July 7, 2016 — The automotive retail technology world is dominated by three players today — Cox Automotive, CDK Global, and Reynolds and Reynolds. On the CRM side, the major players are DealerSocket and ELead1One. Meanwhile, Salesforce is hovering around the industry.
The question is, will this power structure continue over the next two to three years? The answer is yes — and no. The solutions, Reynolds’ and CDK’s dealer management (DMS) solutions will continue to control that area of the market while DealerSocket and ELead1One are showing no signs of ceding any of their market control. Cox Automotive, meanwhile, because of the depth of solutions it offers over the entire automotive landscape is the biggest player in the space today.
While the solutions will continue to dominate, the ownership or alliance of some of these companies may — if not likely — change in the near future.
Our analysis of this market is ongoing, obviously, and changes based on developments as they happen. Clearly, private equity is interested in this part of the market and any number of firms could pull off a surprise acquisition or investment. (For example, Robert Smith’s Vista Equity Partners became the primary investor in DealerSocket in 2014 and continues to be a buyer in the automotive space.)
One of these investment firms could be a Chinese company. Already this year, a multi-national group headed by Chinese investors, the XIO Group, has acquired J.D. Power and Associates.
A private equity purchase, though, likely would not change the landscape all that much — unless Vista Equity makes a large acquisition in the DMS space. (And now, it’s looking less likely that CDK will be the target for Vista. The firm may be looking at other, less costly options that may ultimately provide more flexibility for DealerSocket.)
What would upend the current power structure is an acquisition by a large strategic player currently not in the automotive retail sector. For the last 16 years, names such as Microsoft, IBM, Oracle, or SAP occasionally pop up as possibilities, but so far, none of those firms have shown much interest in working directly with dealers in this space.
Salesforce is the one company whose entrance into the sector would make a lot of sense — and one we think is possible, if not likely.
Salesforce is the world’s leading CRM provider (In fact, it’s listed as CRM on the NYSE). Its’ projecting annual revenue to be in the neighborhood of $8.3 billion and has a market cap of approximately $53 to $55 billion — depending on its stock activity.
The point is, it is one of the few strategic players that has the money to pull off a large acquisition. it recently lost to Microsoft in a deal for LinkedIn that ended up being more than $26 billion.
Salesforce is involved with the automotive space — just not in the retail area, except for providing CRM services to a small group of dealers — primarily outside the U.S. It currently has relationships with approximately 16 different automakers including a deep relationship with General Motors’ connected vehicle firm OnStar, and a global digital and CRM initiative with Renault that began in 2014. It hired former Renault COO Patrick Pelata to head its automotive division in 2012. (Pelata left the company in August 2015) according to his LinkedIn profile).
It also has relationships with several automotive suppliers and at least six captive finance firms, including Nissan, Honda, Toyota, Ford, GM and Ally. In 2011, it began work on a deal with Toyota to create a private social network for Toyota customers to friend their vehicles.
In addition, we are hearing rumors that a certain OEM with significant market share in Mexico is signing all of its dealers there to the Salesforce platform.
The question is, should it make a play in the automotive retail sector, and what would that play look like?
Huge Revenue Opportunity
On the surface, yes, because 18,000 dealerships represent a huge revenue opportunity. Founder, chairman and CEO Marc Benioff, has said he wants Salesforce to be a $10 billion company. A play in automotive retail could get it there (if it involves an acquisition). Currently, three companies control between 55% and 60% of the market — DealerSocket, ELead1One, Reynolds and Reynolds, and VinSolutions (which is owned by Cox Automotive). More than 20 other smaller vendors fight over the remaining market share. Some of those vendors use variations of the Salesforce CRM solution, so it’s not completely foreign to dealers. Furthermore, Salesforce’s reputation likely would attract numerous dealers.
Overall, the CRM market in automotive retail is about $325 million — that’s using a rough average of about $1,500 a month per store (18,000 dealerships) for a basic CRM package. That seems small, but today’s CRM vendors are packaging numerous other solutions with the CRM tool, such as lead management tools and inventory management solutions, which expands the revenue opportunities.
The Salesforce platform today extends far beyond being a mere CRM tool to one that will encompass the entire landscape of the Internet of Things (IoT).
Rise of Vehicle Connectivity
The explosion of the connected car world is a second reason. Estimates are that 75% of all new cars built in 2020 will have Internet connectivity — up from 13% last year. Add to that, anywhere from 20% to 25% of all vehicles on the road will be connected in 2020.
The connected dynamic potentially will change how manufacturers and dealers interact with the people buying their vehicles. Much of that interaction is going to take place inside the vehicle. They are going to rely less and less on their dealers for that one to one communication. That doesn’t mean the dealer is going to be out of the picture, it just means the OEMs will take a much more active role in communicating with the customer.
And much of that interaction or communication may be passive — meaning, the communication may be happening directly with the vehicle instead of the customer. Over the air service or technology updates, diagnostic updates, or data about driving habits or patterns are examples of this type of communication.
Along with this coming explosion in vehicle connectivity will come an exponential growth in the amount of data that’s collected. The entire scope of what’s possible with the Internet of Things (IoT) along with the increasing role of social apps as artificial intelligence and chatbots become a reality will force OEMs to find technology partners that have the platforms capable of collecting all that data — every single customer interaction, whether passive or active, analyzing it and then using it to enhance the customer experience.
The goal is to become smarter about customer interaction — it’s the ultimate promise of CRM, “The right message to the right customer at the right time.” (By the way, that statement was from an interview I conducted with an ADP Dealer Services executive 14 years ago — the point being, the industry still has yet to achieve that goal.)
Nevertheless, the exponential growth in data is the dynamic that will upend, disrupt, and bring about a restructuring of the current automotive retail technology landscape. We believe this will happen over the next two to three years. It already has begun. It’s why Cox acquired Dealertrack last year and why DealerSocket is looking for the right pieces that will help it build a platform that turns it into one of the top power players in the industry.
These changes are happening now. Companies no longer have the luxury of time to chip away at the market share of some of the larger players. Three to five years is too long. Companies that want to be the power brokers in five to 10 years have to make their moves now.
For Salesforce to truly provide OEMs with the ability to leverage the possibilities of the future, it will have to develop a large dealer footprint. The challenges of doing so probably are what has kept Salesforce out of the market to this point.
It’s a complicated market. Manufacturers maintain significant influence over their dealer’ vendor choices. There are the data integration challenges presented by Reynolds and Reynolds and CDK. It’s also a fragmented market with 18,000 different businesses ranging from publicly traded companies to small family-owned businesses.
Making a big play in automotive retail would require huge sales and support staff. Consider the two largest CRM vendors — both DealerSocket and ELeads have approximately 1,300 employees each focused solely on automotive retail.
Building a large sales and support staff solely focused on automotive retail — including selling directly to dealers — is a prospect that has kept many of the large potential players out of the market, including Salesforce. These firms employ models that are based on a top-down approach providing enterprise solutions to large companies. To be fair, automotive retail’s environment is far from that scenario. (It’s important to note, Benioff, earlier this year, talked about how Salesforce’s “new” strategy of selling directly to CEOs of large firms is a factor in the company’s marketshare lead over its competitors).
Yet, there are indications Salesforce may be considering making a move into the automotive retail arena. Going back several years, presentations by Salesforce employees at various conferences (including Marc Benioff) indicate the company understands the role dealers will play in the new world.
We’ve heard similar comments through the years from companies such as Microsoft, IBM, Oracle, and SAP, who, likely thought they could work with the OEM to push a single technology platform down to the dealers. Siebel Systems attempted a similar strategy more than 10 years with General Motors. The initiative failed, in part, due to too many data silos within GM and the fact that the dealers are individually-owned businesses.
Those dynamics haven’t changed and could keep Salesforce out of the market. But what has changed is the advancement in technology mentioned above. And for a Salesforce to truly take advantage of the opportunities, it will have to make a play in the retail arena.
Instead of trying to sell its platform going dealership to dealership, Salesforce should build its network by acquisition. Interestingly, within the last week, we’ve started hearing chatter from the investment community that it may be looking at different companies in the space.
Salesforce is no stranger to acquisitions having made 38 since 2006. It’s most recent — and largest — came last month when it acquired e-commerce vendor Demandware for $2.8 billion. Demandware is interesting because it’s a solution that would fit nicely with an automotive retail strategy that involves automotive online transactions.
If Salesforce is looking only to build a presence in the retail space, it could opt to roll up several smaller vendors. Likely, these would involve CRM firms that are on the preferred vendor lists of various automakers. (Automakers often choose a set of vendors they want their dealers to work with).
With relative speed, Salesforce could grab 15% to 20% of the dealer body. There are several companies that would sell for the right price today. But it would be a complicated strategy involving multiple systems and cultures. The advantages of this strategy would be low risk and less money. And it would give Salesforce the opportunity to learn the intricacies of the automotive retail space.
Acquire an Automotive CRM Leader
Another strategy could involve acquiring one of the two leading CRM vendors — Dealersocket or ELeads. Salesforce would get 25% to 30% of the market with one acquisition. Either company has significant OEM relationships and contracts with large dealer groups. The question is, does Salesforce swap out the CRM solution they buy with its own? Or would it try to add its best features onto the acquired solution?
It would be a more expensive strategy with less margin for error.
Acquire a DMS Vendor
Acquiring a DMS vendor — either Reynolds and Reynolds or CDK Global would be the best strategy, at least on the surface. The DMS is the central accounting hub where all the data is housed or passes through in the dealership. Other solutions — CRM, inventory management, parts, service scheduling, lead management, F&I, etc. — are either integrated or bolted onto the DMS.
Each company has common advantages and disadvantages.
The advantages include:
- Significant market share in the dealer space
- Strong revenue numbers based on recurring subscription-style long term contracts with dealers
- Little turnover with customers
- Existing sales and support teams.
Disadvantages consist of:
- Cost of acquisition (at least $11 billion to $12 billion for CDK; maybe $9 billion to $10 billion for Reynolds and Reynolds — although, that number likely would end up being higher. CDK is for sale for the right price, while Reynolds likely isn’t yet.
- Either deal would be complex and would require significant leverage.
- Question of technology compatibility. The challenge is whether the technology platforms CDK and Reynolds are built on can be customized.
- Both systems provide enterprise-like scenarios, which could be attractive to Salesforce.
Reynolds and Reynolds
Reynolds and Reynolds has approximately 30% of the DMS market — including many of the top 100 dealer groups. It has few OEM relationships, by its choice. But a new owner, such as Salesforce, could change that dynamic quickly. This actually could be an advantage because there would be fewer legacy contracts or relationships to unwind or wade through at the OEM level. As a result, it would be easier to craft a relationship from the ground up based on today’s realities.
Meanwhile, it has a robust CRM solution with nearly 3,000 dealers, making it one of the top three or four providers. Reynolds recently rewrote the software from the ground up.
CDK has approximately 40% of the DMS market, including five of the six publicly traded dealer groups. Furthermore, acquiring CDK would push Salesforce past the $10 billion level in revenue — a mark Benioff has said he wants to hit.
Although CDK has a CRM solution, it has failed to gain traction among dealers. CDK would give Salesforce immediate opportunity to quickly penetrate the dealer space with its CRM solution. CDK also has numerous OEM relationships — mainly through its digital marketing solutions — which Salesforce likely could improve fairly quickly. CDK also has a more aggressive global strategy than Reynolds has — another factor that could add to its attractiveness.
Whether Salesforce makes a move into automotive retail remains to be seen. It may opt to stay on the outside and partner with numerous companies, but we think that strategy limits its opportunities over the next five to 10 years in an industry with significant earning potential. Having a firm foothold in the dealer space provides Salesforce with significant leverage in how the industry will move forward in the next several years.
Right now, the industry has three dominant players — Cox Automotive, Reynolds, and CDK. A fourth, DealerSocket, with its backing from Vista Equity Partner, is coming on strong and likely will make a significant purchase this year (if it isn’t sold).
Each could decide to stand pat — although, we believe competitive pressures will force significant moves within the next year or two.