Will dealerships survive the future?

In the 22 years since I entered the auto retail business doing acquisitions for AutoNation, dealers have weathered perceived threats from the Internet, public dealer groups and the Great Recession. During that time, average dealership profits have more than doubled, showing the resiliency of the business model.

Dealerships have been like fruit trees that generate healthy profits for owners for decades. But life may be changing for auto dealers. A number of well-respected industry experts are pointing to the future confluence of fully autonomous vehicles and ride-sharing.

These experts predict that retail sales will drop by millions of units per year, which will lead to the demise of thousands of dealerships. In this view, many dealerships are like coal mines: they will produce profits for a limited period of time, and then they will become worthless.

We will leave it to others to predict when autonomous vehicles will be allowed to operate across our country, or if there will be a valid business model to justify their expense. Certainly, untold billions are being invested by OEMs and other companies to develop this technology. The valuations of public dealership companies have been materially hurt by investors' fears for the future. And we see the threat of self-driving vehicles weighing on private valuations, although not as much. A good portion of our client base is selling due to fears of the future — too much of their net worth is tied up in automotive assets that could plummet in value.

For every seller, there is a buyer. What is their perspective? Our conversations with growing groups reveal they are confident in the future of auto retail. These forward-thinking dealers are taking steps to position their groups to take advantage of anticipated changes in our industry.

First, they are embracing technology to increase sales and reduce expenses. For instance, the shift to digital marketing has already reduced the amount of money these dealers are spending to sell vehicles.

Second, they are increasingly focused on improving the customer experience. These dealers know they have to reduce the length of time and create more transparency in a car deal so that customers are happy when they leave and post their online reviews about their experiences. And these dealers know that to please customers, they must attract and retain caring, career-minded staff members. We are hearing more about dealers recruiting out of college, training one person to handle a transaction from start to finish, and 40-hour workweeks.

We are hearing less about fully commissioned compensation, desk managers fighting for high grosses, and service departments charging premium prices for common services.

And third, dealers who own multiple stores can create economies of scale to reduce operating expenses, offsetting the ongoing decline in margins. Scale also allows dealers to offer a large selection of vehicle brands to consumers, which improves customer retention and reduces advertising costs. And scale will allow dealers to invest in their brands and new technologies to compete with a firm such as Carvana, which blew past every dealer in the country with respect to Internet selling.

Carvana is giving many consumers exactly what they want — a frictionless transaction delivering the precise vehicle they are looking for at a competitive price.

Consumers now expect these kinds of transactions given their experience with Amazon. Those franchised dealers that can offer any brand of new or used vehicle through a local showroom or online in a customer-friendly process will outperform smaller, traditional dealers.

And maybe dealers can put a little fun back in our industry, which is surely a good way to prevent more consumers from choosing ride-sharing for their transportation needs.

Carvana's market capitalization is already far larger than AutoNation's or Penske's — the two largest franchised auto retailers. Let's think how much value dealers can create if they replicate the strengths of Carvana — a huge selection of vehicles and a customer-friendly sales process — with the advantage of convenience and the lucrative parts and service business.

That feels like a recipe for long-term success.

To go back to our analogy, growing dealers see an industry that can provide impressive returns on investment, and they are tending to their fruit trees to produce even higher profits in the future. Dealers who stand still will likely lose customers.

To these dealers — and many of them are friends — we encourage them to adapt quickly or think about exiting the industry. Otherwise, they risk seeing their fruit trees turn into coal mines that will steadily lose value.