It’s a great time to be an auto dealer.
Demand for new and used vehicles is outstripping supply, and consumers are paying full price — or more — for popular models. Vehicle margins are sky high and service business is coming back. Tight inventories are saving dealers on floorplan and marketing costs, pushing profits even higher.
It’s also an unsettling time to be an auto dealer.
Beyond the daily challenge of securing sufficient inventory and wooing back workers, the long-term prospects of the industry are fraught with uncertainty as the franchise model faces new pressures.
Once the current frenzy of supply and demand straightens out, the underlying tensions in the dealer community that were simmering pre-pandemic will return with greater force. They include a revolutionary shift toward electric vehicles, digital sales and direct-to-consumer transactions.
As automakers adapt to those industry shifts, some retailers worry that the new vehicles and sales programs being pushed by the manufacturers are encroaching on their role as franchised dealers.
“What we’re talking about here is the OEMs exerting more control over the retail process and the retail customer experience,” said Peter Lanzavecchia, owner of Burns Buick-GMC, Burns Hyundai and Genesis of Cherry Hill in Marlton, N.J.
“We all see these startup EV companies coming to market without a franchised dealer network. We sometimes get the feeling from some of the legacy OEMs that they wish they could bring their EVs to market as a subbrand through a different distribution channel,” Lanzavecchia told Automotive News.
While dealer concerns are valid given the chipping away at franchise laws by Tesla and others, Lanzavecchia said that some of the worries are overhyped. Automakers and dealers are mostly in agreement on how to move forward and that they can work out their differences through honest negotiation.
“We dealers are sometimes in the conspiracy theory camp of, ‘Wait a minute, what are they trying to do? Is this good for us? Is it only good for them?’ ” said Lanzavecchia, who is chairman of the Genesis National Dealer Advisory Committee.
There have long been more questions than answers about the future of zero-emission vehicles, self-driving cars and a push by some manufacturers such as Tesla to sell directly to buyers.
With both luxury and mainstream EVs by legacy automakers now rolling into dealerships, those questions are more urgent.
Will dealers make money on EVs? How will dealers replace service income from vehicles that don’t need oil changes or tuneups? Will consumer demand follow the wave of coming EV launches?
“Whether we like it or not, EVs are going to be here before we know it. So it’s time to start revamping our business model to fit that, not just in sales, but also in service,” said Jorge Gutierrez, corporate strategist at Bert Ogden Auto Group in Texas.
And there is a deeper fear. Are some automakers subtly pushing dealers aside as they impose new rules on the selling of EVs? Will legislation allowing automakers such as Tesla to sell directly to consumers create an opening for legacy automakers to do the same?
The tensions are not limited to the industry’s EV future.
Dealers are concerned that the rise of digital sales could shift more of the process to the automakers as they push specific online tools in exchange for support money. The line between automaker and retailer threatens to get blurrier as the two sides wrangle over those tools and customer data.
Automakers are trying to assuage dealer concerns over the future, promising EV profitability and modern sales practices without throwing retailers overboard. The industry revolution will eventually deliver strong profits all around if the process is properly managed, some auto executives say.
Hyundai Motor America is embracing change in order to be at the forefront of it, CEO Jose Muñoz said. The ultimate goal is to deliver the sales volume and margins that will allow dealers to flourish despite the inevitable disruption from EV technology.
“There is a lot of conversation about what the service situation is going to be like once all the vehicles are electric. In principle, the rule of thumb is that an electric vehicle is going to require about one-third the service needs of an ICE vehicle,” Muñoz said in May.
“But the most important thing is that we are growing as a brand. Even if there is a reduction in the revenue opportunity per unit, everybody understands that it’s not going to disappear completely,” he said. Hyundai is launching its EV subbrand, Ioniq, later this year through existing dealers.
The shift to EV sales raises other concerns for dealers, who worry it may open the door to further changes in the franchised dealer model. Some states are allowing EV startups to sell directly to customers. So far, legacy automakers have not been included in those exemptions.
Tesla CEO Elon Musk offers a cautionary tale. Breaking all the rules on sales, service and marketing has worked well for the automaker. Just as legacy brands are trying to catch up to Tesla on battery technology and automotive software, surely they are studying its sales model.
Some of the initial sales programs for EVs at legacy automakers are different from gasoline vehicles and could impact dealer revenue beyond service.
Although in the early stages, some automakers are proposing greater control over electric inventory and floorplan.
Volvo outlined a strategy this year to deliver customer-ordered vehicles to dealerships rather than having retailers order and carry the inventory on their floorplan.
General Motors, via Chevrolet, is considering a pilot of regional hubs for the 2022 Bolt EV and Bolt EUV later this year.
In the case of GMC’s upcoming Hummer EV, the company has said it would pick up floorplan costs. For some dealers, however, floorplan has become a profit center since manufacturer credits to dealers for inventory needs can be greater than actual floorplanning costs when interest rates are low and vehicles turn quickly.
Lanzavecchia, who has signed up for the Hummer program, said strong demand for the big EVs lends itself to a nontraditional approach to inventory management, because the vehicles coming to the dealership from the factory will be quickly delivered to customers on a waiting list.
“There’s been some very innovative approaches on the launch of Hummer that may or may not be as appropriate once supply and demand reach a more equilibrium state. That might require an update back to more traditional approaches,” he said.
That’s where strong communication and factory flexibility come into play to defuse tensions created by the new programs around EVs, digital retail, facility requirements or whatever the worry of the day is for retailers.
“I think the best OEMs really look for that retail perspective,” Lanzavecchia said.
“Not that they always agree with our guidance. But they oftentimes will accommodate input and make an update that addresses our position.”
Dealers have long grappled with the costs of keeping up in an evolving industry while saddled with facilities upgrades and other manufacturer demands, said Jesse Stopnitzky, partner at Performance Brokerage Services, an Irvine, Calif., buy-sell advisory.
With larger groups eager to consolidate, more franchisees are opting to sell their business now rather than make big investments into an uncertain future of electric vehicles and digital retailing.
“Similar to the pandemic, rather than ride this out, to see what the industry will look like on the other side, many dealers are electing to take advantage of the strong market conditions and cash out on higher valuations,” Stopnitzky said. “For those dealers who were already considering retirement, these changes to the industry are only accelerating their exit plans.”
Urvaksh Karkaria, Hannah Lutz and Jack Walsworth contributed to this report.