Reflecting on the Agency Model w/ Special Guest Steve Greenfield

October 4, 2022
This Tuesday we are talking about the drop in vacancies in retail real estate. We also welcome long-time collaborator with ASOTU, Steve Greenfield, to discuss October’s Auto Intel Report.
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Brick and mortar retailers are coming back from the pandemic with surprising strength as recent numbers reveal U.S. retail vacancy fell to 6.1% in the second quarter, the lowest level in at least 15 years, while asking rents for U.S. shopping centers in the quarter were 16% higher than five years ago, according to real-estate services firm Cushman & Wakefield.

  • More stores opened last year than closed for the first time since 1995 and analysts at Morgan Stanley expect the trend to continue even in the face of a looming recession
  • This is a result of a major pull back in new retail space construction due to the digital revolution, now the table is leveling
  • Brookfield Property Group, one of the biggest mall owners, said that spending at its 132 U.S. malls is 31% above pre-pandemic levels
  • The U.S. now has nearly 22 square feet of retail real estate per person, more than any other country and more than double the per-capita square footage of France and the U.K.—and nearly eight times China’s rate

The Agency model is a huge topic of conversation in Retail Auto and there are few approaching it with as much measured thoughtfulness as Automotive Ventures founder Steve Greenfiled. He shares his observations and encouragement to the Dealer body in the recent issue of his monthly Auto Intel Report you can get for free from his website www.automotiveventures.com

  • Larger groups noted as being positive about the shifts as they see themselves as the distribution model: “receptivity to the agency model increases, while the concern goes down. This is due to the fact that bigger groups are more likely to be the preferred channel of distribution (vs. smaller players), will have more say in strategic decisions, and have a greater influence and "voice at the table" to partner with OEMs.”


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SPEAKERS

Steve Greenfield, Kyle Mountsier, Paul Daly


Kyle Mountsier  00:22

Good morning, it is Tuesday, October 4, your guy Kyle's leaving it off. We're one day away from the conference season to end our conferences. And we're hanging out with our friends, Steve Greenfield,


Paul Daly  00:35

the people who took it away to put it the conference season to end all conferences, because you know what, we're gonna rope nada into that even though like we're gonna that's the season right? Even though it's like next year in January Lee


Kyle Mountsier  00:48

is well here's what's crazy is right now starting tomorrow, Wednesday, the fifth name ad starts on the fifth. as it rolls out, there'll be a ton of people going into Vegas for driving sales, driving sales rolls out on Monday and picks up digital dealer again. So it's like, if you really want to go hard, you can go Miami to Vegas, and go like 11 straight days or something ridiculous.


Paul Daly  01:17

Oh my oh my gosh, then in just like a week or so from then it's Palm Beach for the modern retelling conference. And I believe on and on and on. Well, we'll be at name Ed. If you are going to be there. Make sure you come and see us and say hi. We're going to be leaving a paddle up with Alex Vetter. And Perry Watson and Alex Flores and it's just gonna be a great time they met knows how to put on an event. So I'm looking forward its wheels up super early tomorrow morning for you and I


Kyle Mountsier  01:44

ya know, I'm excited. My wife was like, this is a long flight for you because typically we're like the you know, the the regular east coast.


Paul Daly  01:51

You're so spoiled us and I'm so spoiled from Nashville, you like right in the center of the East Coast direct flights everywhere, right? Because like, I don't know, I'm in Syracuse. So I'm always like, Well, I think I could get there this way. Because like I can leave at 899 30 1015 Right?


Kyle Mountsier  02:04

Yes, exact No, no, I'm also excited because we're gonna get to see my good buddy Duran cage is going to be there. And just so everyone knows, that's a great mini segway, I won't even play the button. But it's a mini segway to today, we we are hosting the conversation with Duran cage on auto collabs. So if you want to check out auto collabs, you can find it anywhere where your podcasts are also I think right around noon today, Eastern, we'll be streaming that on all the platforms, the YouTube, LinkedIn, the Facebook, all


Paul Daly  02:36

the things, all the things well, we have a very special guest for you in just a minute here. Steve Greenfield is in the green room. We named it that just for him. But first want to talk a little story. I love this story. I read it this morning. And it just felt good. As someone who likes to go out and shop in a store. brick and mortar retailers are coming back from the pandemic with surprising strength, as recent numbers revealed the US vacancy rate fell to 6.1% in the second quarter, which is actually the lowest level in 15 years, while while rents are actually very high right now. So I mean, the shopping centers in the quarter were 16%. Higher, actually, this is according to the real estate firm who we all know Cushman and Wakefield. So, I mean, this seems like a little bit of a turnaround story. This


Kyle Mountsier  03:21

is like the it's, every time I see something like this, I think about like the times where Amazon is like, we're gonna do brick and mortar. And then it's like, you know, brick and all the all the all of the dealers out there like she, she told just so gorgeous. So, which is perfect, but I will say that too. You know what's interesting, we had Jeff Klansmen at a soda con a few weeks ago, and he was telling me about some of the research that he's doing around Gen Z, actually preferring the brick and mortar retail experience. And I think that it's interesting, you know, as like the prevailing new generation into retail goes, so a lot of the rest of it, you know, actually I was talking to Chris, our writer yesterday was saying, like, millennials are kind of getting out of the like, everyone thinks like millennials, and it's going into this Gen Y Gen Z and and that's kind of the prevailing retail mindset. And so if that generation is headed back to the brick and mortar, it makes sense that like the, the entire retail generation right now, is saying that's a good thing. And I think retailers are saying, Hey, we're gonna press in, recognize that this might be a trend and go and fill those shops again. You know, it's, it's pretty wild because for for the US, we have more retail space than any other country actually, in this. It's cited that that the US has 22 square feet of retail, real estate retail real estate per person, which is more than any other country and double the per capita square footage of France and the UK and nearly eight times China's rates. So You know, I like I think recognizing that this is a reality that this push is happening and other retailers are trying to make quality brick and mortar spaces is something that we can think about as auto retailer saying, Okay, if everyone's pressing back in, what are they doing with those retail spaces, not just, oh, they're back. And so our retail space is going to be great. But there's probably some interesting things. I haven't really looked into that on what retailers actually doing with the space.


Paul Daly  05:26

I mean, so there was a big retail space glut. And you know, the last 1015 years, the digital revolution happened. Lots of businesses got shuttered retail space construction came to a very, very almost halt, actually. Which is why it seems like we're reaching this new equilibrium, where, where it allows us to kind of hit the reset button. And like you said, Imagine what what is the need of the new retail space? It is probably something the new retail space definitely makes consideration for the click and mortar model, right? A lot more pickup windows a lot more like curbside drop off space. Maybe a lot more even like in store ordering. You know, maybe for things that aren't in stores. I haven't seen that yet. But do you think of how this applies to dealers? I like your point about Gen Z, like finally Millennials are going to have a kids these days moment. And that's when they're going to remember that's when they're going to realize it's over. So yeah, I was born in 79. So right on the border between Gen X and Gen Y i benchmark as a Gen X er. And like, I have to say like, I don't know if it's because I have like Gen Z kids. But I definitely think in similar ways as like some of these Gen Z mindsets. And one of them is like liking to go out to the store.


Kyle Mountsier  06:40

Well, it was it kind of blew my mind as you as as we are gearing up like getting back to a soda contest. We are gearing up for that. Myles is on a call with a few of us. He works for us. And he's also your son. He's 16. And he's 16. So in that in that kind of generation, and he goes, he doesn't he says, Hey, Dad, can we stop by the Nike store? To grab a pair of shoes before the conference? Not like, can I jump on Amazon? Check out the new you know


Paul Daly  07:10

what, on the way home the move? Well, on the way home to he's like, can we go buy it what's at micro Center, which is like I don't know, it's like a best buy for people that build their own computers and stuff. But he wanted to go into the store. All the stuff is available online. While we walked in. He knew about all this stuff. He's like, Yeah, but I want I want to see it. I want to ask somebody a question I want to see with it. So I don't know, maybe maybe retailers are on this something. Hey, Well, speaking


Kyle Mountsier  07:37

of retailers that might be on to something segue. And maybe in the opposite direction, I'm not sure. But we are really excited to talk with our friend, Steve Greenfield this morning about his his auto Intel report that comes out every single month. And then he has a weekly email to go over kind of the industry's transactions. If you don't currently get the auto Intel report, you absolutely should automotive ventures.com You can find the link in the show notes. Or you can spell it right in the old URL bar. But it is a free resource. And let me tell you, it's a resource every single month. But he wrote a lot about this month, kind of the agency model and the conversations that he's having. So welcome Steve Greenfield to the show.


Steve Greenfield  08:24

Thanks, guys. It's good to be back.


Kyle Mountsier  08:26

How are you, sir? Good morning.


Steve Greenfield  08:28

We're all in for some travel coming up here in the next couple of weeks.


Paul Daly  08:32

Where will you be appearing?


Steve Greenfield  08:35

So I'm not at a mad although I wish. A well, there'll be a surprise at drivingsales I'm gonna get more involved with drivingsales. So you'll see that starting Sunday evening out there, Vegas. And in the meantime, I've got a trip to Boston between now and then and then. But yeah, I'll be there. Obviously nada, as you mentioned, and I'm gonna go up for a day to to digital dealer. I'm actually gonna come home first and then go back out there. There wasn't a lot of time


Paul Daly  09:05

in Vegas a long trip. Yeah,


Steve Greenfield  09:07

I know. That's a lot. Yeah, you gotta pick your battles in life. And I'd like I'd rather be back for like another day in my own bed. You know, right.


Paul Daly  09:14

Actually, that's the best way to put it in Vegas does seem like a battle.


Kyle Mountsier  09:20

I did the driving sales through all the way through last year, Saturday to Thursday. It was I was done. I was out by the way.


Steve Greenfield  09:30

My favorite thing is like taking a red eye home from Vegas, believe it or not, and just looking at people, the people that are on that plane. I mean, it's amazing to me, always juxtapose going to Vegas and watching the people the energy, you know, and then watching people like get on a red eye to go home and it's like they are done. Where people have sunglasses.


Paul Daly  09:49

More people have sunglasses on the plane on the flight home.


Steve Greenfield  09:54

Sorry, people wear their pajamas and stuff like Oof. Yeah.


Kyle Mountsier  09:59

Anyway, I need to do that just for the people watching,


Steve Greenfield  10:02

we can start taking photos, it has to be a new series for you guys to consider. Let's just like take video at Las Vegas airport only on red eyes. That would be the same thing. Right? It'd be like red eyes.


Kyle Mountsier  10:17

Red eyes. Yeah,


Paul Daly  10:18

I returned from Vegas, right? Yeah,


Kyle Mountsier  10:20

that's good. Well, hey, let's get into it. Because I'd really love you know, just to explore this together, because I, you know, over the last, especially 90 to 120 days, you know, since Jim Farley kind of like shocked the world with a lot of his comments over the last over the last few months. And, and that's really been leading a lot of the conversations when it comes to agency model direct to consumer how, how OEMs are going to interact with retailing and the franchise dealer. And so those conversations have bubbled into a lot of other manufacturers, a lot of CEOs and presidents have been kind of asked the question and put on, put on the bubble there. But you, I actually mentioned my wife this morning, I said, you know, I think Steve Greenfield took what what is my like term of the quarter, which is a measured approach to the agency model in in this. So I'd kind of like to get like your overview feedback for those that maybe haven't read it yet on like, you know, what, what your measured approach to what we're seeing on the horizon is right now as it as it pertains to OEMs, looking at the potential of an agency model.


Steve Greenfield  11:34

Sure, yeah. And working backwards. I mean, the the summary would be, you know, shame on any of us that aren't paying attention to what's going on, especially these international markets, to see those as a precursor of how things might play out in the US. But then the flip side is, as I say, it's like, we shouldn't be acting like the sky is falling here. Because luckily enough, we've got guys like Jim Farley, who are signaling what other OEMs are thinking? And we can we can see that and then we can have discussions around what's prudent, and what makes sense, right? So I guess, and then just taking a step back from that, I would say, there isn't an OEM out there. And I think I'm fair to generalize who isn't looking at the current situation and saying, Wow, this is good. I mean, dealers are definitely saying, This is good when you can sell every car at MSRP. And you don't have to stock inventory. And you can bet back off of marketing costs, and you know, sell more cars with fewer people. That's all really good, less costs, you know, equal to more revenue, and much more profitability, both on the front and back end of the car. But you the OEMs are observing this too, and saying, Oh, this is pretty interesting experiment, right? It's like, so if we, if we kind of artificially limit supply, what happens to the whole supply chain? Well, the manufacturer makes more money, the dealer makes more money. And consumers aren't really pushing back. They're saying, okay, I can accept the fact that I have to wait for a car now. And, you know, while the OEMs don't really want the dealers to be charging more than MSRP, you know, we are hearing more from OEMs, that, hey, look, in the future, every car will be sold at MSRP. And there won't be any negotiation. So you can't really blame the manufacturers. And then the other thing that I think I mentioned in the article this this this month is like, obviously, the manufacturers are looking at Tesla taking market share, that now that they are profitable, looking at their economics and saying, Oh, they got consultants chirping in their ear, saying, you can say between like 4% to 8%, if you go direct, so the manufacturer is always in the US say, Well, you know, we can push harder into something that's more like an agency model and redefine what the franchise dealers role is in markets like Australia, and South Africa and Europe, they can't they can't do that here because of the franchise laws and how they protect the dealers. But they'll they're they're trying to figure that out and push and as you said, I mean, even the news we saw two weeks ago from Farley about how they're going to have the dealers by the end of October, elect self select into one of three buckets, right? It's other dealers that are only going to sell ice for the next two years. They're going to sell EVs but kind of like have a foot on each side of the line, because those dealers are only going to be able to sell up to 35 EVs a year 25 to 202 a month. And then you've got you know, the dealers that are like saying, Well, I'm gonna I'm gonna make the financial commitment to be all in and, and be able to sell both. But um, we'll see when the dust settles, it'll be very interesting to see out of like 3100 dealers, you know, here we are 20


Kyle Mountsier  14:31

what the percentages are.


Steve Greenfield  14:33

Yeah, and you know, it's funny, I was visiting a group two weeks ago, right, right, right at the end of the Friday, and three brothers, all of whom have Ford stores. And I was asking them, I said, this is interesting. So say each of you elect to go into one of these three buckets, and then you all decide, you know, a year from now to sell your stores. What's What's the valuation for those three store?


Paul Daly  14:56

Which one's worth more? Yeah.


Steve Greenfield  14:59

So you You I also think that if you're playing a long game, and you're in a rural area, and you don't really believe there's going to be much of an appetite for EVs in your local market, you might go down one path, if you have no intent of selling, but if you are a dealer where like, a good offer comes in, in the next like, two years, I'd be willing to sell, you also have to like think, you know, game theory you like chess and say, well, maybe I just had better make the short term pain, to position my dealership to be most attractive. If my intent is actually to sell it.


Paul Daly  15:29

Let me let me level set for a second because I know some of yours might not understand the full dynamic of what we're talking about. So dealership model right now is where dealers get inventory from the OEM, they can price it how they want, they can sell it how they want within a pretty broad level of restrictions. The direct to consumer model is like Tesla, where the product is sold right from the manufacturer to the consumer with no one in the middle, the agency model is kind of Goldilocks, it is where the dealer stays in place becomes an agent earning, I guess what would be similar to a commission for selling the vehicle, the OEM owns the inventory, they get it to the dealer when it's time to sell or a little bit before and give them some inventory. But the dealer doesn't finance the inventory, the dealer just basically gets a transactional attention transactional amount of money for delivering the vehicle. I just wanted to level set that for just a second. You know, one thing that you said in rural areas, we covered a story yesterday that all the OEMs or the the big three in Detroit are leaning in on big truck diesel technology, saying that, that is one of the most profitable sectors of their businesses. And that sector has also received exceptions from even California. And they set up you know, what was it Kyle, they said they're more profits generation generated from heavy duty trucks than like, Expedia was like some kind of OH is unbelievable,


Kyle Mountsier  16:50

right? More than Southwest Airlines, Marriott and other Fortune 500 companies. So like, just the truck segment alone is is is doing


Paul Daly  17:00

from the I just thought of that, because you talked about the world dealer and you know, the complexities there or the decisions that make there. Okay, get back to what you're saying, I would just wanted to kind of level set.


Steve Greenfield  17:10

That's great. Let me riff off of what you're saying. Because maybe maybe I need to go build up this diagram. But I kind of liked the way you put it, right. So think of this as a continuum, right, you can set the dial wherever you want. And the dial on one side could be the, as I mentioned in the article, this month, it could be like Warby Parker, or Casper, you know, we're selling glasses, and we're selling mattresses directly to the consumer, there isn't a retail outlet. In their case, it's kind of interesting, because both have like a hybrid retail outlet. But let's take, you know, direct sales, no intermediary, etc. On the far left side would be current model. And like you said, in the middle, you know, the agency model is somewhere in the middle, it's a little squishy, right. But it can be defined in Europe, and Australia, how it's playing out is like, literally, like the dealers are having their franchise agreements replaced with an agent agreement, literally. And they're being told, hey, look, you're gonna make some margin on the car sale, but you're not gonna be responsible for holding inventory to Paul's point, nor marketing costs any longer, you know, we're we, the OEM is going to have the relationship with the consumer, they're going to configure a car, they're going to order a car, when the car gets produced, it's going to be shipped to your dealership and you're going to be the point of delivery, you are going to be responsible for servicing the car after after sale. But um, it really does redefine, and then you know, going forward to your point, Paul, the dealer doesn't have the ability to mark it up or discount, all cars get sold at the same price. Nationally, there's no more price competition. And it's an interesting experiment to think through. But you know, that that reality that won't won't become reality here in the US that it will be more of a hybrid because of the state franchise laws that the dealers can't cannot terminate the franchise agreements with the dealers here in the US and replace them with an agency agreement. So we see things like what Ford's doing. You know, I mentioned what Volkswagen has announced with a new scope brand, there'll be new brands that emerge, and then they won't be constrained, if that's the right word, by the existing franchise agreements, they'll be able to redefine how they want to work with these dealer points.


Kyle Mountsier  19:12

It's, it's an interesting, there's, there's a couple of things here. One is you keep going back to the marketing costs. And I think one of the things where they've already recognized a lot of profit gain is reducing their marketing costs when it comes to rebates and incentives. And I think he actually mentioned that, but that's a that's a massive gain that they've already had. It's probably somewhere in the like five to 8% of margin already per per retail. And then there's another four to 8%. These consultants are saying that they're that there is on the other side, and then they're seeing the dealers take that four to 8%. An increase with it. And this is what's interesting to me, like all vehicles sold at MSRP. But then they're setting the standard for that. And we're seeing companies like that So the go from, you know, $3,000 in markup to $12,000, in difference in MSRP. So, you know, I think that one comment that I saw on LinkedIn was like, Hey, are they going to refund all of those losses that I took as a dealer for years to get these vehicles across the line so that they could gain market share? You know, when does market share get reduced? I guess is the question because of like, lack of intention on a particular DMA or SOA, depending on what? How that how the manufacturer looks at it?


Steve Greenfield  20:32

Yeah. I mean, yeah, we're in this artificially inflated profit bubble. Right now there's a an article from automotive news in late January 2019. It says, the average franchise dealer lost money last year, 2018, four years ago. And if you look back, you know, 10 years, 12 years, there were about five years there were a dealer lost money to your point call on their new car operations. This wasn't very long ago. I remember articles, you know, in the mainstream press around, you know, dealers that were selling Honda's and for every Honda, they lost money. So they had to make it up on service or accessories or something, right. And accessories, it actually forced dealers to become much more creative with driving, you know, f&i, its profit center, frankly, because they weren't making money. It was like, you know, the whole Gillette thing will give away the handles for free. And so so the razors, but it is interesting, we can't lose track of like, how things have been in the short term history in automotive. And, you know, one of the things I think I wrap up with this this month, is the fact that, you know, historically, there's been this perverse incentive for a manufacturer to run their factories at full production. They've got you know, they've got labor, they've got fixed costs, etc. When you're running a factory, you try to squeeze out that one incremental unit, even if you really don't make any profit on it, you make a marginal profit, as they say, and, you know, we'll get back to there, especially in a world where, you know, there's like millions of cars that didn't go into fleet, and that the manufacturers are going to be like, Oh, well, I produce extra cars, the fleet channel, rental car companies, commercial fleet will absorb those cars at full MSRP they're going to be really profitable for me. And it's gonna be like a temptation. I think that's gonna be really hard. And then the other the other thing is interesting is like, you know, we're living in this delusional, like, paradigm, if that's the right term, where every Eevee that's come out in the last 18 months has been a hit. We have the Hummer, we have the f150. Lightning, we have the Maki, etc. Well, I read an automotive news, I think last week, there was like 150, new Eevee models coming out in the next 18 months.


Kyle Mountsier  22:33

They can't all be


Steve Greenfield  22:34

all be hacked. So yeah, so to Paul's point, Paul's point, you know, the manufacturers are believing that with this will put an air quotes agency model, they're going to take the risk on their balance sheet of the inventory. So the dealer, you're right now the way life works in automotive land is when the car gets to the end of the production line, the new car, it's wholesale to the dealer, the dealer has it on their balance margin. And then that's why the dealer can discount it, because they own the inventory at that point, that new car, in this new in this new new new schema, the OEM will keep those cars on their balance sheet, they'll own those cars, which is great. If every car sells in advance, it's hot. But once the cars start backing up, and the OEMs are, oh, I've got stinkers that aren't selling and marketing. Yeah. And that's the Wall Street analysts start looking at them and say, What's this new line item on your p&l? Your balance sheet that says, you know, what is his inventory? And why are you marking it down? And it's only take one quarter where a manufacturer says, well, well, those cars aren't worth as much as they were when we produce them.


Paul Daly  23:38

Yeah. So that's a depreciate against


Steve Greenfield  23:41

billions of dollars of write offs, and then suddenly, their stock will get hammered. And then suddenly, it's like, well, maybe this wasn't a really good idea. Because, you know, now we're taking inventory risk, and the Wall Street has no appetite for us to do so.


Paul Daly  23:52

Yeah, it's funny, we were just talking about that the other week. We were wonderful with a dealer. And Kyle was like, you know, well, the dealer profit, because they were saying, Are we gonna get back to inventory? And Kyle and I are like, yes, like without human nature, and Kyle was just like, they show revenue by wholesaling units. So when the appetite is like, we need to see more revenue, they're gonna like, the temptation to push more inventory once the capacity is there to the dealer. It's unavoidable. It's unavoidable. Right. Yeah.


Kyle Mountsier  24:22

My question is, what happens when the district reps are no longer salespeople? What are they going to do with that?


Steve Greenfield  24:28

Maybe that's part of the cost that they'll take out. I don't know.


Paul Daly  24:30

Yeah, I mean, you did mention headcount in the report, you said, you know, the opportunity to cut headcount is a big allure, especially in an environment where headcount is awfully hard to come by. And so you think about like this, this, like labor shortage, it's very real, and it doesn't, it's not going to get any better. Right? You start to think when you start, like you said, like Game Theory, like, well, what elements does that bring to the business was going to be hard to fill those positions anyway, like, does that is that part of the equalizer? I don't know. Maybe there'll be Tesla robots instead.


Steve Greenfield  24:59

We are Maybe. Exactly. Well, Steve,


Kyle Mountsier  25:02

we have had an absolute I there's like eight other topics that I wish we could explore and maybe talk for an hour. We could talk for an hour on this. And I'm sure that if people aren't if you aren't watching or listening, grab the auto Intel report, follow Steve on LinkedIn. Watch him as he kind of makes the tour or if he's coming to a city near you grab breakfast or lunch with him. Or if


Paul Daly  25:25

you're on a red eye flight home from Las Vegas.


Kyle Mountsier  25:29

Create your new YouTube channel and you'll be famous. So Steve, thanks for joining us today. For everyone else that's getting in the dirt. Remember, the agency model isn't here today. So today we get to serve customers, retail vehicles, service vehicles, and get the job done. So get out there and get the job done.