Dealer Insights - July August 2014 - Adapting to Today’s Internet-savvy Car Buyers

Published: Jul 1, 2014
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You’d be hard-pressed to name a business segment that’s unaffected by the Internet in some way, including auto dealerships. Thanks to the Internet, today’s car buyers are far more informed when they walk through your doors than they once were.

For example, potential customers often already know which vehicles are available on your lot, including their features, prices, and sometimes even your dealership’s costs. Borrowing from the slogan of a major automobile manufacturer, “This is not your father’s car-buying experience.”

Fewer dealership visits

Before the Internet hit the mainstream, most car buyers would spend weeks visiting multiple dealerships, looking at vehicles and comparing prices before making a decision. Today, most buyers do this legwork online and spend less time on the showroom floor.

A recent study by management consultants McKinsey & Company, which interviewed approximately 4,500 car buyers, found that the average buyer now visits only 1.6 dealerships, compared to five dealerships 10 years ago. (See more study findings in the sidebar “The changing car buyer.”)

A senior partner at McKinsey calls this shift “the most dramatic change we’ve seen in the auto industry and how people buy cars in the last 50 years.” Because buyers have access to more information online, they don’t need to visit as many dealers.

This shift has major implications for auto dealerships. On the marketing side, most stores can no longer rely only on tried-and-true tactics, such as newspaper, TV and radio ads. Now it’s essential for dealerships to have an online strategy designed to showcase their inventory to buyers searching the Internet for specific vehicle makes and models.

When it comes to sales tactics, dealers must come to grips with the fact that better-informed buyers have shifted the negotiation equation. There’s little room to negotiate when a buyer walks in knowing the dealer’s cost on a vehicle and what other nearby dealers are charging. This is one reason many dealerships have switched to the no-haggle, one-price model of transparent vehicle pricing.

Maintaining profit levels

Not surprisingly, reduced negotiating leverage can make it harder for dealerships to maintain the same profit levels as in the past. A recent report notes that, while auto sales appear likely to continue to grow over the next few years, margins have been declining. In fact, gross margins were down 2.6% in 2013.

The report attributes the decline to a number of factors, including the Internet. It predicts that the decline in new vehicle margins will exceed the growth in unit sales in 2014, which will lead to the first reduction in gross profits in the new vehicle department since 2009.

One way dealers can maintain gross margins is to move from a traditional commission-based sales compensation model to a salary model, perhaps with performance incentives. If walk-in customers already know the vehicle they want to buy and aren’t willing to negotiate, a full-fledged commissioned salesperson isn’t really needed – a lower-paid customer service or client care professional can probably close the sale.

To determine whether customers need to speak to a commissioned salesperson or a customer service professional, a greeter could ask them a series of questions about where they are in the buying process. Based on their answers, they could then be assigned to the appropriate employee. This switch in protocol is worth considering for some dealerships.

Another way to maintain profit margins is to concentrate on selling more in the finance and insurance (F&I) area, whether via extended warranties, tire and wheel insurance, or prepaid maintenance.

For public auto groups, the average gross profit per vehicle attributed to F&I has risen from $971 in 2009 to $1,233 in 2013, according to SEC filings. Yet another strategy is to capture more of your buyers’ ongoing automotive service business.

A significant challenge

There’s no question that today’s Internet-savvy car buyer represents a significant challenge for your dealership, affecting your sales and marketing tactics and your gross profits. How well you adapt to these challenges will likely impact your dealership’s success going forward.

Sidebar: The changing car buyer

About 80% of new car buyers and nearly 100% of used car buyers start the vehicle buying process online, according to management consulting firm McKinsey & Company’s recent Innovating automotive retail report. The report also found that:

More than one-third of car buyers say they would consider buying a car online,
About 80% of car buyers want to test drive a vehicle before they buy it, and
Around 85% of car buyers still visit a dealership before buying, but they visit less than two dealerships on average – down from five dealerships on average a decade ago.

Additionally, one-quarter of respondents who visited a dealership said they weren’t satisfied with their experience.

Dealer Insights - July/August 2014