2013 National Automotive Industry Survey

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1 2013 National Automotive Industry Survey The Automotive Retailer of Serious about Success

2 2 National Automotive Industry Survey 2013

3 Serious about Success Contents 1. About the Research 4 2. Foreword 5 3. Executive Summary 6 4. Market Indicators for Moore Stephens Insight Facilities Moore Stephens Insight Online Sales and Communication Moore Stephens Insight Future Retail Landscape Moore Stephens Insight Profitability Moore Stephens Insight CRM and influencing consumer behaviour Moore Stephens Insight Survey demographics Contributors References About Moore Stephens About Moore Stephens Automotive

4 1. About the Research AADA commissioned Moore Stephens Automotive to undertake an Australian automotive industry survey, focused primarily on automotive retail, the first of its kind in over 20 years. This survey is an important initiative of the industry body, undertaken in an unprecedented time of change in the automotive industry generally. The objectives of the survey have been to ask challenging and thought provoking questions to industry participants, in an attempt to understand and predict what the industry will look like in The survey was split into six distinct segments that were thought to evoke the greatest challenges and areas of change for the industry over the next seven years. It should not go unnoticed that in 2013 we are seven years beyond the 2006 GFC, that helped reshape the industry to what it is today, and seven years away from 2020, the timeline picked for our respondents to give their views and predictions on the key drivers of change. Each section has a series of questions and the answers are published in graph and text format. Following each section, Moore Stephens Automotive provides commentary and interpretation of the respondents views and guidance in utilising the common themes to generate changes in business practices and structures to adapt. There were a number of the questions included in this survey that allowed participants to choose multiple answers to a single question. This was a deliberate design of the survey to ensure multiple trends were able to be measured from a single question. For these specific questions, results have been calculated based on the collective total of responses. Acknowledgements Moore Stephens acknowledges AADA and Salefest for their support during the survey and for the opportunity to present the results at the 2013 AADA National Dealer Convention. Moore Stephens Automotive would like to thank and acknowledge the participants that completed this year s National Automotive Industry Survey, providing detailed and insightful responses and contributions. Over 150 respondents completed the survey, comprised of automotive retailers, wholesalers and distributors, allied industry and industry support service providers. 4

5 Serious about Success 2. Foreword What strategic decisions do the automotive retailers of today need to make in order to ensure their businesses are well equipped for the automotive retail landscape of 2020? Will the quickening pace of online retail activity completely change the traditional bricks and mortar dealership format, with a much stronger focus on a dealership s online presence to generate and bring business to the physical dealership site? If the consumer of 2020 is willing to purchase a vehicle online, how will this change a dealer s approach towards encouraging repeat customer service and loyalty? How will a dealer use technology to connect and communicate with customers on a meaningful level? Should automotive retailers and franchisors collaborate on facility and virtual showroom investment requirements, to ensure efficient investment and that both stakeholders are well placed to meet the consumer demands of 2020? The Automotive Retailer of 2020 National Automotive Industry Survey has collected the opinions and predictions of a wide range of stakeholders in the Australian automotive industry. The results of the survey, including the comments received, provide an insight into the key drivers of the changing automotive retail landscape and the key decisions to consider from those most qualified to predict the positioning of the automotive retailer of In the accompanying Moore Stephens Automotive Commentary, we provide readers with a selection of thought provoking and challenging concepts for their consideration. Brett Fowler National Industry Leader Moore Stephens Automotive 5

6 National Automotive Industry Survey Executive Summary The future of the Australian automotive industry is a significant discussion point, and there is much debate about changes in the retail environment, and what will unfold by From July 2013 to August 2013, Moore Stephens Automotive and AADA invited participants from all facets of the Australian automotive industry to complete the Automotive Retailer of 2020 National Automotive Industry Survey. The survey focused on current market conditions as well as opportunities, threats and predictions for change. Survey respondents provided us with an incredibly diverse set of opinions on the range of surveyed topics, many of which were commonly shared. Outlined below is a snapshot of the most commonly shared opinions for each topic. Market Indicators of 2020 Overall sales volumes are predicted to increase slightly. The number of dealerships and brands in the Australian market will decline. Service, aftermarket and finance and insurance departments will be an increased area of opportunity. Online vehicle sales are seen as a profit opportunity, however independent online competitors are seen as a profit threat. Regulatory reform (e.g. F&I) and reduced government support for the automotive industry will be a threat to future profitability. Rising dealership facility costs and overheads will threaten profitability. Facilities Multi-franchise and multi-site dealerships will be the most likely retail format of the future. Most automotive retailers expect that new or upgraded facilities will be required by Most automotive retailers anticipate that investment is primarily required for workshop facilities and a virtual showroom, with considerably fewer automotive retailers expecting that future facility investment is required for their new, used or parts departments. Most automotive retailers expect their rent factors to increase leading up to Online sales and communications Online sales leads will become a significant driver of new and used vehicle sales. Parts and aftermarket sales, service bookings and enquiries, online marketing and CRM systems will be more significant drivers of profitability. Franchisor websites, mobile phone applications and social media will generate a far greater proportion of vehicle sales leads in 2020, compared to Third party websites are expected to generate the same level of vehicle sales leads in 2020, compared to

7 Serious about Success Future retail landscape Dealership consolidation, online competition, cross-selling of products and services and virtual showrooms are significant retail trends for automotive retailers leading up to By 2020, most automotive retailers will be operated by public corporate or large private groups. Increased online retail sales will have the following impact: Decreased dealer inventory stock levels. Reduced gross profit margins. Increased price transparency for customers. Decreased requirement for large facilities. Decreased cross-selling and product up-sell opportunities. Decreased customer retention and brand loyalty. Decreased number of staff. Change in salespeople s skills. Greater reliance on independent online service providers Profitability 60% of automotive retailers believe that their net profit as a percentage of sales in 2020 will need to be greater than 3%. Service absorption rate will need to be significantly higher in 2020 compared to Growth leading up to 2020 will be generated by way of organic growth and achieving greater efficiencies. A reduction in manufacturing in Australia will have little impact on unit sales growth. Fixed operations are expected to increase in overall gross profit leading up to CRM and influencing consumer behaviour Affordability and disposable income will continue to be the key influencing factors in consumer behaviour. Consumer behaviour between now and 2020 will be increasingly influenced by environmental and safety concerns and the consumer s ability to buy vehicles online. Print and media advertising will continue to decline as a way to develop customer loyalty and generate leads. Social media and online communications will be a staple marketing activity in Dealership awareness will be a more important attribute for repeat business in 2020, compared to

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9 Serious about Success 4. Market Indicators for 2020 Survey respondents were asked to provide their view on the movement of five key market indicators between now and 2020, being the number of dealerships, brands, models, unit sales and the number of dealership staff. Dealership consolidation and closure are thought to be the single biggest mover, with 64% of respondents indicating that they believe the number of dealerships will decline between now and % of respondents believe that the number of dealerships in Australia will significantly decrease. 47% of respondents believe that the number of brands in the market will decline, thereby reversing the recent surge in brand numbers. Note that this survey was completed in August 2013, in the same month that Opel Australia Pty Ltd announced its exit from the Australian market. 54% of respondents believe that the number of models in the market will increase by of respondents expect unit sales to slightly increase between now and Opinion on staff numbers was varied, with 39% of respondents expecting a slight decrease, 33% expecting no change, and 22% expecting a slight increase. Will the following go up or down in the next seven years to 2020 in the Australian automotive retail industry? 14% 17% 18% 8% 39% 2 29% 3% 5% 26% 15% 36% 18% 2% 10% 23% 4% 5% 39% 33% 22% 50% 6 Number of dealerships Brands in the market Models in the market Unit sales Staff numbers Decrease significantly Decrease slightly No change Increase slightly Increase significantly Figure 1 9

10 National Automotive Industry Survey 2013 Survey respondents were asked to rank eight profit opportunities in today s market, and in The majority of respondents (over 60%) indicated that service, aftermarket, F&I, online vehicle sales, and CRM solutions are profit opportunities that have increased in importance in today s market. When asked about key profit opportunities for automotive retailers in 2020, many responses were also centred on F&I, service and aftermarket, online vehicle sales and CRM solutions. Rank the following profit opportunities in today s market. 2% 16% 2 19% 2% 8% 16% 18% 7% 24% 25% 3% 10% 13% 22% 6% 23% 19% 2% 9% 7% 13% 24% 24% 10% 15% 2% 27% 42% 43% 38% 44% 38% 46% 56% 52% 5 Service upsell Extension of service/ aftermarket offering F&I upsell Online vehicle sales Investment in sophisticated CRM solution Lateral franchise additions Other profit centres (ie: Cafes, coffee shops) Extended operating hours No opportunity at all Less opportunity No change More opportunity Very high opportunity Figure 2 Respondents were also asked to rank nine profit threats to the automotive retailer of of respondents ranked political change, regulatory reform and reduced government support as a significant threat to automotive retailers in It should be noted that this survey was completed in July and August 2013, which was a significant time of uncertainty for automotive retailers, distributors and manufacturers due to proposed FBT reforms for motor vehicles and new government pledges to support the Australian manufacturing industry. Other profit threats ranked as significant by 30% plus of respondents were an increased facility cost structure, increased overhead structure, and point of sales gross profit being replaced by franchisor incentives. Change of franchisor conditions, decreased brand loyalty and independent online competition were each ranked highly as a possible or significant threat. 10

11 Serious about Success Rank the following profit threats to the automotive retailer of Independent service operators 4% 19% 18% 30% 29% Independent online competitors 4% 10% 17% 20% 49% Staff retention/turnover 6% 16% 38% 39% Increased brand competition / decreased brand loyalty 3% 15% 26% 55% Change in franchisor conditions including realignment of PMA 2% 5% 22% 25% 46% POS gross being reduced and replaced by manufacturing incentives 3% 2% 14% 37% 44% Regulatory reforms political change/ reduced government support 4% 22% 3 42% Increased facilities cost structure 3% 8% 35% 53% Increased overhead cost structure 4% 6% 3 58% No threat at all Low possibility threat No change Some possibility threat Significant threat Figure

12 4.1 Moore Stephens Insight Market Indicators for 2020 The next seven years is expected to bring with it a wide and varied range of profit risks and threats to the automotive retailer of Some are new and emerging threats, and others are existing issues that are expected to continue into the foreseeable future. What is critical to the survival and ongoing profitability of automotive retailers is the ability to adapt and be highly flexible in the face of a rapidly evolving industry. State of the market The overall view of respondents in relation to the state of the market in 2020 was generally positive, with 65% expecting an increase in unit sales. This is offset by a general view that brands and dealer points will decline. Our interpretation is that such a landscape should provide a reasonable base for sustainability for automotive retailers existing in As noted throughout the commentary in this report, the challenge for profit and sustainability is in retaining satisfactory overall gross margins in an increasingly competitive and open online sales environment. Profit opportunities The finance and insurance business is expected to be of greater importance to overall dealership profitability while on the flipside, respondents are expecting this to also be an area of regulatory reform which could bring a greater compliance burden and more stringent qualification requirements for finance and insurance managers. Survey respondents also highlighted that maximising service and aftermarket opportunities using effective CRM solutions will be critical for profitability in Cross selling and upselling as a solution to maintaining overall gross in the current and expected future online sales environment is a theme throughout the survey responses. As automotive retailers generate the initial vehicle sale with the customer, they have the first and most likely opportunity to sell additional business to that customer. The success of automotive retailers in 2020 and beyond will be largely dependent upon harnessing this opportunity in the new online focused environment. Understanding that the website and virtual showroom will be a key influence on customer perception and utilising effective CRM solutions is paramount to this challenge. Profit threats Survey respondents are concerned there will be a high level of reliance on franchisors incentives for a dealer s profitability and overall viability. Because of pressure on new vehicle gross profit margins, franchisor incentives could become a cornerstone of dealership profitability. An increased level of reliance on franchisor incentives for profitability could create a greater level of control by the franchisors over a dealer s day to day operations and investment. Direct sales from franchisors to consumers have also been highlighted as a continuing trend. Rising costs are of great concern to survey respondents, in particular, facility and overhead costs. Lateral franchise additions are being seen as a response to absorbing fixed facility and overhead costs. Online vehicle sales was seen to be a profit opportunity, however independent online competition was seen as a profit threat. 12

13 Automotive retailers should consider where future investment is required. Increased online sales activity and rising facility costs suggest that automotive retailers need to consider whether physical facility investment will be as important as it has been in the last 30 years. (Refer to the Facilities section of this report for further commentary). Automotive retailers should also embrace online communication and CRM systems to develop new methods of customer engagement and retention. The cost of this investment is likely to be significant. Automotive retailers and franchisors need to come to agreement about optimum levels of investment for sustainable automotive retail businesses and where the emphasis should lie. It may be that a partial shift from investment in physical showroom facilities to virtual showrooms is imminent. Greater collaboration between automotive retailers and franchisors is required to ensure that franchisor incentive programs are designed to encourage behaviour that is of long-term benefit to both the automotive retailers and franchisors. Greater collaboration between automotive retailers and franchisors is also required to ensure long term relationships are enhanced for the benefit of the brand. Overall brand and retail loyalty is more likely to be achieved through collaboration between franchisors and automotive retailers. 13

14 National Automotive Industry Survey Facilities Automotive retailer respondents were asked to assess their dealership s rent factor today and in Dealer respondents expect their rent factor to increase from now until The term rent factor represents a dealership s annual rent or facility cost as a percentage of dealership gross profit, so this result highlights two possible drivers of this expected trend, being (1) an increase in facility costs and/or a (2) decrease in dealership gross profit in the next seven years. Survey respondents were asked to assess the expected physical marketplace presence required in An overwhelming 9 majority of respondents believe that multi-franchised automotive retailers will be a key feature of the dealership landscape in An overwhelming 9 of respondents believe that multi-franchised automotive retailers will be a key feature of the dealership landscape in % of respondents believe that the automotive retailer of 2020 is most likely to be multi-franchise and multi-site, and only 27% of respondents are of the view that it is most likely to be multi-franchise but single site. A minority (9% of respondents) believe that the automotive retailer of 2020 is most likely to be a single franchise dealer, with either one or multiple sites. Is the automotive retailer of 2020 most likely to be: 3% 6% 27% Single franchise, multi-site 64% Multi-franchised, multi-site Multi-franchised, single site Stand-alone single franchise Figure

15 Serious about Success Respondents were asked to assess where future facility investment would be required. 52% of respondents believe that future investment will be needed for a virtual showroom. The term virtual showroom refers to a fully interactive virtual experience with the ability for the customer to view different vehicle models and specifications, either located on the dealer s website/phone applications (for example, the Tesla Motors online showroom) or at the physical dealership site (for example, the Audi City London digital vehicle showroom concept). 64% of respondents believe that future investment is required for workshop and service capabilities. This is consistent with responses in the Market Indicators for 2020 section of this survey, where 6 of respondents believe that service bookings and enquiries are going to be an increased or significant profit driver in Future facility investment expectations for other dealership areas was much lower, with 20% of respondents expecting investment required for new vehicle showrooms, 29% for used vehicle showrooms, and 17% for parts capabilities. 64% of respondents believe that future investment is required for workshop and service capabilities. What areas do you think future facility investment is required in? 17% 20% 29% 52% 64% Virtual Showroom Workshop facilities Parts capabilities Used car showroom/ capacity New car showroom Figure

16 National Automotive Industry Survey 2013 Respondents were asked to assess the physical marketplace presence of the automotive retailer of Respondents had mixed expectations regarding what physical marketplace presence was required for automotive retailers in of respondents predict that either a new facility or a facility upgrade will be required within an existing PMA, and 13% of respondents expect that a new facility in a new PMA will be required. 16% of respondents were of the view that the existing facility and PMA would remain unchanged. Overall, 84% of respondents see a future requirement for new or upgraded facilities. What physical marketplace presence will be required in 2020? 16% 36% 13% 35% Taking into account the response to the previous question, this investment will focus on workshop and service capabilities and virtual showrooms. Existing facility, existing PMA Upgraded facility, existing PMA New PMA, that is, new open point New facility, existing PMA Series 1 Figure 6 Respondents were asked whether dealership sites would be owned or leased in % of respondents believe that dealership sites will be leased in 2020, and 45% believe that dealership sites will be owned by the automotive retailer. In 2020, will automotive retailers be most likely to own or lease their facilities? 45% Leased 55% Owned Figure

17 Serious about Success 5.1 Moore Stephens Insight Facilities Rising inner city property values and expensive construction and fit-out costs invariably make a dealership development an expensive proposition. An automotive retail facility is not always the highest and best use for the property in question, which can often be in the form of residential or mixed use developments. Rent and facility costs still remain as one of the largest expenses in a dealership operation, typically second only to employment costs. What we may see in coming years is automotive retailers becoming more creative and innovative in their use of space in order to maximise their gross profit per square metre of property. At a minimum, we can see that automotive retailers are wisely considering future profit opportunities when considering their future facility investment requirements. Service capacity is at the top of the future investment agenda, which is not surprising given that service up-sell is ranked as one of the key profit opportunities both now and into the future. An increased number of service bays may be required or the existing service facility receives a facelift so that this area of the dealership becomes a focal point of a customer s dealership experience. New vehicle showrooms ranked second last on the future investment agenda. How can this be interpreted? Firstly, there has been a continuing requirement from franchisors for automotive retailers to upgrade their existing showroom or build a new showroom in order to meet franchisor specifications and to qualify for incentives. If this investment has recently been undertaken, automotive retailers would be reluctant to invest further capital in this area, at least for the medium term. Secondly, automotive retailers are becoming more resolute that the decision to build a new or upgraded showroom can only be justified if it will generate an acceptable return on investment or payback period. Thirdly, the decreased focus on upgrading the new vehicle showroom could be a direct product of automotive retailers coming to appreciate that customer exposure is no longer just about foot traffic and an attractive dealership frontage. Investment in a virtual showroom was ranked second only to investment in service facilities by survey respondents. With momentum quickly swinging towards a focus on an online presence, which is now seen as a key source of dealership lead generation, we may start seeing investment in websites, phone applications and virtual showrooms being given the same priority as investment in physical facilities. In 2020 and beyond, will a $1 million investment in a dealership s online presence and selling process generate a greater return than a $1 million investment to upgrade a new vehicle showroom? Retailers outside of the automotive industry are already undertaking this analysis and adjusting their business accordingly. The virtual showroom concept, if in reference to a dealer s website or available phone applications, would exponentially improve the customer s online experience in shopping for vehicles, especially when the time arrives where a customer can all but test drive their desired vehicle online. Initial capital outlay and ongoing maintenance, security and updates will no doubt be an expensive prospect, so successful development in this area may occur only with the collaboration of automotive retailers and franchisors. The virtual showroom concept, if in reference to a dealer s website or available phone applications, would exponentially improve the customer s online experience in shopping for vehicles, especially when the time arrives where a customer can all but test drive their desired vehicle online. CRM solutions that are increasingly required to generate service, aftermarket and finance and insurance business will need to be intrinsically linked to virtual showroom applications as customers continue the trend towards an online sales process. 17

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19 Serious about Success 6. Online Sales and Communication Survey respondents were asked what percentage of motor vehicle sales were currently generated from the internet. 68% of respondents reported that fewer than 30% of total sales were internet driven. Moore Stephens Automotive has followed up a number of respondents and confirmed their interpretation of an internet sale as being an internet sales lead. Not surprisingly, when respondents were asked to estimate the percentage of internet sales in the year 2020, the results increased substantially from current day levels. The majority of respondents expect internet sales to be above 30%, with 32% of respondents expecting more than 50% of sales to be from derived from the internet, (that is, being an internet sales lead). This represents the increasing trend of online retail activity within the automotive industry and the retail industry generally. Internet sales percentage today and % 6% 7% 7% 10% 14% 1 13% % 19% 3 32% 0-5% of sales 6-10% of sales 11-20% of sales 21-30% of sales 31-40% of sales 41-50% of sales Over 50% of sales Today 2020 Figure

20 National Automotive Industry Survey 2013 Survey respondents were asked to assess the major online profit opportunities for the automotive retailer in the year Online profit drivers identified by respondents were service booking and enquiries (85%), marketing and business development (73%), and customer relationship management (CRM) systems (76%). A detailed CRM analysis is provided in the CRM and influencing consumer behaviour section. Major online profit opportunities for automotive retailer of % 3% 3% 4% 26% 2 34% 14% 1 26% 20% 26% 1 30% 10% 22% 19% 59% 50% 48% 54% Vehicle sales Service bookings and enquiries CRM systems Sale of parts and accessories Marketing and business development Not a profit driver at all Decreased profit driver No change Increased profit driver Significant profit driver Figure 9 Survey respondents were asked which online channels currently generate the most vehicle lead sales today. Respondents indicated third party websites generate significant leads today (8), followed by automotive retailer websites (66%) and franchisor websites (57%). The responses confirm the status and the current market presence of third party industry websites. Online channels generating the most vehicle sales leads today. 15% 18% 1 0% 7% 12% 34% 5% 15% 23% 1 20% 27% 18% 30% 5% 16% 3 23% 24% 6% 47% 46% 55% Own website Third party websites Franchisor website Mobile phone apps Social media No sales leads at all Few sales leads Neutral Some sales leads Significant sales leads generated Figure

21 Serious about Success Survey respondents were asked which online channels will generate the most vehicle sales leads in Interestingly, respondents indicated a shift from third party websites when asked which online channels will generate most leads in Respondents ranked their own website, before that of third party websites, and then a much broader spread of lead generators than that of today, indicating a desire to take more control of this space. Online channels expected to generate the most vehicle sales leads in % 6% 10% 2% 6% 3% 6% 2% 9% 32% 23% 30% 28% 23% 18% 28% 22% 25% 50% 39% 45% 47% 42% Own website Third party websites Franchisor website Mobile phone apps Social media No sales leads at all Few sales leads Neutral Some sales leads Significant sales leads generated Figure

22 6.1 Moore Stephens Insight Online Sales and Communication Automotive retailers are experiencing technological change in their industry. The Moore Stephens Automotive survey captures the expected shift from traditional marketing and lead generating techniques to the online and virtual space. Survey responses indicate that 32% of participants expect more than 50% of sales to be from internet sales leads. We expect this transition in the industry to be consistent with the broader retail industry. For the year to April 2013, Australians spent $13.5 billion online a level that is about 6% of traditional retail spending. Note the strongest online retail activity (per capita) is customers between the age of 25 to 54 (particularly between 35 and 44). Polk research confirms that the majority of vehicle research occurs online. Among consumers who made use of the internet during their vehicle research process, 76% of their time was spent online. Mobile formats for websites should be automatically activated for smartphone and tablet users. Note the substantial expected increase of the presence of mobile applications and social media to generate leads of motor vehicle sales, identified by respondents. AutoTrader.com estimates that 5 of new vehicle buyers will use multiple devices (PC, smart phone and / or tablet) in Automotive retail websites will increasingly be the first impression for a potential customer. Essentially a website is an extension of the business and should build trust and credibility with the potential customer. Information about the automotive retailer, key employees and customer testimonials assist in building trust and credibility. The aim of automotive retailers is to consistently increase their direct customer contacts, in an ever-increasing online lead generation environment. Ideally an automotive retail website should provide all information for a potential customer to make a purchase. For example, finance calculators should be included on the website, removing the need for a potential customer to leave the website to gather this information. Mobile formats for websites should be automatically activated for smartphone and tablet users. Automotive retailers should implement online and social media best practice guides. Understanding that customers will visit their website prior to contacting the dealership in person is paramount, and resources should be allocated accordingly. Website content and specials should be updated regularly, enquiry responses handled efficiently and customer reviews continually monitored. Potential customers will often read and consider customer reviews, and responses should be managed with this in mind. Automotive websites should cover areas such as browser compatibility, search engine optimisation, first impression review and enquiry response time review. We note the online sales and communication trends of countries other than Australia, and in particular the United States of America. American Automotive retailers like Tesla, offer customers the opportunity to choose specifications for a vehicle, and complete the purchase transaction over the internet. Lithia Toyota, for example, enables the customer to view vehicles, choose specifications and make an offer on the vehicle. A sales representative then contacts the potential customer to negotiate and finalise the deal. We expect this type of sales interaction to gain momentum in Australia. Website content and specials should be updated regularly, enquiry responses handled efficiently and customer reviews continually monitored. Potential customers will often read and consider customer reviews, and responses should be managed with this in mind. 22

23 The importance of mobile applications to generate motor vehicle sales leads is expected to increase significantly by the year Applications are being used by industry retailers to take advantage of time poor customers who access smart phones and tablet computers. Social media is providing an interactive forum for automotive retailers to engage with potential customers. We have seen examples where upon delivery of new motor vehicles, and with the customer consent, photos are taken of the delivery and then immediately uploaded to a Facebook page. This provides instant marketing and profile for the automotive retailer. Like all marketing and business development, discipline to processes is the key to success. It is clear that automotive retailers (and customers) still value personal relationship interaction. The online sales and communication in many cases enhances this relationship. With the potential customer having access to substantial information prior to visiting an Automotive retailer, negotiations with a sales representative are likely to be more limited than ever before. Achieving best practice means recognising that motor vehicle customers are not only using the internet and the automotive retailer s website to research the vehicle to be purchased, but they are also using it to review the automotive retailer s facilities and services provided such as finance, servicing and parts. Potential customers are not just buying a motor vehicle but the entire product experience. The website and virtual showroom must not only look good but be organised too. Automotive retailers need to embrace online sales and communication techniques to keep pace with the expectations of their customers. The access to potential customers has never been greater and due respect should be provided to maintain a competitive edge. 23

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25 Serious about Success 7. Future Retail Landscape Respondents were asked to rate retail trends leading up to 2020 by level of significance. 88% of survey respondents noted that the retail trend with the most significance leading up to 2020 was cross selling of products and services. This is consistent with other observations throughout the survey, particularly for aftermarket and service. 85% of respondents said dealership consolidation was an important trend. 79% of respondents identified the concept of a virtual showroom as a key trend. Refer to the Facilities section of this report for definition and commentary regarding the virtual showroom concept. 68% of respondents said that competition from independent online retailers was an important trend; however, only 56% of respondents believe that competition from independent service providers was an important trend. It is worth noting that the Australian Automotive Aftermarket Association ( AAAA ) reported that 76% of respondents to their 2013 industry survey were optimistic that their aftermarket business was going to grow. Leading up to 2020, rate these retail trends by level of significance: 2% 5% 14% 13% 10% 3% 13% 16% 8% 28% 23% 26% 40% 39% 36% 35% 40% 42% 49% 53% Virtual Showroom Dealership consolidation Cross-selling of retail products and services Competition from independent service operators Competition from independent online competitors Not important at all Not very important Neutral Somewhat important Very important Figure 12 Respondents were asked to comment on the key impact of increased online retail sales. Survey respondents predict that the major impact from online retail sales will be reduced gross profit. Other significant comments include the following: Less opportunity to introduce customers to the dealership value chain in order to cross sell into service, aftermarket and F& I. Greater reliance on online providers Increased price transparency for customers Decreased requirements for large facilities Decreased number of staff Decreased customer retention and brand loyalty Lower stockholdings Change in salespeople skills Greater reliance on online providers This subject is discussed in more detail in the Online Sales and Communication section of this report. The expected reduction in gross profit margins could be explained by increased pricing transparency, greater competition, decline of the sales negotiation process and reduced opportunity to develop customer relationships. Respondents also noted PMA based franchises may have reduced relevance and attaching value as customers have the ability to purchase outside the PMA. 25

26 National Automotive Industry Survey 2013 Respondents were asked what the automotive retail ownership model for 2020 would look like. Overwhelmingly, respondents viewed the future retail model as large private groups (52%) and public corporates (38%). We expect this trend to continue, as it has in other major retail sectors. The reasons are becoming more obvious for large group consolidations. They have the financial advantage in competitive negotiations. They have a more advantageous cost structure, benefiting from economies of scale and buying power. Reluctance of franchisors and financiers to risk approvals of smaller and less financially secure operators. What do you think the 2020 retail model for the automotive industry will look like? 52% Figure 13 6% 4% 38% Franchise owned Large private groups Single ownership Public Corporates 26

27 7.1 Moore Stephens Insight Future Retail Landscape Despite online sales trends, the core values of customer relations and retention remain today. Virtual showrooms, either online or as satellite stores, may be a new way of customer interaction, however traditional sales techniques and principles remain today and there is still a need for sales people to represent these values and develop relationships for long term customer retention. Survey respondents considered crossselling of products and services as the most significant trend leading up to Our interpretation is that automotive retailers see and embrace the need for online communication in the sale process, but see the overriding importance of the retail facility to complete the sales process and take advantage of cross selling to achieve an acceptable overall margin on the transaction. The challenge for automotive retailers is to build a better overall transaction gross utilising the cross sell and upsell opportunities that exist in the physical sales process. This is clearly understood as respondents rated the most significant impact from online retail sales as reduced gross profit. The big question is whether the traditional interpersonal customer relations and sales techniques will be significant in Automotive retail is currently in an experimental phase in attempting to adapt to a potential change in sales processes and techniques. Respondents also identified virtual showrooms as a key trend, indicating a shift in investment focus from physical facilities to online virtual showroom facilities. Phase 2 of the Factory Image Programs Research project conducted by National Automobile Dealers Association and ( NADA ) and Canadian Automobile Dealers Association ( CADA ) poses the question that franchisors may be incentivising dealerships to build facilities suited to buying practices of the past. A fundamental question is raised, are the current facility investments being undertaken going to be utilised to their full capacity and functionality in the future? This fundamental question has been on the radar for some time in other retail segments and future automotive retailers can learn from these experiences. Specialty Fashion Group closed 41 of its sites in 2012/13 and has plans to close a further 120, as it recalibrates its business to an online sales model, evidenced by a 50% increase in online sales in 2012/13. This is not to suggest that automotive retailing will become predominantly online in the near future, but these trends need to be considered. (Source: The Age 27/08/13) Interestingly, competition from independent online competitors was rated by respondents as far more significant than independent service operators, yet service profitability is rated by respondents as a greater profit opportunity. Whilst it may be argued that efficiency and cost arrangements (e.g. fixed price servicing) have reduced the risk of losing market share to independent service operators, have dealerships geared their CRM processes adequately to avert future risk of losing market share in this space? Moreover, by combining modern online CRM techniques with traditional relationship and cross selling techniques, there is an opportunity for automotive retailers to regain the market share previously lost to independent service providers. As noted in the Market Indicators for 2020 section of this report, automotive retailers are generally the first contact point for future consumers of vehicle service operations. Therefore, automotive retailers have the greatest opportunity to upsell this business to the customer. This opportunity needs to be embraced with effective CRM strategies and technology if automotive retailers are to be successful in generating the additional income expected and required from service operations. 27

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29 Serious about Success 8. Profitability Automotive retail respondents were asked what their current return on total sales are, and what their return on sales will need to be in Survey respondents have largely stated (57%) that their current return on total sales lies between -3%. This concurs with our understanding of the market with the average Australian dealer currently achieving an NPBT as a percentage of sales of circa 1.8% (Moore Stephens Automotive benchmark is 2.5%). These percentages are in line with the results being achieved in mature automotive retail markets of the US and UK. In 2012, the average US dealership net profit before tax as a per cent of sales was 2.2%, by year-to-date June 2013 this had increased to 2.5% (Source: NADA). Whilst in the UK, for the rolling 12 months to June 2013, net profit before tax as a percentage of sales for the average dealer was 1.33% compared to a UK benchmark of 3.0%. Whilst the average UK dealer has some way still to go, this is a significant improvement from the rolling 12 months to June 2012 net profit before tax as a percentage of sales of 0.80% largely due to an improved new vehicle performance. Survey respondents anticipate a greater return in 2020 will be required with 46% of respondents predicting net profit as a percentage of sales will need to be 3-5%, compared to only 29% achieving those percentages currently. What is your current return on total sales in automotive retail, and, given the current market trends, what level of return on total sales do you believe the 2020 automotive retailer would require? 9% 4% 4% 6% 15% 27% 29% 48% 57% Today 2020 Less than 1-3% 3-5% Greater than 5% I don t know Figure

30 National Automotive Industry Survey 2013 It is interesting to note selected US, UK and Australian benchmark comparatives: Selected US, UK and Australian Benchmark Comparatives US UK AUS 1. Net profit as % of total sales 4-5% 3% 2.5-3% Sales 2. Used retail to new ratio 1.5:1 1.5:1 0.6:1 3. Sales per salesman per month Used vehicle stock turns in days 30 days 45 days 50 days 5. Used vehicle profit return on stock 100% 80% After Sales 6. Overhead absorption 80% 80% 60% 7. Overall workshop performance (efficiency ratio) 100% 100% % 8. Gross profit on labour sales 72% 75% 78% 9. Hours per retail repair order 2.0+hours 2.5 hours 2.2 hours 10. Parts gross profit on sales 29-33% 21-23% 25-27% 30

31 Serious about Success Respondents were asked to indicate which department is the greatest contributor to gross profit today, and which department will be the greatest contributor in Survey results indicate a reduction in F&I contribution offset by an increase in parts and service contribution. In our discussions with automotive retailers, the expected reduction in F&I contribution reflects automotive retailers concerns around the regulatory environment of the finance industry and franchisor finance incentive campaigns. In 2020, survey respondents are expecting increased back end gross contribution (parts and services) with 50% of respondents expecting parts and service to be the greatest contributors to overall gross as compared to 44% currently. Fixed operations generally account for the largest proportion of profits generated as combined margins are circa 65%. Respondents are using initiatives such as fixed price servicing to increase customer service retention to take advantage of the strong growth in vehicle sales over the last few years. Greatest contributor to gross profit today and expected greatest contributor to gross profit for the automotive retailer of 2020? 2% 13% 13% 6% 9% 8% 1 26% 36% 39% 36% Today 2020 New Used Parts Service F & I Other Figure

32 National Automotive Industry Survey 2013 Automotive retailer respondents were asked what their current absorption rate is, and given the current trends, what they believe the service absorption rate for the 2020 automotive retailer will need to be. Most automotive retailers are aware of service and parts absorption (fixed absorption is the total parts and service gross over fixed and semi-fixed overheads). It is a key indicator of a dealerships ability to survive in a volatile market. Often automotive retailers are encouraged to aim for over 80%, however, the majority achieve somewhere between 50% to 60% (38% of respondents currently at between 50-60%). Ultimately, a strong absorption rate will enable the automotive retailer to cope with future unpredictability in new and used vehicle sales given the emerging trend towards online retailing. Service absorption rate today and required service absorption rate for the automotive retailer of % 8% 1 13% 2 22% 26% 24% 30% 38% Today 2020 Less than 50% 50-60% 61-70% Greater than 70% I don t know Figure

33 Serious about Success Respondents were asked how they expect to generate growth and profit over the next seven years to It is interesting to note that 39% of respondents are expecting to generate growth and profits from organic growth and greater efficiencies. While 36% are expecting to generate their growth and profit from existing franchise(s) with either facilities or online expansion. Despite the broad ownership base of Australia s automotive industry with the three largest automotive retailers having a combined market share of only circa 10%, most respondents do not appear to be pursuing new franchise acqusitions at all costs. How do you expect to generate growth and profit over the next seven years to 2020? 24% 39% 17% 19% New franchise acquisition / New PMA Existing franchise / facilities expansion Existing franchise / online expansion Organic growth / greater efficiencies No growth / looking to divest Figure

34 8.1 Moore Stephens Insight Profitability The Australian automotive retail industry is diverse and mature. Although growth over the long term has been steady, the industry is subject to short-term swings. Over the last two years sales volumes have been strong with CY12 (calendar year 2012) having 1.1 million new vehicles sold, up from 1.01 million in CY11. These volumes are largely being supported by favourable macro-economic conditions (strong levels of employment, lower interest rates and increased vehicle affordability) and increased franchisor incentives. The current VFacts forecast is estimated at 1.12 million units, up on last year s record of 1.1 million units. It is interesting to note the size and competitiveness of the Australian market compared to other mature markets: Competitiveness of Global Vehicle Markets Australia USA Canada UK Number of Vehicle Brands in Market Vehicle Sales 1,112,032 13,040,632 1,620,221 2,249,483 Market Size Per Brand 16, ,699 33,066 42,443 Current population 23 million 313 million 35 million 63 million Table 2: Source: VFACTS 2012 and Wards World Motor Vehicle Data data for Australia and 2011 data for other countries Includes Passenger Motor Vehicles, Sports Utility Vehicles, Light Commercial Vehicles, and Heavy Commercial Vehicles (i.e. heavy trucks and buses). Population data: Country Meters Despite the positive macro conditions for Australian automotive retailers, we believe profit margins will be stable rather than increasing. Franchisor incentive programs are effectively obligating their authorised dealerships to remodel their POS grosses, creating business model challenges. In addition, ongoing facility upgrade requirements are creating additional investment pressures for smaller automotive retailers with reduced access to capital. Given the expectations of further investment by automotive retailers, it is not unreasonable that they look to parts and service and the continuation of F&I to support and increase dealership profitability. Most automotive retailers have long ago moved from a sole focus on front-end profitability (new vehicle sales) to a pool of gross which takes into account F&I as well as gross profit through the vehicle life cycle (servicing, parts, etc.). 34

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