Auto Dealers | June 2025 Reset and retool: Dealers meet 2025 with resilience

The spike in digital shopping and purchasing has catalyzed the longer-term shift toward more transparent pricing. Retailers have tried to make it easier for customers to see exactly what a vehicle will cost them so they can determine how it will fit within their budget. That transparency applies to used car trade-ins as well. With a better understanding of the value of their current vehicle, consumers know in advance how much they can contribute toward their next car purchase. Clearer and more precise, “no-haggle” pricing also helps dealers consistently protect their margins. These policies build trust in the buying process, which bolsters consumer relationships that extend beyond the initial sale, ideally into servicing.

EV sales will continue to grow, albeit not at the pace some predicted a few years ago. Currently, buyers of commercial vehicles (e.g., Amazon vans) are the fastest adopters of EVs. Over time we expect this trend to drive down EV prices, which will encourage more widespread adoption. Hybrid vehicles, including plug-in hybrids, are a popular alternative that helps bridge the move to fully electrified vehicles, which we expect to represent 40% of the market within the next five to 10 years. Continued headwinds to EV adoption include lagging development of charging infrastructure, consumer anxiety around trip planning due to battery range, and subpar battery performance in cold climates and disaster situations (e.g., floods, hurricanes, and evacuation scenarios).

The used car market for EVs has been marginal at best, but some 70% of EV buyers report plans to purchase another one. In fact, 92% of EV owners in a recent survey by Global EV Alliance said they would never own another internal combustion vehicle.^{Disclosure 1}

The interesting growth story will be in the 12 states phasing in EV vehicle mandates starting in 2026, 2027, or 2028. Given the current climate, we can expect many of those requirements to be reduced or rescinded, but California, Colorado, and possibly Oregon are expected to stick to their commitments. These mandates will require much of the EV and hybrid output to be directed to states with EV mandates, leaving a shortage of those vehicles in the remaining states.

The service business is driving profitability and boosting cash flow to a greater degree than many people anticipated. It’s true that vehicles are better built than they were just ten to fifteen years ago—and last longer—but they still need service and parts throughout their extended lifespans. And OEMs will have warranty issues and recalls that require servicing, a meaningful source of revenue, particularly for dealers who maximize their warranty reimbursement rates.

An invigorated used car market closely links customer acquisition and rising service needs as a vehicle ages. Focusing on reaching the rising number of used car customers and fulfilling their needs could add critical service volume. Also, and contrary to expectations, EVs are contributing to added profitability due to higher average costs for service visits.

While many dealers should see solid, organic growth in the coming years, with variation based on brand and individual store performance, the trade policy uncertainty adds a few twists to the story. If the economy avoids a downturn and tariff issues don’t flare up, demand for new and used cars, along with a more normalized market, bodes well for profitability.

Manufacturers are building for overall market demand rather than production capacity. Our data shows that the sweet spot for a healthy margin on new car sales is a 65-75-day supply of vehicles, and April 2025 closed with a 66-day supply—16 days lower than a year ago.^{Disclosure 2} (Compare that to the 110—115-day supply in 2019.) At the low end of the ideal new vehicle supply range, dealers enter the summer with inventory levels that should help protect margins. We expect total dealership profit to stabilize at around 4% of sales—twice the historical pre-COVID levels.

Brand value is typically quite stable, something retailers can take as a given. However, recently, Nissan and CDJR have dropped in blue-sky multiple values. Subaru and Ford are down as well, while Toyota has increased significantly. Besides several outstanding products that generate high-volume sales, Toyota now offers a hybrid-heavy lineup to better meet shifting demand, along with a transparent dealer-manufacturer relationship that provides a clear rationale behind their strategy. These factors combine to bring Toyota to a premium brand value level. Mazda, Volvo, and Audi blue-sky values are recovering from recent slippage, with Honda moving up as well. Chevrolet, on the other hand, has never lost ground but is enjoying rising brand value based on a superior product mix and go-to-market strategy.

Each brand’s strategy in handling tariffs and vehicle affordability pressure in the current market could lead to additional shifts in brand value. For example, Ford has stated they will raise prices on all vehicles produced in Mexico, while Toyota has stated they will not raise prices because of tariffs, instead absorbing a 21% hit to next year’s profits.

When it comes to affordability, some brands are introducing value platforms to maintain vehicle affordability and market share in the face of cost increases from tariffs or inflation. Look at the F-100 version of Ford’s F-150 or the Enterprise Edition of the Dodge Ram. These are stripped-down commercial-looking vehicles with a few nice features in the interior to link to the more expensive offering. They allow a buyer to access a brand where they might otherwise be priced out and keep the brand top of mind with the customer.

We anticipate even more dealer transactions this year than we saw in 2024, one of the top three years from a volume standpoint. The forces driving M&A to new highs in recent years are still in play, bolstered by new geographic trends.

• Dealers are sitting on capital amassed through the COVID-19 boom times, and they’re motivated to grow. In this consolidating market, they can see the urgent need to scale for maximum efficiency.
• Both international and large domestic institutional investors have renewed their interest in automotive retail. A number of financial investors, including marquee private equity firms and family offices, see opportunity in franchised auto retail and are pursuing dealership investment strategies.
• Leadership teams are stronger. After years of struggle to fully staff management positions, most owners finally have capable executive teams to facilitate efficient expansion.
• Technology supports the efficient addition of locations. While dealers have traditionally aimed to scale for five to ten stores in a specific market, technology now enables multi-store efficiency gains beyond a contiguous geographic area. In response to that new capability, we’re seeing a definite trend toward less-localized growth, with dealership expansions finding scale in systems and processes.
• Less favored markets are in. California, Minnesota, Illinois, and the Northeast, are now becoming M&A targets. Reduced dealership values in California make it an enticing market for M&A value investors. Thirty-nine million Californians still need to buy and service vehicles.

If you’d rather go than grow, now should provide ample opportunity to make your exit. With M&A activity having accelerated to an even higher level, owners who choose an off-ramp rather than facing the challenges of another business reset will have an opportunity to move on. With growth-minded dealership groups coming off strong-performing years and capital available for promising acquisitions, you couldn’t ask for a better time to explore offloading nonstrategic stores or putting your transition plans into motion.

Stores with specific strengths will command a premium in the rush to snap up solid auto dealerships. Whether they’re private investors, growth-focused auto retailers, or other interested parties, buyers are looking for stores with the characteristics that pair maximum potential for continued growth and profitability with the resilience to handle market shifts and downturns. That translates to strong service retention rates following vehicle sales, fully staffed and highly capable management teams, desirable brands, and updated facilities that meet manufacturer standards for image and capacity. Businesses that know how to tap the potential of F&I programs to generate profits will have an edge. Dealers who deferred capital investment, or can’t meet these buyer expectations for any reason, will have to sell their stores at a discount.