Why Warren Buffett Is NOT Wrong on Car-Dealer Model

April 14, 2015

When Warren Buffett gets involved in any business, people notice… the car-dealership space is no different. Everyone has a perspective, but I wanted to take a moment to reply to a recent CNBC piece that is calling out Mr. Buffett as being wrong when it comes to his belief that the dealership model is not going to change. This is certainly a topic discussed at every dealership in the country and there are many leaders wondering what the future will hold in regards to how the current model will change. The author, Daron Gifford, lays out some compelling arguments, but I want to take a moment to illustrate how I see the model changing (and in some cases, has already changed).

In Comparison

Mr. Gifford refers to Walmart, Target and Costco as examples of Retailers who wouldn’t have two months’ worth of inventory on the ground. But is this really a fair example? The Automotive Industry is like none other. Perhaps the Housing Market is the closest as the price and sheer physical size of the product are factors when it comes to shipping and the ability to purchase the product.

But unlike most other retail, you don’t need good credit and a down payment to buy a pack of Hanes Underwear. I’m pretty sure that if the store runs out of the undergarment it could have them overnighted, but you can’t do that with a car. I also wager a bet that they don’t sell pre-owned either … or, at least I hope they don’t.

So when considering the auto sales industry it is hard to compare it directly to big box, high SKU industries. So what about the challengers in the direct space.
As Gifford points out, and everyone is well aware, Tesla is making a lot of noise with their push for direct sales, but when considering Tesla and the change they are bringing to the market a question that needs to be asked is “What will Tesla do with pre-owned?

What's their model? If they don't control remarketing like BMW does, their product residuals will diminish quickly and lenders will think twice about funding their deals.
Also, how will Tesla handle pre-owned without lot space?

Additionally, if the retail model of ordering a product online and then waiting for that product to ship is the future, then why do Windows and Apple stores exist?

American Consumers love to try out the product and “experience” those stores. The employees at those stores are “Product Experts” if not Geniuses on their product lines. American shoppers are not only impulse buyers, but once their research is done, they will purchase a vehicle with only visiting 1.2 dealerships in person. This is why the Automotive Industry must change … but it isn’t necessarily going to be the way Mr. Gifford explains.

I am certain Tesla will work through these questions, but this shows that the answers regarding the future of dealerships are not so simple.

The Model has changed … and it is the evolution from selling to becoming product experts

Now by pointing out why some of the comparisons need more thought, it is obvious that the consumer has changed and with that have demanded a new experiences in how they interact with businesses. They no longer want or need to be “sold.”

As Gifford accurately points out:

Buyers have changed, too; they are more informed, Internet-savvy and less likely to accept high-pressure sales techniques.
Most customers dislike the current model, despite recent enhancements. They still feel forced into a choice and lack trust in sales personnel. Buyers in one survey said they would rather give up sex for a month than haggle on a price with a sales person.
This is where the model needs to, and is being changed.

Forward thinking dealerships are currently at work changing both their process online and the in-store “Customer Experience”. The change is driven by the consumer raising the need for more relevant information, product experts and a shorter purchasing process.

The new model is more like the following.

Dealerships are responding to the fact that the buyer has changed. Progressive dealerships are changing to focus on how to keep customers engaged with their online inventory longer by providing consumers with specific relevant information about these vehicles. The more accurate and detailed the dealership can be the better served they are at establishing the true value for their inventory and driving more consumers to their websites.

After the online research is complete, the consumer chooses the dealerships that they will either contact or visit. In the newer, faster model, the stores have formalized the manner in which they can quickly communicate specific answers consumers have about the vehicles of interest. They need real, detailed answers … and they need them in real time. The consumer is informed, and dealership staff need to be experts too … on every car on the lot. Technology is a huge equalizer here. Dealerships also are working to transform the Sales Team from the salesperson of old to true product experts to handle the needs of the consumer once they arrive on the showroom floor? We now know that over 60% of consumers are using their mobile phones while on the lot, and progressive Dealership Sales Consultants are also using mobile technology while on the lot to facilitate their ability to get real time information when it is most critical.

Change is good and yes, dealerships must change. Will dealerships turn into order takers? I doubt it, but will they need to become product experts and provide a better customer experience? Yes.