This is the prepared text of the speech and may not reflect the verbatim presentation
Given the few minutes each panelist has for prepared remarks, I will make three basic points and then hope these thoughts stimulate some useful exchange when we move to our question-and-answer session.
1. The Retail Automotive Business Will Run Best If We "Let Dealers Be Dealers" and "Factories Be Factories".
Until recently the controlling assumption by the manufacturers and investment community seemed to be that dealers were so technologically-backward and set in their traditional ways that dealers would find it difficult, if not impossible, to effectively adopt Internet marketing and make the other technological and behavioral changes that will be required to be successful during the next several decades.
On this assumption, a number of well-financed dot-com's began selling new and used vehicles over the Internet, and several factories opened up channels for the direct sale of vehicles to retail customers via the Internet.
When these dot-com and factory initiatives ran into state franchise laws, the new players filed law suits challenging the existing laws. And rather predictably the dealers and their associations responded with initiatives to close the loopholes in state franchise laws.
The dealers won most of these state battles. Dealers have grown up with many of the relevant elected officials. They probably helped get these officials' political careers off the ground when they first ran for their City Council or School Board. Furthermore, dealerships generate a significant number of local jobs and sales tax revenue, with a portion of this tax revenue coming back to the cities. Therefore, when lobbied by the manufacturers and their paid lobbyists in a battle with local dealers, the outcome was rather predictable.
However, some of these very same dealer-friendly franchise laws have created the problem of over-dealering, since the factories have addressed the problem of poor-performing dealers by simply adding more dealers. This has clearly caused a problem for even good dealers as well.
These state battles over Internet-marketing have occurred against the added backdrop of factory efforts to consolidate retail markets through the creation of auto collections operating within factory-dictated parameters.
But now, in January 2001, the brick-and-mortar dealers don't look quite so antiquated as they were originally presumed to be:
a. First, and to the surprise of many dot-com investors, many dealers have established very effective Internet sales systems of their own.
To take my own automotive group as just one example,
In January 1999:
In January 2001:
I don't think our organization's progress in e-commerce is exceptional. I think most well-managed dealerships have made similar strides the past couple years.
I am told by my Director of E-Commerce that roughly 7% to 8% of retail sales through the Internet has become common for larger dealer groups.
I also know that this dealer performance looks pretty good when compared with other industry standards:
E-commerce still accounts for only 2.2% of overall retail sales, according to a recent article in the Los Angeles Times; and
Internet bookings run 7% for the 3 major U.S. airlines with the highest percentages of online bookings.
So I think dealers in general have responded well to the growing public reliance on the Internet for information, and they have proven they are capable of technological innovation.
b. The factories' experiments in auto collections have also not panned out very well.
It would appear that the factories have in most cases lost market share in those markets where they have created auto collections and other consolidation experiments.
Some of the reasons for this loss of market share appear to be:
The imposition by central planners of an inflexible national strategy (such as non-negotiable pricing) which has proven inappropriate for some local markets.
The predictable difficulty of merging diverse dealership cultures under one corporate structure.
The problem of pulling together all of the right franchises under one roof-as is likely to be the case with Ford's Premier Auto Groups of Volvo, Jaguar, Range Rover and Lincoln-Mercury-because these franchises are family-owned and tough to acquire in most places.
In retrospect, the continuing effectiveness of most individual dealers in responding to the nuances of local economic, social and political conditions doesn't look too bad.
So this leads me back to my original thought:
The Retail Automotive Business will run best if we "Let Dealers Be Dealers" and "Factories be Factories."
Twenty-years ago, when everyone was trying to figure out why American business had lost some of its international competitive edge, Tom Peters and Robert Waterman wrote a book that identified the keys to commercial success. That classic study was In Search of Excellence. And one of the factors Peters and Waterman found that discriminated between the winners and losers was the winners' propensity to "tend to their knitting," that is, to focus intently and consistently on their core technological competencies and not get diverted into unfamiliar areas of commercial activity.
Personally, I do not think that Internet retail sales are the factories' core competency.
I do not think that retail automotive collections are the factories' core competency.
Manufacturers such as Toyota seem to understand this. It is clear that Toyota can provide its dealers with very useful technological support, marketing assistance and sales-lead referrals, but Toyota has also concluded that it would be counterproductive and inefficient for it to go into retail competition with its own dealers.
I am convinced that the factories would have been better served if they had taken all the money they have spent on Internet retail sales systems, factory-owned dealerships and collections, and on legal assaults on state franchise laws, and instead devoted that money to buying out those dealers who did not meet the factories' standards and carry their own weight in the local marketplace.
It is reasonable for manufacturers to expect its local dealers to have local market penetration equal to the regional, state or national share, to be profitable, to have a modern, clean facility, and to be customer friendly.
That's why I support the approach epitomized by Ford's Blue Oval Certification and Chrysler's Five Star Dealership programs-to identify and reward those dealers who meet the factory's standards for excellence.
And those dealers who fall well below these standards and do not respond to factory counseling, should probably be bought out.
The manufacturers have enough major issues on their plates without getting bogged down in the retail side of our business.
The major challenge the manufacturers face with their primary customer (dealers like myself) is how to provide an ever-improving product, defined both in terms of reliability as well as technological sophistication. That reliability and sophistication will make it easier for dealers to satisfy their customer, the retail buyer.
Dealers want to be sure that, as manufacturers look to their suppliers to help them cut costs, vehicle quality does not suffer in the process. I always felt that the old adage "you get what you pay for" was pretty accurate, so I am worried that cost cutting might translate into a decline in the quality of the products I am selling.
It has always seemed to me, as a dealer in American, Japanese and European makes, that Japanese and European engineers in charge of new product development are better known and are more widely honored in their countries than their American counterparts. And it is my understanding that European and Japanese manufacturers spend as much of their budgets on Research and Development of their manufacturing processes as they do on R&D for new products.
With all the fundamental economic, technological, environmental and political issues now facing vehicle manufacturers, I would think that unneeded changes in the retail distribution system would be low on their list of things to do.
2. The Internet-revolution will be a major driver in the ongoing consolidation of the retail automotive industry.
I think my comments about the effort my organization has made on its Internet business strategy speaks volumes about my belief that the Internet will be a major contributor to the ongoing consolidation of the retail automobile industry.
There is no doubt in my mind that the bricks-and-mortar franchise holders left standing a decade from now will be those who mastered the Internet as a way to market vehicles.
It will be a long-time (if ever) before most people feel comfortable taking actual ownership of a vehicle over the Internet-that is, ownership before they have actually seen and test-driven their purchase-but that misses the point that more and more customers are now deciding which dealership to visit via the Internet and are doing all of their purchase research over the Internet. Already 60% of retail automobile customers have consulted the Internet at some point before they come into my dealerships to buy.
And that percentage of Internet users will continue to grow, giving a clear advantage to those dealers who have a major presence and brand on the Internet and who provide superior Internet service.
This growing importance of the Internet in determining showroom traffic will favor those dealers who:
Achieving all these goals will not be simple.
For example we face a real challenge in closing the Information Gap between what our Internet customers know and what our typical floor Salesperson knows.
It is highly counterproductive when an Internet-savvy customer arrives at one of our dealerships knowing more about the capabilities and costs of our own vehicle models and our competitors' models than our own floor Salespersons.
This reflects poorly on our professionalism, undercuts our credibility, and creates an unnecessary level of friction between our Internet customers and our sales staff.
So we are working hard to change our recruiting, training and compensation methods to close this Knowledge Gap between our floor Salespersons and our increasingly-informed Internet customers.
And those sales personnel who are incapable of dealing effectively with the new Internet customer will need to be weeded out of our organization, because they will be dragging down our Customer Satisfaction scores-as more and more Internet customers arrive at our dealerships-and because research shows that satisfied e-commerce customers are 6 times more likely to refer customers than are satisfied traditional customers.
3. Brick-and-Mortar Success Will Contribute to Internet Success.
My third point is that while we spend considerable time talking about how the Internet will determine the ultimate brick-and-mortar survivors in this wired (and wireless) world, it seems equally clear to me that the reverse will also be true, that is, brick-and-mortar success will heavily influence who is left standing on the Internet a few years from now. So we cannot stop executing well all of those traditional marketing things that got us to this stage in our organization's history.
Whether a potential customer goes looking for one of my dealerships' websites is determined primarily by whether I have been able to establish a brand name for that dealership through such traditional marketing methods as:
These are still the things that make most customers think of us when they want to buy a car, and they are all ways through which we can further brand our dealerships' websites and increase the effectiveness of our Internet marketing.
1. Most dealers are highly entrepreneurial and have shown the ability to adapt to the arrival of the Internet. They will make the other technological and organizational changes needed to be successful during the first decades of the 21st Century if they are properly incentivized by their factories, and if the factories avoid the imposition of central plans from Detroit or Los Angeles that are inappropriate for local conditions. For those dealers who prove unable or unwilling to adapt to and meet factory standards, they need to be counseled and-if necessary-bought out.
2. The Internet is already a major force in determining dealership sales, but more so as a method for steering customers to the showroom floor rather than as a method for completing vehicle sales. A successful Internet business strategy will be absolutely essential for survival in the retail automotive industry.
3. At the same time dealers cannot stop successfully executing all the other marketing that has made them successful in the past, because that marketing not only still brings in most of their customers but it also dictates the dealers' success in establishing a brand name on the Internet. There is a symbiotic relationship between traditional marketing success and Internet success.