How Dealers can learn from 'The Future of Shopping'

The term Retail Apocalypse began floating around in 2017 as a result of the many retailers announcing the closure of physical storefronts, or worse, declaring bankruptcy. All of these businesses had a variety of variables as to why they ultimately failed, but the #1 reason was the shift in consumer buying behaviors, gravitating to doing more online, on their own time. For many retailers that have failed to fully incorporate digital into their process, or are operating two silo-ed companies rather than integrating them only continues to add to the retail apocalypse. Sure some retailers have embraced it and dipped their toes into the digital pond, but the future of shopping is one where you can go from digital pond to physical lake all while keeping your swimwear on - a weird analogy of what some would call 'omni-channel'.

For those unfamiliar with omni-channel, here is a definition from Shopify:

"a fully integrated approach to commerce that provides shoppers a unified experience across all touchpoints, online and offline. True omni-channel shopping extends brick and mortar locations to mobile-browsing, e-commerce marketplaces, onsite storefronts, social media, retargeting and everything in between." 

I read a Harvard Business Review (HBR) article this morning published back in 2011 on the Future of Shopping, and many of the points still hold true to this day. Working in the automotive industry, I saw many parallels and perhaps some foreshadowing of what could happen as many dealers continue to operate and sell the same way they have for the past several decades. Let's take a look at the other reasons as to why retailers are lagging behind, and bring in some personal conversations as to how it applies to car dealers today:

Retailers were burned by e-commerce hype during the dot-com bubble

Prior to the dot com crash, companies were salivating at the opportunity to incorporate digital elements into their organization. The promise of being able to expand their geographical footprint, of cutting down costs, optimizing profit centers and creating efficiency came crashing to a sudden halt as the bubble burst. But even prior to the crash, many of these companies were operating their physical and digital store fronts as two separate companies. They targeted different customer segments, created unnecessary friction points and did not have a holistic view of how the customer journey fit into each of these segments.

Dealer comparison: Car shoppers are still given different prices online than they receive when they are in-store. They were treated as separate customers having a different process for whether you started online or in-store. Many dealerships still struggle to find out whether or not the customer had been on their website, and have no idea what research or vehicle the customer is interested in (often after 10+ hours of research) and have to start from scratch when they get into the store. Many have to assume that all customers have been on their website, but with no clear indication and discrepancy on pricing, are operating two separate sales funnels. 

Retailers tend to focus on the wrong financial metrics: profit margins

HBR notes that any change that dilutes profit margins is bad but references research by Bain, how many retailers stock prices are determined by another factor: return on invested capital and growth. Amazon's 5 year operating margin is only 4% compared to the average discount store of 6%, but their return on invested capital and growth is more than double the conventional retailer because they are able to turn inventory much faster, and have less physical assets + overhead. 

Dealer comparison: First off, this is a tough one to argue. A franchise's main goal is to be profitable, while OEMs want to compensate based on their wholesale model and moving volume as fast as humanly possible. Margin compression on the front-end is eroding, especially on new cars. So what are ways dealerships can learn from focusing on certain metrics outside of profit margins? Focus on the speed of the transaction and moving metal quicker while understanding your return on invested capital. Understanding your customer acquisition cost and your return on ad spend will help you recognize how you can maximize your budget and what is working (so you can do more of it and scrap what is not working). In regards to speed and convenience, customers are already begging to do more online so they can test the car that they like and leave without going through a tough sales experience. A study done by Cox on these digital retailing tools shows that it can turn inventory quicker up to 5 days compared to traditional sales. By offering more of the steps online you cut the customers and the dealerships time spent on sale, and are able to maximize faster inventory turns.  

Conventional Retailers and the experience with breakthrough innovation

With any type of change or 'breakthrough' there are typical stages of where businesses fall into: innovators; early adopters; early majority; late majority; laggards.

The HBR article highlights that conventional retailers tend to follow the mantra of 'retail is detail' and are comfortable with a focus on small incremental improvements to the business. Many 'breakthroughs' or disruptions have been too early in their claim, and have quickly died as a fad. Plus in the comfort of working on small improvements over bigger picture trends, many retailers when faced with a novel approach will ask if it's such a good idea, why is no one else doing it? A fair question to ask, but is based on a flaw in how they perceive their current customers.

"Retailers tend to believe that their customers will always be there. But as customers grow more comfortable with omnichannel shopping, they grow less tolerant of what they encounter in stores. Sales associates are hard to find. When you find one, he or she doesn’t know much about the merchandise"

Dealer comparison: This touches on 2 major issues facing automotive today: not keeping up with customer expectation of how they purchase anything in retail today, and the sales rep turnover. Based on NADA stats from 2017, there is a 74% turnover ratio for sales reps within the first year of employment. 28% of all terminations now happen within the first 90 days. This becomes tough for dealerships to manage as the lack of consistency among the sales team does not allow for the best in-store experience, and as a result, sales suffers, the customer experience suffers, repeat business takes a dive and in some cases, a dealer could be teeing up a sale for their competition. I heard Duane Marino chat about this concept of how demo drives or giving price on a visit does not always happen when a customer is in the showroom. Referencing several studies around dealer visits, whether it be 1.6 (McKinsey) or the most recent numbers from Think with Google 3.1 visits - if you aren't prepared to give the customer a test drive and quote them a price on the vehicle when they are in your showroom, you are making their decision that much easier to do business elsewhere. This also adds fuel to the fact that 67% of customers use their mobile device in the showroom, often to search 'other dealers near me'. 

Old habits die hard

Jason Harris explained to me the concept of a ham sandwich. Picture a ham sandwich so full of meat that it was coming out the sides - a metaphor for deals that had so much gross profit built into them. When I asked him if those deals exist today - he said they are extremely tough to come by from the strict reason that customers have access to the same information as dealerships, they know fair prices and what to expect and how to compare across dealerships. And rather than recognize the changing buyer behavior of consumers, short cuts are taken:

"As volume trickles from the stores and sales per square foot decline, the response of most retailers is almost automatic: Cut labor, reduce costs, and sacrifice service. But this only exacerbates the problem. With even less service to differentiate the stores, customers focus increasingly on price and convenience, which strengthens the advantages of online retailers." (HBR Future of Shopping). 

Short term fixes rarely equate to long-term gains. There may be no more ham sandwiches, but you can settle for a bunch of delicious finger foods that will make up that long lost ham sandwich. Don't let price be the only differentiator you offer, because its a quick race to the bottom. When you do things with the customer in mind, for the customer, you always win. Buying behavior is changing and people are getting smarter and can see past the corporate BS. Follow your customer and make decisions around how they buy vs. how you want to sell. 

"A successful omnichannel strategy should not only guarantee a retailer’s survival—no small matter in today’s environment. It should deliver the kind of revolution in customer expectations and experiences that comes along every 50 years or so. Retailers will find that the digital and physical arenas complement each other instead of competing, thereby increasing sales and lowering costs." 

Back in 2011, when the Harvard Business Review article was originally published, they already had the foresight to predict where the market was headed and that this was the future of shopping. And while most dealerships are waiting to see if this 'new omni-channel model' is going to help them sell cars, the progressive ones are recognizing that the future is already here and identifying ways to not only steal more market share but make it easier for their customers to buy from them.