I’ve had two things on my mind that I’d like to share, both relating to how AI is likely to impact automotive dealers.
The Democratization of Software Development
First up, we’re seeing real-time the democratization of software development. Vibe coding seemed to be an interesting side-hustle just a year ago. Now we’re hearing about non-technical employees building themselves CRMs over the weekend.
This is both exciting and potentially very disruptive to the incumbent software providers. A debate that is working itself out in the public markets.
If I’m one of the large software companies, is AI an opportunity or a disruptive threat? How do I build a defensive moat around my business? And is the fact that the average dealership going to be able to easily and cost-effectively build their own software tools an opportunity? Or should I be freaking out right now?
If I’m the average dealer, all of this sounds pretty great. I may finally be able to get the features I want and no longer be limited to only being able to innovate based on the speed of my legacy software provider.
You can be sure that the larger dealer-facing software players are watching this trend intently and have yet to decide whether the disruptive force of the democratization of software development is, long-term, going to be a net good or bad force in the universe.
How AI Will Help Dealers Become More Profitable
The second, and related, topic that’s been on my mind this week: how will AI help dealers attack labor costs and drive more profit than ever before.
During my presentations, I often like to borrow one of Glenn Mercer’s slides that shows that the average U.S. franchise dealer’s net profit before tax has been eerily stable for the past 50 years.
Never in 50 years has the average dealership in America lost money. But earnings have been very predictably stable in a band of 1% to 3% net profit before tax. Except, of course, for the COVID blip, where a shortage of new and used vehicles allowed dealers to temporarily enjoy enhanced profit margins.
The more and more I’ve thought about this, the more I’ve become convinced that we’re about to see a decoupling of this historical level of net profit, as AI allows dealerships to reduce their labor costs.
By my calculations, almost 50% of a dealer’s operating costs are human capital, otherwise known as labor:
Phase one of any AI implementation should result in greater productivity and throughput for the average employee. Think of this as the average employee leveraging Chat GPT to draft emails, improve the quality of the data going into their CRM, or mining the CRM to identify the right prospects to contact. The average dealership employee should pick up a 10% to 20% throughput or efficiency gain.
As dealers get deeper into AI adoption, we should quickly transition to experience the multiplicative effect of employees being able to use AI-powered agents to do their work for them. If an employee can “manage” multiple agents, we should see productivity gains of 100% - 500%, which is going to be a massive unlock in productivity.
Finally, dealers will quickly realize that in many cases, they may not need to backfill employees as they retire or quit. This is where we’ll really start to see cost savings that will flow through to a dealer’s bottom line.
Two good things will result for dealers.
First, in this environment of increasing uncertainty of tariff impact, OEM health, and the looming Chinese entrance into the U.S., AI is going to provide a viable lever to help dealers insulate them from external shocks, and drive more profitability from their operations.
Second, every dollar saved in labor will flow through to a dealer’s bottom line as an increase in net profit before tax (NPBT). The average dealership is valued at about 5-times NPBT, so these savings will not only provide the average dealership with more resilience from external forces, but will drive up the average dealer’s net worth.
Finally, if my thesis is correct, and we can help dealers persistently realize higher profit margins, the knock-on effect should be that the whole asset category becomes more attractive to investors. So we may very well see a multiplier effect for the average dealer’s net worth, as dealerships experience higher valuation multiples as a result.
All of this may sound theoretical, but I’m convinced that’s not the case. Dealers who stay open minded about leveraging the potential of AI are going to enter a new era of enhanced productivity, lower labor costs, higher profit margins and greater net worth.
Let the brave new world begin.
