A prescient article in the Journal laid out the major changes taking place in the channel of the automotive industry. There are so many parallels between what the car industry has seen and what the POS industry continues to struggle to understand that we thought it would be borderline criminal to avoid juxtaposing the two.
Car dealerships, if you recall, are a protected interest group due to decades of state lobbying. Many analyst estimates cite the statistic that car dealers add 30% to the cost of automotive purchases. Although POS dealers weren’t a legislatively protected class, they became the only way to acquire a POS system before the days of the internet, and today it would seem far too many of them add unnecessary costs without any additional benefits.
Now that the internet has finally reached brick and mortar merchants (yes, 20+ years later), merchants are able to find more transparent pricing for hardware and software offerings. Today, there are many POS companies that are betting on merchants using the internet to buy POS products directly. The Journal article notes the same thing for car dealers.
The internet has made car prices more transparent for customers and given them the ability to shop around. It has also enabled online purchases of used cars.
This inescapable reality has put serious pressure on the automotive dealer.
Dealer margins are shrinking amid tough competition and the increased pricing transparency enabled by the Internet. Dealers took home about 2.5% of the selling price of the average new car in 2017, down from about 4.7% in 2009.
The same economic impacts are being felt by POS dealers. There’s less money on hardware, software has become much cheaper, and service and support is being unbundled with tools like remote diagnostics and third party companies who are doing in-person support at a literal third of the price of the POS dealer.
This margin compression has led to consolidation in the automotive channel.
For many years, analysts said that the dealer business was too fragmented and localized for owners to get serious benefits from consolidation. But now, big dealer groups such as AutoNation Inc. and Group 1 Automotive Inc. see potential for economies of scale. Mr. Rosenberg, for instance, is using investments from his Prime dealership’s new owner to develop proprietary software for the dealership group, launch a finance company, and potentially offer subscription services.
Erin Kerrigan, founder of the Kerrigan advisory, said about 200 dealerships changed hands in 2017, near an all-time high with a similar level of transactions to take place this year… thanks to the need to invest in new technologies and offerings, such as subscription services, as a way to diversify their businesses.
The same thing is happening in the POS industry.
i3 verticals has been quietly buying POS dealers. Payments companies are consolidating market share by acquiring the POS manufacturers. Larger POS dealerships like CBS saw the writing on the wall and spent years investing in new solutions for merchants – see their Northstar POS as a prime example.
We expect the consolidation to continue as the economics bear down with even more weight. The POS becomes easier to support remotely, is automatically upgraded with more stable software via the cloud, and on-demand support services grow in availability with simultaneous decreases in pricing. Technology is making all of this a nightmare for the old, lazy dealer of yesteryear, both in POS and in the automotive industry.
More potential headwinds loom. One example: Electric cars, which are expected to represent a growing chunk of U.S. sales in coming years, need less maintenance than their gasoline-powered counterparts because they don’t have an engine or a transmission. That could cut into the revenue that dealers make from their service bays.
What do we think this means for the POS channel? It’s simple, really.
- Lower margins. Margins continue to erode, forcing action. Many dealers desperately search for buyers though they become disappointed to learn that their business is worth 10% of what they think it is.
- Expect dealer consolidation. Imagine more “chain” dealers, or dealers with multiple offices. These can be corporate offices, but don’t be shocked if a franchise model arises. We are firm believers in a federation of dealers.
- Goodbye mom-and-pop dealerships. These dealerships don’t have the business acumen nor installation footprint to migrate to a SaaS model. After failing to find a buyer, they go down with the ship.
- More services. The surviving dealers will sell consultatively and have a number of solutions to help their customers run better. The POS companies that matter will make it easy for their channel to have integrated solutions.
We expect the resurgence and redefinition of the VAR. This whole dynamic will be great for the channel as it weeds out the dealers that are too lazy or dumb to survive. What remains will be companies with better business acumen, focusing on larger merchants that pay for value.
Forget about the sub-$500k/year merchants who buy direct or take whatever POS is first put in front of them by a payments agent: the mature upmarket merchants will belong to the VARs of tomorrow. And these VARs will be larger, with innovative DNA to help their merchants solve new challenges.
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