Long before Google began separating cars from their drivers, the internet was paving the way for abolishing auto dealerships.
Like other service-driven retailers—remember Borders and Circuit City? — the nation’s car dealerships have been speeding toward a collision with the Internet. “What has happened slowly, over time, is that the Internet has created transparency for the consumer, and the process of researching and buying a vehicle has become commoditized,” says Erik Day, CFO of Warren Henry Automotive Group, a collection of dealerships based in Miami. “That has created a situation where the buyer and the seller have, to some degree, equal knowledge.”
Traditionally, dealers kept pertinent financial details—such as the exact “invoice price,” the manufacturer’s original charge— to themselves. Salespeople used their advantage to steer consumers toward prices padded with as much profit as possible. Now before consumers have even crossed a dealership’s threshold, they’ve likely gathered information from such independent sources as Edmunds.com or Kelley Blue Book. They’ve typically used the manufacturers’ website to make choices about which model, color, accessories or options they want. In the reconfigured industry, dealerships risked fast becoming sources of inefficiency rather than suppliers of value.
Thanks to the economic downturn, these businesses didn’t get much time to rethink their role. “Sales were falling so fast that many organizations couldn’t adapt quickly enough,” says Day, 44. “Dealers were driven out of business. Their banks forced them into situations where they had to sell.” Nationwide, the total number of dealerships dropped from 21,000 to 18,000 over the last decade. Scale has enabled some dealerships to confront margin erosion with greater cost efficiency. The number of dealerships with more than $1 billion in revenue has doubled since 2011.
With just over $400 million in revenue from six dealerships, the Warren Henry Automotive Group’s endurance, however, stems from management’s staunch commitment to recognizing, and acting on, its industry’s drastic remodeling. Facing a “negative margin on transactions,” as Day puts it, the company understood that its core business was becoming commoditized. “The business is what it is, you have to understand it and move forward.” For Warren Henry, that has meant hitting the gas on a number of bold initiatives:
Careful cost-cutting. From a peak of 410 workers, Warren Henry now employs 285; Day expects the number to rise to 325 next year. It recently sold Volvo and Subaru dealerships, turning its focus to investing in tier-one franchises, including an Audi dealership and a large Lamborghini store. Other premium brands include Infiniti, Land Rover and Jaguar.
Shrewd investment in efficiency. The company’s efforts to upgrade its dealership software and analytics capabilities have yielded an unexpected offshoot: it now plans to offer its software package on a subscription basis to other dealerships. Under the name Dealer Intelligence, the platform aggregates data and synthesizes it into actionable intelligence. The inaugural product, Day says, will be a module for financial reporting. “We’re always looking for competitive advantage so we can stay ahead of the industry,” says Day.
Spinning out profitable businesses. The software venture is hardly the company’s only offshoot. Warren Henry started a car rental company, VIA Luxury Rentals, a few years ago, as well as an auto-leasing business, Motorcars Leasing, catering to foreign nationals in South Florida. It has also delved into collision-repair and oil-change centers as well as an event-production company. “These companies are generating revenue and profitability,” says Day. “They are a way for us to try to claw back some of the margin we’ve lost. They represent our reaction to the challenge we’ve faced in the commoditization of the dealership.”
Next: Nowhere is the challenge more apparent than in compensation plans
— Josh Hyatt