Shifting gears: are automotive dealerships the new frontier for venture investing??
By Taku Murahwi
We’ve written in some detail about emerging trends in the AutoTech sector and where we believe the greatest opportunity for venture backed businesses lie. We concluded that, as a critical component of the auto value chain, dealerships provide an interesting focal point because the segment itself suffers from fragmentation and inefficiency. Our broader thesis around vertical SaaS (VSaaS) revealed these two components as being critical to a venture-scale opportunity.??
For about a century, cars have been part of daily life, with dealerships playing a pivotal role in buying, selling and maintaining vehicles.?
But the dealership model didn't spring up overnight. In the early days manufacturers sold their vehicles directly or via catalogs. But as cars grew in popularity, the need for dedicated dealerships arose.??
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Today, dealerships are more than just purchase points; they're vital to the economy, contributing significantly to state and local tax revenues. The landscape is vast: 1.2 million Americans work across approximately 18,000 franchised light-vehicle dealers and 60,000 independent dealerships in the United States. Dealerships play an equally important role in Canada with total sales per average dealership at $57.8 million in 2022 up 20.6% from 2021. Despite the digital era ushering in online sales and companies like Tesla shaking up the traditional model with their virtual showrooms, franchise laws in the U.S. ensure that dealerships aren't going anywhere anytime soon.?
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How does Tesla do it??
Given the laws in place, you might wonder how Tesla sells directly to consumers and what’s stopping the GMs of the world doing the same. Since its inception in 2013, Tesla has pioneered a direct-to-consumer sales model, showcasing vehicles in mall showrooms and offering online purchases, a strategy that eliminates traditional dealerships. This approach has provoked resistance from car dealers who initiated legal and legislative action to maintain the status quo of dealership sales. Despite the legal action, the direct sales model has gained some traction, with states increasingly relaxing restrictions for electric vehicles (EVs). However, U.S. lobbying efforts have been intense, and relaxed restrictions have only extended to EVs, with some states like Florida passing laws that both reinforce the traditional dealership model for established automakers and create exemptions for Tesla and other EV startups that have never used third-party sellers, reflecting a nuanced and evolving landscape in automotive sales.?
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Diving Into Dealership Dynamics?
To fully grasp how dealerships work, it’s best to think of them as multiple business units all operating collaboratively under one?roof, with the number of business units generally proportionate to the size of the dealership itself.?
Independent dealerships typically operate on simpler terms. Owners view their operations through a straightforward lens, primarily driven by three revenue streams:?
Sales and F&I are intricately linked, with sales teams setting up the business office to ensure that post-purchase, customers are funneled to the F&I office for additional products.?
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The major players in the industry are the conglomerates, which run very sophisticated operations that typically comprise four to six distinct business units:?
Most large dealerships have a basic tech stack to run the various business units, this tech stack is comprised of:?
We believe that the core of operational efficiency in any dealership is anchored by the Dealer Management System (DMS). Auxiliary products tend to serve as specialized solutions that complement the central system and to date, we see little venture scale opportunity outside the DMS.??
The Dealer Management System (DMS): The Conductor ?
Imagine a conductor, baton in hand, orchestrating a symphony of software—this is the DMS. In many independent dealerships, the DMS often eclipses the need for the myriad solutions listed above.??
The DMS isn't just the operational hub; it's the soul of a dealership often hosting everything from inventory management, sales and financing, parts & service to accounting & reporting, regulatory compliance and supporting targeted marketing campaigns, customer communication, and promotional activities.??
The landscape here is dominated by legacy players like CDK and Reynolds & Reynolds. Historically, manufacturers had a hand in guiding the choice of DMS to streamline their interactions (think parts, billing, accessories) with dealerships. This has meant, despite the shortcomings which inevitably arise with an all-encompassing system, the DMS has largely been considered as “good enough” making it challenging for any startups looking to disrupt the market.??
Implementing a new DMS in a car dealership is a complex undertaking, akin to replacing the engine of a moving car. It requires meticulous planning and precision, as the DMS is the technological heart of the dealership, integral to operations from sales to service. The transition to a new system can be fraught with challenges, including data migration, staff retraining, and potential disruptions to the dealership's daily operations. In conducting our own research for this post, we heard of many horror stories of failed DMS migrations and millions lost because of downtime.??
Despite these challenges, startups like Tekion are rapidly gaining momentum in the auto dealership sphere, fueled by its promise of a cloud-native, seamless, and intuitive DMS that stands in stark contrast to the legacy systems that currently dominate the market. The platform leverages artificial intelligence and machine learning to offer real-time data analytics, a streamlined user experience, and a level of integration previously unseen in the sector. This approach not only simplifies the complexities of dealership operations but also caters to the evolving digital landscape, aligning with consumer expectations for a more modern, efficient car buying and servicing journey. ?
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The State of Play in Dealership Dynamics?
With the top 150 dealers commanding a 20% market share, there's ample space for consolidation. We've seen large automotive groups acquire chains, like Asbury's acquisition of Larry Miller Auto Group's 60+ dealerships for $3.2 billion, but most of the activity is on a smaller scale. Single-store buys are still in play, with some smaller businesses making one-off acquisitions. Any consolidation is a catalyst for operational finesse, setting the stage for disruptors like Tekion to chip away at the legacy empire.?
The dealership's digital matrix is both complex and ripe for innovation. As we track these developments, it's clear that opportunities abound for startups agile enough to offer solutions that resonate with the current and future state of the dealership industry. We believe there is potential to modernize and disrupt the legacy dealership model in the years ahead and would love to meet companies who are challenging the status quo.? If you’re building workflow automation, a modern DMS or an entirely new platform that makes it easier for OEMs to go omnichannel, we’d love to hear from you.?
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