Is a Shakeup Imminent in the Automotive Digital Marketing Space?

Not that long ago, new car dealerships relied almost entirely on Friday newspapers ads promoting weekend specials along with lists of new and used cars in stock. But the advent of the internet revolutionized how U.S. consumers researched and shopped for cars, shifting more than 50% of car dealerships’ advertising budgets to digital.*

Dealerships that quickly adopted digital advertising saw higher sales and lower per unit advertising costs…but that advantage disappeared when all dealerships subscribed to the same services. As one dealership owner told me, “When I was the only Chevrolet dealer in my town on TrueCar, I was getting customers that probably would not have come to my store. But today, all the Chevy dealers in my town are on TrueCar, so all we are doing is paying a fee for people who would have bought from us anyway.”

Today, it still costs a dealership more than $600 per vehicle in advertising expenses (nearly the same amount dealerships spent on traditional advertising before the advent of digital marketing – and when per unit frontend margins were much higher). Yet, many digital platforms offer little differentiation among dealerships than the ancient Friday newspaper. With profit margins under pressure from rising interest rates and plateauing sales, dealerships are beginning to evaluate the productivity of each of their digital subscriptions and are cutting those that fail to deliver actual car buyers.

The auto retail space is heavily populated with companies promising to deliver real customers for a fee. There are at least 112 vendors selling CRM tools, 87 offering lead management, 75 providing chat services, and 104 offering new and used car leads. There are also more than 300 marketing solutions, data mining, reputation management, e-commerce ‘shopping carts,’ and owner marketing/equity mining vendors with their own customer targeting and retention tools. For our purposes, I’ll focus on some of the larger vendors that car shoppers turn to initially. This list includes marketplace sites, like CarGurus.com, Cars.com, AutoTrader.com, TrueCar.com, and many others that have added inventory listings and lead generation to their core businesses like Carfax.

All of these companies have business models that generate revenue from dealerships in hopes of intercepting car shoppers before a car sale. But growth has plateaued, as nearly all franchised dealerships and most larger used car dealerships are already listing their inventory on these marketplace sites, meaning that small (if any) incremental increases in dealership count won’t generate much in revenue. Moreover, despite traffic claims, over 90% of U.S. car buyers already use the internet to research a vehicle purchase. Consequently, these sites are not generating new automotive shoppers for dealerships (vehicle purchase demand is determined by affordability). Instead, they are battling amongst themselves for ‘screen time’ with the same car buyer who’s visiting multiple sites, a war being unwittingly financed by car dealerships.

Last year, approximately 17 million new passenger vehicles were sold in the U.S., an estimated 3 million, of which, were sold to fleets, leaving a retail market of 14 million (a third of which were leased). According to Urban Science, in 2017 there were 18,213 U.S. franchised dealerships as measured by rooftops. A simple calculation results in 2.1 new cars sold per day per dealership. Assuming that new car dealerships sell about 0.7 used cars for each new (likely greater than reality), that equates to 1.5 used cars per day, for a total of 3.6 cars sold per day in the average dealership – or roughly 108 units per a 30-day month. The average dealership in the U.S. maintains a 70-day supply, or 252 vehicles, which equates to a total of 4.6 million vehicles available for sale on an average day in 2017.

In the third quarter of 2017, Cars.com noted 4.9 million average vehicle listings from 21,307 dealerships, illustrating that the overwhelming majority of U.S. dealerships’ inventoried cars are already listed on its site. Cars.com is only one of many marketplace sites, and dealerships are discovering that when they also list their inventory on other sites, they are essentially paying for the same customers to view their inventory multiples times. A large dealership group recently analyzed its $2.5 million contract with a single digital marketplace and eliminated $600,000 in annual spend, after the group’s data showed the site provided decreased value. It plans to do the same with its other lead generator vendor subscriptions. 

Every lead generator or marketplace site boasts unique visitor traffic in the high tens of millions, but these are meaningless in terms of actual sales. Cars.com says that it had more than 100 million 'visits' in the third quarter of 2017. Depending on how many of these 'visits' were comprised of unique visitors, this could potentially equate to more than a third of the U.S. population visiting its platform in three months compared to new and used car purchases of only 7.1 million from franchised dealerships during the same period. And Cars.com is only one of many such lead generating and marketplace sites, as well as the dealerships’ own websites and those of the automakers that they represent. As these sites become saturated with commoditized inventory at symmetrical prices, coupled with a recycled pool of car shoppers visiting most of them, they prevent any single dealer from gaining a competitive advantage, and thus they become perfectly competitive marketplaces that cannot generate sustainable profits for their sellers (i.e. dealerships). To this end, many dealerships claim that their only motivation to list their inventory on these sites is to simply make sure that their local competitors don’t gain exclusivity in searches.

It is no wonder that dealerships are questioning the value of paying high monthly fees to list inventory on sites that have diminishing conversion rates, commoditized inventories, and soaring costs. Some dealerships are shifting more to traditional media while others are looking at services that provide them with the data and analytics to engage with their customers more profitably. The automotive digital marketing space is saturated, and a shakeup among the undifferentiated listing services seems imminent as dealerships’ frontend profits continue to decrease.

Maryann Keller is principal of Maryann Keller & Associates, a Stamford-based automotive strategy consultancy.

*We’ve obtained this percentage from our own surveys of franchise dealerships. We’ve subsequently confirmed our measurement with NADA, which will publish a similar percentage in its next version of NADA DATA.