On-the-Point

Living Under the Volcano

April 3, 2015

The Alpha Dawg steps into a familiar role as he predicts death and destruction for inflated sales figures and underperforming third-party lead providers.
The Alpha Dawg steps into a familiar role as he predicts death and destruction for inflated sales figures and underperforming third-party lead providers.

Nobody ever listens to the doomsayers. We’ve all seen the movie a million times. It starts off with the lone crackpot scientist trying to warn the world of impending doom. Nobody believes them until disaster strikes.

Remember the dumbass mayor who kept the beaches open in “Jaws,” despite the protests of Richard Dreyfuss and Roy Scheider? Or Pierce Brosnan’s boss, who convinced the residents of “Dante’s Peak” that their volcano wasn’t about to explode? How about the poor man’s Dick Cheney who failed to heed Dennis Quaid’s warnings about global warming in time to respond to the cataclysmic events in “The Day After Tomorrow”?

This “It’s-not-going to happen-to-us” mentality is not limited to the movies.

Ever heard of Mount Vesuvius, the still-active volcano that destroyed Pompeii in AD 79 and last erupted in 1944? Did you know half a million people are currently living at its base? Scientists believe a major eruption is long overdue. The Italian government has offered big money to anyone willing to relocate. Hundreds of families have moved; the rest have said, “No grazie.” They have kindred spirits in Los Angeles, where everyone knows the Big One is coming sooner or later, but the residents, desensitized by minor earthquakes, bravely party on.

Well, in the retail automotive industry, our party could be over sooner than we thought.

New-car sales are expected to remain well above the 16-billion-unit mark in 2015, and many forecasters say that figure will only continue to grow. The author worries that saturation will derail that progress, a position echoed by the “Peak Car” theory put forth in a recent Money magazine article.
New-car sales are expected to remain well above the 16-billion-unit mark in 2015, and many forecasters say that figure will only continue to grow. The author worries that saturation will derail that progress, a position echoed by the “Peak Car” theory put forth in a recent Money magazine article.

Ziegler’s Peak

An article in the February edition of Money magazine reminded me that the car business isn’t immune to disaster. In “Car Ownership Has Peaked — or Maybe It Hasn’t,” Brad Tuttle raises the question I’ve written about for years and posed in countless speeches and presentations.

Most industry forecasters and prognosticators are predicting phenomenal increases and stability in car sales up to and through the 2020s. At that point, due to a number of factors, including increased urban living, car-sharing and Google and Uber’s ongoing efforts to create “driverless taxis,” well, all bets are off.

In the Money article, Tuttle uses the term “Peak Car,” quoting a report from Schroders, a London-based asset management firm. Sounds cute, but Peak Car is just another way of saying “saturation,” a term I’ve been using for years. Saturation has nothing to do with the economy or market trends or any other factors. It is simply a mathematical certainty that, at some point, every qualified prospect will own a late-model car or truck and won’t want or need another one.

Tuttle also points out that too many pie-in-the-sky prognosticators are relying on outdated statistics to make their cases. OK, then, let’s take a look at some 2015 numbers:

  • First of all, we are on pace to sell an estimated 16.9 million new units in the U.S. this year, and about 88.6 million globally. People who are smarter than me (or at least claim to be) say that number can only climb in the years ahead.
  • Second, we haven’t sold 42 million used units since somewhere around 2005. Optimistically speaking, we could hit that number this year.
  • Third, according to the latest government statistics, there are currently 196,165,666 licensed drivers in the U.S.
  • Finally, we have the Millennials, a wild card if ever this industry has seen one. Putting aside my own closely held opinions about this self-entitled generation of tattoo-collecting basement dwellers, even the most positive forecasters have to admit this group, on the whole, isn’t that enthusiastic about buying or owning a car or even getting a driver’s license.

Now let’s throw all that math in the blender and see what’s for supper.

It may be a stretch, but the most far-out predictions say we will move 60 million units, new and used, by the end of the year, to a market of fewer than 200 million licensed drivers. Combine that with the fact that most cars are expected to run for more than 10 years before scrappage. Then assume that the number of licensed drivers will probably drop thanks to disinterest among Millennials and the fact that we Baby Boomers will be dying off with fewer licensed drivers replacing us.

Yes, I realize that, depending upon the outcome of immigration reform, undocumented drivers could soon be allowed to apply for driver’s licenses. But even if that happens, it won’t significantly skew the sales figures. And we can’t expect overseas markets to rebound either. Sales in Russia and Europe are in shambles, and even China is slowing down.

In other words, your OEMs can continue to build them, but how are you going to sell them?

The easy math says we have to force every licensed driver to buy a new or nearly new car every three years just to maintain the most optimistic predictions. Anyone who believes we can continue to sell 60 million cars a year to a shrinking and increasingly disinterested market really is living under the proverbial volcano. Sooner or later, that sucker is going to blow.

Dealers will be glued to their industry news sources in the months ahead as developments occur in the mass-action lawsuit brought by Leonard Bellavia and a group of 117 dealers against TrueCar.
Dealers will be glued to their industry news sources in the months ahead as developments occur in the mass-action lawsuit brought by Leonard Bellavia and a group of 117 dealers against TrueCar.

Dealers Suing TrueCar

Just when you thought it was safe to go back in the water!

Before I get into the ongoing lawsuit brought by dealers against TrueCar, I want to be clear that I am neither weighing in on the merits nor choosing sides. I am watching this particular game from the bleachers.

As you may recall — and as far as I know — I am still under investigation by the Federal Trade Commission for a campaign I was involved in concerning TrueCar four years ago. Was I instrumental in organizing a “boycott” that brought TrueCar’s management team to their knees and forced them to change the way they work with dealers? I never thought of it that way. It was just me blogging and speaking and writing to my audience and letting anyone who was listening make their own decisions. There were no meetings or conspiratorial plots or anything like that.

In the months and years that followed, I met and made friends with TrueCar’s execs on a number of occasions. And they did, in fact, change their business model significantly. (In recent years, they have even started sponsoring some of my events.) Do I agree with everything they’re doing and the direction in which the company is headed? I’ll say this about that: There are a lot of evil vendors doing much worse things to their dealer customers, and you are paying them for the privilege.

Meanwhile, my close, personal friend and attorney, Leonard Bellavia, is simultaneously leading the suit against TrueCar and representing my interests with the FTC. So this is a touchy subject for the Dawg. But I have certainly made my peace with TrueCar’s CEO, Scott Painter, and his management team, which includes Vice President Mike Timmons and, as of last year, John Krafcik, who remains one my personal marketing heroes. I was genuinely surprised when he landed at TrueCar. When he left Hyundai, I was sure he would stay on the manufacturer side.

My point is, you don’t always have to agree with the way people do business to be their friends. I apply the same rule to my buddies at the factories. I don’t guarantee anyone good ink. If ever my friends put me in a position in which I have to choose between reporting the facts and covering somebody’s butt, I will always side with my readers.

So here I am between a rock and a hard place. Bellavia first told me about the TrueCar lawsuit in January, at the NADA convention. My first thought was to find an aspirin, and quick. As my regular readers are aware, I was all for the mass-action lawsuit he brought against Carfax. I was hoping it would be the first in a series of moves against the villainous vendors who bash dealers while happily cashing their checks. … Nope! He picked TrueCar. Well, Lenny, what a fine mess you’ve gotten me into! Of course I had to tell him I would I have to sit this one out. He understood. He is an attorney, after all. So all I can really do is go over the facts and keep my opinions to myself.

But this really is one to watch. At some point, every member of our industry will be scanning the industry news outlets for updates on this case. If the dealers prevail, other vendors could start to fall like dominoes. More likely, they will either totally restructure their business models or fold up and go out of business.

The claims at the heart of the lawsuit — as outlined by Bellavia and his plaintiffs, not me — is that TrueCar engaged in false advertising and unfair competition and did damage to dealers’ businesses and reputations in the process. He filed the lawsuit with 117 new-car dealers on board, and if it progresses along the same lines as the Carfax suit, many more will join before the final gavel is struck.

Bellavia is a formidable attorney, but you had better believe TrueCar is going to field the best legal representation available. They are already fighting back in the court of public opinion. The company’s spokesman, Alan Ohnsman, issued a press release in which he stated, “We are aware that a complaint has been filed on behalf of a group of dealers who are not on the TrueCar program. We believe the complaint is without merit. We will vigorously defend ourselves and our business practices and expect to be fully vindicated.”

TrueCar has attracted controversy since the company burst onto the scene five years ago. They have faced more attacks than perhaps any other vendor in our industry’s history. TrueCar was the first lead provider to not only provide the lead but effectively prenegotiate the deal. Their initial success spurred a dozen others to change their business models and another dozen new vendors soon popped up, dictating prices and making deals directly with consumers. The pushback was inevitable.

To their credit, Painter and his team retreated, regrouped and rethought their model. Of course, there’s no denying that I was heavily involved in that movement. Many say I was the catalyst and the driving force, a charge I unequivocally deny. Regardless, the “new” TrueCar’s business plan was a little easier to swallow. Scott Painter went on a coast-to-coast apology tour. We sat down for dinner here in Atlanta and buried the hatchet over a plate of fried alligator tail.

Since then, however, TrueCar has been edging it up and making some dealers increasingly nervous. They have made no secret of their intentions to get into finance, used-car trade-in values, aftermarket and probably service. I am constantly approached by dealers, managers and employees, all asking when we are going to start blogging again.

Losing the Lead

Most recently there have been several major paradigm shifts that appear to be the minor tremors preceding the big earthquake. First and foremost, it appears the third-party lead-generation business is receding, slowing down and becoming harder to justify.

This particular paradigm shift is hardly limited to any single provider, including TrueCar. Every company in that space is experiencing the crunch. The fact that more and more shoppers and buyers are searching for their next vehicles on mobile devices is working against the traditional lead-generation model. Secondly, the “Click to Call” feature introduced by Google is putting the consumers directly in touch with dealerships, often bypassing the lead providers altogether.

Couple this with the fact that dealers are becoming more Internet-savvy and websites are now converting better than ever. Dealers and the digital advertising agencies that support them are making better choices concerning SEO, SEM and social media. That alone could cause some underperforming lead providers to sink into the lava flows.

If you think I’m still slyly picking on TrueCar, think again. They are much better equipped to weather the storm than other third-party sites. Painter & Co. have established partnerships with companies like Allstate, USAA, Costco and American Express, all of which use TrueCar as a car-buying service for their members, and they have launched a TV advertising blitz that will keep them at the top of car buyers’ minds — at least for awhile.

For those reasons, TrueCar is in a better survival position than their competitors, but that may not be saying much. No lead provider is immune to the growing trend of dealers electing to drive their own traffic with better, higher-converting websites. The first shot was fired by Mike Jackson, chief executive at AutoNation, when he announced that the nation’s leading retailer planned to reduce and eventually eliminate all their third-party lead-generation efforts in favor of a “Virtual Storefront” model. The industry noticed, and I have no doubt more auto groups and single-store dealers will follow. They’ll realize they can generate their own leads without the help of middlemen who lower their profits, slander their good names and charge them for the privilege. Once that lightbulb goes on, it’s hard to switch off.

Beyond corporate partnerships and TV ads, the single biggest advantage TrueCar has over its competitors is that you only pay them if you make the deal. No matter how low the profit, if you accept it and deliver the car, you pay. If not, you don’t. That model forces other services to prove their value, show you real numbers or claim they are actually “advertising sources,” not deal providers, so just let them do their work. When those arguments fail to convince dealers, they blame your Internet people for failing to convert all the phantom deals they claim to have sent your way.

Worse yet, I have received dozens of complaints and read a lot of online blogs in which dealers claim that their big-name, national lead providers are showing up at their stores with new contracts in hand. Some say the providers have demanded rate increases of 125% or higher.

How in the world can some of these lead provider companies justify jacking up their rates when their results are suspect, you ask? Well, their pitch is universal. They try to convince you that, if you cancel their program, you will go out of business. They try to prove it by showing you how many people they put on your vehicle description pages. In reality, those may not be your VDPs at all. They could be pictures of your vehicles on the same third-party landing page that included listings for five other dealerships.

I wonder how many dealers have actually laid down and paid the goofy price increases some of these companies are asking for.

I predict this business model will soon go the way of the Pompeiians. Newcomers to the game are making huge inroads by sending every customer directly to your own VDPs instead of their landing pages. That’s a good start, but the fact remains: If you’re not investing in your website, SEO/SEM strategy and mobile media — and figuring out how to convert those leads — you are not in the game. While you scramble to hold onto your customers, your competitors are tracking real results and moving away from companies that can’t document specific sales.

Sales growth could be negatively affected by city-dwelling Millennials, who have shown markedly reduced interest in buying new cars or obtaining driver’s licenses, preferring to rely on alternatives such as car- and ride-sharing services. 
Sales growth could be negatively affected by city-dwelling Millennials, who have shown markedly reduced interest in buying new cars or obtaining driver’s licenses, preferring to rely on alternatives such as car- and ride-sharing services. 

The Ice Age Cometh

I stand by my reputation as a fearlessly accurate industry forecaster, but I cannot and will not predict the outcome of the TrueCar lawsuit. I can say with some certainty that the company will continue to ratchet up new divisions and make inroads into additional dealership profit centers. They just announced their finance arm is now offering consumers pre-approved financing, rates and products. I don’t know if they’re calling it “TrueFinance” or “TrueF&I” or what, but I do know it’s another brick in the wall.

As for all the outdated, underperforming and dealer-bashing lead providers, the honeymoon is over. Dealers are demanding proof that you are delivering real deals. No VDP page views, no “advertising,” no distractions. You have to put your results on a financial statement that reflects a reasonable price for services performed. Like your dealer clients, you operate in a competitive field. You have to adapt or die.

So put me on the list with Dreyfuss, Scheider, Brosnan and Quaid. I know our days of peace and prosperity could be numbered and I refuse to be ignored. Keep an eye on these pages and please keep those emails, phone calls and direct messages coming.

Comments

  1. 1. Jeff Glackin [ April 07, 2015 @ 01:08PM ]

    I love this line "If you’re not investing in your website, SEO/SEM strategy and mobile media — and figuring out how to convert those leads — you are not in the game. " I also think even PPC is in for a rude awakening. The days of milking dealerships for 40% of their budgets are over. Proof and accountability will become standard. Great news for companies like mine.

  2. 2. Bob Bressi [ April 07, 2015 @ 02:20PM ]

    This is another great line.

    •Finally, we have the Millennials, a wild card if ever this industry has seen one. Putting aside my own closely held opinions about this self-entitled generation of tattoo-collecting basement dwellers, even the most positive forecasters have to admit this group, on the whole, isn’t that enthusiastic about buying or owning a car or even getting a driver’s license.

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