David Mondragon on the Health of the Automotive Market

The automotive industry is preparing for massive change with far-reaching structural and economic implications for our dealers and workforce. On the surface, key economic drivers remain well positioned for growth. Market indicators that should be high are high, and indicators that should be low are low. Consumer confidence is at a seven-year high, the stock market is at an all-time high, and housing starts are up from prior year … a leading indicator for truck sales. Average gas prices remain well below $2.50 per gallon, unemployment remains low, inflation and interest rates are low … all signs of a strong economy and healthy industry.

Full-year industry sales estimates remain in the 17 million range, down slightly from 2016 but extremely strong from historical reference. That said, two industry trends continue to challenge our industry.

The first challenge is segmentation shifts: From 2009 to 2017 YTD, the U.S. car segment has declined 17 points. Car sales now represent only 36 percent of our retail industry, with strong growth in utilities and trucks over the same time period. This shift has been supported by low gas prices, an aging population that prefers the confidence and functionality of SUVs, and higher margins associated with SUV and truck sales vs. cars for both dealer and manufacturer. Cars have traditionally been the gateway to automotive brands, bringing in first-time buyers who eventually move up the brand ladder. Over time, high-cost entry associated with SUVs and trucks will challenge certain brands and their ability to attract and retain highly coveted first-time buyers with fewer low-cost car entries in market.

The second challenge is long-term financing: According to Edmunds, the average retail contract length in 2016 was 69 months, the highest on record. Industry incentives are at record levels, and vehicle pricing continues to grow as new models, more trucks and SUVs, and electrification come to market. Unfortunately, household income is not growing at the same rate, and new forms of consumer financing such as balloon payments, shared ownership (both lease and retail), and longer-term financing models will be imperative to support higher industry volumes.

Edmunds also reports that negative equity for consumers is at an all-time high, with an estimated 32 percent of all trade-ins toward the purchase of a new car in 2016 underwater. This trend will continue to grow in the years to come as vehicle prices continue to outpace household income.

Today, millennials represent only 30 percent of car sales. According to Automotive News, these consumers will represent 40 percent by 2020, with a tipping point of 50 percent coming soon after.

A Changing Landscape

Disruption has become the new normal in our industry, with new retail models showing no sign of retreat. Real-time retail is here to stay as consumer demand for transparency, instant gratification, and mobile reach relentlessly encourages faster change. Our world has quickly moved from analog to digital with massive amounts of data driving decisions. Consumers track all aspects of their lives from health to finance online, and according to Digital Commerce 360, researchers predict e-commerce will account for 17 percent of all U.S. retail sales by 2022. The U.S. will spend about $460 billion online in 2017. These figures will continue to climb as mobile and internet use expands in the U.S., and the automotive industry will be heavily influenced by this trend.

Transportation shifts to ride-sharing companies such as Lyft and Uber will continue to expand. New subscription-based models like Clutch will challenge conventional purchase models, and pay-as-you-go platforms will emerge as millennial consumers, not satisfied with traditional automotive ownership, will choose emerging options to fit both lifestyle and budget categories.

Risk- and conflict-adverse millennials and Generation Z consumers shift the stage for a new retail environment of the future. Today, millennials represent only 30 percent of car sales. According to Automotive News, these consumers will represent 40 percent by 2020, with a tipping point of 50 percent coming soon after.

The tipping point will move us from high-touch, high-cost showroom sales to low-touch, low-cost digital sales. Higher use of artificial intelligence will enhance communications with customized, real-time customer interaction to support sales at reduced cost. Lack of consumer trust in manufacturer and dealer by millennials will create an opportunity for social media to fully replace traditional advertising. Precise one-to-one marketing will tailor messages to both shopper and owner, allowing dealers to connect to customers more efficiently.

Over time, the compression of retail margins and potential for a softer industry will ripen the vine for industry aggregators. Large dealer groups and industry disrupters await opportunities that come as long-time owners decide to cash out.

Electrification of our industry is approaching fast. Many brands and countries are pledging 100 percent adoption in the near future. Sources predict that by 2034, half of all new-vehicle retail sales will be electric, which could bring dramatic changes not only to the front-end of your business but also to your service department. Think about the implications of selling vehicles without traditional ICE powertrains. Also think of the economic shifts in power as longtime oil-producing states face lower demand with mass adoption of electric powertrains.

Autonomous vehicles also bring huge implications to our retail environment. IHS Automotive estimates the autonomous vehicle industry will hit 21 million units globally by 2035. Who will handle the sales and service of these vehicles? Will automotive dealers be forced to compete with large leasing companies for this business?

Real-time retail is here to stay as consumer demand for transparency, instant gratification, and mobile reach relentlessly encourages faster change.

Graphs show current trends in the automotive market

Future Impact on Dealerships

According to NADA’s “Dealership of Tomorrow” study released in January 2017, the majority of vehicles will continue to be transacted at or by a dealership through 2025. This gives us time to prepare and respond to these seismic shifts in our industry. Dealers who see these shifts not as threats, but as opportunities, will prevail. The U.S. franchise model is the envy of the world, and dealers, brands, and manufacturers who stay ahead of the curve and adapt quickly will not only survive, but thrive.

Disclaimer: All opinions and comments shared in this article are expressly those of the author and therefore are not associated with any company or brand, unless specifically noted in the article.

David Mondragon

Former Executive Director of Retail Innovation & Strategy at Ford Motor Company
David Mondragon

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