Sonic bets new plan will transform automotive retailing

Surrounded by 8-foot boards with researchers' results, senior Sonic executives strategize during one of their closed-door sessions.
New approach

One Sonic-One Experience

The particulars:
• One-price selling
• IPad-enabled transactions
• A single associate handling a customer from beginning to end
• Completion of a vehicle purchase in 45 minutes or less
The price tag: $250 million so far, another $100 million planned, on technology alone
The prospective payoff: A sales experience so customer-friendly that shoppers will choose Sonic over rivals
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After more than five years of internal work and external carping, Sonic Automotive Inc. will roll out a bet-the-farm change in how it sells cars late this month at a Toyota store in Charlotte, N.C.

During those five years, Sonic has been the odd man out among public auto retailers. It said at times that reinventing itself was a higher priority than acquisitions, even as rivals grew by snapping up stores. It posted falling net profits in 2013.

But Sonic's top brass is betting that it will emerge from its $250 million-plus effort with a business approach, dubbed One Sonic-One Experience, that will so transform car retailing that shoppers will flock to Sonic's stores -- rebranded to showcase the unique sales approach nationwide -- rather than rivals'.

"What we're doing in preparing for the future is preservation," Sonic President Scott Smith said during a series of exclusive interviews detailing the genesis and gestation of the changes. "Because the dealers who don't change will go away. Consumers aren't going to shop the way they used to shop."

Under the initiative, the company promises completion of a vehicle purchase in 45 minutes or less, aided by one-price selling and a single iPad-armed associate who will work with a customer from beginning to end. While other dealership groups are trying one or more of those sales approaches, none has placed as big a bet on creating a seamless experience from all of them.

Sonic, the nation's fourth-largest automotive retailer, is betting that it will survive -- and thrive -- by eliminating the pain points typically experienced by car shoppers, thus becoming a preferred place to shop. The gambit comes with a multitude of risks and involves revamping Sonic's culture, in-store processes and technology.

Critics tick off the perceived faults of the company and its strategy:

Smith: Auto shoppers’ habits are changing.

1. Sonic is taking on too much change at once. In addition to One Sonic-One Experience, the company is launching a group of used-car stores starting in October.

2. Market share and profit margins slipped as managers tried to get all stores to stick with a limited-negotiations model -- though Sonic noted improvements on both in the first quarter. Operating leverage, expenses as a percentage of gross profit and one of the efficiency yardsticks by which public companies are judged, has increased as expenses have surged.

3. By largely sitting out the rush to buy dealerships, Sonic is losing out on the industry's push for acquisition-driven growth. Sonic has bought just two stores since 2008 while divesting 22.

4. The move to one-price selling could make Sonic vulnerable to competitors who would undercut its prices by as little as $100 to poach customers.

"We see slower earnings growth than peers as the company implements its One Sonic-One Experience and pre-owned programs," Goldman Sachs analyst Patrick Archambault wrote in a recent report. "Its peers, meanwhile, are using M&A to augment revenue and profit growth."

Sonic's leaders counter that the company will come out on top, eventually increasing profit margins and winning an outsized share of the market because more consumers will prefer its no-hassle approach. It will reduce transaction times, improve customer satisfaction, lower employee turn-over and increase overall sales, they say.

Tablecloth plan


The developments launching this month at Town and Country Toyota -- about eight miles from Sonic's headquarters in Charlotte -- began five years ago over a white linen tablecloth at an Italian restaurant, Il Mulino, while Sonic's top staffers were on a business trip in Aspen, Colo.

Heading into that dinner, Smith, who co-founded Sonic with his billionaire father, O. Bruton Smith, a longtime dealer, felt "embarrassed" by the reputation dealers had with the car-buying public. He and fellow Sonic executives pulled out Sharpies and started mapping out what the future could look like on that tablecloth.

"It was an aha moment with our senior team," said Jeff Dyke, Sonic's executive vice president of operations.

Sonic was at a crossroads at the time. Industry sales had tanked and the company had warned of possible bankruptcy before quickly restructuring its debt. But Smith and Dyke began laying the building blocks for change.

Dyke had come to Sonic after a stint at AutoNation Inc., but he doesn't consider himself an automotive-retail lifer. He had worked in the convenience-store industry and was frustrated that customers didn't have as much control purchasing a vehicle as they did buying soft drinks and snacks.

"There were all these pain points the customer hated," said Dyke, who still pulls that tablecloth out from time to time. Getting rid of those pain points, from pressured negotiations to the many hours it took to buy a car, became the company's top goals.

Sonic's leaders mapped out the retailer’s possible future on a white tablecloth.

Costly technology


Sonic hired a research team to talk to consumers who shopped at places such as REI, Nordstrom and the Apple Store and then at dealerships. The comparisons helped identify the pain points slated for elimination. The findings are compiled on numerous 8-foot boards that now line the sixth- and seventh-floor hallways at the company's headquarters.

Early in the planning, executives shut themselves in a room with those boards to figure out next steps.

One early conclusion: Sonic needed a new customer relationship management tool built around the needs of the customer, not the needs of the stores.

That meant a customer's history with Sonic had to be at an employee's fingertips when that customer arrived, even if the customer was switching from a Mercedes-Benz store on one side of the country to a Toyota store on the other.

The sales representative then needed to be empowered and equipped to help the customer from beginning to end. To that end, Sonic bought iPads and iPhones for its entire customer-facing sales and service work force. Sonic says a vehicle purchase can be done on the iPad in 45 minutes or less once a vehicle is selected.

"When they come into our store, the guest is in control, and we're not," Dyke said. "They're in control when they go and buy a pair of shoes, and we want them to be in control when they come in to buy a car."

A tablecloth bears Sonic senior executives' notes on what the company's future could look like.

Sonic built its own CRM, inventory management, desking system and F&I management tools.

The technology expense alone has been $250 million during the past four years. Smith and Dyke expect to spend another $50 million annually in 2015 and 2016 to complete the rollout to the rest of the company's 103 stores. That doesn't include the marketing expense.

After rolling out the technology by the end of July, the Toyota store will use August and September as a settling-in period. Sonic's other Charlotte stores will start to use the technology in late summer and early fall. By November, earlier than previously planned, the company should be ready to "blast the market" with a new marketing push and branding campaign, Dyke said. Sonic also plans to add the Sonic name to its dealerships as part of the transformation.

No blue gorillas


The marketing approach will poke some fun at the inflatable-blue-gorilla and plaid-jacket stereotypes associated with dealership promotions. The idea is to "pick on ourselves a little bit for the past and then show how wonderful the future looks," Dyke said.

That message will spread to Sonic's other markets as the company takes the One Sonic-One Experience approach to its other dealerships in 2015 and possibly into 2016. Dyke wouldn't disclose the marketing budget for the national rollout but described it as a "big ouchy." Sonic is working with New York advertising agency Huge.

Changes in the store will be numerous. Highlights will include nearly paperless transactions, mobile credit card swiping and a so-called imagine bar where customers can research their purchases using iPads and a giant screen.

Customers hate paperwork, so going paperless was a high priority, Dyke said. But that's difficult because state and local regulations often require wet-ink signatures. In North Carolina, Sonic has trimmed paperwork from as many as 30 pieces of paper to be signed to three. Electronic signatures on the iPad or iPhone will work for everything else.

"Just that one small piece has probably taken us two years," Dyke said.

Sonic isn't alone in trying to transform the retail experience. Other dealership groups use a one-price sales model. Some use tablet computers in the showroom. But Sonic leaders say their competitors aren't as differentiated from one another as its stores will be after the rollout.

Some Sonic rivals are great dealers with outstanding customer satisfaction, Smith said, but "their systems are identical. They desk deals the same way, they meet and greet the same way, they appraise cars the same way as every other dealer out there. And we're changing that."

Smith isn't really out to change the industry; he wants to enjoy the competitive advantage he expects from Sonic's initiative as long as possible. But, he believes, the industry will change anyway as younger customers seek simplified buying experiences.

Other large dealership groups, including the other publics, are also working on the challenge. Some are running pilots for new sales approaches, including one-price selling. AutoNation, for example, is spending more than $100 million over several years to establish its brand and build a digital storefront that will allow shoppers to arrange vehicle purchases and trade-ins mostly online.

New Web sites are an important part of Sonic's plan, too. They will launch as the customer experience initiative rolls out and will include a customer portal where a shopper can search inventory, set up appointments and expedite the purchase.

"It's Amazon-dot-commish," Smith said.

How so? If a shopper selects, say, a Honda Fit EX, Sonic's site will offer the three F&I products that other Fit buyers in the same demographic most often buy, Dyke said. It will rank them, price them and the customer can add them to a shopping cart right then.

Market watchers are unsure whether Sonic's investment will pay off. Archambault of Goldman Sachs downgraded Sonic to a "sell" rating last month. But he said that he'd become more positive if Sonic demonstrates gains in market share and gross margins as it launches its customer experience initiative and used-car stores.

While the top dealership groups are all trying to reduce transaction time, Sonic is investing most aggressively in it, said Rick Nelson, an analyst with Stephens Inc. in Chicago who has covered the public retailers since they began to form in the late 1990s and rates Sonic a "hold."

"It's tapering their growth, but if they're successful executing, there's potential for outsized growth in 2016 and 2017," Nelson said. "They have their hands full, but they do have a longer-term focus."

Sonic's leaders agree. O. Bruton Smith, Sonic's CEO, has controlling interest in the company. Said Scott Smith: "Nobody has a bigger stake in the success of this than the Smith family."

You can reach Amy Wilson at awilson@crain.com.


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