by Steve Greenfield, General Partner, Automotive Ventures

The franchise dealer model has proven very resilient over the past 50 years. But with the dramatic amount of change coming, how should dealers be looking to build resiliency over the next 5 to 10 years?

History

Data from industry expert Glenn Mercer shows just how stable franchise dealer pretax profit margins have been over the past half century, rarely dropping below 1%, and hovering close to 2% for almost 50 years.

But the consistency of dealer profitability masks significant business model innovation over the same timeframe.

Business Model Innovation

Back in 1976, most franchise dealers were focused on one department: selling new cars.

Fast forward to today, and a typical franchise dealer location is managing seven or eight interdependent departments: new and used vehicle sales, F&I, Parts, Service, Accessories, Collision Repair and often Commercial Vehicles.

The business model continues to evolve, innovation continues to march forward, which makes the average dealer more defensible than ever to external threats.

But this begs the question: what will the average dealership look like in the next 50 years? Which departments will evolve that we have, up until now, not conceived of?

Towards the Future

We need look no further than current day technologies, then extrapolate them out to the future.

First up, it’s sad to see that over the past 75 years, franchise dealerships have lost one-third of their service business to independent repair shops. This is especially true at the end of the vehicle’s warranty period.

Data from Automotive Ventures portfolio company WarrCloud shows that the average dealer loses about 70% of their service customers after the vehicles come off warranty coverage.

But with the increasing sophistication of the technology within cars, how is the independent repair shop going to keep up with both the technician skill and specialized tools required to work on today’s “iPhones on Wheels”? Whether or not we get national “Right to Repair” laws passed, I believe that the franchise dealer will win back more and more of the vehicle maintenance work from the independent repair shop.

Software Defined Vehicles (SDV)

The “Software Defined Vehicle” (SDV) and relatedly the “Connected Car” will create a path for ever more customer loyalty over the lifetime ownership of the vehicle.

As the cars become self-aware and are able to diagnose when key components are about to break down and need service, they’ll be able to recommend to the driver if, where, and when service gets done. The car will guide the consumer to the nearest and best franchise dealer to use and should drive tremendous loyalty back to dealers and away from independent repair shops.

The Impact of AI

Next, we can look at Artificial Intelligence (AI), and what impact it may have on dealership profitability in the future.

According to Automotive Ventures’ analysis, nearly 60% of a franchise dealership’s monthly cost structure is human capital.

The great promise of AI is to help businesses operate more efficiently, getting more work done with fewer personnel.

How might this AI evolution play out? AI should be looked at across a three-phase continuum.

The first phase is that of a “Co-Pilot” for your employees.

According to the CEOs of both Google and Meta (Facebook), more than 30% of all software code is now being created by AI bots.

Within a year, every employee at a dealership will have a persistent “Co-Pilot” on their phones and work computers, anticipating how to help and increasing productivity by 20% to 40%. The benefit should flow through to the dealer’s bottom line.

Things get more interesting as these “Co-Pilots” become much more robust and can be dispatched tirelessly, 24/7, to do repetitive tasks that free up much more time for human employees. Now we start experiencing a force-multiplier multiplicative effect, and one human worker can be commanding multiple “bots.”

Phase three is when these “Agents” become good enough to replace certain human employees. This is when real operational efficiency for dealers occurs, and they can start to take significant costs out of their operations.

An Exciting Future for Franchise Dealerships

All of this points to an exciting future for the franchise car dealer.

The business model has proven to be resilient over the past 50 years.

Entering the age of increased vehicle technological complexity, the Software Defined Vehicle and vehicle connectivity, and the promises that AI brings to worker productivity and enhanced profit margins, dealers can look towards a future of an even more defensible business model with higher profit margins.

This article was written for Getting to Go, a buy/sell newsletter from Scali Rasmussen.