AURORA, Colo.–A panel of car dealers shared their views with credit unions on everything from the future of auto retailing, what they are now looking for in financing partners, how electric vehicles are changing the market, and even whether cars prices will reach the point they become luxury items for a select few.
A popular annual feature of Origence’s Lending Tech Live event, the dealers responded to a host of questions from both the session moderators and the audience. All agreed the current market is like nothing that has ever been seen before—sell fewer cars, make more money--and it won’t be returning to its traditional model anytime soon, if ever.
The discussion was moderated by two people, Charlie Vogelheim, host/pilot for the Flying Car podcast (who appeared via video), and Josh Amaton, VP-dealer/client experience with CU Direct/Origence. Participating as panelists were:
- William Knowles, COO with Mike Maroone Automotive Group, Colorado Springs, Colo.
- Jonathan Fowler, president of Fowler Automotive Group, which has 10 dealerships’ in Oklahoma and Colorado
- Rob Medina, Western Region CFS with AutoNation.
Here’s a look at some of the questions posed and the answers provided. Editor’s note: there has been minor editing of some questions and statements for the sake of brevity and clarity.
Vogelheim: We have not witnessed anything like this. With all these shortages, the dealers find themselves short on inventory. But dealers are selling fewer cars and doing better and making more money. It’s a whole new world. Do you agree?
Knowles. I largely agree. There is a supply/demand imbalance in the market and selling cars at MSRP has never been seen before. It is unique, but it won’t last forever. So, we are trying to figure out what comes later, where are the areas we can learn from that will stick. We are buying more used cars.
Fowler: I agree. I think the fear on our side is it’s all at MSRP and we have become order-takers. You start to see things tighten up on the lots. We don’t even have cars to show the customers right now. There is a lot of concern right now around that from a negotiation standpoint. We are doubling down on customer service. That’s critical right now. On the service side, we are working to keep up up with customers’ communications expectations.
Medina. We are focusing on the fact it’s not going to last forever. We are spending a lot of resources on improving the sales process and the talent we have.
Vogelheim: The customer has developed the habit of going to the dealer and seeing the MSRP and then going down in price from there. Now, you are being vilified for selling the vehicle at the price that’s listed. What can you do?
Medina: We do one price on our used vehicles and had done so prior to pandemic. That won’t change.
Fowler: You have to invest in your teams and in your facilities. We are going through a lot of facilities improvements right now. I think we are going to see a lot more supply. All the manufacturers want to be number-one.
Knowles: We have also gone to one price on our used vehicles. I don’t think we can control the prices, but we can control a more transparent sales process. It’s something consumers are demanding across the board, and they should.
Vogelheim: What about the move to electric vehicles and a different sales model?
Fowler: Something people often ask is, ‘Are you afraid car dealers are going to go away?’ I am a third generation auto dealer. I will buy anyone’s dealerships up here. (The EV’s) direct sales models are inferior because of the customer service component.
Knowles: There is a push for more control over the sales process when it comes to the EVs. They have a goal of making it more transparent for the consumers. I think everybody has the same goal. I think there will ultimately be a middle ground that is found and that dealers have a place in that distribution model.
Vogelheim: Tesla is the manufacturer with the direct model. I have witnessed Tesla owners waiting months and months for a replacement part. They love the product, but a normal dealer would be vilified for this kind of service.
Vogelheim: I see a lot of (dealership owners) now on generation three or four that don’t share the same view of the future as you do.
Fowler. I’m an eternal optimist at heart. (Family-owned dealerships that fail or are sold) typically don’t have strong succession planning. Consolidation is going to happen whether Tesla exists or not. The top 150 auto groups account for 60% of the industry. That’s going to look like the finance industry. That’s why we are trying to grow our family’s business. Scale is going to (be key).
Amaton: (Consolidation) has really accelerated in last few years. The value of dealerships has never been higher, and they see that over next two years there is going to be a struggle for inventory and they ask, ‘Do I turn it over to junior or do I sell?’
Vogelheim: Let’s talk about the actual EV product. With fewer parts and less service work, does that mean less opportunity on the back end?
Medina: That’s exactly right. In finance, service contracts or extended warranties are our number-one product. It’s more profitable than anything else we sell. With EVs we had to talk to a number of companies and have a service contract built specifically for that product.
Knowles: I think it’s a two-stage process. In the near term it’s going to affect parts and service more. The reality is you have to work through the internal combustion engines, which are everywhere and will continue to be everywhere. Will we see an impact? Sure. Are there things we will have to change? Sure. But we are making those investments. It will have an impact but I think it’s very much to be determined what the impact will be. No one knows what the issues will be when EVs are 10 years old.
Fowler: I think you have to have your suite of products set up for it. Studies over the last 12 to 34 months show you actually spend more on service with an EV. (In the dashboard), you don’t replace a single bulb for a few dollars, you replace an entire panel or a harness. That is something that is far more expensive.
Vogelheim: What about the recharging and the information you can’t give the buyer, like how far you can go? What has been your experience with consumers, your sales folks?
Knowles: Range anxiety is real. Very few of our customers are using EVs as their only source of transportation. That said, consumers love their EVs, they are really fun. They’re exciting vehicles. It’s about where it fits into their family’s needs and whether it can be solo transportation
Fowler: In Oklahoma, it may surprise you, but we are in the top five for EV charging capacity in the United States. They have blanketed the state with EV chargers and local utility companies have bought EVs to gather data. What they have learned is if they can put a Level II home charger in all our houses, during overnight and off peak hours they are making a ridiculous amount of money. Utility companies have figured this out and they are incentivizing customers to go that way. We have partnered with a local power company. I see home charging and place-of-work charging where that is going to taking place. It’s just a matter of time.
Vogelheim: What about the building into the F&I the cost of building the charging infrastructure?
Fowler: If you are a member of the Oklahoma Electric Co-op, they will pay 50% of the infrastructure costs and Fowler will pay 50% of the infrastructure.
Medina: There is still a cost. No doubt, it’s where we are going. Everyone loves it. I’ve not heard anything negative from a customer. You can’t find one on the lot. They are sold months down the road in the pipeline. We have had dialogue about whether the home charging station is something we could sell in finance.
Amaton: What about relationships with financial institutions. We had one session, on the blockchain and crypto and how CUs might fit into that space. Is there much interest in conducting a transaction on new vehicles using crypto?
Medina: I know for a fact we have done one at a Porsche store in the last t0 days.
Fowler: If anyone can explain to me what crypto is, maybe we will consider it.
Knowles: We have not had any. Our ownership still believes cash is king.
Amaton: What role do credit union lenders play for your groups?
Medina: The credit unions have two different roles. We have preferred lenders and approved lenders. In our preferred lenders we have credit unions that our present in our stores and are really great partners. Then there are the approved lenders because their member comes in and they want to stay with their credit union. Obviously, the preferred lender is the way we like to go.
Fowler: You have your preferred lenders that you see in your stores. A computer can check a lot of boxes, but it can’t make up for that relationship. Credit unions in our portfolio are critical partners. And our members expect it. Tinker Air Force Base is the single largest employer in Oklahoma. Tinker FCU owns that. They are a critical partner for that. We see a tremendous amount of consistency with those partners, and that’s the other thing we value.
Knowles: Here in Colorado, we have five locations and in Colorado credit unions are very, very strong. They are our number-one lending partners. By and large credit unions are huge drivers of our business. We were initially a little concerned they would be in and out but they have been consistent. It’s hugely important for us to have a great relationships with those partners. To get quick decision, quick funding, all of those things vitally important.
Medina: One thing I think the credit unions do better than our other lenders is that consistency.
Amaton:: What factors do you consider when considering new lending partners?
Knowles: First and foremost, we need quick funding. The working capital in a dealership is a pretty substantial part of our business. Getting that funding in a predictable manner is critically important. Two, it’s the relationship. We want people we can call and who can help us work through problems. We want to be great partners to our lenders and we want lenders who want to be great partners to us. And third, we want lenders who will treat our customers with a lot of respect regardless of where they sit in the credit score realm.
Fowler: Some of the X factors that are a little more granular include, do you invest in the community? We are a family-owned business. We have to build value in more unique ways. There is no (public dealership) that invests in our markets the way we do. Are they really trying to help a customer who needs a car?
My grandfather would put someone in a car if they really needed it and carry that cost. I live in the communities we serve. I don’t want someone throwing water in my face at a restaurant if we ripped them off. Reputation is everything in this business There is a massive incentive to do things the right way. For us, the X factor is who is really willing to go beyond what is on this paper?
Vogelheim: Talk about the F&I person in terms of the relationship with a credit union.
Medina: Getting into AutoNation as a lender is a long process. We are looking for three things. Partnership. We understand that goes both ways. But the first thing is our customer experience; we want to align there. Number two is, are they profitable for us, do they have anything unique other lenders don’t have? The final part is, can we be a partner to them? Can we give them the deals they need to be profitable? Do they have the resources to be in our stores and build relationships with our finance managers? Are we fast lending, smart lending?
All those things are taken into consideration when selecting a lender.
Specifically, Colorado is where I’ve seen the best relationships with the credit unions and our finance teams. Being able to rehash a deal with somebody, not the computer, when all things are even on a deal, it’s going to go to that person we have developed a relationship with.
Amaton, reading an audience question: Are you concerned about vehicle affordability?
Knowles: Very concerned. It’s something we have been concerned about even before high gas prices and these other things. The affordability is a problem. One of the unintended consequences is (the manufacturers) are producing their higher margin, higher profit vehicles. All the fresh inventory is expensive, and all the trade-ins are expensive. It’s much more difficult for the individual who needs an inexpensive unit to find one. That’s not going to change in a short time, it's going to take a long time. We need that because consumers need that.
Fowler: I am also very concerned. I try when it comes to these discussions to keep a historical context. I remember my grandfather freaking out at 60-month terms. My gut is because cars are getting more dependable we will find ways to finance vehicles for longer terms. I think consumers demand what they can afford and what they want, and there is a large segment of the population that is not going to be able to afford and manufacturers will respond to that. I think in the long term we are going to see vehicles become more of a luxury vehicle and municipalities will invest more (in mass transit). It’s definitely an issue.
Amaton: What about the online marketplace? What have you seen in these last few years and what are your expectations?
Medina: The pandemic showed us the need for that end-to-end digital solution. We fine-tuned a few processes we had so customers would not have to come to the showroom. I’m not 100% convinced customers want to buy the car online end to end. In end to end you have to have three things: the customer, dealer and the lender. And I don’t think the lenders are there yet.
Knowles: There has definitely has been more demand by consumers who want to be met where they are in the shopping experience. For us, it means if you want to come to the lot—assuming we have the cars—you can do that. If you want to be totally remote, you can do that. If you want to do all your research online and then come in, then great. That’s a challenge for us as retailers. It requires more training. The truth is we can’t right now deliver the end-to-end solution the way Carvana can. I’m an optimist; we will have the ability to do that eventually, but we are not there yet. And I think there will always be a subset of consumers who want to come in and have that touch and feel experience. And there will be a subset that wants to be 100% online.
Fowler: Customers who initiate the process online now is well over 90%-95%. The majority who want to keep it end to end online, it’s less than 3%. I think at the end of day consumers want as much transparent information as possible so they just feel comfortable coming in. I think the boogie man in the industry is that people don’t like to talk about as much is online pricing of F&I products.
We have recently started to move down that road. My hope is in 12-24 months we will have fully transparent pricing and product. I’m still nervous about that. That information getting out there has been slower in other things we are seeing in our industry. It’s going to take a major player to do that.