Brand new research to hit the market is working to debunk the assertion that factors driving dealer success and profitability remain beyond the industry’s control.

Instead, the new report — released by McKinsey & Company, in cooperation with NADA — titled,  “Fast Forward: How U.S. Auto Dealers Can Drive Sustainable Economic Performance in the Digital Age,” shows that internal operating practices play a large role in differentiating highly profitable dealers from the pack.

In other words, for store owners and GMs, the keys to profitability growth potential might be more in their hands they one might think. According to the report, marketing spending and operations should be top-of-mind for dealers looking to increase profitability.

The study results were announced at the NADA/J.D. Power Automotive Forum Tuesday afternoon, and shared insight on internal operating practices from more than 800 new-car dealerships across the country, as well as analysis of more than 2,000 retailers and a car-buyer survey of more than 3,000 U.S. consumers.

Auto Remarketing discussed the results of the new study with Stefan Knupfer, director at McKinsey; Robert Mathis, partner at McKinsey; and Steven Szakaly, chief economist for the National Automobile Dealers Association, shortly before the results were revealed on Tuesday.

Let’s take a look first at shopping trends that inspired the report’s authors to pick out operations and marketing spending as the top two critical areas dealers need to focus.

Traffic & Conversion

If you have been a dealer for over a decade, there’s a good chance you may have noticed less store traffic — but that doesn’t mean you’re selling less cars.

Compared with 10 years ago, new-car buyers are spending almost triple the amount of time online doing research. Consequently, 42 percent of the dealers surveyed reported a decline in store traffic, compared with just five years ago.

That said, according to the report, 61 percent of dealers reported a rise in the conversion rate of store visitors in the last five years. In other words, shoppers are coming into the dealership with a much clearer picture of what type of vehicle they want.

Szakaly pointed out that if one takes a look at the number of models and the variances on today's vehicle models, it’s almost impossible for consumers to do their shopping only by visiting stores.

“I cannot go look at every mid-sized SUV and test drive it. That’s six weeks doing of test drives. A lot of consumers are now shopping online, doing comparisons, and they have narrowed it down to a couple of products, so they are coming into the dealerships with some idea of what they want to purchase.” he said. “They are much farther along in their purchase cycle than previously, which is why in-store conversion is now higher.”

Interestingly, 84 of the new-car dealers surveyed look at the rise of the highly informed consumer as the most significant recent shift in the industry.

The report’s authors and analysts agree, noting the trend can prove to be a great benefit for dealers.

“They start their search on the Internet; they start comparing vehicles, brands and the content of the vehicles, and they are much better informed and don’t need to visit so many dealers,” said Knupfer. “That is also why dealer traffic is going down. They are visiting less dealers, because they don’t need to see a lot of dealers to get the information they have already found online. And because they are better informed, they can make faster decisions.”

Dealers, Manufacturers and Third-Party Providers

Taking these shopping trends into account, the report pointed out that “new players,” such as third-party lead generation sites, have popped up to aid these new consumer preferences.

This trend brings another marketing arm into the mix, making it even more complicated for dealers to consider line items such as digital marketing spend.

The report stated in this confusion, sometimes manufacturer and dealer spending on media activities are not well coordinated.

The report offered two fixes for this conundrum:

1. Investing in a synchronized approach to marketing return on investment
2. Coordinated lead generation across all channels

For every car sold and serviced in North America, according to the report, manufacturers and dealers jointly spend an average of nearly $8,500 for marketing and sales activities over its lifecycle. 

“Part of the challenge is obviously there are different parties at play that basically try to do the same thing. If you look at a new-car sales lead, from the third-party lead providers like TrueCar, and you have the OEM generating leads, and you have the dealership generating leads, and they are all feeding into the same pool to the dealer that has to convert them into actual customers,” Mathis explained, which can cause confusion as to what marketing and lead generation tools are actually working.

There is considerable frustration and ambiguity surrounding the question of what money is well spent when it comes to the lead generation process, the report contends.

“Obviously, the reason that these third-party lead providers are part of the industry is that they are offering a value proposition that wasn’t covered by the manufacturers or dealers,” Mathis said. “So the question at hand is what the dealers and manufacturers can do to fill that gap, because people are going to third parties for help.”

The report suggests a more synchronized approach to marketing return on investment for individual franchised dealers and their manufacturers.

Though there has been some confusion as to which digital marketing outlets have the best ROI, the report suggested: “With the rigorous application of advanced analytic capabiltieis, each manufacturer can create a complete picture of spending effectiveness across online and offline channels by analyzing the marketing ROI of both its own and its dealers’ consumer-facing spending.”

As a result, the report contended, manufactures and dealers can better allocate marketing spending to the best-performing channels.

“There are three different institutions (lead generators) working on this, and it’s not very efficient,” said Knupfer. “There is a lot of money that is spent, but there is more opportunity for improvement. As a consequence, we see there have been a lot of attempts at training and a more sophisticated efforts between manufacturers and dealers.”

Operational Keys To Profitability

Contrary to popular belief, the report contends that dealership business success is not driven primarily by structural factors out of the control of the dealer, but rather by tightening up internal operations.

According to the report, 60 percent of the performance gap between dealerships is determined by operating practices. And if dealers were to implement existing best practices in operations alone, the average performance of the entire auto retail industry could increase from a net profit pretax margin of 2.2 percent to more than 4 percent. According to the report, this could add about $1 million to the average dealer's bottom line.

What should be top of mind? The report’s authors focused on people management, customer retention and focus on total profit opportunity.

“As part of the research, we basically went out and observed more than 800 dealers in the U.S. and really tried to understand what the operational factors are, and we overlaid them with the financial information we were given and statistically correlated which of the factors mattered the most,” said Mathis. “And what we found among the top 10 factors, was that many of them were people management related.”

Interestingly, the single most important operational factor turned out to be tenure of the service manager, “meaning, if you are able to retain your talent in critical positions, it puts you in a much better position to increase value,” Mathis said.

He also pointed out that in terms of focusing on total profit opportunity, dealers need to focus on the entire lifecycle of a customer, meaning not only the new-car sale, but also F&I, service, aftersales, parts and more.

This strategy can help dealers not only to service the customer, but also understand how much profit is being generated from each individual shopper, said Mathis.

And if that if you have the right documentation of how you captured value for a single customer, it is much easier to see where best to put your resources and prioritize your customers.

“If you look at it in an integrated way, it is much easier to capture customer lifecycle,” he said.

Szakaly agreed, summarizing as follows: “It’s not viewing the customer as a new-car sales or a used-car sale or a service customer, but as all of that combined. When he buys a new car, there is a service opportunity. When he is in for service, there is a new-car opportunity. It’s looking at it holistically.”

In summary, by investing in operational improvements and streamlining marketing expenses, the report shows a potential way overall dealer profitability could hit the levels of today’s top quartile performing dealers in the near future.

Auto Remarketing editor Joe Overby contributed to this report.