Struggles, success for subscription

Holman Enterprises had booked four straight monthly profits for its Flexdrive vehicle subscription business and had a growing customer base, almost a third of which drove for ride-hailing services.

But in November, insurance cost for the service almost doubled.

Back to the drawing board.

Subscription programs, whether initiated by automakers or retailers, bundle insurance, maintenance and vehicle use into one payment, and some offer delivery and the ability to swap vehicles on demand.

Some programs have struggled to attract enough people who want to pay for that convenience. Others can find customers but struggle to turn a profit. Several large, successful dealership groups are exiting their startups, rather than complicate operations and suffer continued losses.

Still, a few dealers say they have found the key to success and are operating moneymaking subscription businesses.

"We've proven there's definitely a demand for the product," said Jeremy Paolone, vice president of technology operations for Holman Strategic Ventures, which also co-owns the Flexdrive subscription platform with Cox Automotive.

To limit risk and losses, he adjusted the program, which debuted in April 2017. Gone are some Lyft drivers racking up 2,000 miles a week with unlimited mileage on their rentals; Paolone put a 500-mile weekly limit on the gently used vehicles, and ride-hail drivers fell to just 10 percent of its customer base.

That change also cut clientele to fewer than 200 subscribers. So Holman may trim that weekly mileage rate even further to reduce the weekly rate in hopes of reaching more consumers.

Several dealerships Automotive News spoke with about their experience with subscription services said depreciation, fleet management and insurance costs drove them to revamp or outright end their programs:

• Jeff Wyler Automotive Family shut down its Wyler FastLane subscription service after a year.
• Prime Motor Group's Prime Flip program closed in December after operating for a year and a half.
• Warren Henry Automotive Group last month wound down its FlexWheels initiative that started in 2017.
• The website for Lou Fusz Automotive Network's Fusz Select subscription service, announced in August 2018, appears to have been shut down.
• FlipAuto, run by Benzel-Busch, a luxury dealership group in Englewood, N.J., has this message on its website: "We apologize but this car subscription program is currently on hold and we are not accepting new customers at this time."

Wyler Group, with 15 rooftops, launched FastLane in January 2018, quickly reaching 70 subscribers, primarily driving new vehicles.

But Kevin Frye, marketing director for the Milford, Ohio-based group, said that adding scale didn't improve the economics and actually increased the depreciation risk. So the group opted to call it off.

"This was a fantastic consumer experience," Frye said. "From a business side, it just didn't make sense."

He declined to say whether FastLane had been profitable.

While subscriptions provide a novel way to package payments, they aren't a radical innovation, said Mike Ramsey, senior director at Gartner.

"The driver is paying to use the car for a limited period of time — shorter than a lease," he said. "That's basically a rental."

And what gets rented out is important.

Jim Butler Auto's driveBLACKTIE doesn't use any new vehicles in its fleet of about 70 vehicles, and it keeps certified or nearly new vehicles in the program for only 90 days. Only two vehicles couldn't be sold for a profit after being used in subscriptions, said Brad Sowers, president of the six-rooftop group in Fenton, Mo.

"It's actually been surprisingly successful," he said.

The fleet strategy has been a key to success, Sowers said, as has allowing only participants with a safe driving record and charging enough for the service.

He's broadening his offering, giving customers the option to drive just one vehicle — instead of being able to swap autos — in exchange for a lower price. He partners with Ally to floorplan vehicles and with Aon for insurance.

"For our first year, we were cash-flow positive and we had profits," he said of the program, which launched in fall 2018 and has almost 60 subscribers. "It's all come down to inventory management. That's the bottom line."

While less than 1 percent of vehicle sales today are subscriptions, some analysts and forecasters are predicting growth for the buying and leasing alternative.

Frost & Sullivan, a research and consulting firm, predicts that by 2025, 10 percent of U.S. new-vehicle sales could be slated for subscription programs, as more automakers and other companies enter the space, said Frost & Sullivan research manager Vishwas Shankar.

By the end of 2020, Frost & Sullivan expects half a million new and used vehicles could be in subscription fleets in the U.S., up from an estimated 10,000 at the end of 2019, Shankar said.

By 2025, Frost & Sullivan is forecasting 16 million used and new vehicles could be deployed for subscriptions between the U.S. and Europe.

Despite some dealership subscription programs shuttering, new competitors continue to hit the market. Last year, rental-car companies Enterprise Holdings and Hertz both launched subscription programs in select markets. And startups such as Steer, a subsidiary of energy company Exelon Corp. that offers battery-electric and hybrid vehicle subscriptions in Washington, D.C., also plans to add markets this year, Steer CEO Sonya Harbaugh said.

Clutch Technologies, a subscription software provider that is part of Cox Automotive in Atlanta, said that over the past year, it has grown its dealership rooftops eightfold to nearly 200, and its automaker clients from four brands to 18.

Several operators such as Prime Motor Group said that customers were fans of the service, but challenges mounted.

Prime Flip, which offered new and gently used vehicles, was assessed in July and management opted to wind it down, said Nancy Sterling, a spokeswoman.

"As we grew the business, we encountered losses due to the cost of inventory and insurance in Massachusetts," where the unit of GPB Capital Holdings' Prime Automotive Group is based, she said in an email.

Officials for Fusz Select in St. Louis and FlipAuto could not be reached for comment.

For the Warren Henry group, based in North Miami, Fla., depreciation expenses on committed vehicles just overwhelmed the revenue, said CFO Erik Day.

Its FlexWheels subscription program grew to almost 100 vehicles, but it couldn't make money.

"We struggled, honestly, to make a profit. It was very difficult," Day said. "You had to carry way more inventory than was necessary. Depreciation was just annihilating your margins."

Tackling depreciation and figuring out how to make money on Drive Germain in Columbus, Ohio, is paramount for Germain Automotive Group this year, said Austin Germain, general manager of Jaguar-Land Rover Easton and manager of Drive Germain.

He said the program has been live for more than two years, and has more than 40 members and about 60 vehicles in its fleet.

But scale doesn't improve the economics, he said, because increasing the number of vehicles just adds more depreciation.

"That's one of the challenges with subscriptions."

Drive Germain is close to being profitable, he said. His team now understands all of its costs and is working to make some changes such as the types of vehicles used, while price changes also are being considered. Six months into its program, it added a mileage limit.

"We are looking at this long-term," he said, adding that expansion to other Germain markets in Michigan and Florida is a possibility.

Asbury Automotive Group is also taking a long view. It's picking up the growing Park Place Select luxury subscription business in Dallas and Fort Worth as part of its deal to buy 10 Park Place Dealerships. The closing is expected next month.

Park Place Select has seen consistent growth since its May 2018 launch, said Hesham Elgaghil, chief strategy officer for Park Place Dealerships. Offering multiple brands has been key, Elgaghil said. Today, it has a fleet of more than 150 mostly new vehicles and offers unlimited flips.
"We feel like our program is extremely successful," he said, adding it has high demand in each of its four pricing tiers, with some people on waiting lists.

Elgaghil said the subscription service realizes profits at the store level when vehicles are purchased from the dealership group's stores.

And Park Place Select also has had customers subscribe to vehicles for a few months and then opt to buy one. "For us, that's the dream scenario," Elgaghil said.

Despite the woes and struggles, several operators remain optimistic about the business model.

One is Holman, which is eager to see the New Jersey Legislature move on a bill introduced last year that would allow for a different license plate for subscription vehicles. The change would be cheaper and easier for Holman's subscription operation, which now operates under rental-car rules, Paolone said.
"We are still very bullish on subscription. We think it is going to be a viable solution for consumers and dealers in the future," he said. "There's just a few odds and ends logistically and regulatory issues we need to work out."

Jamie Butters contributed to this report.