Walled in by Brick-and-Mortar

My November 1 article, Big-Box Customers Give OEMs an Online Edge, laid out the case that OEMs supplying big box brick-and-mortar retailers have already started the transition towards becoming e-tail capable. In order to complete this transition, I believe most will be required to implement additional step-function-type changes.

In this article I will build on that topic, looking at how one start-up changed the game in marketing and delivering its product to customers. I’ll then lay out step-function-like changes that manufacturers need to consider as they transition from brick-and-mortar to e-tail.

In the automotive industry, local brick-and-mortar dealerships are the primary means for the marketing and delivering of products. This model is well-established, and automotive companies have huge investments in its infrastructure. However, this same infrastructure embeds significant costs—both overhead and direct—into these two activities. From my seat in the ballpark, car and truck manufacturers have—to date—taken primarily incremental steps to move away from this cost-heavy infrastructure. What do I mean by this? For instance, product marketing literature was once stocked at each individual dealership. Today that stock has been eliminated, with customers being able to access it online. While such a change is a good thing, it barely moves the overall needle towards becoming either more competitive or e-tail capable. Why do manufacturers employ an incremental approach to making changes? In a nutshell, it is because they won’t significantly upset the current financial apple cart and its outcomes are highly predictable. In other words, it is the safest way to implement change. Additionally, they tend to not jeopardize profitability in a significant way, at least in the short term. But I suspect companies that stick to inching their way towards becoming e-tail-capable will eventually see a significant drop in sales.

I recently interviewed a start-up automotive retailer, Shift, that in 2014 launched an e-tail based business engaged in acquiring and selling used cars. It may seem a bit of a stretch to use Shift as a comparison to companies who actually manufacture and sell new cars, but hopefully after reading their story you’ll agree that many of their strategies and practices represent step-function type changes that established automotive companies will likely have to adopt to become e-tail capable. I’ll describe a few of them in laying out the differences between current and what will likely become future practice in the used car industry.

The used car sales are primarily through local ma-and-pa-type independent dealers—used car lots—as well as new car dealerships that get their inventory through trade-ins on new car purchases. Often, those cars sit for extended times before sale. I was surprised to learn that the vast majority of used cars are through those ma-and-pa operations.

Shift operates differently from this. They are very selective in that cars they buy. They use their proprietary algorithms to ascertain in real time the value of any given car, thus reducing their investment and carrying costs.

Another strategy Shift employs is stocking inventory at regional warehouses; i.e., they don’t have local dealerships. So they are able to serve larger market areas with lower levels of inventory, again, reducing their internal costs.

You may think that this might represent a road block to sales “hit rates” since prospective buyers may not be able to evaluate the vehicle they are interested in without traveling a long distance. And that because of this, they wouldn’t be able to kick the tires of automobiles they are interested in. SHIFT has economically addressed both issues, finding that distributing through regional warehouses does not negatively affect sales “hit rates”, compared to both their local used-car competition and new-car dealerships.

Shift’s warehouses have their own service personnel and—upon buying their stock—they subject each vehicle to a 150-point inspection, addressing any vehicle shortfalls. This inspection/repair information is available to prospective buyers, offering that thorough kicking-the-tires experience many are used to.*

Second, Shift offers a concierge service that involves delivering to their homes the specific car a buyer is interested in, so the buyer can physically inspect and drive their potential automobile prior to actual purchase. And potential customers can conduct their test drives without the participation of the concierge which—at least in my mind—is a significant positive. The concierge service is available with no pre-commitment from the customer and yet Shift finds their process incurs lower overhead and direct costs than those that burden local dealerships.

Due to Covid-19, Shift started offering a no-contact test drive in person, as well as virtual test drives via video chat upon request for remote appointments.

This approach works for Shift because of the fact that most car buyers today do their due diligence online; their inventory selection criteria; the assurance that their 150-point inspection gives customers about the condition of the vehicle; and the fact that they have a 30-day return policy on most of their cars.

There are other strategies and practices that Shift applies that I could go into—but won’t—since I think the above gives a pretty good idea of the type of step-function-type changes that the new car automotive industry needs to adopt.

Step-functions for automotive OEMs to consider:

Set up dealerships more along the lines of brick-and-mortar big-box stores. Specifically, this would significantly reduce on-hand inventory by consolidating overall company inventory at regional storage facilities. This approach maintains product availability without having redundant dealership inventory. Service parts that are delivered in daily milk runs to satisfy dealership orders are already managed in this way.
Source with more local suppliers. This will improve the OEM’s ability to respond to variations in-market demand with lower levels of inventory. For the most part, Japanese automotive manufacturers already do this.
Reduce on-site sales staff. As stated above, most potential customers already have knowledge of the automobile they are considering—both in specifications and competitive comparisons—through internet research, reducing the need to “sell” product to them.
To further the above manpower reductions, establish price points and stick to them. This eliminates back-and-forth negotiating and reduces customer fear of paying more than others do for the same product. With fewer negotiations, there is less need for sales personnel.
Reduce the number of company dealerships, at least in larger metropolitan areas—where there are often multiple/redundant dealerships that essentially compete against each other; i.e., cannibalize sales. Multiple local dealerships also result in a higher overall cost without significantly increasing sales, thus reducing profitability.
Don’t accept trade-ins that will likely sit for an extended period before selling. Sure, sales may be reduced in some cases, but when trade-ins don’t sell, they negatively affect the profitability of the new car sale.
Focus local dealerships on service. Make them a competitive advantage. Although not a direct automobile comparison, I always buy my tires from a regional company that does exactly this. And they do it without nickel-and-diming their customers. For instance, they fix flats for free on the tires they sell; offer free confirmation of tire pressure and fill as needed; and are honest with customers on whether new tires are needed. This is not what I’ve experienced at some automotive service departments.

Hopefully the above suggestions will give some automotive manufacturers food for thought.

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

*Some language in the starred paragraph and the three paragraphs following have been modified after publication to correct errors..