Savvy car buyers need savvier dealers

Research by McKinsey and NADA found that 84% of dealers regard the highly informed consumer as the most significant shift in the industry today. Megan Lampinen spoke to McKinsey’s Robert Hiroshi Mathis to find out more

Dealers are confronting ever-more highly informed consumers, and it is dramatically reshaping the entire automotive retail industry. In fact, recent research from McKinsey and the National Automobile Dealers Association (NADA) found that 84% of dealers surveyed regard the highly informed consumer as the most significant shift in the industry today. With consumers obtaining more information from various online sources and spending less time in the dealer showroom, what can dealers do to ensure they remain relevant and profitable?

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The answer lies in a dual-pronged approach, involving a focus on operational excellence and improving the management of marketing and sales standards across OEMs and dealers.

“We looked into the question of what drives dealer performance,” Robert Hiroshi Mathis, a Partner in McKinsey’s Chicago office and a leader in the company’s North American Automotive & Assembly practice, told Megatrends. “We took the survey and assessed more than 40 different factors, both across operating practices but also structural practice, and correlated that with the financial information to which we were given access. And what we found was actually quite counterintuitive to what conventional wisdom says.”

He went on to explain: “The highly informed consumer, one using multiple online sources to inform himself about products, pricing, detailed features and competitors, is leading to a phenomenon that is changing the role of the dealer.”

Operating practices

The study, Fast Forward: How U.S. Auto Dealers Can Drive Sustainable Economic Performance in the Digital Age, found that two-thirds of what determines a dealer’s economic performance is down to operating practices. “People would normally assume that it’s the size of the dealer, the location of the dealer or the brand the dealer is working with which determines the majority of the performance that you see across the industry,” observed Mathis. But the reality, he continues, is down to “the way a dealer runs the business within their own four walls. And that is highly determined by people practices.”

In fact, the factor that most correlates with the economic performance of a dealer is the tenure of the service manager. Having the right staff is essential, with top-performing retailers twice as likely as bottom performers to have low personnel turnover. Asked what, in today’s retail landscape, makes an ideal employee, Mathis said he believes there are multiple aspects that come into play. “They need to be product and technology savvy, serving as a product consultant, because the consumer is already obtaining all of the base information on the Internet,” he explained. “New technologies, dealing with a variety of product types and variants, is something that a sales consultant now needs to master.”
In addition, a modern sales consultant needs to understand individual customer needs and communicate in the preferred communication channels. This could range from phone and fax to Facebook to in person exchanges. “It’s quite a big variety of different channels and communication preferences that you have to master nowadays as opposed to ten or 15 years ago,” Mathis added.

A third key aspect for today’s sales staff involves taking an end-to-end perspective. “The salesman should not only think about the sale of a new car, but also about how to keep the customer loyal. How can we engage the customer to come back for repairs and service and parts?” It’s essential, he said, to connect the dots between not only selling a new car, but also keeping the customer returning to the shop and keeping customer loyalty high.

Notably, over the last ten years the number of dealers that consumers visit in the purchasing process has declined significantly. “Dealers report half of the store traffic they experienced ten years ago. At the same time, the conversion rate has significantly improved,” he noted.

Marketing spend

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At the moment, dealers and vehicle manufacturers are investing heavily in their consumer facing programmes, personnel, and other expenses. According to the survey, US$8,500 is spent on average by OEMs and dealers during the first four years of vehicle ownership. That’s a significant amount, and raises the question, ‘Is the money well spent?’

The key, according to Mathis, is to “get the bang for the buck on the money that you are actually spending.” When it comes to making wise choices in this regard, he notes that there is a significant variance across OEMs. “Some OEMs fare much better in terms of the effectiveness with which they conduct these different tasks along the value chain versus others.”

The survey did uncover one rule of thumb in this area – collaboration between OEMs and dealers is key. “The more systematic and the more coordinated the manufacturer and the dealer are at managing the marketing spend, the more likely they are to have the right return on investment,” he said.

As for how this spending will evolve, Mathis explained that “the primary optimisation objective has to be improved effectiveness, and to avoid overlaps, not primarily to reduce costs. The second objective should be around freeing up resources for the investments that are needed for network improvements, for restructuring, for new technology, and to bring the industry overall into a healthy performance level.”

In the end, dealers “may end up in the situation where you will save a few hundred dollars that you can hand to the customer. There is a win/win situation that you can create if you manage the whole marketing spend effectiveness topic better.”

Moving forward, effectiveness harnessing Big Data could reshape the sales approach and loyalty levels. “Big Data has a big potential to improve both the retail experience for the customer as well as retail performance. We see the emergence of several user-friendly solutions nowadays that help to automate analytics and to visualise information made out of complex sources of data, and synthesise this in a simple way,” he commented. Dealers could theoretically use these to integrate customer information along all touch points, both online and offline. “That’s the big challenge to make the transition from online lead generation to dealers.” The key for both manufacturers and dealer groups will be to manage dealer performance in a much more integrated way.

Inside the dealership, Mathis believes there is considerable opportunity to incorporate new in-store technologies. “This is already happening with online configuration terminals, where a dealer can show a prospective customer very illustratively how the car will look and exactly the configuration that the customer is going to order. Even with the significant amount of new models, new features and new variants, you can still bring to life what the product looks like, even if the car is not physically on the shop floor,” he explained. “New technologies can actually make this much more attractive than it used to be in the past.”

Megan Lampinen

This article appeared in the Q2 2015 issue of Automotive Megatrends Magazine. Follow this link to download the full issue.

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