for the industry and the economy to see 17.7 million new vehicles retailed this year. Of course, even if we hit that number, there will eventually be an industry downturn, and you can prepare for it now and profit during the bad times; or you can wait for the worst to happen and hope for the best.
Though, as you know, hope is not a strategy.
November 10, 2015 @ 9:40 PM
Admittedly, I was way off about the growth for 2015. I wrote this in early February and didn’t predict that interest rates would stay at ZERO while oil remained in the $35-$45/barrel range for the entire year. While I predicted slight growth, I did not foresee the record year we’re having (despite the pent-up demand).
Well, the better we do in 2015, the faster the next downturn is likely to come. Dealers who heeded my message in February and built for success got not only growth this year, but also grew their market share. They are poised for the next downturn. Here’s to hoping it doesn’t come in 2016. (Of course, hope is not a strategy.)
Auto Group CEO
July 11, 2015 @ 7:42 PM
This is the best advice ever written for car dealers! I am making this mandatory reading for all of our group’s general managers!
July 11, 2015 @ 7:46 PM
Thank you! We’ve received a lot of encouraging notes from dealers about this advice. Good selling!