At the start of a new year, many people, including myself, try to establish resolutions to get the year started off on the right foot. This is especially prevalent this year with most people welcoming 2021 with open arms after the disaster of a year that was 2020. When considering the auto industry in 2020 and predictions for 2021, making some “resolutions” for your dealership to prepare for the year ahead could prove to be helpful. With that being said, here are a few common “New Year’s Resolutions” that can be applied to your auto dealership.
Resolution #1 – Keep Up With the Times
Auto dealers that choose to embrace technology could find themselves faring better than those that don’t in an era of e-commerce explosion.
As we have discussed previously, the COVID-19 pandemic has pushed auto dealers into the 21st century as they relied more on technology to reach their audience. In March 2020 as the pandemic was beginning, U.S. search interests in “dealerships near me” dropped more than 20% from the prior month. Furthermore, as stay-at-home orders swept across the country, many people could not visit dealerships even if they wanted to. In order to continue to reach customers, offering at least portions of the buying process online became necessary. As the year continued and the pandemic trudged on, consumers dramatically shifted their shopping habits to online, as e-commerce sales are projected to increase by 40.3% in 2020 from the prior year. For dealerships, specifically, 90% of car shoppers prefer a dealership where they can start the buying process online. Although dealerships most likely can’t and won’t reach the digital offering scale of a Carvana, having sleek offerings online is important.
Now as we begin the new year, there is some evidence that consumers won’t revert to pre-COVID buying habits. A research paper from McKinsey in early 2020 said trends in China suggest that between three and six percentage points of market share gained by online channels will be "sticky." What does this mean for your dealership? With overall buying habits having shifted, consumers are going to be more familiar with the online purchasing process. Furthermore, experts anticipate the pandemic to continue into 2021. Making an effort to invest in digital technology for your dealership to reach customers could reap dividends as the year goes on.
Resolution #2 - Invest in Yourself
Investment in facilities to achieve image compliance could lead to a bump in your dealership’s value.
Despite fewer people visiting physical dealerships because of COVID, it could still be worthwhile to consider giving your dealership an upgrade in 2021. As reported in Kerrigan’s Q3 Blue Sky Report:
“Image compliant dealerships with low rent command higher multiples. Up-to-date dealerships are more attractive to buyers because they require no additional investment. Dealers also command better pricing when they have an attractive rent factor, lowering fixed expenses. In our experience, dealers frequently own the real estate or hold it in a separate but related entity. But as dealers know, rent factors include other factors include utilities, property taxes, interest, and other hard costs of ownership. Dealerships that can reduce this expense or have a favorable lease if owned by an unrelated third party, stand to have higher earnings, and potentially a higher multiple with lower risk. In general, if a dealership is image compliant and its rent-to-gross profit is below 10%, it is considered to have low rent.”
Resolution #3 - Shed Some Pounds
Auto dealerships can benefit from becoming leaner and meaner by streamlining SG&A costs to promote a healthier bottom line.
A prevalent 2020 trend was cutting SG&A costs. As we mentioned in our Q3 2020 earnings calls post, advertising and personnel costs that were taken out at the beginning of the pandemic haven’t come back as dealers try to determine how best they can run lean and improve productivity. This decrease in overall SG&A has helped support many auto dealer’s bottom lines as SAAR has been running below 2019 levels.
Looking into 2021 and a continuing pandemic, improving the bottom line is going to continue to be important. Advertising costs can be alleviated by choosing alternative and more efficient channels such as social media, as we mentioned previously. Furthermore, with consumers doing more of the car shopping process online, personnel expenses that used to be necessary are no longer so. Auto dealers can take full advantage of this to streamline costs. While many of these costs have already been cut to the bone, dealers will need to be judicious about adding in costs. We had clients coming out of the Great Recession saying they ran leaner than they have previously thought was possible. Ten years of slow and steady economic growth may have led to excess expenses that naturally get trimmed in a downturn. Dealers need to determine which expenses can be removed and which may need to return in order to boost sales, particularly when new vehicle inventory becomes less tight.
Resolution #4 - Make Gains
With vehicle manufacturing revving up, it could prove beneficial to offer consumers wider varieties of models.
If you have been reading our blog over the course of the year, one of the big takeaways that we have been hammering home is that inventory shortages have plagued the industry all year due to lag from shutdowns. Dealers won’t have needed to read a single word we’ve written to know that for themselves. However, with plants back up and running, many dealerships are expecting inventory levels to normalize in 2021; therefore, there might be pent up consumer demand so dealerships will be working to get the right inventory. While consumers have been more patient in light of the pandemic, that patience won't last forever.
As the pandemic continues on, many people are still wary of using public transportation and ride-sharing. In fact, a survey conducted by Google found that 93% of people say they are using personal vehicles more. Furthermore, a recent Cars.com survey reported that 20% of respondents who didn’t own their car were considering purchasing one. Dealerships in 2021 could continue to find new customers trying to shift from public transportation to a personal vehicle.
Conclusion
The Auto Dealership team at Mercer Capital wishes you a happy and safe new year! If you have any questions about what your dealership may be worth, please feel free to reach out to us.
