NADA 2022 - Biblical Proportions: Joseph vs. Noah in the Coming CarBiz

Coming off of #NADA2022, I couldn't get words "abundance" and "windfall" out of my head. Just watch the opening day footage from the ASOTU crew (https://www.dhirubhai.net/company/asotu/) and you understand that you're seeing an industry tour de force, a moment of power and celebration. And why not: per unit profits up 265% over regular times; overall profits up 240%. It's head snapping, almost causing me to forget that two years ago we were looking at headline pixels like these:

?????????? ????????, ??????: "Auto dealers are closed. Sales have plunged. Online sales are now the industry's best hope."

?????????? ????????, ?????????????? ????????: "Life in the time of COVID-19: Inventory is beyond bloated. Car dealers are bleeding cash and ready to negotiate.

?????????? ??????0 24/7 Wall Street: "What Happens When Car Dealerships Go Away?"

?????? ????????, ????????: "The coronavirus pandemic has upended auto sales and buying a car will never be the same"

What a roller coaster. It's almost too weird to be natural: from such great pre-pandemic heights, to deepest depths, and back again. How can we orient, and what should we do with the windfall that dealers and the industry are seeing - these years of plenty that have surfaced from the flood waters of 2020?

As I walked the hall at the convention center, I kept coming back to the story of Joseph. You know, the Biblical character, interpreter of dreams. And specifically the story of Joseph interpreting Pharoah's dreams to tell the story of wheat sheaves and cows amounting to a cycle of economics, from plenty to famine. Turns out, there is actually a proven concept of this specific cycle in mathematics, which is termed the Joseph effect - and another facet, that of disruption, which is termed the Noah effect. The Joseph and Noah effect was invented in the 50's by a brilliant mathematician name Benoit Mandelbrot (who passed away in 2010) and is based on the famous stories from the book of Genesis in the Bible:

Noah: “The earth became corrupt before God; the earth was filled with lawlessness…When God saw how corrupt the earth was, for all flesh had corrupted its ways on earth…God said to Noah, “I have decided to put an end to all flesh, for the earth is filled with lawlessness because of them: I am about to destroy them with the earth…For My part, I am about to bring the Flood—waters upon the earth—to destroy all flesh under the sky in which there is breath of life; everything on earth shall perish.”

Joseph: Then Pharaoh said to Joseph, “In my dream, I was standing on the bank of the Nile, when out of the Nile came up seven sturdy and well-formed cows and grazed in the reed grass...Presently there followed them seven other cows, scrawny, ill-formed, and emaciated—never had I seen their likes for ugliness in all the land of Egypt! And the seven lean and ugly cows ate up the first seven cows, the sturdy ones...And Joseph said to Pharaoh, “Pharaoh’s dreams are one and the same: Pharaoh has been told what God is about to do...Immediately ahead are seven years of great abundance in all the land of Egypt. After them will come seven years of famine, and all the abundance in the land of Egypt will be forgotten. As the land is ravaged by famine, no trace of the abundance will be left in the land because of the famine thereafter, for it will be very severe.

(Translation from Sefaria; excerpted by me)

Simplified, the "Joseph effect" predicts that generally trends that happened yesterday will continue tomorrow. If yesterday was a drought, tomorrow will also likely have a drought. If yesterday was a good crop year, that will likely continue for the rest of the year. This propensity for continuity (i.e., Joseph's seven good years and seven bad years) can be blown to pieces through a different effect, the "Noah Effect," after the biblical story of Noah's Flood disrupting all that was yesterday. This is an event of disruption and discontinuity that resets the table and starts a new "Joseph period" of continuities. There are mathematical proofs for the existence of this cycle.

On a global macro, it feels like we are still amidst a Noah cycle, struggling to get off the ride. Disruption, pandemic, war, upheaval, refugees, inflation - all around us the waters are rising, receeding, and rising again. Chaos still reigns. And yes, while NADA this year was a tour de force of a thriving industry just imagine that we'd held NADA in late 2020: it would have looked quite different, and we'd have felt the pressure of the flood waters.

Nonetheless, despite global instability, the question I'm asking myself is whether our industry, specifically, has entered a Joseph period post the flood of 2020 and 2021, where we will see seven (or at least several) years of plenty. I think this is likely the case. Why? There are so many "missing sales" right now that it has become a new normal that will take years to unwind demand: it'd be a miracle if production accounts for demand prior to 2024, or even 2025. The thesis that we all embraced and bet on in 2020, that the demand for personal transportation would rise was quite simply proven true (despite seeming self-serving at the time). This will continue. Moreover, with the rush by OEMs to put out shiny EV models, dealers will likely catch an additional tail wind in 2025/26. OEMs may want to renegotiate their covenants with dealers, but it's unlikely that will happen in the first few years of this EV blitz.

So it seems safe to say that there is a line of sight on remarkable dealer profitability in the years 2022 and 2023, and even into 2024. I'd hazard a guess that 2025 and 2026 bode well too, considering some of the data JD Power shared on Thursday before NADA. These will be the Joseph years of plenty, and there will be massive opportunity for dealers to build up war chests.

But what comes next? Will this period be followed by seven years of drought, distruption, and overturning? I think there's a good case to at least be concerned: the picture that far forward is foggy and there are enough looming disruptions that we may experience a prolonged period of sustained pressure on dealers or, potentially even worse, another Noah level disruption. Battles for survival, lean periods, disruptive sales channels, mega-groups attacking every local market, unmerciful OEMs looking to go direct and monetize over the air directly. We can of course go on - it's the other side of the coin, the swing of the pendulum.

What's a dealer to do? I'd say the best bet is to invest your windfall from these years of profit into infrastructure and practices that will set you up for the lean years. Chief among this is getting the digital piece in place: organize your data, automate what can be automated, connect your digital environment and your physical, and adopt a full funnel approach to how you interact with your prospects and customers. To do this well is going to be somewhat revolutionary, as it involves building in-house data teams, hiring analysts and data-driven marketers, having tech-savvy people everywhere in the chain of command, and investing in new and leading software platforms (read more over here).

The coming years may not be easy, but with the windfall of these years of plenty properly invested you will have the resilience and the flexibility to adapt and thrive.