In a recent article, BCG projected a downturn that could see sales of new vehicles fall by 9% to 15% by 2021. This could ultimately threaten the survival of many dealers.
Tsunami is at doorway for many of the dealers
As it has become ubiquitous that today’s customers arrive at dealerships much better informed about vehicle features and prices, with online price comparison tools and websites such as TrueCar and CarGurus increasingly driving price transparency. They also arrive with a stronger sense of the model they’ll buy. According to BCG’s Center for Customer Insight, 62% of customers who bought a car within the past two years had determined what make and model they were going to buy before arriving at the dealership; within that group, 81% had determined (within $1,000) what price they were willing to pay. Buyers also increasingly begin the purchase process online and want the fast, seamless, omnichannel experience offered by top online retailers such as Amazon.
This increased price transparency and consumer sophistication, combined with the rising popularity of alternative transportation models such as ride-sharing, is putting pressure on vehicle sales margins. And that pressure is being exacerbated by the large number of vehicles—more than 4 million, the highest number in over a decade—coming off lease in 2019. The last time the number of vehicles coming off lease was near this level; residual losses were approximately $2 billion.
These factors are forcing dealers to rely more heavily on financial products and parts and service to maintain their profit margins. The numbers are telling: collectively, five large publicly traded dealer groups (Asbury Automotive Group, AutoNation, Group 1 Automotive, Lithia Motors, and Sonic Automotive) saw the portion of their margin coming from vehicle sales fall 13 percentage points, and the portions from finance and parts and service rise 9 percentage points and 4 percentage points, respectively, between 2006 and 2018.
Dealers are also facing threats from players such as Carvana and Fair that are looking to disrupt the value chain and steer customers away from brick-and-mortar dealerships. Even the OEMs themselves are hedging their bets and testing the waters with pilots and investments in disruptive players. Examples include Ford’s acquisition of the car subscription company Canvas, which Ford subsequently sold to Fair while retaining an ownership stake, and Daimler’s investments in car sharing players such as Turo and car2go.
Dealer’s net income may fall by 25% to 40%.
All these changes are converging just as the industry faces a potential slowdown in US economic growth, one that could bring a drop in new-vehicle sales of 9% to 15% by 2021. A sales decrease of this magnitude would weigh heavily on the entire auto industry but take a particularly heavy toll on dealers—the average dealership could see its net income fall by 25% to 40%, a decrease large enough to force many dealerships to close. Taken together, these trends create a perfect storm for
Prepare to navigate the storm:
Optimize you inventory. Dealer groups should redouble efforts with OEMs to bring in the fastest-turning new vehicles and free up capital for advantaged inventory. Best-in-class retailers are using increasingly detailed market intelligence built on big data and advanced analytics to better match inventory to demand. Dealers should learn from these examples and double down on inventory optimization plans across their network. On the used-vehicle front, dealers must ruthlessly offload slow-turning units through the wholesale channel to ensure that sufficient working capital is on hand for new-vehicle floor plan financing.
- Push high-margin products and services. To this end, dealers should consider developing strategies to encourage customers to turn to dealers, rather than non-dealer providers, for vehicle maintenance services. Dealers could use white-label aftermarket parts to lower prices and create price transparency on services to fight the perception that no warranty dealer service is expensive. Dealers can emphasize customer segments in which they already have a toehold—a BCG study showed that in some luxury segments, more than 80% of owners thought dealer and non-dealer services were comparably priced.
- Collect, Segment, and Use Data and Decision science to Increase Sales and Profits.
- Being more systematic about the collection and use of data to customize pricing, incentives, and recommendations for vehicle models and options can boost sales and protect margins.
- Dealers can use data to determine which customer segments will be the least price-sensitive and to understand what motivates customers to buy a new car, buy a used one, or defer the purchase decision during a downturn.
- Design segment-specific offers that maximize price realization and volume. To complement this segmentation, dealers should develop digital tools that give salespeople the ability to make real-time, high-quality decisions on the products and incentives they need to offer to close deals at maximum profit.
- Create an omnichannel buying experience that allows customers to shop at home and makes their queries accessible to the dealer’s sales teams will enhance the shopping experience and reduce dealers’ staffing levels. Enabling such a seamless experience requires an investment in digital capabilities.
- Enable your sales teams with real time analytics.
Play to Win
Finally, although we have focused mainly on opportunities within dealerships, we believe that, in a downturn, dealers and OEMs alike should seek opportunities to reset the dealer-OEM relationship. Deeper collaboration across inventory and data management, vehicle incentives, and the customer experience could become a source of competitive advantage for an automaker in the face of overall industry disruption. Significant near-term challenges are at hand for the US automotive retail industry, and not all dealers will survive. But by acting now, dealers can maximize their chances of success and position themselves for growth over the longer term.