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A Framework for Tech Startups to Understand Opportunities in the Retail Automotive Industry

For years we’ve shared our perspective with entrepreneurs and industry insiders on what it takes to build a successful software startup in the retail automotive industry. Now, we’ve distilled this thinking into a roadmap that we can share. We’ve even created a fancy video for those of you that don’t like pictures and long blog posts.

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We simplify the whole industry by doing once basic thing: we follow how money moves between the sector’s three key stakeholders – OEMs who make the cars, such as Ford or GM; dealerships, and car buyers. In it’s most simplistic form, money travels through five different silos in this industry: New Cars, Used Cars, Finance and Insurance (F and I), Service, and Parts.

Here’s the amazing thing. Whether you work at the manufacturer or the dealership, the interactions of the employees are all oriented uniquely within their own silos. So you have a different person from each silo dealing with the consumer at the dealership. And those employees from the dealership each have their own unique counterpart at the OEMs. Rarely do people within these silos cross over each other.

Let’s look at a consumer buying a new car: You walk into a dealership and you meet with a new car salesman. After you’ve found the right car, you are introduced to a used car manager who will tell you how much they’ll give you for the old car you are trading in. Once you agree to a deal, the salesman walks you over to the F&I desk, and introduces you to a new person who is coordinating with the OEM’s financial arm or a bank to help you put together a payment plan. Then before you leave, you’re handed off, yet again, to the service department to schedule your first maintenance appointment or get that windshield treatment that you bought. Finally someone from the parts department shows up with your car mats before you pull out. It took five different people to get you into your new car, and each of them have a different person they work with at the OEMs.

Behind the scenes in a dealership there are software platforms called Dealer Management Systems, or DMS, that try to bring order across this siloed industry. It’s a very big task, so as you can imagine, few are successful. DMS help dealerships manage inventory, accounting, customer service, billing, and a variety of other business processes. However, they don’t do everything, creating opportunities for entrepreneurs to build new products to manage the functions of these silos more efficiently and better than before.

Over time, our observation is that successful startups in this sector focus on a single silo. Budgets and decisions are kept contained within their own silos, which is at the core of the need for this focus. The good news is that each silo is big enough to support large extraordinary startups:

  • New cars – they account for over half of dealership revenues. It’s a $500 billion market in the US alone, and attached to it are massive marketing budgets, with almost $600 spent to sell each of the 15 million new cars sold in the US each year.
  • Used cars – sales have always been vital to dealerships, as most dealers make twice as much selling a used car versus new car. In an average year at franchised dealerships, just as many used cars are sold as new, and the sector alone generates $290 billion for dealerships. If you include independent dealers (dealerships not tied to an OEM) and private sales, the number of used cars sold jumps to 42 million.
  • F&I – can add an average of $1,100 in additional margin per car between financing, specific part insurance like paint protection or wheel insurance, and extended warranties. With 70% of car buyers getting financing at dealerships, it’s no surprise that F&I has been a consistently solid source of money for OEMs and dealerships. In some cases dealers will sell a new car at break even yet still make significant money on the deal because of F&I.
  • Service – when run well, some dealership service departments are so profitable they cover all of the dealership’s expenses. On average, dealerships make $500 servicing a car each year. What makes it really interesting is data shows that a customer who comes in for a service appointment within the first year is 30% more likely to buy their next car at that same dealership. If they come twice that first year, that stat goes up to 40%.
  • Parts – dealerships make 50% margins on parts, not to mention the installation revenue.  Today, only 15% of this $157 billion parts market is purchased and installed at dealerships, leaving room for significant growth within dealerships.

When we take a step back and look at the automotive industry in all its complexity, it’s easy to see how challenging it might be for a small company to find its way. It’s by no means a smoothly paved road, but if you understand how the money and relationships flow, and maintain focus within a single silo, it’ll be a little less bumpy of a ride.

 

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