Prepare now for the next era of automotive retailing

Most predictions suggest it may take from one to three years for new vehicle inventories to return to historic levels, if they ever do. While conditions can shift quickly—who could have predicted the stellar industry performance of the past two years in April/May of 2020? —dealers should have enough time to put in place strategies that can help extend recent successes into the next era of auto retailing.

The next era

Everyone participating in the automotive retailing business is asking “what’s next,” and there’s plenty of conjecture about where the industry will go. From our conversations with dealers and industry leaders, there are seven trends to watch:

1. Disrupted buying patterns. What happens when a buyer’s established pattern is interrupted such that the every-three-year lessor can’t find or afford their next vehicle? In today’s market, retailers are making up in higher margin what they’ve lost in lower volume. That’s fine for now, but if new car buyers can’t buy the way they’re accustomed to, they may start to hold vehicles longer, shift to more affordable brands, or eschew new cars for used ones.

2. Buying on demand versus walking the lot. The recent shift toward ordering vehicles versus the traditional process of walking the lot looks to change the basic customer journey from top to bottom—the only question is how rapidly this will happen. Nevertheless, the move to digital buying will put each dealer’s development of the digital journey to work and validate those investments. Conceivably, this could open new doors to engaging with—and selling additional services or add-ons to—customers who've made a purchase and are waiting for delivery.

3. Rising unaffordability. The combination of inventory shortages and inflation are threatening the affordability of new cars for many people—already, we’re seeing volume in the price-sensitive sub-prime sector drop by 20-25% in recent months. Affordability is an issue for all buyers across both new and used vehicles, and dealers are watching closely to see how it affects demand overall and the mix by category and brand.

New vehicle prices are outpacing consumer purchasing power growth.^{Disclosure 2}

Weeks of income needed to purchase a new light vehicle.

4. Soaring fuel prices. With the current geopolitical dynamics, higher fuel prices at the pump, and environmental concerns about fossil fuels, fuel efficiency could become a much more important buying consideration that will tilt the market even more toward EVs. Alternatively, a truck or SUV buyer could become a crossover buyer in search of better mileage. It’s too early to tell exactly how it will affect the types of vehicles demanded by buyers, but it’s a story we need to watch closely.

5. Increased service revenue opportunities with the aging of the U.S. fleet. The scrappage rate of cars on the road didn’t change just because we aren’t manufacturing enough new cars to replace them. Many of the latest digital tools are effective at better connecting dealers and their customers, making it easier to make maintenance and repair offers that sustain dealership service revenues while offsetting the expected reductions from the longer-term shift to EVs.

6. Greater sales efficiency and increased potential of digital channels. The pandemic ushered in more efficient retail sales models using fewer salespeople as there weren’t as many cars to sell and many customers wanted to do more online. The digital sales journey will provide even more opportunities for dealers to fine tune sales models and ramp up cost-effective marketing strategies like social marketing, search engine marketing, and email/text/mail campaigns.

7. Stepping up the used car game. As the market has shifted towards used cars, many dealers have revamped their used car operations, reallocating lot space, getting more aggressive about acquiring inventory, and rethinking wholesale strategies. Having a high performing used car business will be critical for years to come, and many dealers are setting themselves up to stay competitive with other franchised retailers and public companies specializing in used cars.

Playing to your strengths

At some point, today’s Golden Era will give way to the next era of automotive retailing. While there’s much we can’t predict, we can be sure that competition in our industry will remain fierce, with players with disruptive distribution models, retail consolidators pursuing greater scale, and new technology-driven competitors all seeking their piece of the auto retailing pie.

Local dealers have long relied on their unique ability to build relationships with their customers and pursue a more intimate customer journey to buying and owning a vehicle. The most successful ones will leverage that ability to connect with and engage customers with a state-of-the-art digital approach to buying and owning a car capable to winning with today’s customers. Coupling a relationship focus with technology excellence will sharpen the way dealers communicate with prospects, demonstrate their value during the buying journey, and earn that customer’s ongoing loyalty as an asset for the business.

For the many dealers across the country dedicated to serving their customers, their employees, and communities, there’s no higher reward.