Tekion's big dealership experiment is a big win

In 2019, Tekion was a technology company toddler — a 3-year-old startup betting it could upend auto retailing with a dealership management system driven by artificial intelligence. When it was time to aggressively test and refine the technology, Tekion CEO Jay Vijayan pitched an unconventional idea to his executive team.

A dealership involved in an early Tekion pilot program was for sale, and Vijayan proposed that Tekion buy it. The move would be unusual for a DMS provider, but the founder envisioned a powerful upside: using the business as a real-world laboratory for Tekion's developers.

"Why can't we own a dealership so that they truly understand the business?" Vijayan recalls thinking.

By February 2020, Tekion had snatched up Gilroy Buick-GMC in California, just more than an hour's drive from its Silicon Valley headquarters, for more than $1 million. The gambit proved so successful that Tekion bought a second dealership — Hyundai of Gilroy — several months later.

Tekion now has the dealerships for sale after the experiment helped the DMS upstart accomplish its goals, Vijayan said. It was never a long-term play.

In Tekion's roughly three years as a store owner, company leaders say they have been able to dive deeper into how their technology can be leveraged by retailers. They stationed members of Tekion's science, engineering and design teams at the dealerships on a regular basis so they could observe, answer questions, see what worked and change what did not.

While DMS vendors generally don't buy dealerships as product laboratories, company leaders reasoned that typical pilot programs or partnerships would have limited Tekion's ability to test its software and gather feedback.

Indeed, the ownership arrangement helped Tekion developers learn intimately what dealership personnel wanted and needed, and the venture shaped the company's DMS technology beyond what it could have accomplished with traditional pilot programs, Vijayan and other Tekion executives say.

"Having a dealership on our own really allowed us to be able to have our product personnel [and] engineering people there," said Napoleon Rumteen, Tekion's chief commercial officer. "That's not easy to do if it's not your store."

Car dealerships can be great businesses, and a side benefit of the arrangement meant that the company owned the two stores during the most lucrative years U.S. dealerships have ever seen. The Gilroy dealerships have made "tons of profits," Vijayan told Automotive News.

Tekion programmers and designers worked on site at the stores daily, while Vijayan visited every week in the early days of the venture.

Company leaders said they were careful not to disturb day-to-day operations. But as owners, they had the leeway to implement a lot more technology and experimentation than a dealership in a pilot program would typically allow, Rumteen said.

A pilot store "might take on one thing, maybe two," he said. "But they may not be willing to take on multiple technologies to pilot them and test them in multiple departments."

The DMS market was once dominated by two companies — CDK Global and Reynolds and Reynolds — that maintained their command early on in part by locking dealerships into long, inflexible contracts. But that has changed as those DMS giants relaxed some of their policies, smaller players grew bigger and new entrants debuted.

Though market share data is not available, CDK Global is estimated to still have the biggest slice of dealership customers, according to Matthew Gillrie, CEO of the Gillrie Institute in Lehi, Utah, an automotive software consulting group that works exclusively with dealers. Reynolds and Reynolds and Cox Automotive Inc.'s Dealertrack are vying for second and third place.

Tekion, which formed in 2016, is likely far behind the big three, Gillrie said, though that's not surprising because the company only started selling its product in January 2021. Vijayan, once chief information officer for electric vehicle maker Tesla, claims Tekion has more than 1,000 dealerships under contract.

The company, which has billed itself as a visionary startup since its inception, frames its acquisitions of the two Gilroy dealerships as another out-of-the-box move.

While some smaller competitors such as DealerBuilt and Quorum DMS were developed by dealership groups, Tekion's store ownership play appears to stand in contrast to longtime market leaders, said Stefan Drechsel, founder of DealerTech Nerd, a consulting firm specializing in dealership software.

The move likely gave Tekion a head start building out business rules and workflows, Drechsel said. He questions, however, whether it was smart for a technology company to assume "operational business risk" by also becoming a dealership owner.

Others see the strategy as making business sense.

"It seems like a really smart idea to be able to have hands-on experience [testing DMS software] every single day," said Jeremy Beaver, CEO of Del Grande Dealer Group in San Jose, Calif. Beaver's 18 Bay Area stores use the rival CDK system, though he's familiar with Tekion. "They're a really smart group of people that are trying to help create a revolution … in the industry when it comes to software," he said.

But Beaver hasn't been persuaded to switch to Tekion.

"We are so technologically advanced and don't necessarily depend on one system," he said. "As with any good competition, as Tekion continues to get better, I believe companies like CDK and others are going to also continue to push that curve of what the future [retail] automotive technology looks like."

Any edge gained by dealership ownership will only take Tekion so far, Drechsel said. Tekion has been building its DMS via pilots, largely through dealership groups with five stores or fewer. But as it grows, the company pitches its technology to much larger groups with different workflows, he said.

"You are running into setups in those stores that [do not] apply to those smaller dealerships," Drechsel said.

Tekion received standard approvals from General Motors and Hyundai Motor America to acquire the dealerships. The Hyundai dealership was purchased through an automaker-directed distress sale, Vijayan said.

"Working through the approval process strengthened our understanding of the internal workings of a dealership and the value of the franchiser relationship," he said.

While not a requirement, Tekion kept the Buick-GMC store's operator, Michael Winding, on as a minority partner and general manager, roles he eventually filled for both dealerships. Most of the GM store's staff stayed on, which helped speed the initial deal timetable.

With the Buick-GMC location already piloting Tekion's DMS before the acquisition, "it was a really good fit," Winding said. As he learned more about the platform, he was able to share ideas and even help the engineers.

Tekion said it negotiated an undisclosed ownership percentage with Winding, giving him a minority ownership stake for both stores to help incentivize running the dealerships well through this crucial time. Even as Tekion made clear the dealerships would operate as before, the software company's technology team obtained valuable access to store operations and processes. Winding calls the dealerships' stint as Tekion's learning lab a positive experience for the most part.

"You had your glitches, which we understood because it was a new technology," he said. "What made it work the best was by having all the engineers at the store at one time … boots on the ground in the store while the product was being tested."

Owning the dealerships has helped the DMS provider make some crucial software adjustments.

Tekion COO Guru Sankararaman told Automotive News that transactional workflow changes that were implemented "were only possible physically being in dealerships."

The company built fully remote transactional capabilities into its software and tested them in the Gilroy stores with customers during the COVID-19 pandemic before taking them to other dealership clients, Sankararaman said. Examples of Tekion's functionality developed on site include e-signing of documents and zero-contact service products such as self-check-in, key drop and pickup for service appointments.

The stores also played a role in the development of a casting function for finance-and-insurance menus and deal sheets in a vehicle purchase. Casting allows customers to see and follow any changes to those menus and payment worksheets live on their own device as deals are built.

The enthusiasm about dealership ownership from Vijayan's executive team today stands in contrast to the mixed reactions the Tekion CEO got when he first floated the idea back in late 2019. Investing money into a store acquisition wasn't an easy sell at a time when the company was relying on a smaller tranche of financing and fewer employees.

Tekion has raised $451 million in venture capital to date, with its latest round in 2021. The company has scaled operations to 3,000 employees.

Rumteen recounted his early skepticism.

"We're a technology company," he said. "Why do we want to get into automotive retail?"

Sankararaman responded similarly, saying he was "a bit surprised and shocked." But he listened to Vijayan and then he came around.

"Owning these dealerships would give us an immense advantage," Sankararaman said. "Having access to the dealer operations would allow us to build the product. Better [still], we could validate the product before taking it to our real customers."

After a couple of days, Rumteen came around, too, he said.

One of Vijayan's most important visits to Tekion's Buick-GMC dealership occurred immediately after the acquisition closed. More than three years later, he remembers the energy he felt that day about trying something new.

"I was nervous and excited," he said.

Dealership employees, many who already knew Tekion's personnel because of the store's participation in an earlier pilot program, welcomed the unusual arrangement, Vijayan said.

As he sees it, his grand experiment worked.

"We have a significant, solid, reliable product, and all the core features that we wanted to develop are delivered," Vijayan said. With more than 1,000 dealerships signed up for Tekion's DMS platform, "we've got enough validation," he added.

Editor's note: This story was updated to correct two titles: Napoleon Rumteen is chief commercial officer at Tekion and Guru Sankararaman is the company's chief operating officer.