The Automotive Pipeline

I overheard something the other day that made me cringe. I’m paraphrasing here, but it was something along the lines of “Well, it just doesn’t make sense [as a media sales rep] to call on auto dealers today.”

Whoa. We had better pause a moment before carrying through on such irrational thoughts.

Last month, Toyota announced its April 2009 sales were down 41%. If you look closely at that number, it’s right in step with where U.S. volume is hovering — down from 17 million units per year and lingering in the 10 million range (also a 41% decline). So the general assumption for the broadcast executive might be the automotive category is “41% the pipeline” it was a year or two ago. Not true. Especially for the broadcast television sales rep.

Let’s take a step back and allow the numbers to do the talking before making a knee-jerk generalization on the viability of auto dealerships.

Take a mid-sized market, like Tulsa, Oklahoma. Before the great market contraction, there were nearly 80,000 automobiles sold per year in Tulsa, at roughly 100 dealerships. Today there are fewer than 50,000 autos sold — assuming that Tulsa is fairly representative of the 41% drop we’ve seen across the board. Yet those 50,000 units won’t be sold at 100 dealerships. There might be 80 left, if we’re lucky. Probably fewer.

Of those 80,000 autos sold back in 2007 in Tulsa, a portion of those sales occurred on smaller lots or at independent dealerships. It wasn’t the lion’s share, don’t get me wrong. But these were the types of dealers that were below average in terms of average sales volume (average being roughly 500 – 1,000 cars a year per dealership, depending on the make). Many of these dealers never advertised in mass media like broadcast television — and never had the desire to do so. Quite simply, they were potential destination businesses that never demonstrated the efforts or mechanics to actually become one.

Many of these dealerships are the same ones that will be swallowed up in the “giant consolidation” occurring right now.

Is this good for America? Absolutely not. It’s bad for the consumer, as there will be fewer dealers competing, placing long-term upward pressure on the price of a new car. It’s bad for the workforce, as thousands will lose jobs. But it’s one of a finite number of measures that may help rescue a struggling industry — one that is vital here in the U.S. It’s not always about fairness or even logic — as some profitable dealers are being forced into consolidation or closure.

The silver lining for the surviving dealers and local broadcast sales reps is that the concentration of true “destination” businesses within this category is growing by the day. In other words, auto dealerships will be fewer but larger. Those larger dealerships will still need to beckon the consumer, more so than ever, to visit and buy. Those larger dealerships will be — and always have been — more predisposed to the enormous efficiencies of local broadcast television, on the pure logic that the medium drops their PVR (the amount the dealer spends in advertising per car sold) unlike any other.

Those surviving dealerships will need to drive up their average units sold without breaking the bank. How? By casting a wider net using the market’s most efficient medium. There are more gaping voids in their local market as dealers consolidate and close-up shop. Somebody will acquire that share. How will they do it? With broadcast television.

So in Tulsa, and every market in the U.S., we will see a continued decline in the number of dealerships. This is nothing new to us, as those 21,000 dealerships in existence back in 2007 — before the decline — were actually a far cry from the 25,000 dealerships in place back in the 90s.

The average dealer sells about 750 cars a year. But this is a perfect example of averages lying, because the average Toyota dealer actually sells 1,150 cars, while a GM lot averages 440 units per year.

Why is this important? Well, how many GM dealerships are in your market today? Not just the ones you know about, or the ones that advertise — but how many licensed GM dealerships are physically located in your DMA? When you find the actual answer, you’ll see it’s higher than you may have guessed. How many of them advertise on broadcast television? How many will be television advertisers a year from today? Better yet, how will the survivors grab the vacated share?

The answer to that last question may be a little easier to come by if we avoid jumping to conclusions, and continue with some fundamental blocking and tackling. The road to recovery will be paved by efficient and profitable organizations — and nothing gets more miles to the gallon for the dealership than broadcast television.

SOURCES: US Census Statistical Abstract, Ward’s Automotive Reports, NADA Data.

Dave Eckstein is a partner in the firm ESA & Company, based in Madison, Wisconsin. Dave specializes in highly profitable market share growth for local business and gets a kick out of demonstrating a declining cost of customer acquisition for his clients.


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4 Comments

  1. Thanks David,

    In our DMA i see only one dealer currently marketing as a regional buying source. Good for him since he will own the benefits of that label sooner than other dealers. On the flip side there is another dealer in the same community (Champaign) that says he only needs the deals from the county and actually said i don’t want business from a town 50 miles away (Decatur). And this is a large dealership with this perspective. When will the light come on for these guys? As always ES&A is awesome. best, alan

  2. Great point Alan. As for the light coming on … it may not happen until a dealer (or two) notices someone else is pumping leads and sales out of their backyard. By then, it may be too late. That DMA would actually benefit from a couple more destination dealers. There are already plenty of “walls and gardens” there. Hope all is well with you, thanks for your post. -DE

  3. Hi David,
    Great article, I’m not with an ES&A station anymore but still read as much as I can. With the on going consolidation I am seeing former GM and Chrysler dealers looking to open “2nd tier import stores” like Kia, and Hyundai (The next Toyota), both of which didn’t grow too rapidly in the days of easy money making them still affordable to purchase points. In my former market, RI, there are 8 Toyota stores all within less than a 30 minute drive of each other. They are now forced to give up any gross on cars as most deals are now going into dealer holdback just so they can earn more cars in allocation.
    With the consolidation of dealers, I have been attacking the service market. With the closing of select stores the remaining stores now have the opportunity to gain market share from their former competitor’s customers.
    Here’s where both the AE and the dealership can benefit. The service math is somewhat the same as the sales math. The average Toyota / Honda store should do at least 1,500 tickets per month with the average cost being $311; meaning the service depts. are generating $466,500 for the dealership. They use 3% of monthly sales as the service dept. marketing budget. In short the average dealership is spending 14,000 dollars on service mailers.

    Thanks
    Marc Brown

  4. Marc,
    Thanks for your post … and with comments like that one, please feel free to do so more often. Good stuff! At the beginning of the year, we advised our media clients to take a closer look at the dealer service departments … you are definitely onto something. With total unit sales off big, creative minds like yours will go a long way in helping to bridge the gap.

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