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There are four waves of innovation sweeping through the automotive industry that will disrupt vehicles more in the next 10 years than they've changed in the last 100.

Each week, we explore connected cars, electrification, changing ownership models, and autonomous self-driving vehicles, as we seek to understand and prepare you for the future of transportation.

Aug 28, 2019

EP018 - Managing Director at Maryann Keller & Associates, Jeremy Alicandri

Episode 18 is an interview with Jeremy Alicandri, Managing Director at Maryann Keller & Associates; recorded live at the Automotive Intelligence Summit in Raleigh, NC on Wednesday, July 24th, 2019. Scot and Jeremy discuss a variety of topics, including:

  • Jeremy’s journey through the automotive industry; from an e-commerce startup to automotive strategy with Maryann Keller & Associates.
  • Dealerships combating margin compression following the first operating loss in over a decade.
  • The current and rising impacts of carsharing and ride-hailing on new car sales.
  • The acceleration of digital retailing as a solution for new and used car dealerships, including services like Carvana.
  • Fair as a leader in subscription-based digital retailing

If you enjoyed this episode, please write us a review on iTunes!

The four pillars of Vehicle 2.0 are electrification, connectivity, autonomy, and changing ownership models. In the Vehicle 2.0 Podcast, we will look at the future of the auto industry through guest expert interviews, deep dives into specific topics, news coverage, and hot takes with instant analysis on what the latest breaking news means for today and in time to come.

This episode was produced and sound engineered by Jackson Balling, and hosted by Scot Wingo.



Scot: Welcome to the Vehicle 2.0 Podcast! We are live podcasting from the 2019 automotive intelligence summit here from sunny Raleigh, North Carolina. It's Wednesday, July 24th, and we are excited to have on the show. Jeremy Alicandri. He is the, oh, we'll have to find out your title. You're with Maryann Keller and Associates. And what's your official title?

Jeremy: Managing Director.

Scot: Managing Director. Wow. The MD. Not a medical doctor. Thanks for coming on the show.

Jeremy: Great. Thanks for having me,

Scot: Yeah, I know you, I this shows your, you're crazy busy. So let's start by giving listeners an idea about your career path. We were chatting before the show about you and I share e-commerce. So that's kind of fun. And then I would love to learn more about how you got into your role.

Jeremy: Sure. I just want to issue one clarification. You called it sunny Raleigh. It's hot, humid and sunny. So I do have a background in e-commerce. Actually before automotive, I started a company when I was 16 was a retailer. E Taylor ran that for about eight years moved into doing consulting services for a number of different companies both inside and outside of the automotive space. And one of those consulting opportunities led to a full time opportunity within automotive group where I was an executive for I guess about seven years. And then after that I went into consulting at a price Waterhouse coopers and then now where I am now at Marian Keller and associates. So we are in automotive strategy consultancy and what we do is we help clients both inside and outside of the automotive industry get a better sense of where it's going help them answer some of their strategic questions, do a ton of research topics and write papers and, and offered a detailed analysis to, to help them with whatever it is that they're thinking about. So that's kind of a little short summary of my background.

Scot: Awesome. Are Most of your clients like dealers or are they the OEMs or are they the parts manufacturers or which part of the ecosystem do you touch?

Jeremy: I'd say most of them are large companies. I touched the automotive space, so, so it could be a, a, it could be a large publicly traded dealership group. It could be a large part supplier and auto maker or lender. Even in short, so we're seeing all different types of companies come to us with with common concerns about where the industry's headed and they want to run some scenarios, bias. And that's what we, that's what we do.

Scot: Very cool. Do you guys, are you kind of, I'm the type of firm that will actually publish a bunch of stuff or is it more we do publish thought leadership and be published

Jeremy: A few papers, a in connection with the Auto Intel Council which is actually a, I guess a sub division if you will, to the auto intel summit. So the council and the summit kind of hand in hand. And then we also issue study. So earlier this year we issued a, a study on franchise dealer advertising where we interviewed nearly 400 dealerships and published where we think a dealership advertising is headed and where it is now and what's working and what's not working and kind of give a very granular level understanding to those that may be interested in that space.

Scot: Very cool. And then here at the show you're a talk is tomorrow and you are talking about the the Costco car buying program, right.

Jeremy: I'm going to Mc, I'm going to be interviewing the person that runs that program. Very successful program sold over 650,000 cars last year, which is really amazing. And yeah, we're going to be talking with Rick Borg of of Costco. Should be fun. Cool. Fun. 30 minutes.

Scot: Yeah. So they don't give you a ton of time to do this thing, so it's hard to get it off all the data in there. This in the, if you don't know the answer to this, that's fine. But this is the Costco program is an individual dealers that are in there or is it powered by some other company?

Jeremy: It's a, so it's individual dealers that are the ones that are actually providing the cars to consumers. But the types of dealers that participate those are some of the questions that I hope to find out tomorrow, the answer to because I don't know 100%

Scot: On the show to report what we learned. So here on the vehicle 2.0 podcast, we have a framework where we talk about the four waves of change kind of coming to the auto industry. You are in the ecommerce industry as I was and you know, we've seen trillion dollar companies created out of the changes that have happened there in retail. But we use it, the framework that has essentially four components to it. So we've got the change in car ownership, connected car, electric suffocation, and then autonomy. You're out there talking to dealers or these kinds of things on their mind or it sounds like, you know, some of the reports you're putting out are more tactical, you know, like how do you do advertising in the franchise level and that kind of thing.

Jeremy: Yeah. So you certainly touched on a lot there. Some of those what I would call very let's say high level trends, but essentially that's what they are probably still very far away, not, you know, on the, on the top of mind issues for dealers. I think dealers right now are more concerned about things like margin compression. Where for the first time since the great recession, the operating profit of the average dealer in 2018 was a net loss. Dealers are concerned about vehicle affordability. Vehicle prices are an all time high today, making them financially out of reach for many consumers. In fact, the average new car buyer is age 54 and has an income of $122,000 a year. Compare that to the rest of the U S and it's easy to see a tremendous delta in income. And NH dealers are also concerned about the effect of consolidation.

Jeremy: Consolidation means that there's less and owner's going to be in the automotive retail space between now and 2025 and more dealerships are getting gobbled up into larger groups. So whereas we have an estimated 8,500 owners right now, within the next five, six years, we're probably gonna see about 6,500 and that's going to give a further economies of scale to some of the larger groups some of the publicly traded and also some of the privately owned dealership groups that may further jeopardize the small mom and pop mom and pop independent store and doesn't have access to the scale economies that would be associated with the larger group. So these are some of the issues that our dealers are really concerned about. And, and I would add that the, the biggest is the fact that more so now than ever before, automakers control the profitability of dealerships via incentives.

Jeremy: So what we've seen here is that while the operating profit of dealerships in 2018 went into the red, again, this is the first time it has since a great recession dealerships are still profitable for as a net profit. Okay. And the reason for that is because of automaker incentives that favor dealerships to engage in certain types of activities that the manufacturer incentivizes. So that can mean investing in, in a project to improve the look and feel of the dealership. That can mean, and most most common, it means meeting certain sales quotas. So dealership may sell a cars for loss. Actually, it's quite common now, net profit. In fact, most new car price departments in the u s or dealers are not profitable. So dealerships will sell cars for a loss and then make up the money at the end of the year or maybe every quarter, every month through income incentives that come from the auto maker.

Jeremy: And so when you have a dealership that loses money that that will be unprofitable without making sure that it does what the automaker wants. It's kind of a kind of a major concern, frankly for dealers. And another term for this would be stair step programs. It's kind of all similar, all group together where dealerships are concerned about how these these trends are going to ultimately affect their ability to, to grow and, and make money and, and, and survive just over the next five, six, seven years. I don't think anything cataclysmic is going to happen, but these issues are, you know, really what's on the top of mind for, for dealers as far as what you're talking about with I mentioned earlier rather autonomy and electrification. Maybe we can dig into each one. Depending, depending how, you know, like a brush on, yeah, I'm a, I'm a, you know, total newbie when it comes to dealers. So I imagine dealers have essentially three lines of business. They've got new cars, used cars, and then kind of the service area. I guess finance kind of fits in there. And, you know, that's Kinda like maybe maybe it's kind of, I kind

Scot: Of imagined it being this horizontal between the new and used car sales. How, so if they're not making money on new car, do they make enough on the service and the used car to make up for that?

Jeremy: Trying to, yeah, they're, they're definitely trying to, so what we've seen over the past few years is that dealerships continuing to invest more of an emphasis on service and parts. There's been nearly a 49% growth and sales between, I believe it's 2010 and 2018 in dealership service departments and parts department. So really a tremendous amount of growth there. There's been tremendous amount of growth in FNI where dealerships are making more money on selling things like protection products vehicle service contracts, in fact, penetration for theoretical service contracts, et Cetera, and your all time high. And they're also looking at used cars. So one of the the topics that's come up over the past over the past couple of years at these used car summits that Cherokee has the same organization that runs ais is that dealerships continue to figure out how they can be more competitive in use cars, how they can more quickly turn inventory because they see that as a profit center. So dealerships definitely are looking at other profit centers to make up for the fact that they're not making it in new cars. And then also they're looking for ways to cut back on expenses. Expense reductions always been a big area. Frankly, sometimes it's difficult for dealers to be able to master it, but you know, it's always always a way to, to cut back if needed.

Scot: Hmm. If if there's a pie chart at a dealer between those three lines, how much is new cars used? Cars and services it pretty equal or service like a small slice and yeah, so,

Jeremy: So it varies. The absorption rate, which is basically looking at the service department's profit as a percentage of, of the dealership's overall profit can vary significantly. And so rather than give any general stats cause it can vary by franchise and also size of, of groups. I would say that the service and parts is probably the number one area that, that dealerships are looking for in terms of profitability in terms of a department. And then, and then, you know, it's depending on what the penetration is with used cars and depending on what FNI looks like those could be other priority areas. But I would add that the new car incentives or the incentive income that comes from selling new cars is technically considered below the line. So it's not actually being put into the new car department, but the new car department is what generates that incentive income. So you could say, you know, you can make the argument that the new car department is, is, is the most important department because it's what's, what's keeping the dealership afloat, right? And now that, that negative operating profit, but the way dealerships look at it in terms of where they compartmentalize what's happening in each department, they'll say, well

Scot: Incentive income is something else interesting. I hope that makes sense. That's very helping by a, I've been dying to ask someone that and you're the only person that's been able to answer it. So kudos. So then it seems like the, the one that's most on the horizon, I get the, you know, avs you can kind of push off and say, ah, yeah, who cares? That's like 20, 30 kind of thing. But it does seem like these changing ownership models, you know, with Uber and Lyft going public and really kind of ride sharing is a thing now. And then now there's more and more car sharing out there. You've got Toro and get around really kind of strange or mixed the million dollars days. There's some real dollars there. Is that starting to weigh on, on the minds of, of dealers? So, so the short answer to that is, is

Jeremy: No in the u s okay. Car sharing in the u s right now in terms of taking ownership away, personal vehicle ownership a is very, very insignificant. We don't, not that we, we and as well as many other professional organizations have reached consensus like car sharing in the u s it's probably not going to affect personal car ownership in a significant way in, in either now or in the next five years or 10 years. In other markets maybe like the UK and in other markets where public transportation is more readily available, where car ownership is not as, as affordable as it is in the u s as well as just also the desire of the population to own vehicles. You may see a rise of car sharing. Of course, there's a funny story about how the Japanese are adopting cars, Sha sharing to sleep in the cars.

Jeremy: More often than not, they're not even using the cars. They're just sleeping in the cars. It's actually funny that their apartments are so, yeah. So they still like a way to get out in the middle of the day and take a nap. But I mean that car sharing is one issue or one trend at that won't have an effect on ownership based off of what we've seen. Ride sharing, you know, using the Uber's and the lifts that May 1st for some people who live in the city. But the actual result is, is, is that it's increased vehicle ownership because now you have these drivers that are going around buying vehicles so they can drive and, you know, for whatever ride sharing fleet it is that they drive for. So it's actually resulted in a, an benefit. I think most people that the economics work for ride sharing generally it's, it's, you would have to be driving under 3,500, 3000, 500 miles per year in order for ride sharing to be more cost effective than vehicle ownership. And for most for most drivers they're driving way past 3,500 miles. So, so the, you know, the investment banker that lives in Manhattan that had the Mercedes s five 50 in the, maybe for him ride sharing works, he doesn't need that big expense anymore. But for most drivers in the u s they still need, they still need a vehicle.

Scot: Cool. How about so one of the big topics of the show seems to be, and this is probably in our both of our wheelhouses giving, giving the auto buyer more of that e-commerce type experience. So you've had Carvana come in and really kind of disrupt the used car market and then a lot of the topics here at the show are, how do you give that e-commerce like experience at the dealer? Is that, that is that more top of mind with, with folks?

Jeremy: Yeah, it's, this is something a that we covered in our advertising study that we published earlier this year, which I'll add is on our website if anybody wants to download it. And what we found is that pretty much every dealership group is experimenting or fully entrenched in what we call digital retailing where they'd actually sell a vehicle online. There are different flavors of digital retailing. There are different vendors involved. There are different things that some dealerships are willing to do as it relates to selling online that other dealers aren't. There's different regulations and teach in each state as well that that sometimes prohibit online retailing and, and sometimes they don't. So it's a, it's definitely still an evolving space from talking with dealerships that are successful with digital retail. And what we found is, is that the only way it really works is if you fully embrace it.

Jeremy: And so what I should add that when I'm talking about digital retailing right now for the purpose of this conversation, I'm talking about a dealership fully selling a car online. So someone goes to the dealership's website, they see the price that they're going to pay for the car, they put their credit information in, they upload their driver's license, their insurance card, and the car's delivered to them. That's to me is 100%. That's digital online, you know, digital retailing or however you, you are comfortable in defining it, but kind of the true Amazon like experience. And that's very, very, very, very insignificant amount of cars that are being sold that way. But for the dealerships that are doing it, that one of the things that they've had to do is really change the culture in the dealership to be able to have their model adapt to a customer coming into the showroom and seeing a price online that is going to be the same price that they're going to pay for it.

Jeremy: So there's no conflict there as well as being more transparent and being comfortable with that transparency. For example, giving away or rather than actually giving away, but being more upfront about different rates for, for FNI or for packages or any type of options being way more upfront where in the past some dealerships don't want to do that. They would prefer to embrace more of, you know, come to the showroom and we're going to, you know start at one price and we'll end up at another price and negotiate with you the dealership set that want to be successful. Digital retailing, have to go with the model of, we're going to put, just put it all out there and be total transparent. And not all dealerships are ready for that cultural shift. I mean that's a major shift. You know, you have pay plans involved where you have a staff of dealerships that are incentivized to to increase or maximize the gross.

Jeremy: So if you have a model that just puts it all out there and doesn't really allow room for negotiation, you have now these, these people that may work for a dealership for 20 years that have a totally different pay plan. And so how do you account for that? So these are some of the challenges. It is very interesting. I think that a lot of consumers, especially new car buyers you know what I mentioned the average age being 54 still want a test drive. They're still not ready to buy a car solely online. Some are, but not all of them. They still have, they also have high credit scores and high income. You know, Carvana is a different business. Carvana just sells used cars. Carvana has a great brand proposition. And that proposition basically tells consumers that are going to get an upfront and easy experience.

Jeremy: And so they in Carvana facilitates that online. But again, most franchise dealers are selling new cars, they're selling cars especially for new cars to a higher generally a higher fico segment of, of the car buying population as well as offering things like leases and things like that. So it's just, it is different, but dealerships again, are adapting based off of what consumers want and the technology is there. Now again, as I mentioned earlier, in some states, there may be regulations that may prohibit a dealer from fully selling your car online, but there's a lot, a large percentage of the transaction that can be done online. And, and that's probably where most of the benefit right now is for consumers. So instead of having to come to the showroom to let's say find out what the price could be on a specific a unit or even the consumer can do that remotely via the dealership's website.

Jeremy: They can review FNI options remotely and they can also upload maybe their credit application or driver's license. So when they come to the showroom, what would have been maybe a four hour, five hour experience can be maybe an hour. And so that's again, that's where the big benefits have been and we'll continue to see this space evolve. Yeah, I bought a car was with no financing. It took three hours. It was crazy. Yeah, I told him all he had like an hour and there's still drug it out three hours and this area, and frankly it's, it's a lot of times it's just, it's just, there's just so many documents that need to be signed. This the, I bought a car via a which is a subscription service. I did a trial earlier this year. I bought the car from fair via my phone, not from the dealership when I got to the dealership.

Jeremy: This is in, this is in New York, I should emphasize and we have a lot of regulations in New York. I had a sign at least seven or eight different pieces of government mandated paperwork and you know, it was, you know, sign the environmental form and use car warranty for and all these different forums and things. I frankly never, not even related to, to really having a practical purpose for me being a subscriber with fair, but we're still required. So, so dealerships are doing their best to, to get around some of these issues and evolve. Cool. well I know you're super busy. Last question if folks want to find you online, do you obviously they can go to the website and find the research, but do you, are you active on Linkedin and Twitter? Yeah, so I, I'm, I'm on a, I'm on Twitter, I'm on Linkedin.

Jeremy: It's, it's my name. There's only one Jeremy Alicandri. So I assume, I assume when you publish a description for this, you'll spell my name and shine shyness and they can also go to Marianne and on that website they'll be able to download our thought leadership, including our dealership advertising study, which goes into more details on digital retailing as well as some of the other trends occurring in that dealership advertising space. 

Scot: Cool. Thanks for joining us today, Jeremy. This has been super insightful. I learned a ton about the dealer space and look forward to seeing your talk tomorrow with Costco. 

Jeremy: Great. Thank you. Thanks for having me.