Industry Trends Driving Change in Automotive Retail

Greg Uland:  Cliff Banks, founder of the Banks Report, one of the preeminent industry publications around M&A and a lot of that activity so thanks so much for chatting a little bit.

Cliff Banks:  It's great to be here. Thanks for having me.

GU:  Yep, absolutely. So Cliff, you probably are in the know as much or more than anybody else in the industry so just wanted to get your take on a few kind of hotter topics, I guess. Things that have been around for a while but are not going away anytime soon. So the first one is really around inventory issues:  chip shortage, supply chain. At a high level, what's your perception of that? Is it going away anytime soon? Where are we at?

CB:  You know, it's not just a chip shortage anymore it's also a raw material shortage. And it's not just vehicles, it's across the board.

GU:  Right.

CB:  That impacts society as a whole. Going in a little bit different direction, too, just on the inventory, as the gas prices continue to explode, are we gonna start seeing customers wanting to turn in their trucks or SUVs? I'm starting to hear some anecdotal evidence that that's the case already. So what is that, what's that going to do to vehicle prices today. You know, certainly I think one of the biggest concerns a dealer has today and certainly one that sells a lot of used vehicles is how to time that market. When is that pricing going to start declining. And you don't want to be sitting on an inventory full of used vehicles when the market goes south. So that's, I think that is an immediate concern.

GU:  So let's dig into that a little bit, right? So the used vehicle pricing and inventory levels and things like that, we've been talking about that since about April of 2020 where when this falls off it's going to be bad. Right? Because we started seeing this climb, April May and it's like, well yeah, but it's a bubble and it's going to pop. Well, it hasn't popped, right? So do you think it's going to be a pop or do you think it's going to be a gradual decline where it's a little more controlled or do you think it's not really going to go back to what it was?

CB:  I'll be honest with you. I don't know. I mean, that's the problem. I don't think anyone really has a good answer there because we don't know what's next, what's going to happen next week or tomorrow. I think we're in a world right now that is uncertain not just from an automotive manufacturing perspective, but also just from a world perspective. The reality is any day you could wake up and not have access from an internet perspective. You know, I mean, cyber warfare is a very real thing that's going on and dealers need to be nimble and need to be able to pivot quickly. You have to pay attention to what's going on both in your local market certainly because I think there's a lot of things that we may be talking about nationally or internationally that maybe aren't impacting the local market. But then again, maybe there are some local markets that are going to be on the leading edge, right?

GU:  Sure.

CB:  And then just, you know, paying attention to what's going on in the world. Having the mechanisms and processes in place, too, or plans in place to offload that inventory fast if you have to. Listen, I'll tell you when--You know, it was interesting watching the inventory levels of a Carvana, CarMax and some of these others, when we first started entering the pandemic they unloaded vehicles very quickly. Before anyone else really knew what was going on. So they were on top of it. And, now, they had to go back and get that inventory at a much higher price so maybe they don't work today. But again, it's to the point of the uncertainty that I talk about often right now. You have the uncertainty long term of manufacturer strategies with direct potential strategies of direct to consumer, what the EV, you know, how the EV is going to impact the retail network but, and the connected vehicle which I think is going to have a huge impact over time. But, right now, that's amplified a thousand times because of the uncertainty of what's going on in the world and it's day-to-day uncertainty.

GU:  You're right. So let's go there with EVs, right? So, electric vehicles. It's all you see in any advertisement, right? And dealers are prepping up and they need to, right? It's coming. But at the end of the day, when you look at the grand scheme of things, how many new vehicles being sold are electric vehicles? And maybe more importantly, what percentage of used vehicles being sold are electric vehicles? What impact is this gonna have? Where are we going? Kind of where are we at today? How far out are we until this is a real thing?

CB:  We're still in the world of hype.

GU:  Yeah.

CB:  And much of what we see talked about from the manufacturers is really designed to drive up investor interest and create that message that hey, yeah, OK, there's Tesla, there's Lucid, there's Rivian. But, we're in the same game. Right. The manufacturing capacity yet on EVs, with Ford, GM, and others still isn't there. I mean, look Farley, Jim Farley, announced this week or just last night in fact at a conference that I think they have capacity for 200,000 Lightnings. They have reservations for 200,000 and that's all they're building until I think 2025. So, it may sound like next year, next month the whole world's going to be EV. It's not. It's still a gradual process. And then certainly with some of the world issues going on impacting manufacturing, the battery strategies. You know, the batteries still, yeah. That's a huge deal. That's why you're seeing manufacturers building battery factories here in the U.S. All over. I mean, all over. So, and again, the other part to that is are their strategies gonna play out? We don't know. But again to your point, you mentioned the dealers. Dealers are being asked to invest hundreds of thousands, if not more, dollars into their facilities to prepare for this EV tsunami that's coming.

GU:  So is there an opportunity though. So they're going to invest this money, right? And they're going to have to. In a lot of ways, they've had to do things like that all the time. But is there a good way for them to capitalize and shorten the return on investment on some of these things? Especially with certain manufacturers maybe where they are going to allocate EVs to dealers, are there ways for them to take advantage of this as an opportunity rather than just spend all the money and wait for the cars to come?

CB:  Yes, I think certainly being able to understand--It's not--and it's not just an EV question today. It's also a question of overall inventory. How you're engaging with the customer. And is there an opportunity for dealers to change their model of engagement with the customer. You order a vehicle, you know, you're not going to get it for a year and you don't hear boo from the manufacturer or the dealership. Can the dealer communicate and keep the customer updated in a way that the customer's not having to call and find out? I think the dealers that can show that they have processes like that in place are going to be ones that win in the market. This is still, it's still a world in which the dealers that are smart, have the right processes, are the ones that are gonna win. I mean, and we see that, and we're seeing that today still. Even with even in this world. I mean, the dealers that can figure out a way to get the inventory, and there are dealers that have done that.

GU:  Absolutely.

CB:  Yeah. So, again, having a plan in place. But the manufacturer is going to have a much greater role in dictating what that retail process looks like. So understanding where the manufacturer is going and being able to set up your dealership:  finding the vendors, finding the solutions that will help you meet what are accomplished with the manufacturers dictating. You're going to be in a much better position as a dealer to get the inventory and to be one of the chosen few. I think at some level, manufacturers are going to have to determine and choose which dealers are going to get which inventory.

GU:  Yeah, you're right. I mean, you talked about the Ford Lightning, right? How many F-150s are sold each year?

CB:  Oh, yeah.

GU:  900,000, a million, something like that?

CB:  Right, yeah.

GU:  And so you're talking about 200,000 cars over the next three years, you don't need the same dealer body to sell those.

CB:  Right.

GU:  You just don't.

CB:  So, allocation is going to be, you know, tough. And I think that's across the board with any, with any of the manufacturers and some of the EVs coming out. There's going to be a limited number to sell going forward, for the next few years at least. So, part of that's driven by the fact that you need to have profitability in these sales. So, you know, I think the ICE engines, the ICE-driven vehicles are still very profitable.

GU:  Right.

CB:  By the end of the decade, maybe the EV will supplant that, but it's still going to take a while.

GU:  Yeah. When you see certain OEMs really taking the what, well it's the work that Tesla's done over the last five or six years with the legislations in different states across the country, and leveraging that to find ways to go either actually direct to consumer or in a hybrid direct to consumer model. So when you see that, what impact do you think that has a little longer-term on the dealership franchise model? Is there a concern there and how do you mitigate it?

CB:  Oh, yeah. Certainly, there's a concern. I don't know that we're gonna have much clarity on how realistic that is until we see how successful Rivian and Lucid and some of these other direct-to-consumer plays are doing. Certainly, Tesla's been successful to this point. But are they getting to a point where there's the number of sales or sales volume is going to, is negatively going to impact their retail process. It's possible. It takes a lot of money and investment to manage that customer relationship. So, if a couple of these EV direct-to-consumer models are successful over the next two, three years, then I think that puts the franchise model at greater risk. If it does if they're not successful, then I think that's going to be, I think that'll be beneficial to the franchise model.

GU:  So we're rooting against Rivian. Got it.

CB:  Well, you know, I didn't say that. I mean, you don't want to root...

GU:  (Laughs) No, I'm saying it.

CB:  Yeah, but I think there are certainly things we can learn from companies like that. But I always maintain there may be things, you know, they may need to learn a lot more from dealers. I, so, great. You guys have heard me talk a lot about uncertainty. And to me that's part of the uncertainty over the next few years is what that how that model evolves. And I don't know that what the manufacturers are thinking today is going to be what they're thinking next year.

GU:  That's true.

CB:  Very troubling comments from Farley this week with Ford. I think Stellantis, also, in terms of what the model looks like and the value at which, or the number that which they seem to have pegged the franchise model costs per vehicle. It's around two thousand dollars. They certainly are looking to reshape how they distribute and market vehicles. So I would think tier two advertising could be one of the victims here. Whether they present it as direct to consumer or it's, we're going to tell the dealers how to sell the cars or how to distribute the cars and it's going to be an online platform, it's going to be online one price only period. We're going to dictate the price. Again, I think we may see different manufacturers approach that differently. But again, the dealers are going to have and the NADA and the state association is going to have a lot to say about what these new franchise contracts are going to look like.

GU:  Yeah. As they should.

CB:  Yes. Yeah, absolutely.

GU:  Yep. So, thinking about that kind of franchise model, is there an impact that the tech in cars is going to have on that relationship between the OEM, the consumer, and the dealership? So you think about how many pieces of the car are connected at this point. What impact does that have on that kind of triangle of the relationship?

CB:  Well, I do think the connected vehicle, and as we quickly get into the era, and it's going to be connected more than EV, I mean.

GU:  Sure. Oh, yeah.

CB:  So every vehicle coming off the line is going to be connected and essentially able to, I mean every part at some point on that vehicle is going to have a sensor that's transmitting data to a cloud-based platform ostensibly created by manufacturer. They're gonna have all that service-related data. Now if you buy a vehicle from a manufacturer, you're going to have probably download an app from the manufacturer.

GU:  Have it and I love it.

CB:  Yeah, you love it. Well guess what. That data is going to the manufacturer, not necessarily to the dealer. So my point is the manufacturers are going to have much greater access to the customer than they've ever had before. So they're going to dictate the messaging. They're going to dictate, you know, how that process looks. And it may impact service department activity, also. And again, different manufacturers are going to approach it differently and different manufacturers are going to have different levels of execution. Again, we're, you know, this world demands manufacturer execution with this data and that's not always a given, as we've seen yeah so many times in the past. So, but again, no, I think it's, at the very least they're going to have access to the customer.

GU:  Yeah. It'll be interesting to see how it plays out because once, you know, that information, you can start doing things with it, and whether you do or not is the, your point, right? As far as what happens in the future but, when you have the information, when you have the data, there's a lot of really cool stuff that can happen, so.

CB:  And the fact is we have the technology today. I mean, to do that. Now our industry is fragmented. There's a lot of work that needs to be done. But the industry is moving there slowly. We're getting there. This thing's happening quickly but it's not happening quickly. There's a lot of talk about it but again, it's for example, let's take GM and their EV plans, right? If you listen to Mary Barra talk about the EVs and listen to their investor presentations and whatnot, you would think that they are one of the leaders in electric vehicle manufacturing. Well, LA Auto Show, there wasn't one EV on the show floor in November. I think they sold 26 total EVs in the fourth quarter. Now, that's not to say that they aren't laying the pieces and laying the groundwork, which they clearly are. But still, it's not going to happen overnight.

GU:  Right. Right. No, you're right. You're right. Well, Cliff, you know, I could talk to you for hours. I really, really could. I love having conversations with you, but want to be respectful of your time, obviously. So, anything we haven't touched on that you want to chat about? Any other rabbit holes you want to go down?

CB:  Well, no. I just think it's good to be back at NADA. And certainly seeing the energy. We are in such an uncertain period of time. We have an opportunity to really kind of shape what the future of the automotive industry looks like. And that's the people that are here. And that's what I think everyone's focused on.

GU:  Absolutely.

CB:  It's an exciting time.

GU:  Yeah. It is. All right, well thank you very much for taking the time to chat. I always appreciate the insight.

CB:  Thank you.

GU:  So, Cliff Banks, have a great NADA and hopefully we'll talk soon.

CB:  Thanks, you too. Great.

GU:  All right, thank you.