The Future of the Franchised Car Dealership Model in Canada

The Future of the Franchised Car Dealership Model in Canada

Much has been written about the future demise of the local car dealership due to a wide assortment of industry threats. Game changing technologies such as self driving cars, the negative impact of global climate change, traffic congestion, the evolution of ride sharing, all point to a very different future for the auto industry and dealerships. Many “experts” expect that by 2030, vehicle ownership will be on the way to becoming obsolete, electric cars will the only vehicles on the road, and manufacturers will be selling vehicles directly to customers online. Self driving cars will further reduce the demand for automobiles.

There simply won’t be a need for the bricks and mortar of a car dealership. Indeed, Amazon has proven how a direct to consumer online model can wreak havoc on traditional brick and mortar businesses.

As a car dealer, it is pretty scary to think that my dealership will be essentially worthless in less than 15 years. No one wants to wake up one day and realize that they own the equivalent of a Blockbuster Video Franchise in 2010. Indeed much of the activity in the mergers and acquisitions market can be attributed to long time dealers cashing out before the seemingly inevitable decline occurs.

 

The threats are summarized as follows:

 

1) Electric cars –

As technology improves and government regulations/subsidies increase the public will increasingly move to electric cars. This in turn will spell the demise of dealership service departments. Without an engine, the experts argue that electric cars won’t require regular maintenance and therefore dealership service centers will become obsolete.

 

Without dealerships, Tesla’s model utilizes travelling technicians that go to the car to look after any issues or provide online computer updates that the owner downloads with a Wifi connection. Given the importance of the Parts and Service Department to a dealership’s profitability and viability, many will fail as electric cars begin to dominate the landscape.

 

2) Ride Sharing –

Uber, Lyft and similar companies have stormed into the traditional taxi market making transportation much more convenient and cost effective than ever before. The theory goes that the increasing costs of cars, insurance, and parking in urban areas will increasingly make owning a car illogical as consumers realize that they just don’t need a car for day to day activities.

 

The evolution of self driving cars will further make ride sharing attractive as ride costs decline since these cars will be zipping around 24 hours a day without the need of a driver. There simply will not be a need and therefore no demand to own your own car.

 

3) Self Driving Cars –

This is the real game changer. Imagine jumping into your self driving car and commuting to work. Your car drops you off in front of your office with no need for a parking spot and drives home in time to pick up your kids and drop them off at school. It then zips home and your spouse takes it to pick up groceries. The 2 car household has gone to a 1 car household and for the rare time that you need an additional car, there is a self driving ride share that you can use.

 

In fact, many families will eschew the need for a vehicle completely and rely solely or ride sharing for all their transportation needs. The average North American family with just one car in the driveway instead of two is a monumental change. That alone is a 50% decline in demand for automobiles and would have massive implications for the auto industry.

 

4) Online Retailing and Direct to Consumer Retailing –

Every year consumers become more comfortable with purchasing goods online without needing to see or touch the product that they are buying. Amazon and other online merchandisers are devastating the traditional retailing landscape while traditional retailers are scrambling to adopt their own online business models.

 

To date, the car business has been relatively untouched by these changes but several start ups in the U.S. are directing their energy at this business. Well financed upstarts such as Beepi, Carvana and others are jumping into the used car business with elaborate websites, money back guarantees, financing online, and free transportation of the vehicle that you choose, directly to your home. Without the need for a physical dealership or salespeople, these retailers will be able to squeeze the profit margins of traditional dealerships and already declining profit margins will force many dealerships out of business. Indeed Walmart has now entered the fray giving customers the ability to purchase a new or used vehicle. The customer is then referred to a participating dealership but how long before the relationship becomes direct to manufacturer?

 

On the new car side, Tesla has already employed this model with some success and other manufacturers are no doubt observing with great interest. Why add another layer to the sales process? Efficiencies will demand the elimination of the middle man – us, the franchised dealer.

 

Companies such as Google have also shown great interest in the auto industry, investing hundreds of millions of dollars in self driving technology. Given their huge financial clout, they have the cash resources to either compete with or acquire any existing car company. As a matter of perspective, Google has a market cap of $652 billion, General Motors on the other hand has a market cap of $51 billion. It is highly doubtful that a Google Automotive company will be looking to the existing franchisee model to guide their entrance into the car business. Meanwhile, existing car companies will be looking to shed the shackles and inefficiencies of the franchisee model to better compete in the new auto industry.

 

It sounds like a pretty dismal future for the franchised dealer. However, as Mark Twain one penned, “rumors of my death are greatly exaggerated”, so too for the franchise model. While changes in the automotive landscape will be fast and furious, it will take at least 20 years for many of these new paradigms to become reality and there is strong evidence that these changes will be more evolutionary rather than revolutionary.

 

Here are 6 reasons that the franchised auto dealership model may be more resilient than the experts think:

 

1) The dominance of electric cars isn’t just around the corner.

 

Despite massive government incentives and subsidies, sales of electric cars still represent a tiny portion of the market. Despite 2016 being a record year, they accounted for less than 0.5% of vehicles sold in Canada. Not surprisingly, they have only made a dent in those provinces which have provided massive consumer subsidies (BC, Ontario, and Quebec) where the taxpayer pays up to $14,000 to make an infinitesimal reduction in your carbon footprint. Even with these subsidies, the automaker is typically losing money and the dealer is making a very small margin.

Electric cars still need massive improvements in both technological advancements and cost effectiveness to become competitive with the gas powered vehicles. And, as the market share of electric cars increases, governments will be less eager to subsidize their purchase as the cost becomes prohibitive to both their budget and the electorates sense of good judgment.

Even with further improvements in battery range, much of the public will remain skeptical of electric cars due to limited range. Indeed, the range figures quoted (150 – 250km depending on make and model) don’t take into account our punishing winters that can reduce range up to 50%.

Lastly, electric vehicles make sense only in an urban environment where charging stations are plentiful and the time taken to recharge is less of a factor. Can you imagine someone wanting to plan a family road trip where, after 2 hours of driving, you need to recharge? Fast chargers have reduced the charging time to 30 minutes but still, the notion of pulling over for a full half hour (assuming that the charger is available and not being used by someone else) every 2 hours will not be palatable to many prospective customers.

Electric cars will undoubtedly become more prevalent in our market, especially within our cities. Government legislation, subsidies, and improvements in battery technology will certainly have an impact on demand however, there will still be a place for gas engines for many years to come.

Never underestimate nostalgia. The internal combustion engine will continue to be a factor for many years to come, as many consumers will simply prefer the sound, the performance, or the contrarian thrill of driving a “real” car. And, as the demand for oil eventually declines due to increasing market share of electric/fuel cell/ hydrogen vehicles, the price of oil (and therefore gasoline) will also fall making the economic equation even more difficult for other technologies to overcome.

2) Electric cars aren’t maintenance and repair free:

 

As Telsa has discovered, their cars aren’t maintenance free and the cost of taking repairs to the customer is proving to be an expensive venture. Having vehicles repaired and maintained at franchised dealerships has endured because it is still more efficient than other methods.

Electric cars still needs tires, winter tires, brakes (albeit not as frequently), suspension, safety, drivetrain, and electrical/electronic repairs and maintenance. That is unlikely to change in the future. Indeed the increased complexity of vehicles is pushing out the independent garages to the benefit of the franchised dealer.

Recalls are increasing throughout the industry. Greater public and governmental sensitivity to safety, more government oversight, and the sheer complexity of the modern automobile has translated into a much greater number of recalls (and service revenue for car dealers) despite improvements in build quality.

3) Ride sharing doesn’t work for everyone.

 

While companies such as Uber, Car2Go, and Lyft have made a big impact and are a major threat to the taxi industry, there success so far has been based upon being less expensive and move convenient than a taxi.

Further price reductions in their model are unlikely until self-driving cars become a reality. In the interim, they are really just displacing taxi’s in most markets.

Some consumers may find the lower price and increased convenience of taking an Uber, enough of a reason to get rid of their car. Again, this is most likely in an urban environment and will have little implications for suburban or rural markets.

4) Self driving technology may be ready, but are we?

 

The more we hear about self driving technology, the more issues arise.

Beyond the slow pace of government regulation changes, there are some very real hurdles for true self driving cars to overcome. How does a self driving car choose between two different accident scenarios? i.e. does it choose to protect the driver at the expense of pedestrians. Whose life is a priority within the car in a crash? There is a lot to ponder.

How well does a self driving car work in a rural environment? Gravel roads, side roads, etc. are a reality for a lot of rural Canadians. How does a self driving car navigate when there isn’t a paved, clearly marked road? What about pick up trucks? Off-roading?

I think that the biggest resistance will be simply from people for whom driving is synonymous with freedom, control, and a number of other emotions. This impact will wane over time but ask people over 30 how willing they would be to give up their car to own a 100% self driving car with no steering wheel? Not many despite some of the advantages.

So yes, it will have an impact but it will take time. Our cars are much more than transportation appliances. They remain an emotional as much as a rational purchase. How else can you explain the incredible rise and continued increase in luxury vehicles purchased when a basic Chevy or Honda at a third of the price could handle the transportation needs of most Canadians? What you drive has been a symbol of how you want the world to view you and a fashion statement as much as a practical decision.

I believe that once the regulatory and technological hurdles are overcome, self-driving cars will again, have more of an impact in urban markets. The taxi/ride sharing and long range trucking industries will no doubt embrace the technology quickly but it will take many years before our 100 plus year love affair of driving dissipates completely.

5) Online and Direct to Customer Retailing

 

It seems that the move to online purchasing is gaining momentum and increasingly consumers are demanding more up front and online information. Many dealerships are also embracing this movement and endeavoring to solve the myriad of logistical challenges. It isn’t merely a function of providing a price and taking a credit card over the phone. Trade value, finance approval, vehicle registration and final paperwork are all areas that an online solution needs to be able to address. Undoubtedly, these issues will be solved over time, which may result in there being less of a need for physical showroom premises and staff. Again, likely to be a slow and systematic change over time.

In terms of a direct selling model, Tesla is certainly embarking on a dramatic change. However, the jury is certainly out on whether it will be successful. Despite the media love affair with Tesla, to date they are still a luxury niche player at this stage, losing money at a breakneck pace, and the track record of manufacturers trying to run factory dealerships is a poor one. There has yet to be a single example of a manufacturer running a factory store more efficiently than the present franchise model.

Given the necessity of a physical service department, and the necessity of taking trade-ins, it is tough to imagine having no need for a dealership although the huge facilities that many dealers have built over the past ten years may become white elephants as the need for physical space for showrooms, service departments and vehicle storage becomes more efficient and rationalized.

6) Market efficiencies

 

Many industries are ripe for consolidation and disruption based on economies of scale opportunities and other efficiencies that a diversified industry may not be taking full advantage of.

While the movement away from single owner/operator stores is a continuing trend in the automotive space and will likely continue, disruption by a major online player does not seem imminent or even likely at this stage.

Given Canada’s incredibly expansive geography and the necessity of having convenient and accessible repair facilities, I’m not sure that there will be much change in this regard.

While efficiencies could be gained in urban markets by having fewer and larger dealerships, the manufacturers have conspired to prevent this. Indeed they seem eager to achieve their sales goals by adding franchisees, not limiting them.

In summary, I do believe that change in our industry will continue at an exponential pace however, we are years from a fundamental change in how vehicles are sold and serviced in Canada. Like always, the innovative dealership will prosper and the laggards will suffer.

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