The Coming Automotive Retail Disruption Explained on a Cocktail Napkin

 

The Coming Automotive Retail Disruption Explained on a Cocktail Napkin

As I’ve written previously, the real disruption to the automotive retail model in America will not come from the Carvana’s (NYSE: CVNA) of the world. That is, “a better customer experience” won’t matter if there’s no price and convenience advantage. (And, Carvana won’t be worth $3 billion much longer if they don’t start making money; so, a sustainable low-price advantage is out.)

Look at Amazon. It wasn’t a better experience that allowed Amazon.com to destroy your local bookstore; it was a retail price that undercut the local guy’s wholesale price (not to mention no sales tax and free shipping) and the convenience of ordering online.

People absolutely loved going to bookstores – that was a great customer experience – but they loved saving money even more. Damn the Mom & Pop bookstore owners, full speed ahead!

The same will be true in automotive retail. It will be price and it will be convenience and nothing else. Let me explain on a cocktail napkin.

Vehicle Ownership vs. Public/Alternate Transportation

(For the purposes of this discussion, everything that is not a human-owned-and-driven vehicle will be interchangeably considered public or alternate transportation.)

Image A (above) lays out the basic ideas of price and convenience relative to transportation options.

The y-axis shows the relative cost of owning and driving your own vehicle versus some alternative. At the bottom of the y-axis, the cost of not owning a car is much lower than owning and driving your own car. As you follow up the y-axis, the cost of alternative transportation (relative to owning and driving your own vehicle) increases.

The x-axis represents the perceived convenience and safety of taking your own car versus all other options. [I combined safety with convenience because it’s a (sometimes subconscious) factor in many transportation decisions; and because it’s darn inconvenient to be mugged or carjacked or killed based of the transportation method you choose.]

To the far left of the x-axis, owning and driving your own car is exponentially more convenient and safer than the alternatives. As you travel to the right along the x-axis, perceived (or real) convenience and safety increase as you choose alternate forms of transportation.

If we break this chart into four quadrants, we can better understand and plot the alternatives to owning and driving a personal vehicle:

Briefly, the four quadrants shown in Image B (above) represent:

• Quadrant 1: Any form of transportation that costs more to use and is less convenient than owning and driving your own vehicle.
• Quadrant 2: Any form of transportation that costs more to use, but is more convenient than owning and driving your own vehicle.
• Quadrant 3: Any form of transportation that costs less to use, but is less convenient than owning and driving your own vehicle.
• Quadrant 4: Any form of transportation that costs less to use and is more convenient than owning and driving your own vehicle.

As Image C (below) indicates, we don’t need to be concerned with Quadrant 1, because anything that both costs more and is less convenient and/or less safe than owning and driving your own vehicle would never pose a threat to the automotive retail model in America.

For Image D (below) let’s plot the alternate transportation choices that have been available to human drivers for about as long as there have been cars.

In the bottom left of Quadrant 3, we plotted city buses, as these represent an inconvenient, but relatively cheap transportation option. As such, those with fewer dollars and more time will ride these to and from their destinations instead of buying and driving their own vehicle.

Conversely, we plotted private limos in the top right of Quadrant 2. Why? Because these represent a form of transportation that costs much more than owning and driving your own car; though, inarguably, private limos are much safer and more convenient for those who use them.

(If you’re still not clear on the importance of the price/convenience relationship, imagine if using a private limousine service cost the same as taking a city bus. The impact would be undeniable: Buses would be empty, and everyone would be sitting in a chauffeured Town Car.)

Traditional taxi cabs are plotted in Quadrant 2, because they cost more than owning and driving your own car, but are more convenient. (Think about it: If taxis were less convenient and cost more than driving yourself, they’d be in Quadrant 1 and they would not exist.)

We plotted the New York City subway across Quadrants 3 and 4, because it’s always a cheaper option than owning and driving your own vehicle, but not necessarily always more convenient or perceived as being as safe.

By the way, the reason I called out the NYC subway (and not every city’s rail service) is that according to a 2012 University of Michigan study, 56% of households in New York City don’t own a car. This is the highest in the country, by far, and the reason is clear: The alternatives in NYC are exponentially cheaper and more convenient than owning and driving your own vehicle.

For those who believe that “people love driving and they will never give up their cars,” I ask you to explain to me why that’s not true for New Yorkers? Moreover, if the exact same relative cost and convenience factors that exist in NYC existed in Southern California, would we not expect to see 56% of households in Los Angeles giving up their cars, as well?

The bottom line: Where public (alternate) transportation is cheaper and (perceived to be) more convenient, most (but, not all) households would abandon vehicle ownership. This is not a theory; it’s a fact based on actual data.

Enter Uber

In 2011, Uber drivers began ferrying passengers around San Francisco cheaper and more efficiently (convenience) than taxi cabs; and the rest, they say, is history. As Image E (above) shows, the ride-hailing services (plotted as “UBER / LYFT”) can run the gamut on costs and convenience.

There are times when it costs much more to take an Uber than the alternative of owning and driving your own car; but, some people do it anyway. Why? Convenience and safety. (Perhaps after a few cocktails on a Friday night, for example.)

Alternatively, there are times when using a ride-hailing service is not as convenient as owning and driving your own car; but, some people still take an Uber. Why? Price – the cost (for them) of owning, insuring and maintaining a vehicle is too high given their limited need for transportation.

Autonomous Fleets

This brings us to the next logical step in the Uber/Lyft/Waymo/GM/Apple/Etc. playbook: Fleets of self-driving vehicles that are expected to cost much less to own and operate (and are safer and more convenient) than human-driven Ubers (or anything else on the road today).

That’s why we’ll likely plot self-driving fleets in the bottom right of Quadrant 4 (as I did in Image F, above) when they achieve some measure of scale.

This is where price and convenience (and nothing else) begins to create a major disruption for automotive retail. Will some people still own and drive their own vehicles? Of course. (Heck, 44% of New York City households still own at least one vehicle!)

The question is not whether vehicle ownership will go away; but, rather, when will the percent of households who don’t own a vehicle (about 9.2% in 2012, according to that U of M study) grow to a number that poses a threat to America’s car dealers? (I first wrote about the winners and losers of the autonomous vehicle revolution in 2015.)

Whenever that is (and I have my opinions on the timing), the impact will not only hit “traditional” car dealers, but also the alleged “disruptors,” like Carvana, that claim it’s all about a better customer experience.

It’s not. True disruption is about price and convenience and nothing else.

Good selling!

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About TheManager:

Steve Stauning is a CEO, Writer, Keynote Speaker and leading consultant for small and large automotive and media companies worldwide. Learn more about Steve at SteveStauning.com.

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