Dealers hope to leverage vehicle complexity to increase share of the service market

Dealership service, sales and parts functions will be more tightly integrated in the future, industry consolidation will continue, and technology will be increasingly important to ensuring dealer profitability.

Auto Team America, a network of CPA firms that serves the dealer industry, has released a new report, "2025 Dealership Vision: What Lies Ahead!," which outlines a number of sales, technology and service trends that are likely to affect dealer operations over the next decade.

According to the report, dealerships will continue to consolidate as an aging owner base looks to retirement. Sixty-nine percent of respondents to the survey are looking to grow their operations through acquisition and expansion, and there will be a growing pool of owners looking to sell. Of the survey respondents, 34 percent expect their majority owner to be retired by 2025, and another 38 percent plan to transition to lesser roles in the business.

"There is a huge transition that will happen in the next 10 years," says Scott Gorden, managing principal, dealerships at Auto Team member CliftonLarsonAllen. "Given the age of the dealers, the business will consolidate and change more than at any time in the last 50 years."

According to the report, OEM influence also will contribute to consolidation: "Couple this with the factory’s increasing demands for facility upgrades along with the true need for some dealerships to relocate and rebuild; we will find more dealers who are unwilling to commit the capital needed to undergo major real estate renovation projects that will take decades to pay off," the report says.

A single point of contact

Lines between fixed ops and sales also will erode as dealers provide a single point of contact for customers.

"Right now when you buy a car and have it serviced at a dealership, the person you deal with on the sales side is not the same person on the service side," Gorden says. "When you come into a dealership in the future, there may be one customer sales rep that handles everything you need, from sales to service to parts. You have one point of contact for the customer."

Service will remain an important source of revenue. In 2025, 41 percent of dealers expect service to be their most profitable department, while only 5 percent see sales as the most profitable department.

Manufacturers will continue to work on their stocking guides and automatic replenishment systems, expanding their influence on the parts department.

According to the report: "Better logistics, improved demand analysis, careful selection of strategic warehouse locations and more common vehicle systems in 2025 will allow even more efficient control of inventory. Dealer-to-dealer transactions through the manufacturer parts locators will also improve movement between dealer inventories. Overall, manufacturers will control 90 percent of dealership inventory with guaranteed buybacks, eliminating much of the past obsolescence issues."

Average inventory turn will improve to about 12 times a year, and could climb as high as 20 times per year depending on wholesales business. Parts gross profit will remain highest on non-maintenance parts because of the lack of aftermarket competition on specialty parts, the high cost of shipping with Internet sellers, and the shrinking DIY market.

However, service profitability will be hindered by longer recommended maintenance schedules and better vehicle reliability. Dealers will experience growth in customer repair work on older vehicles and benefit from the more complex systems in the vehicles that will reduce aftermarket competition.

"The aftermarket simply will not be able to keep up regardless of the final results of so-called 'right-to-repair' legislation as the cost of entry for the training, tools and knowledge will be too high," the report says. "Independent shops will continue to shrink in numbers. More new vehicles being sold will also help keep dealership shops busy."

Remote diagnostics will also help, since monitoring solutions will alert the driver of a problem and send files to the manufacturer and dealership about the issue. This will encourage use of dealership service facilities, since the diagnostic information is already there. For warranty repairs, required parts could be automatically shipped to the dealership. As the vehicles become more complex, the report also predicts that entire modules will be shipped and replaced rather than specific components.

"Vehicles may also be able to communicate in other ways," Gorden says. "Imagine what would happen if you were driving down the road and the vehicle could communicate opportunities to you. Your car is worth this much as a trade-in, would you like to look at options for a new car? The dealership is five miles away. The technology impact in the next 10 years will be huge."

Sales up, profits down

Industry data indicates that over the next 10 years total dealership sales will increase, while grosses decline along with net profits. While grosses will compress, this will be offset by higher sales and the use of technology, which will reduce departmental expenses.

Non-operating income will also be increasingly important. This other income is cited as the source of dealership profits by 52 percent of respondents. These volume bonuses, customer satisfaction rewards and other OEM-generated incentives can be the difference between breaking even and making a profit.

"If they don't get incentives, they don't make money," Gorden says. "The new car business is almost entirely dependent on factory assistance to the extent that they become more reliant on those payments."

That puts some dealers in a precarious position, since these factory payouts aren't necessarily predictable or reliable. Reliance on incentives also gives OEMs greater influence over the dealership in terms of facility requirements, business practices, advertising, stocking guides and more. In fact, 35 percent of dealers see factory demands on dealership operations as the biggest threat to the franchise system and their way of conducting business.

In terms of the actual sales experience, most customers will rely on online shopping, with minimal interaction with the actual dealership sales staff, resulting in a shorter overall sales cycle. Asked what technologies would have most impact by 2025, 49 percent of respondents cited customer communication, and 22 percent said technologies that make the sales process quicker and more efficient

Since most of the sales process will occur offsite, Auto Team expected to see an increase in the number of sales closed per sales person each month. But when asked, dealers responded that they didn't expect the close rate per salesperson to change much.

And what will dealers sell? Based on new Corporate Average Fuel Economy (CAFE) standards, the mix will likely include a lot more hybrid and pure electric vehicles. That has many dealers worried about potential sales, since the higher cost of hybrid systems could push buyers out of the market.

"However, technology costs have always fallen over the life span of innovations and the total SAARs estimate for 2025 was not changed when the new standards were announced in 2012," the report says.

For a copy of the report, visit www.autoteamcpa.com.

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