I did a little recon work prior to my visit this week to Google’s autonomous vehicle division, Waymo.

I wanted to get a sense of how driverless vehicle technologies might be underway and visible in California’s high-tech corridors.

Jay Seirmarco, an assistant general counsel for Cox Automotive who lives in San Francisco and works at Xtime’s offices in Redwood City, relayed that driverless vehicles are already common during typical commute times in his Noe Valley neighborhood.

“There are numerous autonomous vehicles coming into my neighborhood every morning,” he says. “The rumor mill in the neighborhood is that Apple workers are taking some of these to work. This happened recently and the volume is amazing. For me, it’s been an epiphany—this is the real deal and some people are commuting in these things.”

Lucy Smith, a Cox Automotive corporate counsel who lives in Redwood City, affirms that driverless vehicles are common during her daily commute. It’s also pretty common to see Teslas with drivers whose hands aren’t on the steering wheel.

“These vehicles are fantastic at handling traffic,” she says. “They actually drive better than some human drivers. They change lanes much more expertly.”

Those on-the-ground observations helped inform my meeting with Waymo CEO John Krafcik and COO Shaun Stewart. I had a rough sense that driverless vehicle adoption and use was gaining ground, and a hunch that it might be more profound than what I’ve read in industry and mainstream press.

The following are some of the big take-aways from my meeting with the Waymo executives and a drive in one of their vehicles—what I’ve come to call “My Trip to the Mountain”:

The technology is intense. Our vehicle arrived precisely at 9:30 a.m., exactly when it was supposed to. The vehicle, a Chrysler Pacifica, had two engineers in the front seat with laptops. They weren’t driving the vehicle as much as monitoring its performance and answering our questions. Between them, the dashboard featured a monitor showing a grid with images of color-coded objects ahead—other vehicles, street lights/signs, pedestrians, cyclists, etc.

The image colors changed to denote whether a specific vehicle sensor, a camera or laser radar, captured the object. The colors also changed based on movement and proximity to our vehicle.

At one point during the ride, a cyclist rode up beside our vehicle and passed us. I asked the engineers how the vehicle knew it was a cyclist and where he was going. “We calculate the probability of what the cyclist will do,” I was told. I asked the obvious follow-up—“how do you do that?”

The explanation was pretty incredible. The sensors track the cyclist’s position on the road, the angle of the rider/bike frame, and other factors to predict where it’s headed.

My mind spun as I thought about all of the data-crunching and programming necessary to produce such predictions.

Seirmarco shared a similar experience: He recently watched a driverless vehicle at a four-way intersection assess a cyclist, who was rolling backwards and forwards for balance while waiting for a vehicle to pass. The autonomous car appeared to stop and start in sync with the cyclist, and then proceed.

“The car figured it out,” Seirmarco says. “It blew my mind that the car knew what to do.”

Driverless vehicle critical mass will take about 10 years. Krafcik and Stewart helped me understand that some predictions, like one that says 100 percent of vehicles will have Level 5 autonomous technology by 2021, are a bit far-fetched. They also thought other predictions, like one that views 2030 as the point when autonomous vehicles will achieve critical mass, as about right. I came away thinking “10 years” is probably a viable timeframe when driverless vehicles will show up more commonly in places outside of California’s tech-heavy communities.

“Taxi” will mean something different to all of us. We discussed Waymo’s plans to commercialize its driverless vehicles with a “taxi” offering in Phoenix. The conversation helped me better understand Waymo’s intentions to operate fleets of autonomous vehicles, and offer them in a model that enables one vehicle to serve many different customers, sometimes at the same time. We didn’t dig into how consumers might pay for this type of transportation. But it’s likely the model will blend pay-per-use or pay-per-term principles. It seems like the idea of “calling a cab” may mean something entirely different in the not-too-distant future, and the Phoenix experiment bears watching.

OEMs will compete and partner with Waymo. We spent some time discussing the seeming arms race among OEMs around driverless vehicle technology. The dialogue helped me understand that Waymo and others will probably go head-to-head with larger OEMs, and partner with smaller OEMs that may find it difficult to develop driverless technologies on their own. The partnerships might take several forms, ranging from efforts to integrate the sensors and related technologies into vehicle designs and supply the vehicles Waymo and others will need.

Waymo shares our values. Both executives impressed me with their keen, shared sense of personal and social responsibility. They care about their people and their broader communities—just as we do at Cox Automotive. I also liked the way the company’s committed to innovation. Their mission talks about making “moonshots” (see image) and we are focused on “transforming the way the world buys, sells and owns cars.”

I would be remiss to not share how the discussion of shared purpose and values offered a positive outlook for Cox Automotive. The executives were sincere in saying they believed Cox Automotive would play an important role in the future of mobility and Waymo’s efforts to shape it.

I left the meeting thinking: “They know us. They understand what we do. They get why we do it. This is good.”

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How many dealers figured they’d make up for ever-smaller margins in new and used vehicles by selling more cars in 2017?

If you asked the question in a room full of dealers, I suspect most, if not all, hands would be in the air.

“You make up your gross in volume” is the age-old rule of thumb in the car business.

But what if the thumb is broken, and the rule doesn’t fit anymore?

That’s the situation in today’s retail automotive market.

Through June of this year, the National Automobile Dealers Association (NADA) reports that dealers are seeing declines in two important places—on the gross and net profits they realize when they retail new and used vehicles, and in the overall number of vehicles they actually retail.

Gross/net profits: NADA reports that gross profit as a percentage of new vehicle selling prices dropped below 6 percent, to 5.9 percent, in the first half of 2017 compared to the same period in 2016. In used vehicles, the gross as a percentage of the sales price dropped to 12 percent.

Meanwhile, the net profit per new vehicle retailed fell 74 percent to -$396, and the net profit for each used vehicle retailed fell nearly 50 percent to $112.

Retail sales: In the first half of 2017, dealers averaged 449 new vehicle retail sales, up just two vehicles from the same period a year ago. In used vehicles, dealers saw a slight drop, as they averaged 358 retail sales, down from 362 a year ago.

These dealership data points suggest that dealers who believe they can retail their way to improved profits are probably kidding themselves in the current market. If the strategy worked, shouldn’t we see decidedly different numbers from NADA?

To me, the data amounts to a call to action. Dealers need a better way forward that doesn’t rely simply on selling more cars to make more money. Similarly, I don’t think cutting expenses will provide dealers sufficient relief from the combined pressures of margin compression and a softer sales environment.

I believe the best way forward rests with increased operational efficiencies. Dealers simply have to find a way to sell and service customers with greater efficiency and lower costs.

The good news here is that most dealers have three areas of long-standing inefficiency that, if addressed, can help them achieve the higher levels of operational efficiency, productivity and profitability they need to thrive in the years ahead:

Human capital: Dealers continue to suffer from an average annual turn-over of 67 percent in sales, and 40 percent across their operations. These figures suggest a high level of dissatisfaction. You can only wonder how many deals are lost or bad decisions made, on any given day, because the hearts and minds of dealership employees aren’t in the game. Dealers who have tackled this inefficiency have formalized their hiring processes around key personality traits and cultural fits, and moved away from the traditional practices of commission-based pay and uncertain work hours.

Inventory: I see signs of inventory inefficiency every day. If I had to summarize the problem, I think it’s fair to say that up to a third of dealers’ new and used vehicle inventories is effectively dead capital. These are over-age vehicles that haven’t sold, and they’re preventing dealers from reinvesting the capital in more profit-productive units. Of course, there are a multitude of reasons behind such inventory inefficiencies but they all point to the same underlying need for more investment-minded inventory decisions. In both new and used vehicles, dealers need to do a better job of assessing each vehicle’s retail prospects before they own it, and then working more diligently to retail every unit more quickly before its ROI, and front-end gross, effectively disappear.

Technology:  Dealers have invested sizable sums in technologies that should help their sales associates and service technicians work more productively and profitably. Yet, sales associates still average about 10 retail sales per month, and technicians about 40 hours per week—averages that haven’t changed in nearly 40 years. The statistics suggests to me that solutions providers can and should do a better job of helping dealers achieve greater utilization of their tools, which would help dealers realize the promise of increased efficiency and profitability the technology and tools are intended to produce.

These three areas of opportunity don’t represent an end-all, be-all list. But they do offer starting points for dealers to push back against margin compression and a softer market, and gain back some of the profitability that seems to dissipate with each passing year.

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Dealers have long understood that having water in their inventory is a bad thing.

The conventional view holds that you determine the level of water in your inventory by comparing your costs to own the vehicle against the amount you could get if you wholesaled it right away.

Hence, if you own a used vehicle for $10,500, and current valuations suggest you’d only get $9,500 for the car on the wholesale market, you’ve got $1,000 in water for the unit. The same math holds for a dealer’s entire inventory.

Dealers pay varying degrees of attention to their inventory water. For some, it doesn’t really matter at all. If the vehicle’s a fairly fresh piece, dealers will hold out hope that a retail sale will make any water a moot point. Others reckon with water when they’ve given up on the vehicle as a retail unit, and take their lumps as they wholesale the car.

But I’ve begun to believe that this traditional view of inventory water isn’t as useful for dealers as it has been in the past.

For starters, the wholesale market, despite a headwind of high supplies of late-model vehicles, has remained relatively strong. Both demand and valuations are surprisingly resilient. On a day to day basis, dealers may still take baths as they wholesale vehicles, but the water’s not as deep or as cold as it could have been.

Second, the traditional view of water doesn’t really measure the most significant challenge dealers face in today’s used vehicle market—the continuing grind-down of front-end gross profits.

In our current margin-compressed environment, even a vehicle that isn’t weighed down by water often doesn’t produce a sufficient level of return on the dealer’s investment.

This condition shows up every day in my work with dealers. More and more, it’s increasingly common for dealers to have a large number of vehicles with Cost to Market ratios at 90 percent or higher. The ratio suggests the dealers might make a 10 percent front-end gross profit, given the spread between the vehicle’s costs and retail asking prices. But, in reality, the vehicles will likely transact at less than their asking prices—which means the front-end margin for dealers will be significantly less than 10 percent.

I often tell dealers that “30 is the new 45 or 60 in used vehicles”—a saying that captures how margin compression has shortened the viable retail shelf-life of most vehicles.

I also share an analogy: Suppose your inventory was like a block of ice, sitting in the middle of a room that’s 100 degrees and getting hotter. The longer the ice sits, the more it turns to water, runs down the block, spreads across the floor and loses its original purpose.

This is the water that dealers should really be worrying about. Here are two best practices that I recommend dealers follow to mitigate the water’s ongoing erosion of their front-end gross profits in used vehicles:

  • Maintain at least a minimum of 55 percent of your used vehicle inventory under 30 days of age. If you want to keep a block of ice from melting, you need to insulate or protect it from heat. For dealers, your best protection is a faster pace of retail sales. If the cars sell faster, you minimize the profit loss that occurs as vehicles age in inventory. I tell dealers, “30 is the new 45 or 60 in used vehicles” to underscore how inventory age has a direct bearing on a used vehicle’s investment quality—the longer it sits, the less you get.
  • Mind your Cost to Market metrics. The Cost to Market metric is useful to dealers in two ways. First, the metric tells you, from the moment you acquire a vehicle, what your likely retail gross profit margin will be. Second, it helps you monitor, on an individual vehicle basis, how much potential profit resides in a vehicle. I recommend that dealers strive to maintain an overall inventory Cost to Market average of 85 percent. This benchmark allows for the realities of today’s market. Some vehicles, with a low Market Days Supply and other unique characteristics, may be perfectly fine to acquire at a Cost to Market ratio higher than 85 percent. They may cost more, but they’ll sell fast. Meanwhile, other vehicles, such as rental car purchases, should have Cost to Market ratios considerably lower than 85 percent, even below 80 percent, given they are less special, and more abundant, in the market.

I’m not suggesting that dealers ditch the conventional view of inventory water. But I do think dealers will need to more vigilant about managing their inventory investments in an era of margin compression.

As the old song goes, “you don’t miss your water, ‘til your well runs dry.”

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AutoNation Makes A Play For Future Relevance

11.03.2017

I can’t help but regard AutoNation’s multi-year deal to service Waymo vehicles as a smart move for the company, and perhaps a telling sign for the rest of us. My job has me traveling the country, speaking at dealer groups and other events and, more and more of late, talking about the future of the […]

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Three Take-Aways From A One-Day Tour In Detroit

10.20.2017

My new book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive had me on the road this week in Detroit. The visit sparked a lot of stimulating conversation as we met with editors from Automotive News, Ward’s Dealer Business, Reuters and Autoline. Like me, the automotive media is thinking hard […]

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My First-Ever Op-Ed in Automotive News

10.16.2017

I dialed up the digital edition of this week’s Automotive News a bit earlier this morning than usual. I was excited to see my first-ever op-ed piece, an excerpted chapter from my new book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive. The chapter focuses on the idea of dealers […]

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A Sneak Peek At My Fourth Book—Like I See It

10.10.2017

I don’t normally use this blog for promotional purposes. But I hope you’ll forgive this one-time policy suspension to plug the upcoming publication of my fourth book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive. Like any author, I’m awaiting the official release date of next Tuesday, Oct. 17, with […]

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3 Lessons From The Impending Sale of Rolling Stone

09.19.2017

When I was a teenage kid, if you wanted to keep up on music and politics, you read Rolling Stone. I credit my older brothers for introducing me to the magazine. Once I’d read it the first time, I was hooked. I especially remember the writing. For me, Rolling Stone was a way to be […]

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A Post-Harvey Call For Rational Retailing

09.06.2017

My phone’s been buzzing this past week with dealers and others asking for my take on how Hurricane Harvey will affect the used vehicle market. For one thing, I suspect dealers everywhere will feel or see some of Harvey’s after-effects. After all, the storm claimed an estimated half-million new and used vehicles, and more dealers […]

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4 Misunderstandings About Price In Today’s Auto Retail Market

08.17.2017

Old beliefs and habits definitely die hard. Take the way many dealers still think about their new and used vehicle prices: Dealers control vehicle prices. I’m not talking about the obvious point that dealers do, in fact, largely set the asking prices for their vehicles. My point relates to the ever-more powerful influence the market […]

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