This is the final post in a six part series about trends threatening traditional the Auto Dealership business model in the US. “Alien Invaders” such as Tesla have affected consumer preferences and alternative dealership models such as CarMax. Global trends in regulation are also forcing consumption changes.
The posts describe other factors that are pressuring the markets. The 4 points below summarize EkaLore’s overall view of the marketplace and its challenges:
1) Current Auto Owners are retaining their cars for a longer time frame. Multiple trends reduce the overall volume in the 2020s as the transition to EV/NEV continues.
The average vehicle age will likely continue to increase in the near-to-mid term. Coupled with longer-term (>60 months), financing reduces sales in the future as the sales from the past aren't paid for yet. The effect of low-driving years during Covid-19 is to extend the useful life of vehicles by 6-12 months in the demographic with the highest commuting usage.
2) Dealerships are being forced into investment for the coming EV transition but with little chance of payback.
Capital investment costs for EV charging infrastructure (including permitting, access construction, and electrical service changes) can be estimated at USD$1M or more per dealership. One of the few manufacturers with integrated EV Charger manufacturing is Tesla. The costs of these investments are unlikely to have a large revenue/margin improvement for dealerships for a simple reason. Land costs (footprint) for dealerships have dictated locations in lower-cost areas less convenient to high-frequency travel destinations. It is unlikely dealerships will become social or shopping destinations for even 'fast charger' access when not in an area where 'gravity modeling' show a high visit rate. Large chains (Walmart, Target, Home Depot, and others) are committing to installing large EV Charging stations for consumers as attractions and time sinks. As a competition, a pre-existing shopping destination for more than 90% of the USA population within 10 miles will be more desirable than a vehicle dealership. The electrical service infrastructure, road access, and parking capacity for shopping destinations are also favorable from an infrastructure and servicing cost standpoint. [Spending to put in a charging station in locations chosen for low real estate cost rather than high traffic is likely a poor investment.]
3) At a time when rising prices are putting new cars out of reach for many consumers, manufacturers will look to cut investment into Dealerships, and the Dealerships themselves will need to lower marketing and advertising expenditure.
Large manufacturers already understand that the costs of a dealership network already increase their per-vehicle pricing. Ford's CEO has publicly identified advertising and dealership costs as increasing the costs to consumers of up to USD$5,000 per vehicle (roughly 10% of 2022 industry average transaction values). The pricing and competitive pressures to reduce these costs to compete with Tesla and other EV/NEV brands will cause manufacturers to put efficiency pressures on dealerships. The large spend from local dealerships for advertising (television, radio, print) and local marketing will be pressured as social media marketing, online selling, and lower volumes reduce overall transaction volumes.
In conclusion, these pressures on dealerships are longer-term, coupled with the actual market performance of ICE versus EV/NEV sales. The assumption that EV/NEV transaction costs (new and used) are higher than ICE vehicles is under challenge in the USA. These trends occur simultaneously as government subsidies, tax credits, and infrastructure subsidies. Vehicle operating expenses will reflect increased fuel costs for carbon pricing, international macroeconomics, and local increases for roads and infrastructure. These pressures effectively change consumer behavior, as can be seen in rapidly increasing EV/NEV sales in China, the EU, and segments of the USA's new vehicle markets. Post the initial vehicle purchase, the total costs of vehicle ownership will see the competition between electric/hybrid mileage costs competes with ICE vehicle costs. The effects on consumer behavior will unlikely push new revenues and margins to dealerships. The final effects on dealers will weaken their economic positions in communities from lower (adjusted) revenues, employment, and economic activity.
If you’d like to see the whole series in its entirety, you can find the earlier posts at www.ekalore.com/alien-invaders.
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