Ongoing inventory constraints and shifting electric vehicle sales model could alter dealership format

Anewly built Subaru flagship store which Fox Motor Group LLC opened in Cascade Township simultaneously demonstrates the latest in dealership technology and what may become a declining part of the automotive retail industry.

The gleaming 50,000 square foot store would take the crown as the largest Subaru dealership in the country, with 22 service bays, six express service lanes, two tire changing winches, a pair of EV service lanes and a rack of alignment.

Conceived by Ghafari Associates Inc. and built by Walker Triangle Associates Inc., the store also includes a range of customer-centric amenities and features, including a living room, fireplace, and living wall. Tailored to the Subaru brand, Fox plans to open an indoor dog park later this year, complete with a water fountain, benches and an agility course.

“They wanted to provide the best dealership experience with the best amenities, including comfortable workspaces and seating areas with video games and televisions,” said Mitch Watt, senior vice president and principal of Triangle Associates.

While the new facility features the latest in store design for the Subaru and Fox Motors brand, it is also firmly rooted in the dealership industry of the past, with outdoor parking space for an inventory of more than 400 new and used vehicles.

That’s probably an ambitious amount of space, at least for the foreseeable future, given that most dealership parking lots have remained grossly underutilized – or even nearly vacant – for the past two years due to inventory shortages. linked to a global shortage of semiconductor chips.

At the same time, automakers and dealerships have taken advantage of the lack of inventory by moving – at least temporarily – to a higher-margin sales model in which customers specify the vehicles they want and then go through the dealer to order it.

A confluence of factors has allowed some dealerships and automakers to “thrive with reduced inventory,” said Mike Wall, executive director of automotive analytics at S&P Global in Grand Rapids.

“It’s a bit contrived, it’s fabricated because of the crisis, but everything lined up, so it was possible for them to do it,” Wall said. “They learned that, ‘We can make decent money and have inventory discipline.’ But it will be interesting, once we can produce more vehicles: Will we have the discipline to maintain this inventory strategy?

Consider new sales models

Beyond immediate component shortages and lack of inventory, the car dealership model faces several fundamental challenges as the industry gradually shifts from internal combustion engines to more electric vehicles.

EV startup Tesla and new entrants like Rivian and Lucid have entered the market with direct-to-consumer sales that don’t rely on the traditional brick-and-mortar franchise model.

The model has taken hold for electric vehicles, so even traditional automakers are considering direct-to-consumer sales for their electric vehicle brands. To that end, Ford Motor Co. CEO Jim Farley told a recent investor conference that the company needs to move to a “100% online” sales model with non-negotiated pricing for its vehicles. electrical.

“We think our distribution model today costs about $2,000 per unit more than Tesla. About a third of that is inventory. We have all that inventory at dealerships, in transit, (and we have to) get rid of all that,” Farley said at the Bernstein Strategic Decisions conference, noting that public advertising also costs the company $500 to $600 per EV.

Under Farley’s new vision for Ford, dealerships would still exist, although their model would change to focus on servicing the vehicles customers buy online.

Such statements have certainly caused concern among dealers.

“When you look at the electric vehicle situation, particularly in the next couple of years, we’re going to have a bunch of new vehicles, a number of new nameplates. That’s part of the reason why you see automakers looking at different go-to-market or distribution strategies,” Wall said. “They’re going to have all these new nameplates in varying volumes and they’re going to want to make sure they’re getting the models they want into the hands of the people who want them. and don’t run the risk of having those stocks in various areas. It’s a challenge for them, it’s a challenge for the dealers.

“It’s causing concern on the dealer side. They want to make sure they’re part of the process; they don’t want to be left behind. Obviously the vast majority of the market is still buying internal combustion vehicles (vehicles), But they don’t want to stay with the bag as the market shifts to battery electrics, which is why they want to make sure they have a seat at the table.At least so far, automakers understand that.

Destination Billing Opportunities

Even switching to electric vehicle maintenance poses a new challenge, given that electric motors have fewer moving parts than internal combustion engines and have a different, or even less frequent, maintenance schedule.

Even so, Wall still thinks the dealer network has plenty of opportunities ahead. On the one hand, electric vehicles still have parts that wear out and can break. Additionally, the dealer finance and insurance (F&I) profit center is expected to remain lucrative, especially for products suitable for extended battery warranties.

Wall also envisions dealerships capitalizing on new revenue streams by reallocating a portion of their footprint that was dedicated to inventory to instead focus on fleet management for the growing ranks of autonomous and electric vehicles, including vehicles electrified utilities used for last mile delivery services, for example.

“It’s possible these dealerships would have a lot more space to work in if they didn’t need as much parking,” Wall said.

Likewise, the dealership network also offers car manufacturers opportunities to develop their charging infrastructure. Unlike electric vehicle companies like Tesla that don’t have a physical presence and have to build their infrastructure from scratch, traditional automakers already have physical locations.

Traditional automakers and their dealerships “have not even scratched the surface” of figuring out how to leverage the distributed franchise dealership model to rapidly roll out charging stations across the country, Wall said.

Building on the amenities many dealerships currently offer, Wall said stores in some areas could capitalize on serving as a “destination charge” location.

“Not every dealer will want to be in the restaurant business, but could this present an opportunity for a lunch spot or other destination opportunity? Maybe it’s retail or shopping in general,” he said. “It won’t work for all dealerships, but it has the potential to reshape the conversation around the dealership itself and it can create additional opportunities.”

More change to come

If companies move to this destination pricing model, it could certainly lead to more store renovations and refits and boost what has already been a positive sector for many construction companies like Triangle Associates.

“Retail is down for us, but automotive is the bright spot,” said Watt, who also thinks dealerships will change to respond to different models and the different needs of electric vehicle owners. .

“Everyone is influenced by electric vehicles. They want charging stations out front that people can use when they pick things up, or charging stations for service areas and for cars in the field.

“It has always been an evolving and ever-changing industry. Dealerships change and adapt to customer demand.

To that end, stores may quickly have to move away from the traditional dealership layout with large parking lots for inventory.

“I see the trend towards almost very small dealerships, since everything will be built online,” Watt said.

Triangle Associates continues to carve out a niche in the industry and has worked on several projects in West Michigan and Chicago for Fox Motors and other dealer groups.

The company is involved in a handful of dealership projects that are in the planning stages, several of which are driven by automaker-mandated store redesigns to reflect new brand standards.

“(Dealers) haven’t slowed down. They continue to grow and expand their business,” Watt said. “The market in general continues to be strong and the pandemic hasn’t slowed that down. New car sales have slowed only by the difficulty of obtaining parts and parts.

Constraints persist

According to the latest forecast, analysts are betting that inventory constraints will continue to affect the industry for the foreseeable future.

S&P Global is revising its forecast for U.S. light-vehicle sales of 14.5 million units, Wall said, noting a likely downward revision given slower than expected sales. planned so far this year. The seasonally adjusted annual rate (SAAR) of new car sales reached 13.5 million units in July, which Wall said was “recession level.”

Forecast revisions will take into account supply chain pressures as well as macroeconomic factors that could cause consumers to forgo buying new vehicles.

Near-term forecasts are almost entirely determined by component availability, while worries about the economy have yet to affect buying decisions, Wall said. He believes macro factors have the potential to “aggravate” and become a problem in 2023.

“We will see production growth this year, which is certainly positive, but sales are going to be a challenge,” Wall said. “Finding a home for these parts in the right order is difficult, and then getting them to market is difficult. This will continue even next year. We still see this as a headwind.

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