In this second episode of Presidio’s Podcast Full Throttle, automotive retail innovator Don Flow talks with host Jason Stein about his view of the future of automotive retail – from inventory management to facilities to the future of OEM relations and the velocity of the buy-sell market sector.
In this second episode of Presidio’s Podcast Full Throttle, automotive retail innovator Don Flow talks with host Jason Stein about his view of the future of automotive retail – from inventory management to facilities to the future of OEM relations and the velocity of the buy-sell market sector.
Jason Stein 0:06
It's not just the valuations of stores, in most cases based on incredible profits that is fueling a desire for some to step away from the market and cash in.
Don Flow 0:15
My expectation is that a number of folks will make some decisions to sell because they've done really well. And they've probably done well enough to think differently about their future. And they're also at a point where they say, you know, it could be a little softer. I didn't really want to go through that again.
Jason Stein 0:18
This is Full Throttle, the Presidio groups automotive industry podcast. I'm your host, Jason Stein, Presidio's Marketing and Communications Adviser and host of Sirius XM's Cars and Culture on business channel 132. On a monthly basis Full Throttle serves as the industry's meeting point for great conversations with leaders across the automotive world. And today I sit down with one of the true retail giants in our industry, a tireless innovator, Don flow, Chairman and CEO of Flow Automotive Companies. The Buy Sell market hasn't been the only element of the retail business that has faced a radical transformation. It's also the enormous change occurring across the industry. There are many aspects to consider in the new retail reality. Inventory levels, data sharing agreements, the future of incentives in a post pandemic environment, and the future of brick and mortar and the employees that work within those walls. Today we explore all of those topics with a leader who spends his time thinking about new models, new approaches, and every measure of analytics that he can get his hands on. He's Don Flow. His reach is about as broad as they come in auto retail, 45 stores across 21 manufacturers, nine cities in North Carolina and Virginia. From one pre-owned center in 1957 that offered fully reconditioned cars and a warranty, Flow automotive has built on trust. And from that one store, a Volkswagen franchise was added four years later. And the rest of the story rolled on. The Flow name is one recognized at all levels. Today Don flow shares his vision of retail and what the future holds. He's thought provoking, introspective and always willing to learn. We learn a little more on Full Throttle the Presidio group's automotive industry podcast.
Don Flow 0:36
Hi, I'm Don flow, and this is Presidio's Podcast, Full Throttle.
Jason Stein 1:37
He's an innovator, he's a creator, he's a pioneer, he's a trailblazer. Those are some of the words that others have used about him, and I would concur, he never rests. Don Flow, it's an honor to have you on the program. Thanks for joining Full Throttle.
Don Flow 0:23
Jason, it's my privilege to be here. Happy New Year to you. I'd sure like to meet those fine folks who say so many kinds of things. Maybe I could write them down and give them to some other friends that don't think the same thing of me. Thank you.
Jason Stein 2:50
We can arrange that and a very happy New Year to you as well. When you look at where the retail space is today, I know you have said, this is a very unusual time. I know you've you've told your team that that we're in a, we have been in a mostly supply driven market, which is very different than a demand driven market. Where do you find yourself in January of 2023, from an operating standpoint.
Don Flow 3:19
So of course, we have just concluded two and a half years of probably the most unusual experience in my 44 years in our business. And I think we've learned an enormous amount from it. As an industry, how value is created, what's possible for us to do and how we can operate as retailers. And so Jason when I look out and say for our company, we ended the year in a very strong position, but as we look ahead, we've learned that our ability to forecast is actually minimal, because we really don't know. 30 days is an extended forecast right now, we're down to weekly forecasts. What's moving with inventory, literally 10 days is the most look we see anymore with any clarity along the way. We just finished doing this last, um this Monday. And we looked out ahead, we will actually end January with less cars in stock the than we ended December with across all of our brands. And so it tells you that we'll have a 70% turnover rate again, across the band for the whole company. So it tells me when I look out ahead that we should probably in Q1 see something somewhat similar to what we've seen before. Now I think the question will be for all of us is what are what is the impact of interest rates and who will it impact? It's fair to assume that impacts income folks who are strained to make the jump from 3% to 7% and how that translates into monthly payments. So the brands who are impacted by that will see that first and foremost along the way. We've already seen that in the over $30,000 used car bracket. So those cars have slowed almost everywhere now because that payment difference has really jumped for folks along the way. We first extended payments in terms of terms, but terms won't cover up a gigantic jump in terms of the interest rate itself. So we ended the year with cautious optimism because of the big deficit in the relationship between supply and demand. With somewhere between five and six million vehicles in deficit for the last several years, it feels like there is pent up demand. The question will be how much is demand dampened down by the interest rates and does it match supply? So if supply can reach somewhere 14 and a half million units this year 14 and 14 and a half, will demand meet that? And so we actually end up in a very similar place along the way. And if that's the case, that's a pretty balanced situation for the OEM and for us. Because if you look at the incentive differential, you know, Jason, I was looking at one brand, whose incentives were down $5,000 a unit. And just to make the math easy, we'll call it 200,000 units. That's a pretty good number, 200,000 out of 5,000. So if you look at everybody winning through that particular system. So the last thing I would say, we look at and Jason think, what's perfection look like in our business? What's that beautiful model? 50 to 60% turnover every single month, we think we hold margin, the OEM holds margin, and the customer has selection.
Jason Stein 6:35
What's the relationship between the OEM and the dealer going to look like in the future after what we've gone through, Don?
Don Flow 6:43
So it's a great question, because I think it has two ways it can move.
So one we'll say, our relationship is just framed by legal framework, by legal framework.
I've personally never found that to be a relationship that's really sustainable. Because you're bouncing up against a legal framework all the time, there will be some OEMs to head that direction, they're going to press the boundaries of the legal framework all the time, because they believe there is a model that's better. There are other OEMs, who I believe have made a mindset which is the legal framework does not determine frame our partnership, we actually create value together. So OEMs, who embrace the latter model are going to, and who commit to trust at the center point about we are, have the opportunity to create new value, because the integration between retail and the OEM, if done properly, has the potential to open up new relationships and value in the marketplace. But both of us are quite uncomfortable with that, unless there's a new kind of relationship that can emerge. And we know that the OEM really has to first extend the kind of the fig leaf in this matter. But we also know that dealers have got to respond as well, assuming best intentions, and then create a much more collaborative approach to how to go to business.
8:07 Jason Stein
If 30 to 40 days supply becomes the norm as some have predicted, at least 80% of the sales will begin online and 50% of purchase, but delivery is taken at the store. So what do the buildings look like in the future?
Don Flow 8:23
Don't ask that too much. Since I've just invested in about 40 locations.
What will the real future look like? It's hard for me to imagine Jason. And that's the size of our showrooms and the way the cars are laid out and what we actually do and are shown as being the same. So picture an omni channel process where the transaction is largely done before the customer actually arrives at the dealership, that doesn't mean we're irrelevant, just means the transaction is digitized. So pricing is done online, appraisals are 90% done online, financing against online and that process. So we asked when they come to the dealership, what are they actually coming for. And so it has to be a value creating experience. And I think gigantic showrooms that are laid out in kind of the way they typically are, and probably not what that's gonna look like. There'll be a delivery section of the business. And there'll be an engagement section that will really involve using all kinds of virtual reality and interesting things to engage the customer on the car. We believe in the car when the customer comes in, if they have to come in, in the future. So think about Amazon's told us like just go from left to right. That's all you should do. And if I have to do more than that, then you got to make it fun for me. You got to make entertaining for me. You got to make it enjoyable for me. You got to make an educational for me. You got to make it engaging for me. How will we do that when the guest comes in?
Jason Stein 9:48
And that extends to the point that you just made which is the new and different relationship that will exist with the OEM and both groups will have to get on board with what that appearance is, what the facilities look like. But there's also something else around data sharing and unlocking new value for dealers and OEMs. How do dealers ensure that they're not disadvantaged in any kind of new data sharing arrangement that could occur.
Don Flow 10:14
So this is where data sharing agreements are really important. That we work closely with the OEMs to make sure first that we set the correct framework up.
Don Flow 10:25
So then let's think about kind of where that opportunity to create a new relationship exists. So here I have the customer. And I know a lot about the customer. Here they have the car, they know a lot about the car. If we can merge those two together so that we understood exactly the right way and the right time to engage the customer, that we actually were able to do real one on one marketing, the opportunity for that really opens up new doors for us, because then we're not talking about 50% service retention anymore. We're talking about 70, 80, 90. But how do we make sure we say, who's the initial contact with the customer? What's the relationship with that? Then we look at inside of these data sharing agreements, if that data is shared, sold in any way, we should be participating that value stream.
And so that has to be incorporated within all of these agreements, and if you look at it, so that also involves, for instance, over the year updates, and etc, that are value creating over the year updates updates I'm not talking about safety recalls, I"m talking about value creating links. That's, in effect, part of the margin, if we might think about that. So how are we going to participate in that fully. So that full value stream associated with the product still is appropriated in a way that's equitable?
Jason Stein 11:49
There's a lot of talk, Don, about scale and in finding economies of scale. Can large dealer groups access all of the revenue around future businesses, should they be thinking about doing that? And and I'm talking about starting finance companies, or insurance companies or fleet companies, maybe even subscription which I know you've gone down that path before.
Don Flow 12:09
Yeah, we're a strong believer we should be doing that. And the reason why we think we should be transportation service providers, if we can think about this holistically. And we would say, okay, customers have all kinds of transportation needs, how do we meet the needs around that along with them? And what are the value creating activities associated with this, that we participate in this in creating value for our customers along the way? And when we step out of that, we actually invite the customer to establish the relationship with somebody away from us, if our goal is to have a deep relationship with everything around mobility in their lives, how do we become the trusted place for them to come when it comes to mobility. And so there's opportunities in this space along the way, you have to become a certain size to go out and actually achieve that. But my belief is in the next wave of growth, we'll see large data groups begin to think about that. And some of them have already done that on the way.
Jason Stein 13:08
Is there a future in, you know, across the country for single point stores anymore?
Don Flow 13:14
Well, I once read an article by Sam Walton. And it was, "How I would compete against Walmart."
And Walton said, You know what, I'd be at the front of the store every time.
Everybody would know me, I would know every customer we had, we would respond to whatever the customer needed whenever they needed it. And so I would say deep personal service, fully engaged people, the owner operators there on the spot, that still adds value to the marketplace. Now the question will be, will their costs get out of line with their ability to actually deliver value? So if you think about it like this, so values, the revenue levels out there, what's the cost it takes to retain? The difference of that is our profit. It may take too much cost to actually create that much value. But I know that that still matters to people because personal relationships still matter along the way. The more difficult for folks in that setting will be, can they attract and retain the human talent needed to deliver that? Not having enough opportunities for growth, not being able to give a future that folks like that. What we've found is our ability to attract young people, come through training programs, look for a future career enables us to give a full pathway for what they want to do. That's more difficult if you have a single store.
Jason Stein 14:38
And if most sales begin online, which leads to appointments, but only 20% or less are classic walk-ins we could say, what do retail hours look like in the future? Could it radically alter work schedules make it easier to hire people? Can productivity be significantly increased?
Don Flow 14:58
So of course COVID helped a lot of us really move from the theory stage of this to actuality. Because one, we lost a lot of people, we had a lot of people out of work, a lot of times, people didn't want to come in and shop all the time. And so we experimented a lot with ours during that period of time and said, I grew up in a time, you know, it was bell to bell, nine to nine, nine to 10, nine to 11, all hours of the night. And now we found out you know, what, people don't wanna shop like that anymore.
Jason Stein 15:28
Yeah.
Don Flow 15:29
And so we looked and said, what time do we need to open up? And so in every market, we start tracking all of our traffic and stuff, we said, look, summertime, 7:30, wintertime, seven o'clock at night, we also tracked how many people come in what we might call classic walk in after 6:30 at night, very few, we were able to pull all of our hours back, people got to go home on time, focus on productivity during that period of time with changing things. So the average sales per salesperson went from 10 to 11, to 12 and 13 and 14 and 15. So incomes went up. And so we've been trying to say, now how do we learn from that and embed that permanently what we're doing, because we know younger generation, they were born with more intelligence than we my generation was. Somebody told us, we're gonna tell them, you're gonna work from nine to nine every day. They're like, you're on the wrong planet. That's not happening. You know we've got to adjust to that. Right, we got to adjust to what that looks like. And we all did that during COVID. You know, most of us had to sit with our employee base Jason and say, how do we make this work for you? You got dueling comps, you got kids at home. Now you got parents that moved in with you? What do you need us to do? And the organizations that did that had tremendous response from their employee base. And we all learn from them to say, okay, given we proved we could do that. How do we think about our future differently?
Jason Stein 16:54
A couple more things about the future? Are we looking at a potential radical shift in inventory levels Don? And if so, how can pipeline selling be fully integrated upstream, all the way to the factory maybe.
Don Flow 17:08
So this is a big opportunity. Huge opportunity for all of us. I'm in conversation with a couple of OEMs who are in decision making process about committing to 30 day supply, and effectively paying dealers if they don't.
Jason Stein 17:24
Wow
Don Flow 17:25
They're saying it works for all of us. This is a different model, because it'd be tied up to pipeline selling and think about all the way to the factory. So let's take one, I placed my order. And now I'm tagged to the actual to the car being built. I'm being sent pictures of the car being built, coming off the line. Here's on the windshield, specially built for Jason Stein shipping RFD chip where it is when it's come, just arrived to the dealership. Now I'm tied in, this is what I'm talking about this kind of new relationship matching us and the OEM tied together like that. Or, if I buy a car that's already been built, tell me exactly where it is. Oh, yeah, that car is halfway across the United States right now or halfway across the Atlantic halfway across the Pacific right now. That's your car just tagged for you, you now can track that all the way through that. So we see and own this together. Because in the past, what's happened is, there's no insight to this. There's no transparency to it, we just put you on the list. We'll call you when we got something.
Jason Stein 18:25
Yeah, it may sit in a port for awhile.
Don Flow 18:27
Right, right, right, forever, like and by the way, every week, I come up with new excuse about why your car's not here. And I don't know, which you know, I lose all credibility when I do that. Instead I want to be able to say, "Look at where your car is". And we've all shared this together.
Jason Stein 18:40
Now, the Buy Sell market, what are you seeing today? What do you expect this year?
Don Flow 18:47
Well, last year, if you wanted to buy something you paid a lot.
Jason Stein 18:51
Yes, yes.
Don Flow 18:52
You know, and for good reason, strong earnings, people looking out ahead, high level of confidence. If you were a seller, you would say you have to reward me for walking away from this market. I think it probably will help tamper down a little bit. My expectation is that a number of folks will make some decisions to sell because they've done really well. And they've probably done well enough to think differently about their future. And they're also at a point where they say, you know, it could be a little softer. I didn't really want to go through that again. So relative to last year, I think there'll be more openness to it. But if you look back on earnings, and you say, my multiple is going to be on the last three years is not going to be cheap. So you know, think carefully about that. Look carefully about that. Look at, for us, we look at so what's the fixed coverage? You know, what's the sales effectiveness in the market? What's the customer experience on numbers like that? So that gives us a much clearer picture of how secure are those earnings?
If their earnings were just written by new car grosses that's a different business model than a model that's heavily covered, fixed coverage with it, you know, image has already been performed on so be ready to go and operate in it. But my guess is you will see folks being pretty active in the M&A business next year.
Jason Stein 20:14
Well, you always get me thinking about where this auto industry is headed. And I think throughout the course of this conversation, we have a lot to think about Don flow. It'll be an exciting year, I wish you the best of luck, you and your entire team. And thank you for sharing your thoughts here on full throttle.
Don Flow 20:33
Jason, it's a privilege to be with you. I'm excited about the next year, I will follow what you're saying. Because you bring folks on that I really have a lot of confidence in. And one way we all do business together is we learn from each other in this business. So thanks for bringing yourself to the market. Appreciate it.
Jason Stein 20:50
Oh, thank you, and thanks for being on the program, Don.
Don Flow 20:53
Great to be here. Thanks.
Jason Stein 20:55
Thanks again to my guest Don flow and thanks for listening to Full Throttle. Come back to us again in February for our next interview on this platform. Suggestions? Email me at jason@flatsixmedia.com. And to learn more about The Presidio Group, go to thepresidiogroup.com or follow us on LinkedIn. Thanks again for listening, and we'll see you next time.